One question you must ask yourself before buying any stocks 9


Things that I gain as I get older are not only grey hair but I feel I am getting wiser through experience (as opposed to what my wife says). I have been investing on my own for last 3 years in the stock markets and the journeys have been interesting.

My investing styles have changed significantly last 3 years and had about 4-5 major transformations to get to my current investing style. I figured I would write it out for you.

It just lit up today in Toronto!

 

 

Pre DIY investing- Mutual funds investing

It is quite embarrassing but I am quite guilty here. Yes. I invested in mutual funds without knowing what investing really was. I had an idea that I had to put the money to work but knew nothing about investing. I remember the first day I opened the mutual funds. I went to a TD bank and the teller and I went through about 30 questions or so to find out what my risk comfort level was. The style that the software picked based on my answers was TD balanced mutual funds which was like 60% equity and 40% bonds. It was quite embarrassing to pay 1.5-2% MER to the TD (without knowing I was paying that much… I thought the service was free and felt I was very smart) but on top of that the stupid questions and my brainless responses put this young and poor fella to invest in 40% in bonds… What’s even more embarrassing is that I was an accountant but had no clue what I was doing and neither was the teller. The software who decided 60% equity and 40% bonds was the only thing knew what it was doing among us.

Pros-easy and quick to set up

Cons-mostly below average performance after MERs

 

 

First style- Index funds investing

After realizing how much TD bank had been robbed me over time, I sold off the mutual funds and invested everything to Canadian and US index funds. I did pretty well with it. Although I felt that I could do better by picking stocks individually, investing in index funds was very easy to execute. I could really focus on my life as this got really easy and boring. Boring is good in investing. I automated this by saving and buying ETFs every month and repeated regardless of where markets were going. I really liked index investing for its simplicity, peace of mind, low cost etc… but I did not like the fact of owning many below average companies from the pool. I may go back to index funds investing when I feel like I have enough money and want to more focus on what’s more important in life rather than watching stock markets every day.

Pros-Very easy, simple, some constant cash flow(dividends), low cost, relatively stable, you can own basket of companies in other countries

Cons- Can’t weed out companies that you do not want to own, performance will always be average, some country index funds are not really diversified (E.g. Canada and Australia index funds are very Financial and commodity heavy)

 

 

Second style- Value investing (or I would call it classic dirty investing)

I started reading lots of DIY investing books and blogs and seemed that most of bloggers do well by using so-called value investing. I felt that I could do better than them and started selling off all index funds and started buying individual stocks. I did not have certain strategies and started buying what others were buying with minimal research or whatever looked cheaper based on P/E multiples thinking I was genius. Some picks worked, some did not work. The strategies made me obsessed with stock monitoring on every few hourly basis. I realized value investing was really hard to execute properly and I had to be very patient for a long time. It often hurt my feelings seeing some of my picks in red for days, months or even years. This could be an area that may give you a huge return but you gotta be exceptional at executing strategies from buying to selling. Timing is important. When things worked out it gave me more than 200% return in a relatively short time (e.g. I bought Home capital group at around $6 and sold at around $16-17 within 3 months. It even went up to $20ish then dropped to back to $13). Only few that I think do well with Value investing are Francis Chou and David Einhorn

but even they have been struggling lately… so if value investing is challenging for these two proven investors then you probably should be away from value investing as well.

Pros- If executed properly, you can have exceptional returns

Cons-Very challenging to properly value companies, emotionally tough, requires tons of patience

 

 

 

Third style- Dividend or dividend growth investing

This probably is the most popular strategy by DIY investing bloggers and their followers. There are literally more than 100,000 blogs out there copying each other without really measuring their yearly performance. I liked the idea of having constant flow of cash so I had been with the strategy for about a year or so. I did ok with it because it is supposed to give an ok result as majority of dividend payers or consistent growers are stable large caps with low growth perspective. They would be Canadian banks, Utilities, Telecommunications, Energy, REITs etc… It would give people a good feeling of getting cash flows and some people can set up DRIP to own more stocks each time dividend is declared. If executed properly people would be able to do slightly better than index funds as consistent dividend growers (which is very good signal) may indicate that companies are stably growing and you may be able to weed out bad industry (e.g. commodity or energy etc…) and companies. Some people may fall into dividend trap so watch out for extremely high dividend payers as they will likely cut their dividends if dividends are not sustainable and when that happens, the stock prices typically crash as many dividend investors leave the scene. I always thought that this strategy should be utilized by retirees or old people who do not have day jobs, no other incomes to put into markets.

Pros- constant cash flow, stability especially during downturns, solid returns (e.g. Royal bank, TD, Canadian National Railway etc…), dividends are tax preferred

Cons- low growth, time and effort consuming to do it properly 

 

 

 

Fourth style- GARP Growth At Reasonable Price investing

 

Many books helped me shape my current investing strategies.

Notably,

Phillip Fisher’s Common stocks and uncommon profits,

some books about Warran Buffett

Peter Lynch’s One Upon Walstreet,

Joel Greenblatt’s The little book that beats the markets,

Stephen Jarislowsky’s Investment Zoo,

Jim Slater’s The Zulu Principle etc… 

Lots of readings and research made me realized and concluded that Warren Buffett, my favorite icon is actually a GARP investing guy. I know that he was influenced by his teacher, Ben Graham and used to be a value investor but he quickly changed his investing style after he met Charlie Munger and started adopting GARP investing style.

Probably the most important idea about GARP is ‘quality matters the most’. As long as the business is fundamentally strong, price you pay now may seem expensive but is actually reasonable.

Facebook, Google, Amazon, Constellation Software, Dollarama, etc… have almost always been traded at extremely high P/E and Cashflow multiples compared to other companies but if you held them let’s say last 10 years, your $10K of investment would have become 60K (5 years), 45K, 280K, 375K and 150K (8 years) respectively, whereas your $10K investment on RBC would have grown to $25K…

Pros- Impressive returns, higher chance to beat the markets

Cons- Fundamentals are difficult to analyze, time and effort consuming

 

 

I have been using GARP investing style for about a year now and I think I have been doing pretty well (well markets have been doing well as well).

 

I sleep pretty well every night. I am currently managing a very concentrated portfolio with top 10 holdings accounting for more than 75% of total value of the portfolio and I am quite confident that my picks will more than likely beat the markets (at least 70% of time…?)

 

I don’t think there is a best investing style among many others but as I went through various investing styles to find my fit and stick to my current investing style, you should find your own investing styles that fit your investing personality. It could be dividend growth investing style, value investing style etc… and if you really stick to what you are good at then you can beat the markets as well.

 

One important thing to keep in mind though.

Quality really matters and here is a quick question that you can ask yourself to measure the quality of the companies that you are or will be buying.

“Can you double down if the stock you own crashes and loses its value by 30% or more from a bad quarter or two?”

 

If you answer as yes and are confident in doubling or tripling down then you believe in the quality of the company and you should really double or triple down.

If you are hesitating, then you really should not have owned the company from the first place or do not buy if you never owned it before. The company should never be your long term pick. I guess you can trade it if you are good at trading (I am pretty bad at it). Great examples for this would be Valeant, CRH medical, Concordia etc… You know how they ended up…

 

To be honest, recent drop on CRH medical is very tempting for me but I have some doubts on several fundamental related issues. If I am not too confident in buying after recent 70-80% of stock value drop, then I may buy it as short term value creating trade pick or stay away from it completely.

 

If by any chance, Google or Constellation Software drop their market values by 30% or more from a bad quarter or two, I would almost likely double and triple down.

Thus for me, Google and Constellation Software are my long term holding and CRH medical is not.

Anyway let me repeat the question again for you

“Can you double down if the stock you own crashes and loses its value by 30% or more from a bad quarter or two?”

I hope your portfolio consists of many companies that you can easily answer yes to.

 

P.S. Do not believe anyone especially all the investing and personal finance gurus out there. Almost 95% of them do not know what they are doing when it comes to investing. I love their hard working energy and saving and investing mentality though. That may include me 🙂 so find your own investing style, take whatever you read online with grain of salt, do your own research and stick to what’s working for you. It is better to make a mistake now than later so be objective towards your investing result and do not hesitate to evolve your investing style. I honestly think all four investing styles above (index funds investing, value investing, dividend growth investing and GARP investing) are strong solid and they will get you the result you are quite happy with.

 

 

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I also shared why cash flow is so important when you buying any stocks

 

Also importance of not waiting too long when you find great companies

 

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Many people like this post as well.

 

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9 thoughts on “One question you must ask yourself before buying any stocks

  • Brad

    You may want to take a closer look at CRH, its got great potential. Yes, its dropped massively from its highs where it was very over valued. Its taken a beating, was hit with a short attack, was impacted by some rate cuts which will impact revenue going forward, also felt some impact from the hurricanes and cancelled appointments. But the drop in share price has been really over done. The company has not changed all that much and is still producing a lot of cash flow. So much so that it announced this week that it is buying back 10% of the outstanding shares, starting Nov 20th. Its doing this out of frustration for the unjustified share price and as a show of good faith to frustrated investors, not to mention it can be a great allocation of cash if done when shares are undervalued. Obviously CRH is in the dog house right now and its never really recovered from that short attack. But the company is solid, they keep generating cash, keep making accretive acquisitions with this cash flow plus their very cheap line of capital, mgmt is pretty good and do what they say they’ll do without raising equity. The last month its been impacted by capital loss selling, and will continue into December. I’m interested to see how it responds to the share buybacks starting soon. It may be enough positive momentum or we may have to wait until the new year when sellers are able to buy back in and value investors show some interest. Thoughts?

    • monsterid
      Be Smart Rich Post author

      Very well said. It seems like you have been doing your home work. I took the share buyback very positively. I read the transcript of the recent quarter and CEO said something like he is frustrated with shares not moving back up. There are many things I really like about the company (including so many things you already said and its strong fundamentals and its cheap valuations) but I also do not like several areas and they are mainly three folds.

      1. Ownership- CEO only owns 120,000 shares worth only $250K but have 1.4M options. He also has been actively selling the shares in the markets. These tell me that he is not in CRH for long term but probably do an ok job, take the cash and leave type of guy. There is no owner like board of directors or management. The highest ownership was two directors who hold 1M shares each. Considering 74M shares outstanding, that’s not really much. They also seem to have a big on issuing share units and stock options that I am not a big fan of. CEO got paid last year $4M.
      2. Acquisition- They typically buy 51% of business instead of 100% of business so 100% of revenue gets reported but only 51% of net earnings are included. Not a big fan of this. Look at Buffett, he rarely buy 51% of business but mostly 100%. So much complications from owning only 51% than 100%. I am also not too sure about their short acquisition track record.
      3. Health care- Its macro headwinds are quite scary. Just like Linamar’s cyclical auto-peak, NAFTA etc, so many areas are not really controllable by CRH and its management and what’s important is that those events were actually the major reasons of CRH stock crash.

      Above 3 reasons made me conclude that CRH will never be my long term pick but I am taking it very seriously about initiating a small position here for its extremely enticing valuation. Maybe I am 85% GARP investor and 15% value investor after all…

      • Brad

        Here are my thoughts on your points, I agree with much of what you said.

        1.Totally agree with you on the insider ownership. This is why in my comments I said mgmt was “decent”, because I was not happy when the ceo sold shares earlier this year at a very inopportune time. It was actually right around the time all the negative news started happening and in my opinion hugely contributed to the sell off. I feel strongly that mgmt needs to start buying more shares if they are sincere in wanting to improve things for share holders and if they believe in the companies future. This was a big black mark on my opinion of company. Outside of this the mgmt has been “decent”. I think they are making strides to correct this bad move.

        2. I don’t really agree on this one. There are benefits to buying 51% of a successful company. I do agree that it complicates the financials a bit but once you know what you are looking for its fine. The benefits are that they are partnering with the current owners (usually doctors) of these practices that want to cash out a little but still want to work and be involved with and incentivized to work at the practice. They already have relationships with these doctors from their partnership over the O’Regan hemorrhoid treatments that the clinics are using. I think both sides benefit from the 51% deal. The doctors get to get paid out on their hard work from building the practice and enjoy their lives a little more, while still keeping considerable ownership and having a job. CRH gets majority ownership of an already successful practice with a partner they know and work well with. The turnaround on these acquisitions is quick because they already know each other and are using some of CRH’s services. There is not as much of a transition as a 100% take over where the previous owners are leaving and CRH needs to learn everything about the clinics inner workings.

        3. Totally agree, healthcare headwinds are horrible right now. I dislike the fact that their revenues can be impacted on any given day by a government decision. This goes for a quite a few sectors. But yes, this is a negative.

        • monsterid
          Be Smart Rich Post author

          Well said on your second point. There could be so much more benefit than cost if executed properly however that being said most of companies out there probably don’t execute properly so cutting things clean (i.e. owning 100%) would make more senses. I am low-balling my bid so if it gets executed, great, if not, it is alright considering there could be further pressure down the road by tax loss sales. I can see a good value on this as a short-mid term trade…

  • Warren Hansen

    I especially liked this blog posting.It is very timely for me as I am transferring to a dividend growth style.
    I am doing this because I am nervous of the overvalued market and want the stability provided by dividends.

    byw, I have noticed you give valuable information about your research on the “don’t fuck with Donville” site.
    Why don’t you do that at your own site?

    Cheers.W.

    • monsterid
      Be Smart Rich Post author

      Dividend growth style is pretty good as long as you stick to higher quality, less resource oriented and established dividend aristocrats that have many super products.

      Haha Penetrator’s site is one of my favorites so I don’t mind providing my inputs for his blog success. Thanks for your recognition though! Cheers buddy! Come often and hang out!