Stocks - The Best Buys 2

[chedder]

Originally Posted by V

Are you serious? I had an accountant tell me that if I bought and sold the same security within 60 days it would be deemed taxable and not sheltered in the registered account. Is this inaccurate?

Someone needs a new accountant.

[V]

Originally Posted by DoubleK

Sounds like you need to give Slava a call in the morning.

I don’t think Slava’s an accountant?

[V]

Originally Posted by chedder

Someone needs a new accountant.

Funny, it’s already been in the works.

[opendoor]

Originally Posted by V

Are you serious? I had an accountant tell me that if I bought and sold the same security within 60 days it would be deemed taxable and not sheltered in the registered account. Is this inaccurate?

No, as mentioned above it sounds like someone along the line is misunderstandings the superficial loss rule.

That can come into play with RRSPs and TFSAs, but only insofar as sometimes people sell at a loss and then re-buy the security in a registered account when they have the room. This allows them to benefit from the capital loss now while sheltering the future gains. In that case, you cannot re-buy the security in the registered account within 30 days of incurring the capital loss; if you do you lose the capital loss.

[Slava]

Originally Posted by V

https://financialpost.com/personal-f...26dfa7cc0/amp/

If you read that though, that rule is regarding partial losses that were purchased within 30 days as well. I think that would be a rarity, but it will depend on what type of “investing” a person is engaged in. I can’t say I’ve ever run into that scenario and wouldn’t expect it comes up all that often.

But it’s 30 days and that’s common. If you have worries about selling something for the capital loss and it’s propensity for things to turn though, you could always buy something very similar. Say you have shares in one big bank and you sell those and buy a different one. That type of trade happens all the time, because you maintain exposure to the sector. The rule is the identical security, so there’s where that option arises.

Originally Posted by V

I don’t think Slava’s an accountant?

I’m not. I’m a Portfolio Manager and Investment Advisor.

[Enoch Root]

Originally Posted by CaptainYooh

I measure my portfolio performance annually and it was almost 25% up by June. Then everything started to slide, of course. Not that it's the key factor, but I get your point.


Not sure I follow your reasoning. Please elaborate on the "pressure to act" behavior. (For some reason I thought you're a lawyer, not a finance guy.)

I too am a portfolio manager and an investment advisor. Several lawyers around here, but I am not one of them.

The pressure to act is just human behavior and how it works against us. We are over-confident (especially men), and then when the market moves against us, we feel stressed and it causes us to act emotionally, when that is exactly what we should be avoiding.

There is a mountain of information on behavioral finance and how human behavior is not built for investing, if you are interested.

[flamesfever]

Originally Posted by Enoch Root

I too am a portfolio manager and an investment advisor. Several lawyers around here, but I am not one of them.

The pressure to act is just human behavior and how it works against us. We are over-confident (especially men), and then when the market moves against us, we feel stressed and it causes us to act emotionally, when that is exactly what we should be avoiding.

There is a mountain of information on behavioral finance and how human behavior is not built for investing, if you are interested.

You are absolutely right. The best thing is to get to know yourself, your risk tolerance and investment tendencies. I know I am too conservative (comes with age) and have trouble with "paralysis by analysis". My wife has always advised me to trust my gut. It came from years of telling her that my gut tells me to buy such and such, and I wouldn't and it would go up.

At present, my investment philosophy is simple i.e. to buy quality stocks like banks (RY, TD), railroads (CP, CNR), telcos (T. BCE) oil and gas (CNQ, TOU), Gold, etc. and hold them for long periods of time, and to vary the amount of cash depending on how I view the future.

I have no idea what the market is going to do in the next year or two. I think a lot of stocks are reasonably priced, however with a probable upcoming recession, there is a good chance that there will be an opportunity to add to portfolios in the future.

[CaptainYooh]

Originally Posted by flamesfever

...
At present, my investment philosophy is simple i.e. to buy quality stocks like banks (RY, TD), railroads (CP, CNR), telcos (T. BCE) oil and gas (CNQ, TOU), Gold, etc. and hold them for long periods of time, and to vary the amount of cash depending on how I view the future.

I have no idea what the market is going to do in the next year or two. I think a lot of stocks are reasonably priced, however with a probable upcoming recession, there is a good chance that there will be an opportunity to add to portfolios in the future.

Your stock preferences are not dissimilar to most investors' approaching (or already in) their retirement age. Buy blue chip dividend-paying stocks with long history and decent ratios. Nothing wrong with that. I buy and sell the same 10-12 stocks all the time - a little up, a little down.

My point was that keeping these stocks in RRSP portfolios through market downturns does nothing good to your portfolio returns. If recession is inevitable, then these stocks are more likely to drop even further from their current lows than staying level or rising in that period. What do we have to lose by selling them and watching the market? The common answer is: "you don't know when the bottom occurs"; sure, you don't. But you will see some signs of economic recovery coming up and contributing to the market upturn, which would be a good time to buy those same stocks back. Even buying them at the same prices you have sold them for would have you lost a few bucks on commissions and missed dividends but had the capital preserved during turbulent times. The other possibility is that you would be re-buying same stocks at lower prices; thus, benefiting even more.

[Slava]

Originally Posted by CaptainYooh

Your stock preferences are not dissimilar to most investors' approaching (or already in) their retirement age. Buy blue chip dividend-paying stocks with long history and decent ratios. Nothing wrong with that. I buy and sell the same 10-12 stocks all the time - a little up, a little down.

My point was that keeping these stocks in RRSP portfolios through market downturns does nothing good to your portfolio returns. If recession is inevitable, then these stocks are more likely to drop even further from their current lows than staying level or rising in that period. What do we have to lose by selling them and watching the market? The common answer is: "you don't know when the bottom occurs"; sure, you don't. But you will see some signs of economic recovery coming up and contributing to the market upturn, which would be a good time to buy those same stocks back. Even buying them at the same prices you have sold them for would have you lost a few bucks on commissions and missed dividends but had the capital preserved during turbulent times. The other possibility is that you would be re-buying same stocks at lower prices; thus, benefiting even more.

OK well, I'll give you the rationale for why this is so hard. Aside from the "you don't know where the bottom is", investor psychology is brutal. I've done this for clients, where we sold before 2008-09 and were in cash/near-cash. The selling is easy, because you stalk to people and say "I think we should sell" and literally no one wants to debate that for any length of time. For me, this was January 2008 and things were volatile, so people were concerned and that only made it easier.

The problem is getting back in. So, fast-forward to March 2009. We didn't know that was the bottom, and nothng new happened that day. There was no news and nothing that actually let you know we were at the bottom. Basically, things just started to go up and never went as low again since that time. The old saying (I think from an ad in the 70's) is that "they don't ring a bell at the bottom", and it's so true. So, we started to rise and instead of everyone in the media and such saying things like "buy now because we hit the bottom!" you have pundits saying "we're going to have a double-dip and we're not out of the woods" and things like that. Some people would say there were green shoots and we were seeing things improve, but they were shouted down. And for the individual you have a real psychological puzzle. I talked to numerous people imploring them to buy back in and got responses like "how do you know it won't cut in half again?!" and things like that. And the truth is, you don't know, at least not with 100% certainty. What looks easy today, with the benefit of perfect vision looking back, was uncertain and unknown at the time.

So, while it seems simple to say you could sell and buy back in again cheaper, it could be true. But the one element you have to see here is that I sold things in January 2008. The real pain happened in September 2008. What happened in between? The market rallied, oil hit an all-time high and I definitely got asked by people whether "I had a clue what I was doing". You're sitting in cash making a few percent and people around you are making way more. That's grueling and for me, causes a lot of anguish. It's extremely easy to second guess yourself. If you've seen the "Big Short" and watched Michael Burry there incredibly stressed out and knowing he's right, but there's no proof...it's like that (he had billions leveraged, so I'm not saying it's the same...but it's my entire livelihood and this is your lifesavings, so I can only say it's painful!). Just know that there is a price to pay if you're wrong, and also a price to pay if you're early.

And, since I'm getting pretty personal here, or at least I think I am, you might wonder if I think it's worth it? Well I sold almost everything in late January 2020 because things looked bleak. I do generally agree that it makes zero sense to just ride things down if you're pretty sure there is a major drawdown coming. But, I think that you need to have a lot of conviction in doing that, because I don't think it's as easy as it seems.

tldr; I'd be careful.

[CaptainYooh]

Originally Posted by Slava

OK well, I'll give you the rationale for why this is so hard. Aside from the "you don't know where the bottom is", investor psychology is brutal. I've done this for clients, where we sold before 2008-09 and were in cash/near-cash. The selling is easy, because you stalk to people and say "I think we should sell" and literally no one wants to debate that for any length of time. For me, this was January 2008 and things were volatile, so people were concerned and that only made it easier.

The problem is getting back in. So, fast-forward to March 2009. We didn't know that was the bottom, and nothng new happened that day. There was no news and nothing that actually let you know we were at the bottom. Basically, things just started to go up and never went as low again since that time. The old saying (I think from an ad in the 70's) is that "they don't ring a bell at the bottom", and it's so true. So, we started to rise and instead of everyone in the media and such saying things like "buy now because we hit the bottom!" you have pundits saying "we're going to have a double-dip and we're not out of the woods" and things like that. Some people would say there were green shoots and we were seeing things improve, but they were shouted down. And for the individual you have a real psychological puzzle. I talked to numerous people imploring them to buy back in and got responses like "how do you know it won't cut in half again?!" and things like that. And the truth is, you don't know, at least not with 100% certainty. What looks easy today, with the benefit of perfect vision looking back, was uncertain and unknown at the time.

So, while it seems simple to say you could sell and buy back in again cheaper, it could be true. But the one element you have to see here is that I sold things in January 2008. The real pain happened in September 2008. What happened in between? The market rallied, oil hit an all-time high and I definitely got asked by people whether "I had a clue what I was doing". You're sitting in cash making a few percent and people around you are making way more. That's grueling and for me, causes a lot of anguish. It's extremely easy to second guess yourself. If you've seen the "Big Short" and watched Michael Burry there incredibly stressed out and knowing he's right, but there's no proof...it's like that (he had billions leveraged, so I'm not saying it's the same...but it's my entire livelihood and this is your lifesavings, so I can only say it's painful!). Just know that there is a price to pay if you're wrong, and also a price to pay if you're early.

And, since I'm getting pretty personal here, or at least I think I am, you might wonder if I think it's worth it? Well I sold almost everything in late January 2020 because things looked bleak. I do generally agree that it makes zero sense to just ride things down if you're pretty sure there is a major drawdown coming. But, I think that you need to have a lot of conviction in doing that, because I don't think it's as easy as it seems.

tldr; I'd be careful.

Thank you for this post, Slava.

I remember taking the quant course and asking my finance professor (quite a few years ago): "If you are so smart and confident, why are you not a billionaire?". His response was a bit of an eye-opener for me. He said "I don't have the guts to risk my own money". He then told us about his own experience living through 2008-2009 when he was managing his university pension fund portfolio and questioning his decision to stay market-neutral, while the markets continued dropping daily and the portfolio losing tens of millions. What you said matches almost word-for-word the feelings of helplessness and physical pains he had doing that.

Like you, I have also sold everything I had but not in January-2020; I've waited an extra month (you and I had a quick exchange about it here, actually). I doubted myself and held on for a month longer, losing more money. But if I didn't sell in February, I would have lost more.

[Enoch Root]

Originally Posted by flamesfever

You are absolutely right. The best thing is to get to know yourself, your risk tolerance and investment tendencies. I know I am too conservative (comes with age) and have trouble with "paralysis by analysis". My wife has always advised me to trust my gut. It came from years of telling her that my gut tells me to buy such and such, and I wouldn't and it would go up.

At present, my investment philosophy is simple i.e. to buy quality stocks like banks (RY, TD), railroads (CP, CNR), telcos (T. BCE) oil and gas (CNQ, TOU), Gold, etc. and hold them for long periods of time, and to vary the amount of cash depending on how I view the future.

I have no idea what the market is going to do in the next year or two. I think a lot of stocks are reasonably priced, however with a probable upcoming recession, there is a good chance that there will be an opportunity to add to portfolios in the future.

Most people feel they can make rational decisions, and think they can control the process. Almost all are wrong. Regarding the bolded, this is no doubt how you act most of the time. The problem is that, when things get difficult - really difficult - we can no longer act rationally.

Conscious thought, and conscious control of our actions, constitutes a much smaller percentage of our total thoughts and actions than we would like to admit. At the best of times. However, under stress and pressure, we almost invariably lose total control of conscious thought and the ability to maintain conscious actions. When the chips are down, we all lose control, and our emotions run the show.

[Enoch Root]

Originally Posted by CaptainYooh

Your stock preferences are not dissimilar to most investors' approaching (or already in) their retirement age. Buy blue chip dividend-paying stocks with long history and decent ratios. Nothing wrong with that. I buy and sell the same 10-12 stocks all the time - a little up, a little down.

My point was that keeping these stocks in RRSP portfolios through market downturns does nothing good to your portfolio returns. If recession is inevitable, then these stocks are more likely to drop even further from their current lows than staying level or rising in that period. What do we have to lose by selling them and watching the market? The common answer is: "you don't know when the bottom occurs"; sure, you don't. But you will see some signs of economic recovery coming up and contributing to the market upturn, which would be a good time to buy those same stocks back. Even buying them at the same prices you have sold them for would have you lost a few bucks on commissions and missed dividends but had the capital preserved during turbulent times. The other possibility is that you would be re-buying same stocks at lower prices; thus, benefiting even more.

It just isn't that black and white. First of all, all information is priced into the markets, and the expectation of a recession is already well baked. Second, the stock market is not a scoreboard of where the economy is today, it is forward-looking, and typically runs about 10-12 months ahead of the now.

By the time we hit recession (if we in fact do), it is just as likely - I would
argue more likely - that the market is already rising.

[Enoch Root]

Originally Posted by Slava

OK well, I'll give you the rationale for why this is so hard. Aside from the "you don't know where the bottom is", investor psychology is brutal. I've done this for clients, where we sold before 2008-09 and were in cash/near-cash. The selling is easy, because you stalk to people and say "I think we should sell" and literally no one wants to debate that for any length of time. For me, this was January 2008 and things were volatile, so people were concerned and that only made it easier.

The problem is getting back in. So, fast-forward to March 2009. We didn't know that was the bottom, and nothng new happened that day. There was no news and nothing that actually let you know we were at the bottom. Basically, things just started to go up and never went as low again since that time. The old saying (I think from an ad in the 70's) is that "they don't ring a bell at the bottom", and it's so true. So, we started to rise and instead of everyone in the media and such saying things like "buy now because we hit the bottom!" you have pundits saying "we're going to have a double-dip and we're not out of the woods" and things like that. Some people would say there were green shoots and we were seeing things improve, but they were shouted down. And for the individual you have a real psychological puzzle. I talked to numerous people imploring them to buy back in and got responses like "how do you know it won't cut in half again?!" and things like that. And the truth is, you don't know, at least not with 100% certainty. What looks easy today, with the benefit of perfect vision looking back, was uncertain and unknown at the time.

So, while it seems simple to say you could sell and buy back in again cheaper, it could be true. But the one element you have to see here is that I sold things in January 2008. The real pain happened in September 2008. What happened in between? The market rallied, oil hit an all-time high and I definitely got asked by people whether "I had a clue what I was doing". You're sitting in cash making a few percent and people around you are making way more. That's grueling and for me, causes a lot of anguish. It's extremely easy to second guess yourself. If you've seen the "Big Short" and watched Michael Burry there incredibly stressed out and knowing he's right, but there's no proof...it's like that (he had billions leveraged, so I'm not saying it's the same...but it's my entire livelihood and this is your lifesavings, so I can only say it's painful!). Just know that there is a price to pay if you're wrong, and also a price to pay if you're early.

And, since I'm getting pretty personal here, or at least I think I am, you might wonder if I think it's worth it? Well I sold almost everything in late January 2020 because things looked bleak. I do generally agree that it makes zero sense to just ride things down if you're pretty sure there is a major drawdown coming. But, I think that you need to have a lot of conviction in doing that, because I don't think it's as easy as it seems.

tldr; I'd be careful.

So many of the people I knew that got out during the 08 crash never got back in until 2011 or 2012. I knew a couple guys that still weren't back in in 2018.

This sounds silly in hindsight, but at the time, it is not so easy and not so clear. If you were out in 2009, while the market was rallying, virtually everything you read was saying that it was a false rally and that things were still very bleak, with lots more pain coming.

But it kept going up.

So now it's 2010 and the market has rallied more than 20 or 30% and you feel like you've missed it and you need to wait for a pullback.

But a pullback never comes, and now it's 2011. Now you feel kind of stupid, and you really want a correction to save your pride. Plus, everything you read still says that there are still huge problems, quantitative easing is going to destroy everything, and the market has gone too far, too fast.

I saw so many people live exactly this.

And the most frustrating this is that it is basically the same, every single time. The same messages. The same advice. And the same mistakes. Humans are over-confident, and simply don't want to hear that they're not wired properly to be good investors.

[Slava]

Originally Posted by Enoch Root

So many of the people I knew that got out during the 08 crash never got back in until 2011 or 2012. I knew a couple guys that still weren't back in in 2018.

This sounds silly in hindsight, but at the time, it is not so easy and not so clear. If you were out in 2009, while the market was rallying, virtually everything you read was saying that it was a false rally and that things were still very bleak, with lots more pain coming.

But it kept going up.

So now it's 2010 and the market has rallied more than 20 or 30% and you feel like you've missed it and you need to wait for a pullback.

But a pullback never comes, and now it's 2011. Now you feel kind of stupid, and you really want a correction to save your pride. Plus, everything you read still says that there are still huge problems, quantitative easing is going to destroy everything, and the market has gone too far, too fast.

I saw so many people live exactly this.

And the most frustrating this is that it is basically the same, every single time. The same messages. The same advice. And the same mistakes. Humans are over-confident, and simply don't want to hear that they're not wired properly to be good investors.

And you know that the pundits and people in the media are the same. I saw this again in 2020 where a fairly prominent person said that the S&P500 would go back to 1450. Well...it never did and even with the tough year thus far it's at 3800-3900. Maybe the guy jumped back in and revised his forecast at some point, but that's pretty hard on the ego.

[bluejays]

I just read an interesting article about people pulling out of mutual funds and instead getting into ETFs. What are the advantages and disadvantages of ETFs over MFs?


https://ca.finance.yahoo.com/news/bi...171218122.html

[accord1999]

Originally Posted by bluejays

I just read an interesting article about people pulling out of mutual funds and instead getting into ETFs. What are the advantages and disadvantages of ETFs over MFs?

Generally much lower management expense ratios, especially for the ETFs tracking major indices. For example the ones tracking the S&P500 are around 0.1%.

[Enoch Root]

There are all kinds of mutual funds, and all kinds of ETFs, so this is an over-simplification, but when people compare the two, they are generally referring to mutual funds as actively managed, and ETFs as passively managed, index funds. And I presume that is the implication of the article you referred to, bluejays.

Actively managed funds are ones where the managers are actively picking or choosing securities - the most common example being stocks (but could be any securities), so the manager might pick 40 or so Canadian stocks, or US stocks, or maybe tech stocks, or whatever exposure they are trying to create. The main characteristics of actively traded mutual funds are that they have high MERs (management expense ratios), which just means high fees - typically in the 2 - 2.5% range.

ETFs (which stands for exchange-traded funds) are often used as examples of passive funds, meaning they offer exposure to an entire asset class, such as the entire Canadian stock market or the US stock market. And they might hold 200-300 securities or more (sometimes thousands), instead of the 40 or so that an active fund holds. Passive funds don't trade actively, they simply hold the market (or more accurately, a large enough subset of the market that will behave like the market). Since there isn't a bunch of trading and ongoing analysis (which is required before trading), they are cheaper to manage, and therefore can offer significantly lower fees - typically in the 0.1 - 0.5% range.

There are a couple of reasons why ETFs (index funds) are favoured over active funds: first of course, are the lower fees; another is that you know what you're getting - meaning that if you buy a passive index fund that replicates the Canadian stock market, you can be confident that it will perform similarly to the Canadian stock market. However, with an active Cdn fund, the manager might have a bias to one sector or another, and the return might be quite dissimilar to the Cdn stock market, so you never really know what you're getting. For example, one manager might favour O&G stocks, while another might favour consumer staples. Both would be listed as Cdn stock funds, but they would behave very differently.

Finally, active managers tend to under-perform the market over time. That is largely due to fees, however, many studies have shown that active managers sooner or later will under-perform their asset class even after accounting for fees, due to errors, biases, and emotional decisions.

Long story short: ETFs (passive or index funds) are cheaper, and tend to perform better than mutual funds (specifically, active mutual funds).

[Enoch Root]

There is another difference between the two, and it is possible that the article was referring to this, so I will explain:

ETFs are traded like stocks on the stock exchange, while mutual funds are not - they are priced once per day (end of day) and if you buy or sell, you get that end-of-day price.

So let's say you are interested in fund that gives you exposure to the banks, and there is both an ETF and a mutual fund that you could buy, and both started the day at $10. Now let's say there is good news for the banks and the market is moving rapidly. If you buy the ETF, you can buy it right now, and it might be trading at $10.50. But if you buy the mutual fund, you will get it at the value at closing. And by then the banks are up more and the fund is worth $11.00, so that is what you pay.

With the mutual fund, you can't buy intra-day, but with the ETF, you can.

For most people, most of the time (almost all the time), this should not be an issue. But in certain situations, there is value in it being exchange-traded.

[bluejays]

Wow. Huge and well appreciated explanation! Explains it perfectly. Some of which I should know but got muddled somewhere over time. I vaguely remember someone on here saying ETFs diminish over time so it’s of lesser benefit to hold them over the long term? Any recollection of what that may mean?

[Enoch Root]

Originally Posted by bluejays

Wow. Huge and well appreciated explanation! Explains it perfectly. Some of which I should know but got muddled somewhere over time. I vaguely remember someone on here saying ETFs diminish over time so it’s of lesser benefit to hold them over the long term? Any recollection of what that may mean?

Absolutely no idea what they may be referring to, but no.

The only thing I can think of is maybe someone was arguing that the benefits of lower MERs diminishes over time. But if they were arguing that, they were dead wrong. Beyond that, I can't think of anything they might have been referring to.