Uzair’s Theory On Investing: Getting Started
Since I’m the biggest hater of real estate as an overrated investment, a lot of people have asked me where else can you put your money. Well the day has come where I feel I’ve read enough about the subject to offer my disciples sound advice. Now, we all know I’m a very steady, level headed and disciplined man so if you’re expecting me to teach you how to win the jackpot and get 300% returns on a yearly basis then you will have to wait for my next point. I don’t look for the one stock that will hit the home run, I want steady and consistent returns over the lifetime of my portfolio. At least with a portion of my portfolio.
Now a lot of people have lost lots of money on the stock market, or been burned because of their friends hot tip and bought at the peak but you only have yourself to blame for that. The stock market is the easiest way to lose money if you’re ignorant and don’t know what you’re doing. In every transaction there is always one sucker.
On the other hand there are people who really want to learn about the stock market but they don’t know where to start. They make excuses like “it’s too complicated” or “I don’t have time to keep up with all the information”, which are all reasonable. One thing you will learn about the world of finance is that there is a ton of noise. No one can possibly keep up with everything that’s going on, which is why it’s crucial that you are focused on a set of companies you’ve chosen before and stick to your strategy.
Which leads me to my next point; the importance of having and sticking to your trading strategy and rules is crucial to success in the stock market and cannot be overstated enough! Since time of the essence in this crazy world with short attention spans, I’m not going to waste my time talking about what everything means, I will just tell you my plan and how you can follow it yourself. If you want to learn about what everything means, check out www.investopedia.com.
I also want to recommend the following book that will get you introduced to the world of Wall Street in the best way:
|A Random Walk Down Wall Street
Burton G Malkiel
There are literally countless other books out there but this is just a starting point. This book will introduce you to the history of human stupidity and all the different “theories” there are in the investment world.
Anyways enough with the fluff let’s get started on the real good stuff.
1) Open an account at Questrade.
Questrade is far the best discount online broker in Canada. You can also try Virtual Brokers among others. Going through your bank is stupid because they charge you an arm and leg for commissions which munch away at your returns. Plus Questrade has excellent technical support and they provide you with Questrade IQ Edge you can download which is extremely powerful. On top of that you can set up your account completely online without having to mail in a bunch of signed forms.
I recommend you open up a tax free savings account (TSFA), margin and RRSP at the same time due to tax reasons. You want to minimize how much you pay for taxes which can really add up and cause a lot of grief. Here’s a chart for how to allocate your securities on their different accounts. Buy all your speculative stocks on your margin account! If you lose out at least you will get tax credits versus the other types of accounts where you don’t get taxed anyways. Also margin just means that you can take a loan out from your broker to buy stocks to leverage your buys. Plus in a margin account you can play options and do various spreads. Also I recommend you max out your TSFA, especially if you are making less money for you putting money in your RRSP.
2) Understand the value of Asset Allocation
The CIO of David Swensen has said that Asset Allocation is responsible for over 100% of your returns. How is that even possible? Well the costs of security selection, including paying for advisors and commissions lower your returns overtime. Plus on top of that, no one can predict which stocks will go up consistently. That’s a fact that you have to understand, picking individual stocks is risky, and no one can consistently predict the future. The markets are too irrational. You can put the odds in your favor by researching the stocks and doing your own analysis on the company, but you will never be 100% right. Accept it and move on.
I like to use the following asset allocation model for my investments:
Domestic Equities are Canadian stocks, Foreign Equities are American stocks, Emerging markets are countries like Brazil, China, India etc. REIT’s are Real Estate Investment Trusts and I’ve set money aside for when I like to speculate on certain stocks, to provide some excitement to my life. I’m also looking to add commodities to my portfolio such as gold and natural gas so it might change in the next 6 months. I will obviously update my followers however.
Before I move further I’d like to address the issue of individual stock picking. A lot of investors try to pick individual stocks to try and beat the market because they believe according to their analysis of a particular stock, or a gut feeling that they will beat the market. The best fund managers of all time will be right about 50% of the time, and this is only for stocks that go up. This is why mutual funds are so popular; ignorant fools give their money to professional money managers to try and beat the market for them in exchange for “management” fees. Mutual funds are the one of the biggest scams in the financial industry, and according to these very professionals who sell mutual funds, the management fees are a “stupid tax”. It’s a form of financial Darwinism.
An index fund on the other hand is a collection of stocks such as S&P 500, which is a collection of all the top 500 companies in the United States. It’s very simple and a universal benchmark that a portfolios performance is based on. The tricky part is that each year, about 70% of mutual funds will fail to beat the S&P 500! So you are paying these ridiculous salaries to fund managers when they are actually doing worse than if they had just bought the entire market! Some of you will try to argue back that you know of one mutual fund that “beat the market by 15% last year!!11”. Well that’s great genius hindsight is 50/50. In the world of finance though, past performance is never an indicator of future performance because there is such a large element of luck involved. In the world of geniuses, aka my world, there is this little thing known as regression to the mean. All that means is that you might do really well for a while, or poorly but you will always regress to the mean over time. So while your mutual fund might have beaten the market 3 years straight, it will eventually go back to the average rate. The challenge is finding this particular mutual fund which is a guessing game at its best. My idea of investing is playing your odds, and hitting average 100% of the time is much better than beating it 30% of the time and losing out 70% of the time. If you want to be a buffoon and pay people even if you lose money than be my guest. Also never visit my website again. Read more here.
Ok now that I got that out of the way, I’m going to explain what I like to do personally with my asset allocations. Since I know my limitations and know that I’m not an accurate predictor of the future I leave most of my money in index funds and ETFs. At the same time I don’t want to limit my genius so I will add a mixture of stocks which I think will are too hot not to have. This will also help me put some stocks in my portfolio which I believe are undervalued right now due to the cyclical nature of their industry. On top of that there are always great stocks that you can speculate on using options and other derivatives that can net you healthy gains which I’m not going to deprive myself out of. Some say the worst thing that can happen to the individual investor is them being right on a certain trade. That opens up a can of worms in a sure fire way to losses.
Now here’s another trick to my portfolio which makes it so great, my money invested in stocks is only about 50% of all my money. Out of all the money that I have, 50% is invested in the stock market as above, 10% in bonds and GIC’s and 40% will remain in cash. Remember the crashes in the stock market this last decade? The 9/11 attack, the tech bubble collapse and the real estate bubble popping in 2008? These create some amazing buying opportunities where you had the chance to double, triple or even get your money back tenfold by buying solid companies which had nothing to do with the crash but they were trading at extremely depressed prices. A lot of people like to put all their money in the market working for them, but when these buying opportunities arise they don’t have enough cash to take advantage. This idea makes a lot of sense, like all my other ideas, yet people don’t do them because they are impatient and emotional. But you aren’t one of them. The reason why I keep bonds, albeit a small percentage, is because traditionally as the stock market crashes, bond prices will go up.
With the boring stuff out of the way, here is what I have bought for my ETFs and Index Fund. Note: When it says % of portfolio, it refers to % of the original allocation for that particular security. I.E Domestic Equity will make up 30% of total stock portfolio, and 75% of that 30% will be in XIC and 25% of that 30% will be in XCS.
|Symbol||Name||Description||% of Portfolio|
|XIC||S&P/TSX Capped Composite Index Fund||Follows the TSX Market||75%|
|XCS||S&P/TSX SmallCap Index Fund||Follows the small cap stocks which have higher growth potential but are more volatile||25%|
|Symbol||Name||Description||% of Portfolio|
|VTI||Vanguard Total Stock Market ETF||This follows the entire American stock market||75%|
|IJS||iShares S&P Small 600 Value ETF||Follows 600 small cap stocks, which as above have higher growth potential but are more volatile||25%|
|Symbol||Name||Description||% of Portfolio|
|ZRE.TO||BMO Equal Weight REIT||Provides an equally weighted collection of numerous REIT’s to provide diversification||70%|
|RWO||Global Real Estate||Helps you follow the world’s real estate||30%|
|Symbol||Name||Description||% of Portfolio|
|EEM||iShares MSCI Emerging Markets Index Fund||Provides stability by following big foreign oil companies such as Samsung||70%|
|VWO||Vanguard MSCI Emerging Markets ETF||Follows high risk high growth used for results in the long run||30%|
So open up Excel, calculate how much you need to allocate on each security depending on how much money you have ready to invest. For everything below $5000 I recommend you put all your money in ETFs and Index Funds and start playing with individual stocks when you have around $10,000. Talk to your broker, and ask if you can start an automatic deposit plan where you send a certain amount of money every month and they put it in the right index without charging you commissions. If that doesn’t have happen I suggest you rebalance in May, September and January every year.
By rebalancing I mean, you either sell or buy certain ETFs so that the percentages as in the above chart look the same. Some areas will do better than others, so sell the ones that are doing better and buy ones that are doing worse so the total percentages look the same. Also in Wall Street, there is saying “Sell in May”. Traditionally, during the months of May to August, stocks have gone down. You can see this by looking at the charts and it happens quite often even if it doesn’t every year. Usually I don’t try to time the market, but this is something I might do with my US securities. You can also look at the 200 day moving average and try to get out before it shifts over. People who have done this consistently and without fail have missed out on all the crashes of the last few decades.
I know this was a lot, but there really isn’t much else I can do to shorten it. I’ve had to spend countless hours reading just to come up with this. Either way, I’m always going to promote sensibility so this is an excellent way to get a good foundation started before you start moving on to more advanced techniques. Plus this requires minimum maintenance and you can ignore all the investment new,s unless the world economy crashes where you will then use your extra cash reserves to get buying! Doing this is much better than owning a mutual fund.
In the long run, this should return around 8% to 12% a year annualized. That’s much more than any real estate investment!
Now for the people among us are interested in trading and want to make more than the market, there are ways to get triple digit returns and play with options and spreads. It’s riskier, but by riskier I mean you won’t always gain money. I think the stock market to a large extent is a no loss game, if you practice proper money management (which most people do not) you should not lose much money in the markets. It’s those idiots who hold on to stocks while they go down that make the most noise about how much they hate the market. Anyways, I’m going to write about that later.