Saturday, December 29, 2012

4 Practical Tips for Passive Investors

1. Avoid opening your broker account daily/regularly – Unless you’re doing research, there’s no reason to open your broker account and look at your positions constantly. As a beginner, this was something I did frequently and it mostly lead to unprofitable, emotionally driven portfolio moves. 

Personally, I found that I would talk myself out of a perfectly fine company, or ‘take profits’/ sell one of my winners, when the best thing to do was nothing. I was more susceptible to market fluctuations. As a passive investor, most of the time the companies you originally selected should still be compelling for the same reasons you chose them in the first place. It’s easy to forget the original reason why you bought a stock when you’re constantly looking at your positions and the profit/ loss column. Always remember the reason that first compelled you to buy a stock; if it has not changed, hold, if it has changed or maybe you were wrong in the first place, then you may think about selling and replacing with a better company. You cannot gain this insight from constantly checking your positions. 

You should always question your positions and continually look for better companies, but having your online broker always open can lead to too many emotional trades. I like to briefly look at a watch list once or twice a day to keep an eye on my positions. Speaking from a passive, long term investor perspective, in my experience, there is no value in watching your positions constantly throughout the trading day.

2. Do way less, but not nothing – As a passive investor, it’s very important to not make too many portfolio moves, but you still have to sometimes. This is a problem that I’m learning the hard way. This year I have essentially made almost no portfolio moves, except buying stocks with new money saved. In hindsight, because of my extreme passive nature, I have missed out on good opportunities. Ideally, as a passive investor, the goal should be to make as little trades as possible without missing out on an opportunity to add a better company to your portfolio. The upside of extreme passivity is low trading fees, but that shouldn't discourage you from selling a less attractive stock for a more attractive stock. So do way less, but not nothing. (I realize ‘not nothing’ is terrible grammar but it seems to uniquely fit my thinking on this subject)

3. Make your own index fund and let it run – I find it helpful to think of investing in this way. If you buy an index fund, basically you are buying every stock on the S&P500 or TSX and holding it for an indefinite period. I like to think of my portfolio in that way. Essentially my portfolio is my own personal index fund of my favorite companies, and for the most part, I plan to hold all the companies for an indefinite period. 

If you buy individual stocks like me, you have the flexibility to switch a company out and add a more attractive one. Most people would think of that portfolio flexibility as a positive, but one just needs to observe how almost all mutual fund managers under perform an index fund over the long term. Hence, that flexibility could be negative. This is why I always recommend a passive, long term approach. For the most part, if you make your own index fund of 10-20 stocks and let it run passively for the long term I’m willing to bet your long term returns would be better than if you were constantly tinkering with your portfolio daily (which seems to be common practice of most investors).

4. Think only very long term (5yrs-forever) – So your favorite company just had a less than great quarter and the stock is beaten down accordingly - don’t worry. As long as you bought the stock for the right reasons in the first place, time will heal your worries and the stock price. 

Time is the friend of a wonderful business. A good illustration of this is Saputo; after a rough quarter earlier this year the stock sold off to below $39. Despite the reason for the weak quarter, you could still have concluded with a good degree of certainty that Saputo still had a leadership position in Canadian dairy and specialty cheese markets (which it did and still does), they still had growth opportunities in international markets and by acquisition (still does). Despite the bad quarter, the original reasons why you would have bought the stock were still intact. That’s why it is so important to think very long term. Since then the stock has advanced to over $50. Short term thinking could have had you sell this stock at fire sale prices, only to see it shrug off temporary shortfalls and continue to rally. Remember, this only applies to phenomenal businesses.


  1. Totally agree. Why buy an index when you can build your own diversified index with only great businesses. I currently have the following 18 names in my RSSP account.
    Financials - CFN, HCG, DCI, RFC
    Technology - CSU, SUM
    Utilities - ALA, ENB
    Industrial - BAD, SJ, CVL, WJA
    Consumer - GLN, PLB, ATD.B, HLF
    Resources - ABM, HNL

  2. Don't be surprised to see the TSX making a big move in 2013 and an all-time new high in early 2014. Why am I so bullish?
    1). A 30yr chart (log base 10 scale) of the TSX indicates a long term trading range. Only two others times did the TSX trade at this level in the range, 1993 and 2003 which were followed by +25% rise.
    2). Never has a 50% market correction (2009) been followed with a further correction. We're in the infancy of the next bull market and climbing the wall of worry.
    3). The volume of money sitting in cash, GICs and government bonds earning next to nothing is at extreme highs. This trade can not last forever. People will begin to realize/fear they are missing the next big move and pile back into equities.

  3. Peter Hodson has a very similar view of the stock market for 2013.

    1. There is lots of historical evidence that shows good performance in the S&P500 the year after a democratic president is re elected. Another positive.

  4. I always enjoy catching up on your views and reading your blog. Good insight. Have a great 2013!

  5. Hi Gene. Thanks, nice hearing from you. Hope you had a happy holiday. Happy 2013!