David Driscoll on BNN-Bloomberg’s Market Call – Aug 7 2018

David Driscoll on BNN-Bloomberg’s Market Call – Aug 7 2018

The stock market is a dynamic multifaceted phenomenon where there is no one methodology that always works. Some investing styles work for awhile then under-perform, only to start working again later on. The individual investor will in time develop his own personal approach to the market that is right for him while realizing that he will at times undergo periods of under-performance. He will accept this as part of the cost of investing in the stock market…Below is David Driscoll’s (CEO of Liberty International Investment Management) take on the market as of Aug 7...This is his approach to investing in the markets.

MARKET OUTLOOK
Ignoring all the noise, it’s essential at this time that investors focus more on their portfolios than buying or selling individuals stocks. We’re now almost 10 years into one of the best bull markets in history. Will the market roll over this year, next year or in two years? Will rising interest rates spoil the stock market party? Will the yield curve invert this year or next? Will inflation slow down personal and corporate spending? Are earnings to be trusted? Since nobody knows the answers, investors should focus on prudent portfolio management by following these suggestions:

1. Avoid the noise. Companies will always adapt to whatever politicians throw at them.
2. Leave your emotions at the door. Investing should be mechanical, not emotional.
3. Hold some cash. If the stock market drops, you’ll need cash to take advantage of buying opportunities. After all, time and compounding is what makes stock investing profitable, not stock picking or stock trading.
4. Rebalance when necessary. If you own 30 stocks with an equal weight of 3.3 per cent and one of the stocks becomes a 6.6 per cent or greater weighting, sell half. It also helps preserve capital, especially if you own names with high betas (above-average price volatility). The higher the volatility, the greater the downside risk. We’ve rebalanced positions of Cognex and Shopify this year for these reasons and avoided subsequent large losses.
5. Avoid correlation risk. While Canadian banks are strong and stable, it wasn’t just one that fell 40 per cent in 2008: they all did. And if you’re retired and taking money out of the portfolio when a major market correction occurs, you raise the risk of running out of money in your lifetime. It’s better to diversify around the world in different sectors than have high levels of concentration in your portfolio.
6. Don’t chase yield. Focus on companies that grow their dividends so that your income doubles at a faster rate. A company may have an attractive yield of 5 per cent, but if the dividend growth is only 2 per cent a year, inflation will eat up that growth. It would take 36 years to double your income. The Rule of 72 is to take 72 and divide by the growth rate to get the number of years to double your income. 72 divided by two is 36 years. The average growth rate of companies around the world is about 7 per cent, so the income should be doubling every 10.3 years. And as the dividends grow, ultimately the share prices should follow.
7. Buy gradually. Consider buying only a half weight instead of the whole position. For example, if you have $10,000 to invest in a stock, buy only $5,000 to start and keep the rest in cash. If the market corrects, you can buy more at a lower price. Dollar-cost averaging is a time-trusted strategy that helps avoid huge losses.
8. If you’re investing in concept stocks, invest only what you can afford to lose. The volatile stocks today are in the cryptocurrency, junior oil and gas, technology or marijuana sectors. About 80 per cent of concept stocks end up worthless, so be disciplined when taking on this risk. Buy 10 names and hope the two that survive cover the losses of the other eight.
9. Downside losses are worse than upside gains. The more you go down, the more you have to rise to get back to break-even. In 2008, the market fell 40 per cent, so a $1 value then was worth 60 cents a year later. As a result, investors needed to make 63 per cent just to get back to break-even, not 40 per cent. In other words, it took five years for most fully invested mutual funds and ETFs to return to break even. Those who held 20 per cent cash and reinvested the money in 2009 returned to break-even in one year. The next four years were pure gravy.
10. Focus on companies that generate rising free cash flows. This helps improve the odds that you’ll invest successfully. The last newsletter on our website explains further.

Investing successfully is having the ability to keep yourself in the game by not losing all your capital to let time and compounding of dividends grow it.