Spreading the risk: Investment tips from an amateur

Early in 2005, I asked my investment adviser for suggestions regarding stocks I could buy in US dollars, and he didn’t come up with one.  When my wife asked to buy Catepillar, he said it wasn’t a good idea.  For these reasons, and because he also received 2% commission for every transaction, I decided to try a self-directed trading account (DIY, do-it-yourself). On November 1, 2005, I bought my first DIY stock, CAT, at $50 per share and sold it at $70 the following February.  That marked my beginning as an investor.  So I have an answer now to that thorny question, “What do you do?”  That question has been embarrassing since 1996 when I finished my doctoral studies.  As a biblical scholar, I’ve never had a full-time job in the field.  Rather, I’ve taught as an adjunct in Canada and as a visiting professor in Africa, I’ve continued my research in the Acts of Paul, I’ve been the director of a charitable project called the Barnabas Venture since May 2004, and I have been very active in my local church.  I do work for my wife’s company too, but only part time.  But imagine trying to explain all that to people.  Now I just say, “I’m an investor.”

Being involved in philanthropy, I’ve desired to increase our ability to be charitable.  This has been one of the driving factors in leading me into DIY; but also, in the last half of his life, my grandfather and role model, Wallace Wilkinson Dunn, Sr., was an investor.  An inheritance from grandfather paid for the first year of my studies at Cambridge.  My father, who received the bulk of grandfather’s estate, paid for the next two years.  Thus, I enter investing with full confidence that it can be done profitably.  Finally, when it comes to our retirement accounts and Tax Free Savings Accounts (TFSA, which is the Canadian equivalent of a Roth IRA), we dare not put them in fixed income with constant ebb of inflation taking away most of our gains.  So I manage all but one of our retirement accounts, TFSAs, and small but growing non-registered account.

This morning I sat down and made short list of my investment strategies which included the following points:

(1) Pay attention to the macro trends in the economy.  Information is key, but one must realize that much of the information out there is provided by incompetent writers or supporters of disastrous policies such as Keynesian economics (keyword, “stimulus”) and Obama’s presidency, which have led to huge budget deficits and inflation.  The conservative world view serves me well as an investor.

(2) Always maintain sufficient cash or credit instruments to take advantage of market downturns.  But I try always to maintain an extremely low debt to equity ratio (far below 1:1–the goal of a business is to be in business the next day–while failed banks like Bear-Stearns had ratios of 30:1).  The investments must also be able to pay for themselves through their dividends.

(3) Keep the watch list down.  It is very difficult for me to watch more than about 20 stocks.

(4) Specialize:  Most investors have their specialty, a nook where they have a better feel for the market.  Some are commodity traders; others trade gold or foreign currencies.  I trade in bank, oil and gold mining stocks.  I am not a competent in options or short selling.  I stay away from investments that I don’t understand.  That’s why I don’t do options trading, because I don’t understand them.  Not being an expert, I also have to depend on analysts at TD Waterhouse and Scotia iTrade to inform me if a stock is a “buy” or a “hold” or “sector outperform” or “underperform”.

(5) Spread the risk:  When we still had an investment adviser, he told us the story of how certain Nortel employees who lost their jobs also had retirement portfolios which were predominantly made up of shares and options in Nortel.  As a consequence, they were severely hurt by the demise of Nortel.  Once while in my bank, a representative mentioned that one would do well to buy, as she had done, bank stocks (which were at an all time low).  She had invested in TD Bank; I told her that she shouldn’t do that since she was employed by the bank.  Well she would have made money, without a doubt, because TD Bank is back up to $68 per share.  But it is necessary to maintain the principle of spreading risk which means that one should never have everything in a single sector or a single company (Don’t put all your eggs in one basket). My wife’s company is in aviation maintenance, so I have chosen never to purchase a stock related to that sector.  So Air Canada, Boeing, Bombardier are all on my never-buy list.

Obviously there is some tension between specializing/keeping the watch list down and spreading the risk.  Buying 100 stocks in several sectors effectively spreads the risk even more.  But I can’t know enough about every sector to manage that; so I am trying to learn more about the gold mining and oil and gas sectors to be able to trade and invest effectively.

In late 2008 and most of 2009, when people asked me what I do, I said I was an unsuccessful investor.  But today, thanks to the recent upswing in the market, I’m still investing, while many professional financial advisers are delivering pizzas, waiting on tables, driving taxi, or just sitting at home unemployed.  For that, I, a DIY amateur, am thankful