Canadian Stock Market Basics:: How to Trade Stocks and Make Good Investments in Canada

8/9/2019 Canadian Stock Market Basics:: How to Trade Stocks and Make Good Investments in Canada

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Canadian Stock Market Basics:

How to TradeStocks and

Make GoodInvestments in

Canada

By: Pat McKeough



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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Want more investment advice and information like this? Visit tsinetwork.ca today. Page 2

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,

long-term investment choices.




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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.















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Successful Investor Wealth Management: If you are already familiar with Pat McKeough and

his long history of profit-making advice, imagine how well your portfolio might do if Pat

managed it for you! That’s what you get when you become a Successful Investor Wealth

Management Inc. client. For complete information, please click here or call us toll-free at 1-888-

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Past returns do not guarantee future results. The Successful Investor Inc., owner of tsinetwork.ca,

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Portfolio Manager.

Information about all of these comprehensive services is available at TSI Network

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FREE REPORT

CANADIAN STOCK MARKET BASICS: HOW TO TRADE STOCKS AND MAKE

GOOD INVESTMENTS IN CANADA

TABLE OF CONTENTS

1) Finding a broker ……………………………………………………………… 6

2) Placing an order ………………………………………………………………. 7

3) Dividend reinvestment plans (DRIPs) ………………………………………... 8

4) The right number of stocks to own …………………………………………… 9

5) What you can expect to make ………………………………………………… 11

6) Our three rules for success ……………………………………………………. 12

7) How much turnover should you have in your portfolio? ……………………... 13

8) What do you do when stocks you own appear headed for a setback? ………... 14

9) Stay out of bonds ……………………………………………………………… 15

10) Hold 20% to 30% of your portfolio in U.S. stocks …………………………... 16

11) Hold some resources & commodities stocks ………………………………… 17

12) Use caution when investing in gold ………………………………………….. 18

13) Don’t overload your portfolio with income trusts …………………………… 19

14) When to sell ………………………………………………………………….. 20

Report Publication Listing ……………………………………………………….. 21








1) FINDING A BROKER

To trade stocks you’ll first need to open a brokerage account.

Many investors have given up on full-service brokers and do all their dealings through discount

brokers, with no regrets. But a lot depends on you, and on the quality of brokers you havemanaged to find.

A good broker is generally worth the higher commissions that he or she costs you in comparison

to dealing through a discounter. However, good brokers are hard to find. Many good brokers

eventually move into money management.

Today, the Internet provides lots of information on publicly traded companies, including

corporate press releases, newspaper articles and company web sites. This can give you further

information on stocks we recommend.

Your bank is probably the best place to look for a discount broker. All of the banks have both

full-service and discount brokerage arms. It’s also easier to transfer money between your bank

account and your brokerage account if you have both at the same bank.

Commission rates are even cheaper if you use a discount broker’s Internet trading facility.

However, low commission rates sometimes lead investors to trade a great deal. They may

assume they can’t lose because they can sell at the first sign of trouble. Being quick to sell can

cut your losses, but that’s not the same as making money. And, if you stumble onto an

investment that has a huge move ahead of it, you may wind up selling just before the move

begins.

In the long run, the best way to cut commissions is by sticking to high-quality investments and

making fewer transactions. This cuts commissions, and it improves your tax deferral.

For instance, suppose you buy an investment at $10 and it goes to $20. As long as you hold on,

the entire $20 keeps on producing dividends and capital gains for you. If you sell, you’ll have

only $18 or so to reinvest, after capital-gains taxes and commissions.








2) PLACING AN ORDER

There’s no set minimum needed to buy a balanced portfolio of stocks. However, you could build

a portfolio of stocks with as little as $10,000. Buy five stocks, with one from each of the five

economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector,

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

out entirely on your best investing ideas.








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.








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-

managed funds.








If you include a few of the fund industry’s worst disasters — the kind that get erased from fund

history every year through mergers with better performers — your results can be far worse.

That’s because diversification can only help you up to a point. It is subject to the law of

diminishing returns. It can’t possibly make up for what you can lose with the low-quality stock

selection you get in bad funds.








5) WHAT YOU CAN EXPECT TO MAKE

Long-term studies show that the stock market as a whole generally produces total pre-tax annual

returns of 10% to 11%, or around 7.5% after inflation.

Many investors and money managers find that it’s hard to beat the market’s long-term average

returns over long periods (many years, if not decades). But it’s easy to fall below the average.

Investors earn less than the market return for a variety of reasons. One is sheer randomness.

Others include taxes; brokerage commissions (particularly if you trade more than absolutely

necessary); mutual fund MERs; getting caught up in stock-market fads; buying speculative

stocks that collapse; buying financial-industry creations that are virtually certain to produce

meagre profits, if not losses, for the bulk of participants (stock options and hedge funds are a

couple of key examples); loading up on risky investments at market peaks; selling out in despair

at market bottoms; and every other market error you’ve ever thought or heard of.

If you’ve heard of it, you can bet that lots of investors have lost money to it, and many others

will do so in the future.








6) OUR THREE RULES FOR SUCCESS

We always focus on three key factors to help cut risk and secure profits:

The first is investment quality. High-quality investments are mainly well-established companies

that have a history of earnings, if not dividends, plus a sound balance sheet and other factors that

tend to help a company survive unexpected setbacks.

The second key factor is diversification. If you spread your money out across most, if not all, of

the five main sectors of the economy – Manufacturing & Industry, Resources & Commodities,

the Consumer sector, Finance and Utilities – gains on your best choices will tend to offset, if not

overwhelm, losses on your worst choices.

The alternative to diversification is to be a sector-rotator, or an investor who invests heavily in

sectors or industries that they feel are headed for success. Sooner or later, sector rotators wind up

heavily invested in the worst possible sector or industry. When that happens, the results can be

disastrous.

The third key factor is our recommendation that you avoid, or at least downplay, stocks that are

in the broker/media limelight. Investors can build up unrealistic expectations when stocks spend

time in that limelight. When broker/media favourites fail to live up to those expectations, they

drop much further than they would have if they had been less widely followed.

These three safeguards will tend to limit your losses at the worst of times. But over long periods,

they also let you profit nearly automatically.








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.








8) WHAT DO YOU DO WHEN STOCKS YOU OWNAPPEAR HEADED FOR A SETBACK?

Buying and selling costs money. But you may wonder what else you could do when bad news

surfaces and threatens to undermine the value of your holdings.

You need to keep in mind that other investors have also heard the bad news, and it may have

already impacted the share price — its effect may already be “in the market,” as the saying goes.

You also need to develop a better feel for what truly constitutes “bad news” for a particular

stock.

A single quarter of lower earnings at a company like TransCanada Corp., for example, may have

little effect. For a stock like Research in Motion Ltd., on the other hand, a single quarter of lower

earnings can have a devastating effect on the stock price. That’s because Research in Motion is

what you call a “momentum player’s favourite.”

There’s a dog-chasing-its-tail element to a momentum favourite. Momentum players buy a stock

like Research in Motion because its stock price and earnings are going up. But part of the reason

its stock price goes up is that momentum players are buying it. When stocks like Research in

Motion see their earnings falter, momentum players may quit buying and instead try to sell.

These days, when you read that a stock has dropped 25% to 50% in a day, it’s usually because of

the mass exit of momentum players.

If you could sell before they did, you’d be better off. But most momentum players are active

traders who spend a lot of time studying the market. They pay a lot of money in commissions, so

their brokers keep them reasonably well-informed. If a single quarter of lower earnings at a

company like Research in Motion is a shock to them, it’s apt to be a shock to you, as well.

To succeed as an investor, you need to recognize that you can’t eliminate all risk from an

inherently risky investment like stocks (or mutual funds that invest in stocks). That’s because

each risk-reducing step you take costs money. When you overdo it, the costs of these risk-cutting

steps can overwhelm your potential profit.








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.








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.








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

risk during downturns.








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.








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

we’ve long recommended.








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.”








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