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Canadian Stock Market Basics:: How to Trade Stocks and Make Good Investments in Canada
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8/9/2019 Canadian Stock Market Basics:: How to Trade Stocks and Make Good Investments in Canada
Page 1 Want more investment advice and information like this? Visit tsinetwork.ca today.
Who is Pat McKeough?
While we have a staff of experienced researchers, all our recommendations are personallyreviewed and analyzed by our founder and president, Pat McKeough.
A professional investment analyst for more than 25 years, Pat has developed a stock-selectiontechnique that has proven reliable in both bull and bear markets. His proprietary ValuVestingSystem™ focuses on stocks that provide exceptional quality at relatively low prices. Many savvyinvestors and industry leaders consider it the most powerful stock-picking method ever created.
Pat is one of Canada’s top safe-money advisors. Proof: His conservative growth portfolio is up303.8% since 1995. That’s 126.8% above the 177.0% gain of the S&P/TSX. Conservative NorthAmerican investors have come to trust him for help in finding stocks with hidden value.
Pat is the editor and publisher of our four investment advisories:
The Successful Investor — An advisory for the conservative investor who wants great gainswith prudent risk, mainly in Canadian stocks. Click here to learn more.
Stock Pickers Digest — An advisory that’s a little more aggressive than The Successful
Investor. Click here to learn more.
Wall Street Stock Forecaster — An advisory that focuses on conservative portfolio investing,mainly in U.S. stocks. Click here to learn more.
Canadian Wealth Advisor — An advisory reporting “safe money” strategies on mutual funds,royalty and income trusts, exchange-traded funds (ETFs), index funds, TFSAs, RRSPs, RRIFs
and RESPs. Canadian Wealth Advisor also covers tax- and financial-planning topics. Click hereto learn more.
As early as 1980, Pat was recognized as #1 in the world of published investment advice by theWashington, DC–based Newsletter Publishers Association, and he was the first multi-yearwinner of The Globe and Mail ’s stock picking contest.
Both CBS MarketWatch and The Hulbert Financial Digest recognize Pat as one of NorthAmerica’s top stock analysts. The Wall Street Journal calls him “one of only four investmentnewsletter advisors who have managed to serve their readers well over the long haul.”
Pat is also a best-selling Canadian author who wrote the book on the 1990s stock-market boom, Riding the Bull . Through his many television appearances, he is well known to investors for hisinsightful analysis and his candid, unpretentious style.
Bottom line: Pat’s conservative, reduced-risk strategy is a proven approach to lower-risk investing.
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What is TSI Network?
TSI Network (www.tsinetwork.ca) is the online home of Pat McKeough’s highly successful
family of investment publications, The Successful Investor , Stock Pickers Digest , Wall Street
Stock Forecaster and Canadian Wealth Advisor .
While most media outlets only cover the popular investment theories of the day, TSI Network
goes beyond the headlines to get to the heart of what really affects you – the individual investor.
The site is based on Pat’s rock-solid investing system and his unflinching focus on helping North
American investors make the right choices for their own unique investment needs.
Pat’s conservative growth portfolio is up 303.8% since 1995. That's 126.8% above the 177.0%
gain of the S&P/TSX. Many conservative investors have come to rely on him to help them make
their stock selections – as Pat’s many testimonials from his satisfied subscribers show.
Through TSI Network, investors get access to all of Pat’s past daily postings, as well as freereports and more helpful financial advice and information.
Plus, when you subscribe to one of Pat’s newsletters or his exclusive Inner Circle service, you
get even more: aside from his daily posts, polls, free reports and other portfolio-building advice
and information, you get full access to all of your paid publications online. As soon as it leaves
Pat’s desk, your publication is posted on TSI Network. As well, you get full access to your
publication’s archives, so you can see for yourself how Pat’s past picks have performed over the
years. You always have Pat’s most current advice and information close at hand.
Through TSI Network, newsletter subscribers and Inner Circle members can also quickly and
easily get in touch with Pat and manage their subscriptions and memberships online. You are
always just a mouse click away from the advice and information you need to make lower-risk,
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The Successful Investor Family of Publications
In addition to reports like this one, Pat offers a host of other publications to help you make the
right investment choices for your own specific needs.
1. The Successful Investor includes a monthly newsletter, a weekly telephone/email hotline
and a monthly portfolio supplement. The newsletter recommends high-quality, mostly
Canadian stocks that will surge ahead in good markets and hold their own in the face of
market declines. It focuses on low-risk stocks with strong profit and growth potential.
Click here to learn more.
2. Stock Pickers Digest focuses on the aggressive segment of the Canadian and U.S.markets, where risk is high, but the potential for profit is much greater. As these stocksare faster moving and not as well-established, the service includes a weeklytelephone/email hotline in addition to the monthly newsletter. Tech stocks, small caps
and junior mining and oil stocks are just some of the types of investments you’ll readabout in Stock Pickers Digest . The newsletter picks aggressive stocks, but at the sametime it looks for above-average value — rising sales, good balance sheets and a stronghold on a growing market. Click here to learn more.
3. Wall Street Stock Forecaster includes a monthly newsletter, a weekly telephone/emailhotline and a monthly portfolio supplement. The newsletter recommends high-qualityU.S. stocks that will surge ahead in good markets and yet hold their own in the face of market declines. It helps investors build a well-balanced, diversified portfolio whatevertheir particular risk/reward level. The newsletter also gives a clear, easy-to-read analysisof how economic changes, political decisions and the Federal Reserve affect the markets
in general, and your portfolio in particular. Click here to learn more.
4. Canadian Wealth Advisor is published monthly and deals with lower-risk investments:
mutual funds, exchange-traded funds (ETFs), income trusts, conservative large-
capitalization stocks, RRSPs, RRIFs, TFSAs, GICs and tax-advantaged investments. The
newsletter also looks at financial planning, investment bargains (and rip-offs, too) and
many other issues related to making more money with less risk. Click here to learn more.
Special Services
Pat McKeough’s Inner Circle is Pat’s exclusive service for investors who want more
personal attention for their portfolios, plus access to all of Pat’s publications. Inner Circle
membership gives you the opportunity to ask Pat your personal investment questions and
includes his commentaries as he answers questions posed by other Inner Circle members. As
a member, you get access to all four newsletters, our full library of special reports and much
more. Click here to learn how you can become a member of Pat McKeough’s Inner Circle.
Finance and Utilities). There’s no need to buy a board lot of shares (in most cases an even 100
shares). You could purchase, say, 30 shares of widely traded Bank of Nova Scotia to make up the
Finance portion of your portfolio.
So $10,000 is a reasonable minimum. Mind you, you’ll have to accept a bigger proportional
commission expense than with larger stock purchases, but that expense is well below the MER
on most non-index mutual funds.
Typically, when you place an order with your broker you’ll want to place a market order. A
market order is an order to buy or sell a specific number of shares at the best price available
when you place your order. These orders are almost always filled within a very short period of time — in minutes, if not seconds.
However, you only learn the price you paid (for a purchase) or received (for a sale) after the
order is filled. The market price may change, for or against you, between the time you place the
order and the time it is filled.
You can also place a limit order. With this type of order, you specify the highest price you are
willing to pay to buy. However, you then risk not getting a fill for your order if there is no stock
available at or below your price.
This introduces a filtering mechanism that can cost you money. Failing to get a fill is much more
likely with your best choices, since they are far more likely to shoot up faster than you guessed.
But you’ll always get a fill on your worst choices; they’ll come down to meet your price, then go
lower.
In general, most investors should use market orders when buying or selling widely traded shares.
The market-order risk of occasionally paying too much is more than offset by the limit-order risk
of missing out on your best ideas.
With thinly traded shares, you may want to put a limit on the price you are willing to pay if you
are buying (or the price you are willing to accept if you are selling). But if you use limit orders,make the limit a fairly wide one. It’s better to pay a little more or receive a little less than to miss
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3) DIVIDEND REINVESTMENT PLANS (DRIPs)
Dividend reinvestment plans, or DRIPs, are plans some companies offer to allow shareholders to
receive additional shares in lieu of cash dividends. We think DRIPs are a good way to slowly
build wealth over a long period of time, for a number of reasons. First, they eliminate the
nuisance effect of receiving small cash dividend payments. Second, some DRIP plans let you
reinvest your dividends in additional shares at a 5% discount to current prices. Third, many
DRIP plans also allow optional commission-free share purchases on a monthly or quarterly basis.
Generally, investors must first own and register at least one share before they can participate in a
DRIP. Registration will generally cost $40-$50 per company. The investor must then notify the
company that they wish to participate in the company’s DRIP.
Overall, we think that DRIPs are okay to participate in. But here are a few things to keep in
mind:
Too many investors select their investment ideas solely on the basis of the existence of the DRIP
option. We think the availability of a DRIP is only a bonus, rather than a reason to invest by
itself. Investing in only DRIP stocks limits both investment choice and opportunity.
The advent of the low-cost discount brokerage and on-line investing has reduced the commission
cost of investment trades. Thus, the commission-free investing that DRIP investing allows is less
of an advantage today than it was in the past.
Taxes are still payable on dividends that are reinvested.
Most companies that offer DRIPs provide details on their web sites. Another place to look forinformation is the inside back cover of most companies’ annual reports. Finally, you can also
contact the investor relations department of companies you wish to invest in.
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4) THE RIGHT NUMBER OF STOCKS TO OWN
The right number of stocks for you to own depends, in part, on where you are in your investing
career. When they’re just starting out, most people have modest amounts of money to invest.
Even so, it generally pays to invest at least several thousand dollars at a time, even if this means
you can only buy a handful of stocks. Otherwise, your broker’s minimum commission will work
out to too high of a percentage of your investment on each trade.
You should aim to invest initially in a minimum of four or five stocks — one from each of most,
if not all, of the five main economic sectors. You can buy them one at a time or over a period of
months (or even years) rather than all at once. After that, you can gradually add new names to
your portfolio as funds become available, taking care to spread your holdings out as we
recommend.
When your portfolio gets into the $100,000 to $200,000 range, you should aim for perhaps 15 to
20 stocks. If you’re married, it’s best to treat your family holdings as one big portfolio, even if you and your spouse keep your money separate. This way, you can be sure you aren’t operating
at cross purposes, or investing too much of the family fortune in a single area.
When you get above $200,000 or so, you can gradually increase the number of stocks you hold.
When your portfolio reaches the $500,000 to $1-million range, 25 to 30 stocks is a good number
to aim for. Of course, you may fall a few stocks below that range, or go a few above it,
particularly when you’re making changes to your holdings. That won’t matter if you follow our
three-part prescription of well-established companies, diversification across the five sectors and
favouring out-of-the-limelight stocks that may offer hidden or little-noticed value.
My upper limit for any portfolio is around 40 stocks. Any more than that and even your best
choices will have little impact on your personal wealth.
Mutual fund investors routinely break this rule. They often invest in 10 or more individual funds,
any one of which may hold 50 to 100 stocks. There’s a lot of overlap in stocks between funds, of
course, but this still represents far too much diversification. When you spread your money out
that thinly, you condemn yourself to mediocre results, at best. The best you can hope for is a
long-term return that more or less equals the market, minus the average MER (the yearly cost of
investing in most funds) of 2.5% to 3%. Mind you, that’s what you get if you invest only in well-
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7) HOW MUCH TURNOVER SHOULD YOU HAVE INYOUR PORTFOLIO?
Ideally, you want to avoid excessive turnover in your portfolio. This way, you postpone or avoid
brokerage commissions, taxes and losses on the bid-ask spread. To do that, you seek out stocksthat you might want to hold on to more or less indefinitely. You’ll change your mind on some of
them, of course. But you’ll hold others for decades, and these will give you some of your biggest
profits.
Many successful investors we’ve met over the years replace about a quarter of their holdings
each year, on average. In the case of a $400,000 portfolio, that would mean you would sell
$100,000 worth of shares and buy $100,000 worth of shares, for total transactions of $200,000 a
year. With a 2% commission on each trade, you’d pay yearly commissions of $4,000, or about
1% of your portfolio’s value. That would still make a dent in your portfolio’s growth. But it’s a
half to a third the cost of investing in a mutual fund.
You may trade more actively than that, or less. But if you pay 11% of your capital every year in
commissions, it’s unlikely that you’ll make any money in the long run.
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9) STAY OUT OF BONDS
Recent stock-market volatility has rekindled interest in bonds. This is understandable, since
bonds provide steady income streams and a guarantee to repay the principal at maturity.
However, bond prices will likely fall over the next few years as interest rates inevitably riseagain. Big government budget deficits could spur inflation and push up rates, for example.
We continue to recommend that you invest only a small portion of your portfolio in bonds and
other fixed-income instruments. Instead, you should aim to build a diversified portfolio of well-
established companies with long histories of rising dividends.
We think that’s a better approach than basing your bond/stock split on how you expect these twoto perform. This requires the kind of foresight that no investor has. You are far better off basingthe split on your own needs and on the characteristics of these investments.
For one thing, your equity holdings are bound to produce higher profits for you over long periodsthan your fixed-return investments. That’s because returns on equities are related to businessprofits, while returns on fixed-return investments are related to business interest costs. Businessprofits have to exceed business interest costs in the long run. Otherwise, everybody who owesmoney would go broke, and that’s not likely to happen. That's why most investors should hold asubstantial portion of their money in stocks most of the time.
Returns on your stocks are sure to be more volatile than what you earn on fixed-returninvestments (that includes short-term bonds and money-market funds). That’s because returns onstocks are related to “a residual,” as academic investors like to refer to it. In this case, theresidual is the portion of gross profit that’s left over after a company pays its interest costs.
Though fixed-return investments are less profitable than equity investments, they can help tostabilize your portfolio’s value. They serve as reserves that you can use to buy more stocks whenprices are down. For that matter, when stock prices are down, you can use your reserves forpersonal spending to avoid having to sell at a low.
The right equities/fixed return split varies widely from one investor to another, of course. Itdepends on your financial circumstances and your temperament. If you’re a young investor witha secure income, and you add regularly to your stock holdings, you may want to keep all yourlong-term savings in stocks. If you are retired or close to retirement, you may want to hold somefixed-income investments — but stick with Canadian T-bills with maturities of around three
months.
Regardless of age, we think all investors should stay out of long-term bonds.
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10) HOLD 20% TO 30% OF YOUR PORTFOLIO IN U.S.STOCKS
The state of the U.S. economy continues to worry many investors. Some are dumping their U.S.
stocks for fear that the U.S. market rise will stall. Others are loading up on gold, because theyworry that a drop in the U.S. dollar will hinder the global economic recovery.
Needless to say, some journalists and newsletter publishers have had a lot to say about the
situation. They blamed the market’s drop on the “credit crunch.” This situation lends itself to
broad analogies and alarming one-liners.
We’ve lost track of how many times we’ve heard negative economic predictions caused by the
“credit crunch.”
Any issues in the U.S. credit markets can’t go on forever. The stimulus programs undertaken by
the U.S. government will start to correct the problem. In addition, an increased savings rate willoffer U.S. banks cheap access to capital through customer deposits. Simply put, the U.S. market
offers various multinational investment opportunities that just aren’t available anywhere else.
Underlying all this is the fact that the U.S. has lower tax rates and higher productivity growth
than Canada. These two factors build on each other. The lower tax rates attract more of the
world’s human and financial capital. This tends to support the value of the U.S. dollar, regardless
of the direction of commodity prices. Greater capital investment gives the U.S. economy better
tools to work with, which enhances growth and productivity all the more.
We’d say now is a terrible time to dump your U.S. stocks (or U.S. dollars). You are far better off diversifying with 20% to 30% of your portfolio in U.S. stocks.
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11) HOLD SOME RESOURCES & COMMODITIESSTOCKS
Oil, gold, copper and other resources moved steadily upward until mid-2008. Rapid economic
growth, particularly in countries like China and India, drove this increase. These prices droppedsharply due to the recession, but they’ve begun to rebound, although not as a sustained, across-
the-board advance. Instead, we’re seeing pockets of strength and weakness. You’ll need
Resource & Commodities sector exposure in your portfolio. But don’t go overboard in this area,
because some commodities will continue to drop as others rise.
Prices of most Resources & Commodities stocks move up and down with the overall economy.
That’s because resource companies supply many of the raw materials that manufacturers use in
their products, particularly in durable goods, like cars. Other factors, like interest rates, inflation
and unemployment, also affect demand.
When the economy is expanding, businesses and consumers buy more of these goods, and
resource-stock profits rise. Demand eventually falls, however, and earnings suffer.
Many investors try to predict the best time to invest in or sell cyclical resource stocks. They hope
to “get in cheap” and “sell at the top.”
However, economic cycles are difficult to predict, and you could wind up selling a cyclical stock
that’s ready to resume its rise. Instead of relying on timing strategies, make sure that most of the
stocks in the Resources & Commodities portion of your portfolio are high-quality, well
established companies. This way, you’ll take advantage of cyclical upswings and minimize your
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12) USE CAUTION WHEN INVESTING IN GOLD
Gold has been attracting investor interest, and it hit an all-time high of $1,214.80 U.S. an ouncein November 2009.
We feel that gold could well move even higher. That’s mainly because investors fear that lowinterest rates and government stimulus spending will spur inflation. This could prompt manyinvestors to seek security by investing in gold.
If you are interested in gold investing, we recommend staying away from buying gold bullion,coins (unless you collect them as a hobby) or certificates representing an interest in bullion.Unlike stocks, commodity investments like gold bullion do not generate income. Instead, theycome with a continuing cash drain for management, insurance and so on.
Furthermore, conservative investors should be very careful when choosing gold investments.Gold has a particularly strong grip on some investors’ imaginations, so they tend to bid up gold-
stock prices out of proportion to how much profit these companies can make from gold mining.
We feel that the best way to profit from gold is through high-quality companies like NewmontMining. Its mines should be productive for decades, and its costs are coming down. As well,most of its production is in politically stable areas, like North America and Australia.
However you choose to invest in gold, we feel it should make up no more than a very small partof your overall portfolio.
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13) DON’T OVERLOAD YOUR PORTFOLIO WITHINCOME TRUSTS
Starting in 2011, Ottawa will impose a tax on income trust distributions. This will put income
trusts on an equal tax footing with conventional taxable corporations. Trusts will pay a 31.5% taxon distributions to unitholders, so your cash flow from those trusts will fall by the same amount.
However, if you hold trusts outside of registered plans such as RRSPs and RRIFs, you will not
see a dramatic change in your after-tax position — even though the distributions you receive will
likely drop by 31.5%. That’s because the distributions will be taxed as dividends, and Canadians
will benefit from the lower tax rates provided by the combination of the dividend tax credit and
the dividend gross-up (foreigners don’t qualify for the favourable dividend treatment).
If you hold trusts in registered plans, such as RRSPs and RRIFs, you will receive a 31.5% lower
distribution, but with no offsetting tax benefits on dividends. When you eventually withdraw the
distributions from your RRSP, you’ll pay tax at the same rate as you would on ordinary income.
A great deal could change between now and 2011. The current government, or its successor,
could change, postpone or drop the new tax rules.
Meanwhile, we still feel you should avoid low-quality or newly issued trusts — and it’s all the
more important to continue to keep your income trust holdings below 15% of your portfolio, as
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14) WHEN TO SELL
Investors often ask, “When do I sell?” There is no simple answer to this question. But there are
some helpful guidelines.
First, you’re never going to sell at the top or buy at the bottom. As Bernard Baruch said, “Thatcan't be done — except by liars.” That’s why we’re so selective about our recommendations. The
better the quality of the investments you buy, the less you have to lose by failing to sell.
In fact, regardless of whether you are an aggressive or a conservative investor, the quality of
your investments matters much more than your skill at selling.
Second, you should be quicker to sell aggressive stocks than conservative ones. With stocks we
rate as “Speculative” or “Start-up,” it pays to apply our sell-half rule. That’s when you sell half
of a stock that doubles in price.
Third, when a stock you own is getting taken over, it usually pays to tender to the takeover offer.
This way, you get the full takeover price and you don’t pay brokerage commissions. Selling one
month ahead of the takeover can cost you, say, 3%. On a yearly basis, that’s like missing out on
a 40% profit.
Many investors mistakenly assume that frequent profit-taking is the key to long-term success.
Few brokers disagree, since they make money every time you buy or sell. But in the long run,
taking profits simply because profits are available is going to cost you money. That’s because of
the way the stock market works.
Stock prices rise 10% to 12% a year over long periods, on average, but individual cases andyears vary widely. Even good stocks sometimes go sideways for decades, while others turn out
to be “ten-baggers,” with gains of 1,000%. To make serious profits, you need to hang on to your
best performers for years. If you are too quick to sell stocks that have gone up, you may avoid
some 20% setbacks, but you’ll also miss out on some 200% gains.
As one successful investor told me long ago: “I’m a rich man today because I was smart enough
to buy Canadian Tire at $0.50 and too stupid to sell it at $2.00.”
All rights reserved. No part of this report may be reproduced in any form or by any means, electronic or
mechanical, including photocopying, recording, posting online or by any information storage and retrieval
system, without written permission from the publisher. However, TSI Network aims to help all investors
expand their investment knowledge through its free reports, so please feel free to forward this report on to
friends or colleagues.
The Successful Investor Inc., owner of tsinetwork.ca, is affiliated by common ownership with Successful
Investor Wealth Management Inc., a Portfolio Manager. Past returns do not guarantee future results.
Contact Information
The Successful Investor Inc.Suite 977, 6021 Yonge St.,
Toronto, ON, M2M 3W2;
Phone: (416) 756-0888
Toll-free: 1-877-656-6461
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nor the publisher assumes any responsibility for error, omissions or contrary interpretations of the subjectmatter contained herein.
Stock prices, portfolio holdings and other information statements are current as of the publication date.
The purchaser or reader of this publication assumes responsibility for the use of these materials and
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Opinions and information contained herein are not guaranteed. Some recommendations are bound to
prove disappointing. For overall portfolio direction, consult a personal financial advisor and our flagshippublication, The Successful Investor. Clients and employees of Successful Investor Wealth Managementand The Successful Investor Inc. may hold securities recommended or discussed in Successful InvestorInc. publications.