Four Strategies for Shaky Markets

Posted by Ryan Irvine - Keystone Financial

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Market Buzz – Four Strategies for Shaky Markets

While the S&P TSX Composite has come off around 5% since reaching its year-to-date highs in April, the index remains up over 20% since July of last year, which was the genesis of the rally that pushed stocks to post crisis highs. The gains have come despite a rather shaky recovery which continues to draw on negative data points including the recent report that the S & P/Case-Shiller index of property values in 20 U.S. cities hit its weakest level since March 2003 and a warning from Moody’s Investors Service that “if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the U.S. government’s rating under review for possible downgrade.”

So the question becomes, for those who believe in equity investing long term but are bracing for a rocky period over the next three to nine months, what strategies should investors employ over the course of the summer investing season and into the Fall?

Here are a few simply strategies we employ when our outlook is mixed to negative or we are facing significant uncertainty in the near term.

Layer into Positions: We suggest investors set the total dollar amount they wish to invest into any new stock and purchase half that amount, with the strategy of adding the remaining half if or when a correction has hit. For instance, while we continue to like the long-term business Glentel Inc. (TSX: GLN) and still consider it a BUY for those looking greater than one year out, the stock appears fully valued at present in the near term after a very sharp appreciation in its shares. By layering into this stock, an investor could buy half their initial purchase in its current range ($19.00) with the goal of adding the remaining position if the stock drops in a broader market correction over the next six months. In the event the stock does not drop, at worst, we are left with a half position in a solid company and can consider buying more when the dust settles.

Buy Strong Balance Sheets: Again, this is a theme we consistently hold tight to as it is a core strategy we employ regardless of the market conditions, but it is always a healthy reminder. We continue to like companies with limited to no debt positions, good working capital, strong cash positions, and continued solid free cash flow generation. A great example of this is type of company is our current top technology (software) small-cap, which was updated in last month’s edition for our clients. Again, this is just an example; our research universe contains a number of additional names that meet this criteria at present.

Enter Positions Gradually: If you are either re-adjusting your portfolio or just beginning to create your own personal Small-Cap Fund (eight to 12 Small-Cap stocks from our or other analysts recommendation list), we feel it is prudent to make sure you purchase individual companies at different points in the market cycle over the course of a given year. This will ensure that you do not make a market high your sole entry point on a company. Be patient and enter positions gradually to build your diversified Small-Cap portfolio over time.

Diversify by Sector: A strategy we employ regardless of broader market conditions, but one that can never be stressed enough. Having said this, we do not believe in over diversification, or the purchase of 30-75 individual companies within the average sized portfolio (something we have seen all too many times in the portfolios of a surprising number of investors, wither by themselves or with the help of an advisor). When you have individual equity diversification within a market (such as the TSX) coupled with the ownership of several broad mutual funds, in most cases you have basically “bought the market” and your returns will proxy the index itself.

“Remember, you cannot beat the market if you are the market.”

In this case, one is better off buying one or two low cost, TSX Exchange traded ETFs to save significant fees and the inevitable headaches of managing a portfolio that complex overtime. What we suggest rather is a “focused” diversified strategy that is designed to invest in winning businesses in a range of sectors and has the ability to weight itself towards one or more sectors that you are particularly bullish on within the next six to 18 months. The reverse would be true for those sectors which we hold a negative outlook on over the same time period.

Looniversity – What is SEDAR?

SEDAR (the System for Electronic Document Analysis and Retrieval) is the system used for electronically filing most securities related information (i.e. quarterly financial results) with the Canadian securities regulatory authorities. Filing with SEDAR started on January 1, 1997, and is now mandatory for most reporting issuers in Canada.

SEDAR’s framework was established by Canadian Securities Administrators (CSA) and is carried out by each provincial securities regulatory authority. The CSA has appointed CDS INC. (CDS) (a subsidiary of The Canadian Depository for Securities Limited) as the filing service contractor for the SEDAR system. In this role, CDS administers and operates the system, provides assistance to the filing community, and works with both the regulators and the filers to plan future enhancements to the system.

The SEDAR system is an innovative link that enables industry to file securities documents and remit filing fees electronically — saving time and money. The SEDAR system allows users to gain immediate and intelligent access to public companies and mutual fund information in the public domain, and provides an important communications link among issuers, filers, and the securities regulatory authorities. It’s an excellent place to help you research your investments.

Put it to Us?

Q. Can you explain the difference between “Bottom Up Investing” and “Top Down Investing”?

– Donald Harknes; Edmonton, Alberta

A. A. Let’s see, “top down,” “bottom up” kinda sounds like terms you’d hear at a spring break party. But in the investment world, both refer to specific styles of analysis. A bottom up approach de-emphasizes the significance of economic and market cycles and instead focuses on the analysis of individual companies (stocks). This approach assumes that individual companies can perform well despite being in an industry that is not performing very well.

Top down investing involves careful analysis of a region’s economic health before considering a sector to invest in. Proponents of this approach determine what industries or sectors will return well, based on overall economic conditions, and then buy stocks that are attractive within that industry.

While both hold merit on their own, you are probably better off using a combination of each approach. So relax, keep your “top down” and we say “bottoms up” to your investment future.

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