David Driscoll, president and CEO of Liberty International Investment Management
Focus: Global equities

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MARKET OUTLOOK

Ignoring all the noise, it’s essential at this time that investors focus more on their portfolios than buying or selling individuals stocks. We’re now almost 10 years into one of the best bull markets in history. Will the market roll over this year, next year or in two years? Will rising interest rates spoil the stock market party? Will the yield curve invert this year or next? Will inflation slow down personal and corporate spending? Are earnings to be trusted? Since nobody knows the answers, investors should focus on prudent portfolio management by following these suggestions:

  1. Avoid the noise. Companies will always adapt to whatever politicians throw at them.
  2. Leave your emotions at the door. Investing should be mechanical, not emotional.
  3. Hold some cash. If the stock market drops, you’ll need cash to take advantage of buying opportunities. After all, time and compounding is what makes stock investing profitable, not stock picking or stock trading.
  4. Rebalance when necessary. If you own 30 stocks with an equal weight of 3.3 per cent and one of the stocks becomes a 6.6 per cent or greater weighting, sell half. It also helps preserve capital, especially if you own names with high betas (above-average price volatility). The higher the volatility, the greater the downside risk. We’ve rebalanced positions of Cognex and Shopify this year for these reasons and avoided subsequent large losses.
  5. Avoid correlation risk. While Canadian banks are strong and stable, it wasn’t just one that fell 40 per cent in 2008: they all did. And if you’re retired and taking money out of the portfolio when a major market correction occurs, you raise the risk of running out of money in your lifetime. It’s better to diversify around the world in different sectors than have high levels of concentration in your portfolio.
  6. Don’t chase yield. Focus on companies that grow their dividends so that your income doubles at a faster rate. A company may have an attractive yield of 5 per cent, but if the dividend growth is only 2 per cent a year, inflation will eat up that growth. It would take 36 years to double your income. The Rule of 72 is to take 72 and divide by the growth rate to get the number of years to double your income. 72 divided by two is 36 years. The average growth rate of companies around the world is about 7 per cent, so the income should be doubling every 10.3 years. And as the dividends grow, ultimately the share prices should follow.
  7. Buy gradually. Consider buying only a half weight instead of the whole position. For example, if you have $10,000 to invest in a stock, buy only $5,000 to start and keep the rest in cash. If the market corrects, you can buy more at a lower price. Dollar-cost averaging is a time-trusted strategy that helps avoid huge losses.
  8. If you’re investing in concept stocks, invest only what you can afford to lose. The volatile stocks today are in the cryptocurrency, junior oil and gas, technology or marijuana sectors. About 80 per cent of concept stocks end up worthless, so be disciplined when taking on this risk. Buy 10 names and hope the two that survive cover the losses of the other eight.
  9. Downside losses are worse than upside gains. The more you go down, the more you have to rise to get back to break-even. In 2008, the market fell 40 per cent, so a $1 value then was worth 60 cents a year later. As a result, investors needed to make 63 per cent just to get back to break-even, not 40 per cent. In other words, it took five years for most fully invested mutual funds and ETFs to return to break even. Those who held 20 per cent cash and reinvested the money in 2009 returned to break-even in one year. The next four years were pure gravy.
  10. Focus on companies that generate rising free cash flows. This helps improve the odds that you’ll invest successfully. The last newsletter on our website explains further.

Investing successfully is having the ability to keep yourself in the game by not losing all your capital to let time and compounding of dividends grow it.

TOP PICKS

David Driscoll's Top Picks

David Driscoll of Liberty International shares his top picks: Nutrien, Spectris and Stryker.

NUTRIEN (NTR.TO)

Nutrien serves the agriculture industry worldwide. It produces and distributes potash, nitrogen and phosphate produces for agricultural, industrial and feed customers. While there are short-term headwinds such as downward pressure on crop prices and bumper crops in the U.S., global agriculture fundamentals remain generally positive. Nutrien is absorbing its Potash Corp merger well and should benefit from paying off its debt as the lower interest expense will support future higher earnings. Last purchase was July 25 at $68.48.

SPECTRIS PLC (SEPJY.PK)

Spectris provides complete solutions combining hardware, software and related services for some of the most technically demanding industrial applications. Its innovative solutions are designed to enhance customers’ productivity, yielding clear benefits by helping them to work better, faster and more efficiently. It currently trades at 10 times earnings, but has the potential to grow faster. Free cash flow is expected to grow by 10 per cent a year, providing solid dividend growth. While a British stock, 70 per cent of its sales are outside Britain, so a drop in the pound would increase their sales and profits. Last purchase was July 26 at 23.02 pounds.

STRYKER (SYK.N)

Stryker makes specialty surgical and medical products. In the last quarter, organic revenue growth in its various segments was 8 per cent, well above its competitors, thanks to growth in its Mako robotics division which is used on knee surgeries. The company is also profiting from the demographic growth of baby boomers needing hip replacement surgery. Free cash flow growth is expected to double from $1 billion to $ 2 billion a year in 2019. This should help maintain its dividend growth at 10 per cent or higher. Last purchase was July 27 at US$168.12.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
NTR Y Y Y
SXS Y Y Y
SYK Y Y Y

 

PAST PICKS: JULY 27, 2017

David Driscoll's Past Picks

David Driscoll of Liberty International reviews his past picks: TD Bank, Jardine Matheson and NextEra Energy.

TD BANK (TD.TO)

  • Then: $64.23
  • Now: $76.65
  • Return: 19%
  • Total return: 24%

JARDINE MATHESON (JMHLY.PK)

  • Then: $63.95
  • Now: $66.70
  • Return: 4%
  • Total return: 7%

NEXTERA ENERGY (NEE.N)

  • Then: $144.65
  • Now: $170.63
  • Return: 18%
  • Total return: 21%

Total return average: 17%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
TD  Y Y Y
JM Y Y Y
NEE Y Y Y

 

WEBSITE: www.libertyiim.com