Market Analysis plus Simple Strategies to Employ When Buying Stocks – Editor Money Talks
The TSX Composite Index closed the week at 14,468 points, up a solid 5.7% after 4 straight days of gains. This week’s partial recovery was a welcome sigh of relief to investors who nervously watched the market shed almost 10% of its value in the 3 week period ending last Monday.
Click on the image for the more dramtic Daily Chart
But before investors get too complacent let’s remind ourselves that we are not out of the woods yet. The culprits that
brought on this malaise were low energy prices coupled with a weak outlook for global growth. It may be the case that the former will help to bolster the latter as few things are more economically simulative as a big drop in energy prices. But at least in Western Canada the economic wagon is firmly tied to the price of oil which has yet to offer a clear sign it has stabilized.
But consumers at least are benefiting from a quasi-tax break at the pump with the average gasoline price in Canada declining below a dollar to $0.99 per liter for the first time in 4 ½ years. This is a far cry from just a few months ago when the average price was over $1.30 per litre. Over the course of a year, many analysts suggest that this can result in savings of $1,000 to $2,000 per family. Time to max out those TFSA contributions!
One of the issues that we have had with the Canadian stock market and economy in general is that it is too focused on resource related sectors. Energy alone accounts for nearly 25% or ¼ of the entire TSX Composite index. With mining and materials accounting for another 9%, we have nearly 35% of our top stock exchange weighted to the two most cyclical industries in the world. Technology on the other hand (an industry which we should be focused on growing) accounts for a measly 2%. This is compared to a technology weighting of 20% for the S&P 500 in the U.S. Clearly our capital markets and economy needs to diversify and it is times like these when this concept really hits home.
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Simple Strategies to Employ When Buying Stocks
1. Build your Portfolio Gradually over Time: There is a general tendency for the investor to want to put all of their capital to work immediately. We strongly advise against rushing in and becoming fully invested right away. Our opinion is that it is usually better to take 6 to 18 months to build a portfolio if you are starting from scratch. Taking this time allows you to keep some capital available to purchase new recommendations that come out over the course of the year. Spreading the portfolio building process also mitigates the risk of short-term market volatility and gives you the opportunity to purchase attractively priced stocks during market bottoms.
2. Buy Businesses with Recession Resistant Qualities: This is a theme that has always been a key ingredient of our investment philosophy. With the threat of economic contraction always looming, it is advisable to build your portfolio around a core of recession-resistant businesses. These can be conventional industries with recession resistant traits such utilities and infrastructure, or it could be a special situation company that occupies a valuable niche position in an attractive market.
3. Buy Strong Balance Sheets: This is another theme that has remained core to our strategy. We continue to favour companies with strong financial positions. An ideal situation would be a company with a significant cash balance and little to no debt. Not only does that cash provide a protective buffer for the company in the event of a downturn but can also be employed to purchase “on sale” assets during periods when competitors are having difficulty accessing capital. Realistically, companies that operate in highly capital-intensive industries will utilize debt in the capital structure (and utilize it well) and may find avenues to invest excess cash as soon as it is generated. The objective as an investor is to ensure that you are not buying a company that is leveraged with debt which makes it more susceptible to economic and market contractions.
4. Diversify by Sector: Try to avoid accumulating too many stocks that operate in the same (or similar industries) sectors or are dependent on the same geographies. Within your 8 to 12 stock portfolio, you will have room to diversify into a multitude of different industries and geographies. Companies that operate in the same industry (and often geography) are exposed to many of the same risks. Diversifying provides significant risk management to your portfolio.
5. Don’t Be Afraid to Layer into Positions: Just as we recommended that you build your total portfolio over time, it is sometimes prudent to build positions in individual stocks over time. For example, if you plan to purchase a total of $10,000 of shares in a single stock, you can break that position up into two or more separate purchases. This can help you to mitigate risk and benefit from volatility that occurs through the year. Individual reports provide specific instructions in this regard when appropriate (such as “BUY HALF” recommendations).
11/28/2014
NATIONAL AND INTERNATIONAL WIRELESS RETAILER GLENTEL RECEIVES 121% TAKEOVER BID FROM BCE INC. – SELL
