Buy good stocks, not good stories. That was the answer I gave to a writer for Investment Executive who asked me to sum up in a sentence what advice I would give to novice investors.
It was a lesson I learned the hard way. As a career journalist and author, I have always been a sucker for a great story. So during my early years of investing, I was often persuaded to put money into fledgling companies that were poised to make gazillions of dollars with innovative, usually off-beat concepts. Almost inevitably, they crashed and burned.
One example was a Quebec-based company that claimed to have developed a technique for making super-strong bullet-proof vests out of spider silk. At first I was sceptical (I should have remained so) but when I learned that they were receiving grants from the U.S. military to pursue their research I figured there had to be something to it and bought shares. That was before it became general knowledge that the U.S. military throws money at almost any project, no matter how weird, that it thinks may give it a technical advantage. In the end, the stock fell to zero and I lost my investment. Perhaps not surprisingly, the name of the company has been blotted from my memory.
Then there was the Lady Mary saga. It was an old tub that had been refitted to offer dinner cruises on Simpson Bay on the Dutch/French Caribbean island of St. Martaan. A marketing executive in Montreal heard that it was for sale and decided he wanted to get away from the rat race and move to Paradise. He persuaded some acquaintances to form a limited partnership to buy the boat, which he and his spouse would crew. I got sucked in through a friend of a friend.
Again, it was a great story. There was no competition and the popularity of the island resort would ensure a steady stream of business. Investors were welcome any time for a sail and a free dinner. Simpson Bay was beautiful, calm, safe, and sheltered. We were assured that hurricanes never hit the island and in the unlikely event one did, the boat was insured. The projected cash flow looked good and there were tax write-offs. I bought two shares.
The business limped along for a few years. The bonanza of passengers never materialized and a break-even season became a welcome event. Then one dark summer night, a hurricane passed directly over Simpson Bay and the Lady Mary went to the bottom along with dozens of other small craft. As for the insurance money, our charming "friend" absconded with it and has never been heard from again. He's probably sailing around Tahiti these days under an assumed name. The investors lost everything.
This is not to say that good stories never translate into profits. Occasionally they do. Back in the 1990s while on a cruise to Alaska I was told to buy shares in a company called Dia Met Minerals, which was then trading as a penny stock on the old Vancouver Stock Exchange. The founder was an old diamond hand who was convinced there were thousands of the gems in the Canadian north. He was reputed to have discovered a big diamond pipe somewhere in the sub-Arctic that was being kept under wraps.
Diamonds? In the Arctic? Even my fertile brain couldn't imagine that. With the super spiders still fresh in my mind, I passed. In 2001, BHP Billiton, the same company that is now trying to grab Potash Corp., took control of Dia Met, paying $21 a share for the company.
But stories like that are rare. Maybe one out of a hundred ends up that way. The other 99 times, investors lose their money.
So if you should avoid good stories, how do you find good stocks? It takes some homework or finding a great advisor. The best stocks are often the ones you never hear about in the news.
I cannot remember even reading a single article about Canadian Utilities (TSX: CU) but it is one of the core stocks in my portfolio and has been on the IWB Recommended List since May, 2000 when I picked it at $18.88. It's one of the dullest companies you'll find anywhere, with a website to match (www.canadian-utilities.com). The core business is supplying natural gas and electricity to residents of Alberta which it does in a low-key, efficient, and profitable manner. In a little over a decade, the stock has gone up by about $30 a share. The dividend has been increased nine times and we have received a total $9.16 in payments. That works out to an average annual compound rate of return of 11.3%. Now that's a good stock!
There are lots of others that fall into that category: boring companies that quietly go about their business, making investors rich in the process. Examples include Fortis Inc. (TSX: FTS), Brookfield Asset Management (TSX: BAM.A, NYSE: BAM), Enbridge (TSX, NYSE: ENB), TransCanada (TSX, NYSE: TRP), CN Rail (TSX: CNR, NYSE: CNI), and most of the banks.
Here's how to separate the good stocks from the good stories.
Look at the bottom line. If a company is not making a profit, pass. No matter how good the story is, there is no guarantee it will ever earn a dime for investors. Think about all the great high-tech start-ups of the late 1990s. They all looked like huge money-spinners, at least conceptually. Most ended up on the rubbish heap.
Check the earnings record. If the company is making money, do some digging and see whether earnings have been growing and if so at what rate. Double-digit profit growth over several consecutive years is a clear indication that management is doing something right.
Make sure it pays a dividend. These days, I rarely buy a stock that doesn't pay a dividend. I'm not terribly concerned if the yield isn't high but I want to see a history of steady dividend increases over the years. CN Rail only yields 1.6% but it has raised its dividend 11 times since 1996.
Choose industry leaders. Companies that dominate their sectors tend to stay on top for a long time - sometimes even longer than our life expectancy. General Electric was founded by Thomas Edison more than a century ago. It has had its ups and downs over the years but remains one of the giants of U.S. industry to this day.
Look for barriers to entry. When the Internet was ramping up, everyone wanted to get in on the act and it was cheap and easy to do so. All you needed was a few skilled programmers, a couple of computers, and an idea. The barriers to entry were minimal. Contrast that with the obstacles facing an entrepreneur who wants to launch a new cable TV system in Canada or build a new railroad. They're overwhelming. That's why companies like Rogers, Shaw, CN, and CP are going to be on top for the foreseeable future, maybe forever.
Those are the truly good stories. They may not be sexy but they'll make money for you. In the end, that's what counts.
It was a lesson I learned the hard way. As a career journalist and author, I have always been a sucker for a great story. So during my early years of investing, I was often persuaded to put money into fledgling companies that were poised to make gazillions of dollars with innovative, usually off-beat concepts. Almost inevitably, they crashed and burned.
One example was a Quebec-based company that claimed to have developed a technique for making super-strong bullet-proof vests out of spider silk. At first I was sceptical (I should have remained so) but when I learned that they were receiving grants from the U.S. military to pursue their research I figured there had to be something to it and bought shares. That was before it became general knowledge that the U.S. military throws money at almost any project, no matter how weird, that it thinks may give it a technical advantage. In the end, the stock fell to zero and I lost my investment. Perhaps not surprisingly, the name of the company has been blotted from my memory.
Then there was the Lady Mary saga. It was an old tub that had been refitted to offer dinner cruises on Simpson Bay on the Dutch/French Caribbean island of St. Martaan. A marketing executive in Montreal heard that it was for sale and decided he wanted to get away from the rat race and move to Paradise. He persuaded some acquaintances to form a limited partnership to buy the boat, which he and his spouse would crew. I got sucked in through a friend of a friend.
Again, it was a great story. There was no competition and the popularity of the island resort would ensure a steady stream of business. Investors were welcome any time for a sail and a free dinner. Simpson Bay was beautiful, calm, safe, and sheltered. We were assured that hurricanes never hit the island and in the unlikely event one did, the boat was insured. The projected cash flow looked good and there were tax write-offs. I bought two shares.
The business limped along for a few years. The bonanza of passengers never materialized and a break-even season became a welcome event. Then one dark summer night, a hurricane passed directly over Simpson Bay and the Lady Mary went to the bottom along with dozens of other small craft. As for the insurance money, our charming "friend" absconded with it and has never been heard from again. He's probably sailing around Tahiti these days under an assumed name. The investors lost everything.
This is not to say that good stories never translate into profits. Occasionally they do. Back in the 1990s while on a cruise to Alaska I was told to buy shares in a company called Dia Met Minerals, which was then trading as a penny stock on the old Vancouver Stock Exchange. The founder was an old diamond hand who was convinced there were thousands of the gems in the Canadian north. He was reputed to have discovered a big diamond pipe somewhere in the sub-Arctic that was being kept under wraps.
Diamonds? In the Arctic? Even my fertile brain couldn't imagine that. With the super spiders still fresh in my mind, I passed. In 2001, BHP Billiton, the same company that is now trying to grab Potash Corp., took control of Dia Met, paying $21 a share for the company.
But stories like that are rare. Maybe one out of a hundred ends up that way. The other 99 times, investors lose their money.
So if you should avoid good stories, how do you find good stocks? It takes some homework or finding a great advisor. The best stocks are often the ones you never hear about in the news.
I cannot remember even reading a single article about Canadian Utilities (TSX: CU) but it is one of the core stocks in my portfolio and has been on the IWB Recommended List since May, 2000 when I picked it at $18.88. It's one of the dullest companies you'll find anywhere, with a website to match (www.canadian-utilities.com). The core business is supplying natural gas and electricity to residents of Alberta which it does in a low-key, efficient, and profitable manner. In a little over a decade, the stock has gone up by about $30 a share. The dividend has been increased nine times and we have received a total $9.16 in payments. That works out to an average annual compound rate of return of 11.3%. Now that's a good stock!
There are lots of others that fall into that category: boring companies that quietly go about their business, making investors rich in the process. Examples include Fortis Inc. (TSX: FTS), Brookfield Asset Management (TSX: BAM.A, NYSE: BAM), Enbridge (TSX, NYSE: ENB), TransCanada (TSX, NYSE: TRP), CN Rail (TSX: CNR, NYSE: CNI), and most of the banks.
Here's how to separate the good stocks from the good stories.
Look at the bottom line. If a company is not making a profit, pass. No matter how good the story is, there is no guarantee it will ever earn a dime for investors. Think about all the great high-tech start-ups of the late 1990s. They all looked like huge money-spinners, at least conceptually. Most ended up on the rubbish heap.
Check the earnings record. If the company is making money, do some digging and see whether earnings have been growing and if so at what rate. Double-digit profit growth over several consecutive years is a clear indication that management is doing something right.
Make sure it pays a dividend. These days, I rarely buy a stock that doesn't pay a dividend. I'm not terribly concerned if the yield isn't high but I want to see a history of steady dividend increases over the years. CN Rail only yields 1.6% but it has raised its dividend 11 times since 1996.
Choose industry leaders. Companies that dominate their sectors tend to stay on top for a long time - sometimes even longer than our life expectancy. General Electric was founded by Thomas Edison more than a century ago. It has had its ups and downs over the years but remains one of the giants of U.S. industry to this day.
Look for barriers to entry. When the Internet was ramping up, everyone wanted to get in on the act and it was cheap and easy to do so. All you needed was a few skilled programmers, a couple of computers, and an idea. The barriers to entry were minimal. Contrast that with the obstacles facing an entrepreneur who wants to launch a new cable TV system in Canada or build a new railroad. They're overwhelming. That's why companies like Rogers, Shaw, CN, and CP are going to be on top for the foreseeable future, maybe forever.
Those are the truly good stories. They may not be sexy but they'll make money for you. In the end, that's what counts.
