no, but this is <g>Rules to follow, myths to avoid
Bill Carrigan
STAR COLUMNIST
Getting Technical
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Most of us have some curiosity about individuals who achieve celebrity status.
Britain and the United States can always count on the royal family and Hollywood, respectively, to supply provocative stories of the rich and famous. In Canada, we have only a small pool of politicians and business leaders to draw from.
Last week, Nortel Networks Corp. chief executive John Roth got more local press coverage than the Oscar-winning Julia Roberts.
On Thursday, a Nortel-John Roth front-page extravaganza obscured a tiny news item titled Genesis sold. Apparently, yet another Canadian energy producer had quietly fallen into U.S. hands. What a pity. Perhaps a name like Roth Energy would have raised more eyebrows.
I always avoid the shares of companies when there is any controversy surrounding their operations or their executives. Share prices usually suffer during these noisy periods and it is best to seek out investment opportunities elsewhere.
That's just one of the trading rules I adopted over the years. I have learned to avoid investment decisions that usually produce a negative outcome. Investment insanity can, therefore, be defined as doing the same thing over and over and expecting a different outcome.
Write down these rules:
Trade in active stocks.
Don't invest on inside information.
Don't buy stocks in down trends.
Use stop losses.
Never average down on a losing investment.
Don't buy because the stock seems cheap.
Don't sell because the stock seems expensive.
Learn from your mistakes.
And here is the big rule for investors: Never buy into a common belief or a ``feel-good'' theme that appears to guarantee a positive outcome. Bear markets usually tear these to shreds.
Here are what I call investment myths:
The myth of diversification: Dozens of stocks and mutual funds will simply guarantee below-average returns without any significant reduction of risk. A U.S. study published two years ago proved that as few as 12 stocks of different asset classes can provide adequate diversification.
The myth of dollar cost averaging: Systematic monthly or quarterly stock or mutual fund purchases will not always guarantee a lower average cost over time. An early lump-sum investor will do better in a rising stock market and a late lump-sum investor will do better in a falling market. Invest monthly only if you can't identify a market trend or you simply don't have the cash for a lump-sum investment.
The myth of professional management: Actively managed funds actually underperform in bull markets and then offer little protection in bear markets. A recent study by a Vancouver-based advisory firm compared the 10-year return of the TSE 300 index to that of 69 Canadian equity funds with a 10-year track record.
The TSE beat an equal investment in each fund by almost one-half per cent per year. I wonder, who in heck is going to buy 69 mutual funds?
The myth of foreign content: Do you actually believe that a little London, Hong Kong, German and U.S. content will reduce risk and enhance returns? Forget it. My math shows that all these foreign stock markets have over a 90 per cent correlation to the TSE 300.
Modern portfolio theory suggests that the negative correlation of different asset classes will improve the risk/reward ratio of the overall portfolio.
Our chart this week is that of the monthly closes of the German DAX and the TSE 300 index. They had an almost perfect correlation over the 11-year period. In other words, these two indices did the same thing at the same time, most of the time. Foreign investing has nothing to do with stock markets and everything to do with currency speculation.
The myth of this-time-it's- different: The new economy was to be recession-proof and the old rules of organic growth and profits were no longer valid.
The analysts should have heeded the advice of Cuba Gooding Jr. when he shouted to his agent: ``Show me the money!'' |
