Simple steps to smarter investing

Five rules can shield you from bulls and bears

“I have a simple philosophy. Fill what’s empty. Empty what’s full. And scratch where it itches.” — Alice Roosevelt Longworth

Investing is often made out to be a lot more difficult than it really is, but it isn’t hard to get confused by all the so-called expert opinions that weigh in on weekly economic statistics, the latest geopolitical uncertainty, technical trends, capital market developments, valuations and on and on.

Many of these pundits like to camp out permanently with either the bulls or the bears, making it rather difficult to decipher what are truly nonbiased analyses. As a result, investors are subject to information overload or, worse, influenced to make an incorrect decision by giving in to human emotion.

For example, the fear of missing out in today’s market environment is causing a lot of investors to capitulate and buy certain markets and stocks at their all-time highs.

It is prudent in situations like these to take a step back and use a much simpler and organized approach to investing. Specifically, we’ve identified a five-step method to help simplify the investment process by separating the useful information from the noise.

Step one: Look around you.

On your next vacation or work trip, simply be aware of your surroundings and ask questions of the locals. Notice the cars being driven, the houses being sold, the lineups at restaurants, and the overall pulse of the economy. If not travelling, ask these questions to those who have recently travelled or have family living in various regions.

Step two: Identify strategic value.

We believe the United States is leading global markets because it has core strategic value in the powerful and active U.S. Federal Reserve. We also think Canada has long-term strategic value in its resources. However, it has lost some of this value given its overreliance on one export market. Do the same when examining a specific company by asking how strategically positioned it is in the market it is operating in.

Step three: Think long term.

This involves asking questions such as: How strategic would the U.S. economy be without an active Fed? Is Canada going to build out its petroleum export capacity in a timely fashion to meet the demand in other markets such as Europe and China? Where is a particular company positioned in its growth cycle and what are its plans going forward to maintain such growth?

Step four: How much does it cost?

Ask yourself how much of a company’s strategic positioning and growth is already factored into the underlying valuation? If forward multiples imply an unsustainable or unrealistic growth outlook, then move on to the next potential target investment. If you already own the stock, it may be worth locking in some profit and switching into another more attractive opportunity.

Step five: Manage risk.

Map out all that could go wrong and what would happen to your underlying investment if any of them occurred. In order to do so, determine if any of these potential future risks are factored into the underlying valuation of the stock, sector or market. It can be very inexpensive to hedge against such risks during times of euphoria and complacency, not unlike the current market environment. But buying insurance through puts, for example, can be a very effective and low-cost solution to protecting gains on a stock or exchange-traded fund.

Finally, for those investors who do not have the time, expertise or resources and are looking for help, we suggest asking prospective advisors and investment managers about their investment processes. Look for simplicity and effectiveness in their answers.