# New high on TSX (total return)



## james4beach (Nov 15, 2012)

We went through a pretty bad period on the TSX for a while, but I noticed that the TSX Composite (looking at total return) has just hit a new all time high. This chart shows XIC total return including dividends: http://schrts.co/DBDnIitt

Here's the Morningstar XIC page, showing 10 year return of 9.5% and 15 year return of 7.3% annually
http://quote.morningstar.ca/QuickTakes/ETF/etf_performance.aspx?t=XIC&region=CAN&culture=en-CA

It's also noteworthy that the TSX is hitting these highs even while energy is performing very badly.

I'm curious if people still think that the TSX is a bad/flawed index? I've heard this said countless times on this forum, that the TSX index just isn't that great and that stock pickers can easily do better. I don't really grasp the problem when the long term returns are this strong... returns like 7.3% CAGR seem like normal equity returns to me, showing the expected equity risk premium.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I'm curious if people still think that the TSX is a bad/flawed index? I've heard this said countless times on this forum, that the TSX index just isn't that great and that stock pickers can easily do better. I don't really grasp the problem when the long term returns are this strong... returns like 7.3% CAGR seem like normal equity returns to me, showing the expected equity risk premium.


Yes, the TSX is a flawed index. It's heavily weighted to financials, energy and materials and it contains a lot of dogs. It's easy in Canada to beat the index with individual stocks, but you have to know how to do that, and so most would be better served with the results from the index.

ltr


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## james4beach (Nov 15, 2012)

Here's what I don't follow about this argument. You're saying there is some kind of flaw in the TSX. As a result, the 15 year return is 7.3% CAGR which I believe you're saying could be higher if the TSX wasn't a flawed index.

But let's look at other global benchmark indices. The 15 year return on SPY is 8.5% and EFA (MSCI EAFE) is 5.1%. Both are pillars of global stock investment.

Given that context, how flawed can an index be that produced 7.3% CAGR? How much higher do you think it should be? The S&P 500 has been by far the highest performing index globally, pretty much an outlier. And the TSX has performed nearly as strongly.

I'd have an easier time believing the "flawed index" argument if performance was poor. But TSX performance is actually very strong versus other global benchmarks.


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## AltaRed (Jun 8, 2009)

The capped but market cap weighted index itself isn't flawed, but the sector mix of the Canadian market is not balanced well, making it more vulnerable and volatile. That said, the S&P500 has been driven primarily by FAANG stocks in recent years with 2018 an example of what happens when that momentum stutters too.

Added: FWIW, my spouse has 25% of her RRSP in XIC and my ex has a significant holding in XIU. I stock pick Canada because I can and because I like too.


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## OptsyEagle (Nov 29, 2009)

I think there are two question in this. The first is whether the TSX is a good index to diversify a portfolio. The answer to that is obviously "it could be better". The other question is, whether the index is so flawed it makes it easy to outperform. Well, since an index is designed to mirror the average stock in a marketplace, weighted to the value of those individual companies and the average investor owns those same stocks and are the people that create their valuations and therefore their weighting, the answer is, 1/2 of the investors will outperform the index and 1/2 the investors will underperform the index, about everyday.

Since the investors tend to read things into these performances and therefore add this non-material information to their strategies, their personal results tend to eventually fall behind, what should be an average result. So the answer is, that less then 1/2 of investors will outperform this index, over longer periods of time, as they will most indices. 

Any investors that say they outperform the index, in my opinion, are either: the lucky few who will, or not comparing apples to apples, or have simply not done it long enough. That is because I believe more in the laws of math then I do in individual investor claims.

The above is just my opinion, of course.


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## Eclectic12 (Oct 20, 2010)

As soon as those trying to use a better allocation do something like dropping all commodities or energy or cutting back on the financials component - are they not guaranteed to be "apples to oranges", as they intend?

As for "simply not done it long enough" ... the index was overhauled so it would be interesting to see if it's still being published after this was done Prior to that point, I can recall ten years at at time slices being published where the "bad" decade was was the index being better for three of ten years, with most decades being one of ten.

I haven't checked Argo's five pack lately but that would be another indication.


Cheers


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## cainvest (May 1, 2013)

james4beach said:


> I'm curious if people still think that the TSX is a bad/flawed index? I've heard this said countless times on this forum, that the TSX index just isn't that great and that stock pickers can easily do better. I don't really grasp the problem when the long term returns are this strong... returns like 7.3% CAGR seem like normal equity returns to me, showing the expected equity risk premium.


I don't think the TSX is flawed but our market doesn't have the weighted diversity that the US side does.

In comparison, how did the Argo 6 or 12 pack perform?


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## james4beach (Nov 15, 2012)

cainvest said:


> In comparison, how did the Argo 6 or 12 pack perform?


Yes, Argo's pack, and Eder's pack have both done very well. The BTSX strategy has done well, all of these have outperformed the TSX.

But the real question is: *of all* the hand-picked individual stock portfolios posted at this board at some time, what has been the average performance through to now? Just looking at Argo's pack or one of the other great outcomes is survivor bias. My guess is that if we looked across all attempts, they would do worse than the index on average.


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## like_to_retire (Oct 9, 2016)

Most of the methods use to stock pick today use large caps and usually dividend payers, and staying away from the junk that's in the index. There is some stuff in that index I wouldn't touch with a ten foot pole. 

The most famous would be the BTSX method.
From the latest BTSX (Beating the TSX) article:
_
"With data going back to the late 1980s, the strategy now has a 30-year track record. 
Over that time, the method has returned an average of 12.33% annually. 
The benchmark index has returned an average of 9.40% (dividends included)." _

ltr


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## james4beach (Nov 15, 2012)

But what about all the _other_ methods and schemes that were introduced in countless newspapers, magazines and newsletters over the decades? How did all of them fare?

You can't just focus on a particular winner and conclude "therefore the TSX is easy to beat". Imagine that a million random strategies were introduced over those decades. Some of them would turn out to be index-beating winners, but that doesn't make them good strategies.


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## AltaRed (Jun 8, 2009)

We will never know unless some individual wanted to spend an inordinate amount of time researching it, and to what use would it be anyway? Strategies that have failed are of no use to anyone. 

BTSX may falter some time too, given that it's success fits nicely within the bull bond market, i.e. declining yields since circa 1980, making dividend yield a popular and thus 'successful' strategy from investor interest in such stocks. If/when we ever got into high inflation and high interest rates again, all bets are off. I doubt I will see it in my remaining lifetime. That all said, I am not a 'trader' and thus have never followed it.

My view is those who wish to stock pick will make the case for why they stock pick regardless of track record and those who have better things to do (or more interest in other things) will index.


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## cainvest (May 1, 2013)

like_to_retire said:


> Most of the methods use to stock pick today use large caps and usually dividend payers, and staying away from the junk that's in the index. There is some stuff in that index I wouldn't touch with a ten foot pole.
> 
> The most famous would be the BTSX method.
> From the latest BTSX (Beating the TSX) article:
> ...


Also posted with the BTSX from https://www.finiki.org/wiki/Beating_the_TSX

_Criticism of performance report
It has been pointed out by forum member nisser,[5] that BTSX is very dependent on start date. A 3-year rolling-return analysis of BTSX from 2003 to 2018, offset by one month, reveals that the median backtest barely beat the market. Starting on the wrong month would have underperformed the TSX market by up to -34%. A lucky start month would have delivered an excess return of 48%._


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## james4beach (Nov 15, 2012)

There are countless examples of strategies that work for a long stretch of years, and then stop working. The professional capital allocators live in constant fear that their methodologies might just be _working by accident_ and will stop working next year.

I think that when a strategy is used, and it's seen to outperform the market average, there are two possibilities: (1) you got lucky, or (2) you're on to something. However you can *never* tell which is the case, and even if you're on to something, you won't always outperform.

Take value investing for example. Seemed like a good idea for a long time (especially in depressed markets), then it basically stopped working in the US somewhere in the early 1990s once valuations got extremely high -- and stayed high since. Now we have nearly 30 years of broken (flawed?) value investing. So should you be value investing? How does it feel to underperform for 20-30 years?

Canadian Couch Potato has a really good article on this kind of phenomenon: Why Isn’t Everyone Beating the Market?

I would argue that it's much harder to beat the market than the stock pickers at CMF assert. Go ahead and use the BTSX method if you want, or a method like ZLB which omits certain sub sectors. But when, eventually, the method is underperforming for 10 years, you're going to be asking yourself some very serious questions.


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## My Own Advisor (Sep 24, 2012)

like_to_retire said:


> Most of the methods use to stock pick today use large caps and usually dividend payers, and staying away from the junk that's in the index. There is some stuff in that index I wouldn't touch with a ten foot pole.
> 
> The most famous would be the BTSX method.
> From the latest BTSX (Beating the TSX) article:
> ...


Agreed. I wish I could say the same for the U.S. market but it's far too big to skim/dissect for individual stocks and beat the S&P 500 long-term.

The CDN market, skim the top-20 of XIU and live off dividends


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## like_to_retire (Oct 9, 2016)

My Own Advisor said:


> Agreed. I wish I could say the same for the U.S. market but it's far too big to skim/dissect for individual stocks and beat the S&P 500 long-term.
> 
> The CDN market, skim the top-20 of XIU and live off dividends


100% agree.

ltr


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## OptsyEagle (Nov 29, 2009)

Eclectic12 said:


> As soon as those trying to use a better allocation do something like dropping all commodities or energy or cutting back on the financials component - are they not guaranteed to be "apples to oranges", as they intend?


As long as they stay within the Canadian stock market, it would be apples to apples. What I am saying is a diversified portfolio of global stocks, in various currencies, or even a balanced portfolio of stocks and bonds. Those would be apples and oranges.

As for the length of time. Even Warren Buffet has not lived long enough to statistically prove his results are anything more then luck. Statistically there should probably be at least 10 Warren Buffets, derived simply from what luck would provide when you consider how many participants we actually have attempting this feet.


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## james4beach (Nov 15, 2012)

My Own Advisor said:


> The CDN market, skim the top-20 of XIU and live off dividends


That's not as bulletproof as you might think. Skimming the top 20 off XIU will do fine as long as the mega large caps are outperforming. This has been happening since 2000 during the current theme: dominance of the mega corp monopolies during a stagnant economy that favours the monopolies and their established advantages, including government supports. My XIU 5 (or 10) pack has the same concern.

However during different economic environments, perhaps rapid growth, or tremendous change/upheaval which favours smaller and more nimble companies, the top weights in XIU could underperform and therefore your strategy could do worse than the broad market XIC. Add to that a scenario like a bull market in commodities, and your top weights from XIU could do significantly worse than the broad XIC.

Another scenario that could end this theme is the rise of populism. The public could demand the breakup of monopolies and the end of special government assistance for the mega corps. That kind of scenario could suddenly change which type of company has an advantage in the economy.

The ability of the mega corp monopolies to provide steady dividends could be impeded by the same scenario I describe. I don't think there's anything wrong with your approach, but I think it's good to be aware of its limitations and the scenarios in which it could fall apart.

Really what you have here is a particular strategy, that currently outperforms or matches the TSX index. But it may not outperform forever and could even start underperforming. (I suspect that as long as we're in a stagnant economy with status quo politics, with no revolutionary changes in tech/industry, that the method will keep working).

Indexing acknowledges that we don't know what the winning theme going forward will be. We settle for market average returns instead of playing the game of trying to jump on the winning theme du jour.


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## OptsyEagle (Nov 29, 2009)

I think the real fallacy is thinking that one should beat the index. How many DIY investors are here because they noticed that their advisor was not beating an index. The curiosity I always had with that was "why did they ever think that an advisor could ever do such a thing". An advisor's role is not to beat an index, since they have no ability to ever do that. Their role is to beat what you could do yourself.

I have never compared my results to an index. Yes, I know how well my portfolio has done and I know how well many indices have done, but to compare the results, which changes nothing, is more of an ego thing, if you ask me. Many will say, how would you know if you were doing it right, without this comparison, and although I don't have a great answer for that, I do know that noticing some index has beat me in the last year or 3 years, and also knowing that this time frame is way too short to derive any useful conclusion, is not an overly useful observation.

That is basically my opinion. It may not be the right one, but if someone has come up with the right one I would be glad to hear it and probably debate it.


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## cainvest (May 1, 2013)

OptsyEagle said:


> I think the real fallacy is thinking that one should beat the index.


Bingo!

It's just chasing returns, in one form or another. Different strategies give different results at different times and really ... how much of a return does one need anyways?


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## like_to_retire (Oct 9, 2016)

cainvest said:


> really ... how much of a return does one need anyways?


More than the index. 

I've beaten the index for enough years that I could do quite badly for many years and still be way ahead.

You can't beat it unless you try.

ltr


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## peterk (May 16, 2010)

james4beach said:


> That's not as bulletproof as you might think. Skimming the top 20 off XIU will do fine as long as the mega large caps are outperforming. This has been happening since 2000 during the current theme: dominance of the mega corp monopolies during* a stagnant economy that favours the monopolies and their established advantages, including government supports.* My XIU 5 (or 10) pack has the same concern.


Yes good assessment of _why_ they might be outperforming...but what makes you think this is _ever_ going to stop? By what motivation could you see the future playing out where government becomes less controlling and smaller, and less supportive of large companies through reduction of regulatory hurdles that only they can navigate, with approvals to run a business being granted in increasingly obfuscating ways by increasingly fewer people with authority?

I see no evidence that this is going to do anything but accelerate, let alone stop or reverse...Powers that be want consolidation of all economic activity into a few approved megacorps, and they are _going to get it._


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## cainvest (May 1, 2013)

like_to_retire said:


> More than the index.
> 
> I've beaten the index for enough years that I could do quite badly for many years and still be way ahead.
> 
> ...


And you can't do worse unless you try!


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## like_to_retire (Oct 9, 2016)

cainvest said:


> And you can't do worse unless you try!


Seriously, equities are risky. If I didn't want any risk, I would buy 100% GIC's.

Taking a stab at buying individual stocks in Canada compared to buying the index is a very small difference in risk, and worth the effort in my opinion. All the hand wringers will caution you against it, but it's something that won't break you right away. It's a long slow process that gives you lots of time to react and not take any significant loss. In fact, in Canada it's probably a slam dunk that over time you'll better the index. It's a lot better than 50% because most people just buy the index and go back to sleep. 

ltr


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## cainvest (May 1, 2013)

like_to_retire said:


> Seriously, equities are risky. If I didn't want any risk, I would buy 100% GIC's.
> 
> Taking a stab at buying individual stocks in Canada compared to buying the index is a very small difference in risk, and worth the effort in my opinion. All the hand wringers will caution you against it, but it's something that won't break you right away. It's a long slow process that gives you lots of time to react and not take any significant loss. In fact, in Canada it's probably a slam dunk that over time you'll better the index. It's a lot better than 50% because most people just buy the index and go back to sleep.
> 
> ltr


Well we're not talking about stocks vs GICs it's about an individual selecting specific stocks vs buying the index to beat it.


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## like_to_retire (Oct 9, 2016)

cainvest said:


> Well we're not talking about stocks vs GICs it's about an individual selecting specific stocks vs buying the index to beat it.


Yes, and did you read my second paragraph? 

ltr


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## cainvest (May 1, 2013)

I did ... if you know what you're doing you'll likely be "ok". Given the investor knowledge of many people I know I'd just say "buy the index" and move along.


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## james4beach (Nov 15, 2012)

like_to_retire said:


> Seriously, equities are risky. If I didn't want any risk, I would buy 100% GIC's.
> 
> Taking a stab at buying individual stocks in Canada compared to buying the index is a very small difference in risk, and worth the effort in my opinion.


Wow I really like this big picture view... nicely said!

I actually do enjoy stock picking, and am having fun with my 2 strategies. At the same time I usually recommend that others use the index. My parents use index ETFs and they have no interest in stock picking.


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## AltaRed (Jun 8, 2009)

I suspect the vast majority of Canadians would be much better off simply indexing. My spouse and my ex both do and it serves them best, especially if I get hit with a bus.


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## doctrine (Sep 30, 2011)

james4beach said:


> I'm curious if people still think that the TSX is a bad/flawed index? I've heard this said countless times on this forum, that the TSX index just isn't that great and that stock pickers can easily do better. I don't really grasp the problem when the long term returns are this strong... returns like 7.3% CAGR seem like normal equity returns to me, showing the expected equity risk premium.


The TSX has a very high concentration of energy and materials stocks. Look at the 15 year performance of indexes like the TSX energy index (XEG), TSX gold index (XGD), or TSX materials index. Long term capital destruction. The great performance of the TSX is due to those other companies, like banks, railroads, utilities, telecom, some retail, etc, that have created shareholder value through long term increases in revenue and earnings per share built by consistent and compounded return on capital. That is all that matters.


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## like_to_retire (Oct 9, 2016)

doctrine said:


> The TSX has a very high concentration of energy and materials stocks. Look at the 15 year performance of indexes like the TSX energy index (XEG), TSX gold index (XGD), or TSX materials index. Long term capital destruction. The great performance of the TSX is due to those other companies, like banks, railroads, utilities, telecom, some retail, etc, that have created shareholder value through long term increases in revenue and earnings per share built by consistent and compounded return on capital. That is all that matters.


I agree Doctrine. This is why I avoid Materials and Oil. For my energy sector I choose pipelines (which can almost be considered like a utility). I buy 3 stocks in each of the remaining 8 sectors, equally represented in Financial Bank, Financial Non-Bank, Energy, Telecom, Utilities, Consumer Discretionary, Consumer Staples, Industrial. 

So 24 stocks total with each of those sectors equally represented. Most of the stocks are the winners in those sectors and are blue chip with good dividends, although some are more growth than dividend like CNR, SAP, MRU, CTC, etc.

Compare that to the TSX60 with contains quite a few dogs and horribly skewed to a couple sectors and I can't see why it won't beat the index over the long term. So far I am handily beating it, but everyone does seem to come up with reasons why it won't.

ltr


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## andrewf (Mar 1, 2010)

like_to_retire said:


> Seriously, equities are risky. If I didn't want any risk, I would buy 100% GIC's.
> 
> Taking a stab at buying individual stocks in Canada compared to buying the index is a very small difference in risk, and worth the effort in my opinion. All the hand wringers will caution you against it, but it's something that won't break you right away. It's a long slow process that gives you lots of time to react and not take any significant loss. In fact, in Canada it's probably a slam dunk that over time you'll better the index. It's a lot better than 50% because most people just buy the index and go back to sleep.
> 
> ltr


If you're good at beating the index you should run a hedge fund and become fabulously wealthy.


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## Eclectic12 (Oct 20, 2010)

like_to_retire said:


> ... Taking a stab at buying individual stocks in Canada compared to buying the index is a very small difference in risk, and worth the effort in my opinion. All the hand wringers will caution you against it, but it's something that won't break you right away ...


Properly done ... sure. Done like my co-worker who "stuck to what he knew" ... not so much. He was losing money in three months and when back to his high fee advisor in six months. He wasn't interested in diversification or looking for bargains before during or after. I was so my portfolio was making money while his was sinking dramatically.

Those I talked to who has Nortel worth $300K to $1 million readily admit they had time to sell some or get out completely but because they didn't act or because they were waiting for their peers to signal it was time to sell, they pretty much rode it to the bottom.

My aunt, thankfully didn't buy but no matter how I tried to get across to her that the jump in Nortel's share price was due to the reverse split so that nothing had changed, in her mind the increased share price meant Nortel had rebounded.




like_to_retire said:


> ... Most of the stocks are the winners in those sectors and are blue chip with good dividends, although some are more growth than dividend like CNR, SAP, MRU, CTC, etc.
> 
> Compare that to the TSX60 with contains quite a few dogs and horribly skewed to a couple sectors and I can't see why it won't beat the index over the long term. So far I am handily beating it, but everyone does seem to come up with reasons why it won't ...


They seem to want to overblow things like Nortel imploding, to ignore that money manager performance cited as proof the retail investor can't do well have restrictions the retail investor does not have and assume that retail investors out performing over the long term must be applicable to money mangers handling a lot more money.


Cheers


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> If you're good at beating the index you should run a hedge fund and become fabulously wealthy.


Absolutely ... but then again, why would someone want the restrictions and politics that the hedge fund managers have, unless they were interested in that particular job in the first place?


Cheers


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## like_to_retire (Oct 9, 2016)

Eclectic12 said:


> They seem to want to overblow things that Nortel imploding, to ignore that money manager performance cited as proof the retail investor can't do well have restrictions the retail investor does not have and assume that retail investors out performing over the long term must be applicable to money mangers handling a lot more money.


For sure, using the example that professional fund managers have trouble beating the index, so how could some lone investor hope to do it is an old canard that indexers like to throw out there.

I think with respect to risk when attempting to beat the index, it's best to stay away from the small 4 pack, 5 pack schemes. The company specific risk is too high. With 5 stocks, each one represents 20% of your stable. Not really the best idea over the long term. Once you get in the range of 20 stocks, each stock isn't that big a threat. If you're attempting to beat the TSX60, your 20 stocks will all likely be in that index and represents a major percentage of the entire index, so you will essentially track that index and hopefully pull away slowly year after year. The difference in risk is very small. 

ltr


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## Eclectic12 (Oct 20, 2010)

The flip side of the coin is that retail investors who aren't paying attention to their psychology, results, methods or are just plain obstinate can be much worse off.

I can recall the article in I believe the G&M for an investor who needed four rounds of dramatic losses before he finally decided he shouldn't be the one managing the money. Or the investor who started off the article acknowledging that he had limited time/access to the markets when turning $150K into $30K with a third margin call yet he ended the article complaining about how the pros had all the advantages. :rolleyes2:


There's also my father who lost money in a penny mining stock, went straight to only deposit accounts / GICs, refused all suggestions to take a small percentage to try some equity and when forced into more equity by low rates - complained about how his CU didn't offer alternatives. Somehow he forgot the CU did suggest alternatives.


Cheers


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## AltaRed (Jun 8, 2009)

like_to_retire said:


> I think with respect to risk when attempting to beat the index, it's best to stay away from the small 4 pack, 5 pack schemes. The company specific risk is too high. With 5 stocks, each one represents 20% of your stable. Not really the best idea over the long term. Once you get in the range of 20 stocks, each stock isn't that big a threat. If you're attempting to beat the TSX60, your 20 stocks will all likely be in that index and represents a major percentage of the entire index, so you will essentially track that index and hopefully pull away slowly year after year. The difference in risk is very small.
> 
> ltr


Depends on what your asset allocation is. I wouldn't have 20 stocks if my equity allocation was only 30-40% of my portfolio. 20 stocks work fine with an 80-100% equity allocation because that means no more than 5% in any one holding, and I don't think I would hold less than 3% in any one holding to make it meaningful. Way overkill when one's equity allocation is only 30%. Then a 5 or 10 pack works fine, or even just simply an all equity ETF like the new Vanguard one. We need context when describing this sort of stuff.


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## Eder (Feb 16, 2011)

I'm down to 15 stocks from 24....trying to get to only 12. Easy to keep an eye on and prune as necessary.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> Depends on what your asset allocation is. I wouldn't have 20 stocks if my equity allocation was only 30-40% of my portfolio. 20 stocks work fine with an 80-100% equity allocation because that means no more than 5% in any one holding, and I don't think I would hold less than 3% in any one holding to make it meaningful. Way overkill when one's equity allocation is only 30%. Then a 5 or 10 pack works fine, or even just simply an all equity ETF like the new Vanguard one. We need context when describing this sort of stuff.


I don't know if it would be overkill, since regardless of your equity allocation, 5 stocks is just too risky to own and the person should move to an ETF. The company specific risk with 5 stocks is too high. I have a 50/50 allocation with 24 stocks and so each stock represents a bit over 2%. That's very low risk, not overkill to me anyway. If you own 5 stocks you have to watch too close and you better move at the first sign of trouble because it's an overwhelming portion of your equities regardless your allocation.

ltr


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## AltaRed (Jun 8, 2009)

To each his own obviously. 2% holdings seem rather inconsequential to me.


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## cainvest (May 1, 2013)

james4beach said:


> Take value investing for example. Seemed like a good idea for a long time (especially in depressed markets), then it basically stopped working in the US somewhere in the early 1990s once valuations got extremely high -- and stayed high since. Now we have nearly 30 years of broken (flawed?) value investing. So should you be value investing? How does it feel to underperform for 20-30 years?


James what's you take on value investing in Canadian markets?


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## Eder (Feb 16, 2011)

At any rate I was wondering at the disbelief of many here that it is not too hard to beat XIU over time by my strategy of cherry picking the TSX so I checked my records...I won't post results as I had to double check but lets just say I won't be buying XIU any time soon.


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## cainvest (May 1, 2013)

Eder said:


> At any rate I was wondering at the disbelief of many here that it is not too hard to beat XIU over time by my strategy of cherry picking the TSX so I checked my records...I won't post results as I had to double check but lets just say I won't be buying XIU any time soon.


As a guesstimate, how much time per month do you spend on managing your 15 stock portfolio?


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## Eder (Feb 16, 2011)

Maybe 30 hours/month is spent on all my investments since I retired...I enjoy the process so probably drag out my research longer than required.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> To each his own obviously. 2% holdings seem rather inconsequential to me.


I know we have a agreed to disagree on this, but I still cannot understand your logic on this issue.

As an example, if I owned Fortis (FTS), a utility stock, and it represented 4% of my equities, this would qualify as acceptable in your opinion.

But, if I decided that I wanted more diversification and sold half the Fortis holding and added Emera (EMA) such that it now represented 2% of my equities and Fortis (FTS) now also represented 2% of my equities, this is _overkill_ and _inconsequential_?

Why is this not a good move to lower company risk and add diversification within a sector? EMA and FTS are both fantastic stocks but are different animals with respect to geography and sector representation of utilities (i.e. Regulated Utilities and Non-Regulated Utilities in electricity generation, transmission, distribution, gas transmission and utility services), and so owning both is a really smart move in the utilities sector. 

Just because of the percentage that one represents in the portfolio doesn't lower its appeal. If I owned $50K of each rather than $100K of one, do you really think this inconsequential, and that it would be a better move to only own one of them to satify that requirement?

ltr


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## AltaRed (Jun 8, 2009)

To me, it is a question of balance, i.e. time spent on a portfolio, diversification to spread risk in case a holding dives 50% in a year (like NFI), and concentration for a holding to make a difference when it goes up 20% (like EMA in a year). I don't need 20 stocks in my Cdn allocation (currently 37% of my portfolio) @ 1.87% each on a simple average to reduce risk to a comfort level. I see this as a case of the 80/20 tail on a bell curve. In this case, 12 stocks would do nicely (about 3% weighting). 

I do understand we each have our own approaches but do you really think 2% weightings (50% equity - 24 holdings) is that beneficial other than maybe 'sleep at night' factor? 

FWIW, I own both FTS and EMA but I don't own Cdn stocks in 12 sectors. My ex-Canada is all ETFs. I will also say my 15 or so Cen holdings result in just under 3% weightings and I pick them off one (or 50% of one) at a time to supplement my cash flow needs.

P.S. I am not adverse to holding $100k in one stock (I almost do). You are right though.. We have agreed previously to disagree on this.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> You are right though.. We have agreed previously to disagree on this.


hehe, agreed.




AltaRed said:


> To me, it is a question of balance, i.e. time spent on a portfolio, diversification to spread risk in case a holding dives 50% in a year (like NFI), and concentration for a holding to make a difference when it goes up 20% (like EMA in a year).


Yeah, for sure. Most people don't want to take the time to mess around and monitor 24 stocks, so the difference in return in owning 12 stocks isn't that great. I get it. For me, I enjoy the research and so if I pick up a bit as a result, it works out for me. You're right I suppose, it's a tail on a bell curve.



AltaRed said:


> I am not adverse to holding $100k in one stock.


I like to keep it around $50K. I get nervous at $100K and want to divide it up with another stock.

If we examine an ETF index, then each stock represents a mere fraction of a percent, and so can we say that each stock in an ETF is inconsequential? Again, I guess it's how much you value or enjoy your time spent on monitoring each stock in your portfolio.

ltr


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## cainvest (May 1, 2013)

Eder said:


> Maybe 30 hours/month is spent on all my investments since I retired...I enjoy the process so probably drag out my research longer than required.


Thanks for the info! It definitely makes a difference if you enjoy the activity otherwise it's a burden.


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## hboy54 (Sep 16, 2016)

andrewf said:


> If you're good at beating the index you should run a hedge fund and become fabulously wealthy.


I am good at beating the index too, but it doesn't scale. The only emotions I have to deal with are entirely contained in my head, a stunning advantage that would be ruined by even one more person being involved. My wife has no idea how helpful her complete lack of involvement is in the process.


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## james4beach (Nov 15, 2012)

doctrine said:


> The TSX has a very high concentration of energy and materials stocks. Look at the 15 year performance of indexes like the TSX energy index (XEG), TSX gold index (XGD), or TSX materials index. Long term capital destruction.


That doesn't mean these sectors don't have potential. It just means they had a bad 15 year stretch. When you invest in a diversified portfolio (like XIC) you don't get all sectors performing strongly in tandem. That's intentional in diversified investing. It's the core concept!

One danger with the hand picked portfolios that have become popular around CMF is that people are excluding commodities, after concluding that commodity/energy should be excluded. Sure that works currently, but it may not work going forward.

Which again is why I'm skeptical of stock picking. I have a lot of doubt that stock picking (and sector picking) can do better than the index over the long term.


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## james4beach (Nov 15, 2012)

cainvest said:


> James what's you take on value investing in Canadian markets?


I've never tried it. The only two Canadian strategies I've been pursuing are index emulation (XIU sampling) and high growth small caps, which is more of a momentum play than value.


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## doctrine (Sep 30, 2011)

But part of index investing is smart diversification. Materials and energy are not necessarily bad, but when it's 30% of your investment, that's not diversification. It may eventually work, but it's highly risky in a sector which has failed to produce measurable returns for decades. That lost shareholder capital is not coming back, even in a bull market for commodities.

Most Canadian mutual funds are outperforming simply by removing the sectors that haven't worked for decades. No need to run a hedge fund to take advantage. This index outperformance is mostly particular to Canada, it's much harder to do with the S&P 500, which is broader both in terms of # of companies, balance of sectors, and quality and history management and long term shareholder wealth creation.


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## like_to_retire (Oct 9, 2016)

doctrine said:


> But part of index investing is smart diversification. Materials and energy are not necessarily bad, but when it's 30% of your investment, that's not diversification. It may eventually work, but it's highly risky in a sector which has failed to produce measurable returns for decades. That lost shareholder capital is not coming back, even in a bull market for commodities.
> 
> Most Canadian mutual funds are outperforming simply by removing the sectors that haven't worked for decades. No need to run a hedge fund to take advantage. This index outperformance is mostly particular to Canada, it's much harder to do with the S&P 500, which is broader both in terms of # of companies, balance of sectors, and quality and history management and long term shareholder wealth creation.


Exactly, and most investors that have been doing this for a long time know that it's tough and not worth the effort to stock pick outside Canada, but that same group have long figured out that the Canadian index is fairly easily beat.

ltr


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## cainvest (May 1, 2013)

like_to_retire said:


> Exactly, and most investors that have been doing this for a long time know that it's tough and not worth the effort to stock pick outside Canada, but that same group have long figured out that the Canadian index is fairly easily beat.


Kind of surprising that there isn't a slew of ETFs to capture this easy to beat index.


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## like_to_retire (Oct 9, 2016)

cainvest said:


> Kind of surprising that there isn't a slew of ETFs to capture this easy to beat index.


Funds and ETF's have a much tougher time because of scale, plus the problem of large amounts of incoming and outgoing capital. These managers have millions/billions they need to find a home for in the markets, and they have to follow the rules they have set out in their prospectus. They need to continually buy and sell to create cash for investors who want their money out, and for the large amounts of cash that flow into the fund. They also have to pay everyone's salary on the team - expenses. All this buying and selling loses on the spreads and it also creates extra taxes that need to be paid. For a retail investor, they have very little they need to deal with. There is low trading activity compared to a fund. An ETF or fund is a totally different world and I'm sure you know that.

ltr


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## Eder (Feb 16, 2011)

The problem with ETF's is that they include bad businesses...heres a popular ETF that focuses on Canadian banks....

RY,"ROYAL
TD,"TORONTO
BNS,"BANK
BMO,"BANK
BAM.A,"BROOKFIELD
CM,"CANADIAN
MFC,"MANULIFE
SLF,"SUN
NA,"NATIONAL
FFH,"FAIRFAX
IFC,"INTACT
POW,"POWER
GWO,"GREAT
PWF,"POWER
ONEX,"ONEX
IAG,"IA
CIX,"CI
EFN,"ELEMENT
X,"TMX
IGM,"IGM
CWB,"CANADIAN
LB,"LAURENTIAN
MIC,"GENWORTH
HCG,"HOME
ECN,"ECN
AD,"ALARIS

Many of those holdings are a poor choice and with a bit of research most of them can be eliminated leaving 4 or 5 worth investing in. (imo)

Only holding the best 3 or 4 outperforms by about 4%/year 

Anyway I'll drop this here ...ETF's are a fine way for most people to invest.


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## hboy54 (Sep 16, 2016)

cainvest said:


> Kind of surprising that there isn't a slew of ETFs to capture this easy to beat index.


The problem isn't that some of us beat the index, the problem is in labeling it easy in general. It is easy for specific people. I have no doubt that there is a very small population of specific people that can beat the index by thinking in specific ways.

Unlike others here, I beat the index, but have no illusions that anyone else can do it in the fashion that I do, even as a client by participating in an ETF. I could not run an ETF because my task would reduce to changing the way the client brains are wired, otherwise they will be unable to handle the ugly truth of the short term results of my methods. My running an ETF does not sound feasible. 

It does not logically follow that someone who in their private investing activities beats the index, can then scale up their operations and run an ETF. I beat the index and could not run an ETF using my methods for the same reason: I think differently.


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## OptsyEagle (Nov 29, 2009)

I find I beat the index a lot more when I am humble enough to understand the challenges involved in doing it and not underestimating them. 

Over-confidence rarely helps.


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## like_to_retire (Oct 9, 2016)

Eder said:


> The problem with ETF's is that they include bad businesses...heres a popular ETF that focuses on Canadian banks....
> 
> RY,"ROYAL
> TD,"TORONTO
> ...


Yeah, agreed Eder, you've really hit the nail on the head. It's the fact that indexes and funds have so darn many stocks, and it's fairly easy for those who pay attention, like yourself, to look at the list and see the dogs. You could, and I feel I could, pare that list down to what would be considered "winners" and end up ahead of that list over time. It doesn't have to be that much, but year after year it builds and you start to pull away. That's how an index is beat, whether the detractors like it or not. I could show a graph of my stocks versus the index over time and you would see that the two track exactly the same, except that my stocks gain a bit over time, and eventually the difference is quite large. That's what beating an index is about, it isn't blowing the index away in one or two years.

ltr


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## james4beach (Nov 15, 2012)

I still don't understand why this would be so obvious, and yet the average Canadian mutual fund manager can't pull it off.

The entire TSX 60 is composed of very liquid stocks and large market caps. They can absorb huge amounts of money. What stops a mutual fund manager from taking the TSX 60 and working this magic on it, perhaps trimming it down to the 40 winner stocks and eliminating the 20 losers?

And since it's such an obvious and simple technique, shouldn't we see a significant number of mutual funds outperforming the benchmark over the long term? And yet, if you look at any standard Canadian Equity Fund, you'll see they hold plenty of energy and materials stocks.


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## Eder (Feb 16, 2011)

MAW106 10.8%/year after 1.1% MER (4.5% material 10% energy)
XIU 8.67%/year (10% material 20% energy)

BIG


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## like_to_retire (Oct 9, 2016)

james4beach said:


> What stops a mutual fund manager from taking the TSX 60 and working this magic on it...


We've already covered that.

ltr


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## cainvest (May 1, 2013)

Eder said:


> MAW106 10.8%/year after 1.1% MER (4.5% material 10% energy)
> XIU 8.67%/year (10% material 20% energy)
> 
> BIG


Yes Mawer 106 is a good example of having lower material/energy when compared to XIU. 
On the flip side MAW106 did not beat XIU in 2016, 2017 or 2018 but it did better in the years before that.


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## james4beach (Nov 15, 2012)

Eder said:


> MAW106 10.8%/year after 1.1% MER (4.5% material 10% energy)
> XIU 8.67%/year (10% material 20% energy)


Ah, but did you look at the assets under management history? Practically nobody was invested in Mawer Canadian Equity until about 2015. That's when it really started getting popular, and huge amounts of money flowed into the fund... with the *hindsight* of commodities doing badly. People only got in after.
http://quote.morningstar.ca/QuickTa...rf.aspx?t=0P00007173&region=CAN&culture=en-CA

This is a subtle but very important point. This stuff we're talking about now, how it's "obvious" how to beat the index by underweighting commodities etc, was not obvious until after commodities already did badly. People did not flock to MAW106 nor did people think the strategy was promising back in 2009-2013.

Now with the hindsight of it already happening, we want to say it's obvious and that they had the right idea.

I think the AUM$ history supports the story that what is happening here is that there is a certain sector leaning that has, in hindsight, turned out to work very well. Many people now believe that it's a permanently good idea as a Canadian investment approach (voiced in this thread), but I caution against that conclusion. The AUM$ history seems to show it's, instead, merely a new epiphany that came with hindsight.

Think about 10 years from now. Something will happen in the markets that makes some other sector mix the new "best and greatest". For example, tech could permanently take off (I doubt it but who knows), rewarding Canadian mutual funds that are heavy in tech. And we'll be looking at some other strategy that is then, with hindsight, "obviously the best way to invest in Canada".... but the critical point is that this is *not* obvious to us today.

I try to diversify and equal weight my sectors to protect against this problem. But I don't like the idea of just dropping commodities or energy just because there's been a bad stretch. This feels like chasing returns and hindsight bias to me.


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## Argonaut (Dec 7, 2010)

I've wrote a lot about why to underweight or avoid commodity stocks. Been doing it myself since 2010/2011 so it's not a hindsight thing. These companies are continuously depleting and chasing after limited resources. They always have cost overruns and are poorly managed. The only main one that has done well is Franco-Nevada, because it has more of a simple business model without as big of risk. I think it was AltaRed who wrote a nice piece about all the major commodity players chasing status as "lowest cost producer" but it ends up being sort of a race to the bottom.

Commodity stocks will have a bull market sometime in the future I'm sure, but in general owning them is painful and unnecessarily volatile.


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## james4beach (Nov 15, 2012)

Does anyone want to tell me again how bad the TSX index is? XIU is doing amazing recently, with 1 year return of 11%, 3 years also 11% CAGR.

In comparison Mawer Canadian Equity has 1 year = 7% and 3 years = 8% CAGR, so for several years now, XIU is outperforming one of the best professional stock portfolios.

I think this shows it's not as straightforward as just "avoiding commodities". Look at these last 3 years. Energy and materials have been weak, and the Mawer fund underweights all of that. And yet, XIU has still outperformed it. For me this is a reminder that indexing has all kinds of advantages that probably outweigh some of these disadvantages such as "dumb choices of sector weights" or "inclusion of some useless stocks".

So yes, let's say the TSX 60 includes some bad stocks. But what else does it do? The passive approach guards you from impulses such as hindsight bias and chasing returns. The market cap weighting avoids unnecessary rebalancing inefficiency. It guards you from the tendency to embed some theme-du-jour into your portfolio.

Proof is in the numbers I think. If it was so easy to do better than the TSX simply by underweighting obviously bad stocks (or dropping commodities), Mawer Canadian Equity wouldn't be *underperforming XIU* like this over 3 years.


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## OnlyMyOpinion (Sep 1, 2013)

XIU underweights commodities as well. There is only SU in the top 10 that comprise nearly 50% of the fund. 
But the difference in performance is worth noting. I see among MAW106's top 10 is cash at 5%.


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## james4beach (Nov 15, 2012)

Can someone pinpoint the main cause of this big difference in 3 year performance? You're right that XIU underweights commodities versus the broader TSX Composite but it still contains 20% energy (ENB,SU,TRP) and 10% materials (NTR,ABX). The energy sector, XEG, has a 0% return over 3 years.

That's something like 20% of XIU in dead weight, and yet it still beat MAW106. I don't understand what happened but I suspect it's because active stock picking is really hard to get consistently right.

This might have happened because MAW106 had cash drag, or made other strategic missteps in their attempt to find good stocks. I think this is the story with stock picking vs indexing. Sometimes stock picking does better, sometimes it does worse, but it averages out to the index. I really don't think picking individual stocks can be expected to consistently outperform the index. We don't see that in mutual funds (another example here), even ones which use the "right approach".


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## Eder (Feb 16, 2011)

Over 16 years (longest comparison I can come up with) Maw106 is outperforming XIU by 140% even though Maw106 carries a hefty MER. But Mawer is an outlier...most active mutual funds are money pits and people would be better off in XIU.


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## AltaRed (Jun 8, 2009)

Looking at annual performance data, MAW106 seems to have lost some of its edge in recent years though. Would have to dig really deep in detailed data if one could find it...to understand why but it may be related to the implosion of the super commodity cycle. A portfolio manager can't be right all the time. Regardless, we have seen some recent strength in the TSX. The question is whether it has much legs left, or not, given real GDP growth may be in the 1-1.5% range this year.


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## cainvest (May 1, 2013)

james4beach said:


> This might have happened because MAW106 had cash drag, or made other strategic missteps in their attempt to find good stocks. I think this is the story with stock picking vs indexing.


Or could it just be their strategy is geared more towards long term results and nothing has changed?

They didn't beat the index in 2009/2010 but then had 5 very good years in a row.


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## doctrine (Sep 30, 2011)

The S&P 500 is up 70% in 5 years in USD. The S&P TSX Index is up 30% in 5 years in CAD. It's doing okay. But the Canadian dollar is down 18% over 5 years. That means the S&P 500 is up over 100% in 5 years in Canadian dollars. That is a good return. The S&P TSX index is up barely 10% in USD in 5 years. That makes it a very poor investment for anyone outside of Canada. Bonds have outperformed, and bonds rarely outperform equities in 5 year periods.


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## hboy54 (Sep 16, 2016)

cainvest said:


> Or could it just be their strategy is geared more towards long term results and nothing has changed?
> 
> They didn't beat the index in 2009/2010 but then had 5 very good years in a row.


This. I had a horrendous 2018 year if what you look at is year over year gain/loss in dollars and percentage. If you look at it from the point of view of all the shares I added at really good prices (many of which continued on down to be even better prices for someone else to harvest and amplifying my short term losses) that will likely show up as gains 1 to 10 years out, then I had a fantastic year.

It was also a fantastic year because I closed the loop on some shares like selling TECK.B high, which last purchase was in 2015 or early 2016 at much, much lower. Not coincidentally, calendar 2015 was also a very large loss year.

The equity investing cycle typically has a minimum period of 5 years. Single calendar year results don't reveal much, yet this figure sees to be the most popular measuring stick.


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## Pluto (Sep 12, 2013)

Included here is a chart comparing S&P 500 vs BRK 1970 to present. The out performance of BRK is so overwhelming that I have to say it isn't luck, and value investing is alive and well.


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## Pluto (Sep 12, 2013)

^
1. Its interesting that in Buffett's 1999 Fortune article he projected a 6% return over next 17 years. Over the last 20 years S&P has offered about 4% compounded, and BRK about 7.8. His 6% prediction was pretty close. 
2. On the luck thesis, Buffett rebutted that in an article and a speech. The Random Walk down Wall street author never responded to the rebuttal. 
3. One of the assumptions of the Random Walk perspective seems to be that math and statistical analysis can capture all of what constitutes investing. I don't buy the assumption. Number crunching only captures a slice of it.


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## Eder (Feb 16, 2011)

Even decent Canadian stocks have creamed the SPY...RY by 250% over 20 years...Fortis by 400%...even Telus by 40%....all easy to pick blue chip dividend stocks I buy & hold. 

I wouldn't get to the forex thing as I have no clue where the exchange will be....between 63 cents & $1.12 I guess lol. In 5 years the Can buck could be above par again.

Of course picking the cream of the S&P might be possible as well but it seems much more efficient than the TSX.


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## like_to_retire (Oct 9, 2016)

Eder said:


> Even decent Canadian stocks have creamed the SPY...RY by 250% over 20 years...Fortis by 400%...even Telus by 40%....all easy to pick blue chip dividend stocks I buy & hold.


Eder, no one is listening in this thread, so you're wasting your breath. The indexers are repeating their mantra that the Canadian index can't be beat, while anyone with even a mild interest can (as CMF member "My Own Advisor" said earlier) _"skim the top of 20% of XIU"_ and you'll be way ahead.

ltr


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## james4beach (Nov 15, 2012)

Pluto, I don't know why you're using BRK in your stock picking or value investing argument. Their stock portfolios are a pretty small part of BRK valuation, most of the company's results are driven by the operation of their fully owned companies such as insurance (Geico), railroads, utilities that make up Berkshire.

Berkshire's outperformance comes from solid management of the excellent companies they directly own and operate. They're careful about acquisitions, very selective, and use cashflows strategically internally, thanks to how their insurance segment operates... they are primarily an insurance company and use their float to finance everything else.

In contrast: stock picking some common shares, where you have absolutely no influence or power over management, no ability to tap into and divert cashflow within your companies, is _nothing_ like what Berkshire does.


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## Pluto (Sep 12, 2013)

I don't think so: Companies BRK owns wholly used to be publicily traded. Too, BRK management say when the buy a company they usually leave management alone to run the companies. In principle, buying an entire company does not preclude value investing priciples. Nor does buying shares preclude value investing principles. In the beginning he just bought shares of compaines but got so big they now can or have to buy entire compaines. 

You seem to be saying that if one buys a whole company, they can't use value principles. But I don't buy that. 

In stock picking there is a degree of control: If you don't like management, don't buy the shares. If you own the shares, and managment changes in ways you don't like, sell them. 

An individual can adopt many of the basic approaches that BRK uses. You don't need to be huge and have a lot of muscle to implement the basic ideas. Just for example, you say BRK own all of GEICO. But Buffett first learned of GEICO when he was 20 years old. Reportedly, he later, in the 1950's, put all his money in GEICO. You seem to argue that because BRK now owns all of GEICO, no young person could learn about a company and have the confidence to put their savings into it and make money. It doesn't follow. 

Also, you seem to be saying an indivudual must be able to do all of what BRK does, or all is lost. Doing some of what they do, you seem to imply, is worthless. Its an all or nothing, Be instantly huge so one can tap into and divert cashflow, or all is lost. its too black and white for me. there are grey areas that are not that difficult for an indivicual to adopt. I know from reading your ideas that much of what Buffett apparently did in the '50's laying the groundwork for what he later achieved, you won't do and that's OK with me. I just don't want young readers of this forum to develope a fearful cynical view of stocks.


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## milhouse (Nov 16, 2016)

There's an interesting short article in the G&M by Tim Shufelt discussing the case for heavy weighting of Canadian oligopoly stocks in the Canadian market (behind a paywall). It references a CIBC World Markets report by Ian de Verteuil that makes a case for a heavy weighting in these Canadian oligopoly stocks. I thought it was kind of apropos with some of this discussion points in this thread. 

Here's my summary of it:
The TSX is full of pitfalls, eg. not diverse enough, lacking health care and tech stocks, etc.
Canada has conditions that have allowed some domestic industries to be dominated by a few large players and allow for high profitability and stock performance.
CIBC's report focuses in on four sectors: banks, telecoms, railways, and grocers. 
While there can be concerns from a consumer perspective, the oligopolies can be stars, relative to the broader stock market and US equivalent sectors. The oligopolies were typically more stable too: better returns with less volatility.
The article sums it up by saying the oligopolies make the Canadian stock market more attractive but reiterates the weakness of the Canadian market's lack of diversity.


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## cainvest (May 1, 2013)

like_to_retire said:


> Eder, no one is listening in this thread, so you're wasting your breath. The indexers are repeating their mantra that the Canadian index can't be beat, while anyone with even a mild interest can (as CMF member "My Own Advisor" said earlier) _"skim the top of 20% of XIU"_ and you'll be way ahead.


ltr, is there some unwritten rule that says indexers can't also buy stocks?


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## like_to_retire (Oct 9, 2016)

cainvest said:


> ltr, is there some unwritten rule that says indexers can't also buy stocks?


No.

ltr


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## Pluto (Sep 12, 2013)

Just for interest sake I looked at some other etf's besides xic. These ones outperformed the index: xit, xfn, xre over the last year. I'm sure there are sectors that will out perform the tsx over the long term. Just pick etf's with no oil and other boom and bust resources, and one will probably do better than the index.


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## fireseeker (Jul 24, 2017)

Pluto said:


> Just pick etf's with no oil and other boom and bust resources, and one will probably do better than the index.


For this to be correct, it means that oil and resource stocks are currently overpriced. 
It also means that this forum has uncovered a significant market inefficiency, just waiting to be plundered.

If only it were that easy ...


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## Pluto (Sep 12, 2013)

^
don't get the connection to "overpriced". 

XRG, for example, is lower than it was 10 years ago. Why have money in a sector that can do virually nothing for 10 years?


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## james4beach (Nov 15, 2012)

Pluto said:


> XRG, for example, is lower than it was 10 years ago. Why have money in a sector that can do virually nothing for 10 years?


Pluto did you mean XEG for energy sector? This had a 4.0% CAGR return since inception. While that isn't amazing, it's also not terrible. For example XIN (MSCI EAFE hedged) had an even lower, 3.3% CAGR return since inception and yet this is considered a core holding for "global diversification".

Recent performance does not prove that something is a bad investment. There is a danger of chasing returns if you only look at what a trailing 10 year performance has been. For example an investor who looked at the US in 2009 or even 2012 might have concluded that the S&P 500 was dead money with no return. In fact that was a common conclusion at the time, and US stocks were avoided by many people.

It's a futile game to keep looking at the last few years of performance to figure out what should go into a portfolio and what should be avoided. Instead, the important question is whether an asset has a reasonably good chance of producing good returns in the future. I don't think you can disqualify a sector just based on 10 or 15 years of performance.

I continue to keep 20% in energy (within my 5 pack) and a lower % once you also take into account my small/midcaps. Could this turn out to be "dead money"? Yes, sure! But so could any of the other sectors I hold. Banks may turn into "dead money" too.


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## fireseeker (Jul 24, 2017)

Pluto said:


> ^
> don't get the connection to "overpriced".
> 
> XRG, for example, is lower than it was 10 years ago. Why have money in a sector that can do virually nothing for 10 years?


As James suggests, every single sector has had 10-year stretches of virtually no returns. 
From Jan 2001 to Jan. 2011 the Nasdaq composite went from 4,000 to 3,100. It was a terrible investment.
Today it's at 8,000. January 2011 was a sensational time to invest in the Nasdaq.

Oil has underperformed for a decade or more. If you think it is going to keep underperforming then you are concluding that it is overpriced right now -- that its price relative to the rest of the market will continue to fall. 

You might be right. I have no idea which sector the market will favour in the next decade. But, like James, I don't think it's wise to give up on a sector simply because it has done poorly. Past performance is no guarantee, etc etc.


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## Pluto (Sep 12, 2013)

^
I guess I don't see the point in holding boom and bust type companies that have no control over the price of what they sell. At best they are trades. But why bother trading when there are plenty of other stocks that grow and don't suffer from severe lengthy busts? 
I guess it is possible that banks, railroads, telecoms, piplines, power utilities, tech, manufacturing could go bust for ten years while oil booms but it just doesn't seem very likely. I don't want to invest based on what is unlikely to happen. I have enough industries, and enough stocks and I don't miss oil stocks. I try to buy stocks that have proven they can outperform the index. If I buy xeg @ 4% CAGR I'm buying something that has proven it can under perform for many many years. Why would I do that? The only reason I can think of is if I thought oil was commencing one of its short supply periods and the price would be rising and stay high for a significant time. If that unfolded, I'd be sure to get out of it while the industry was booming. But I don't see it in short supply: Its being propped up by production cuts that could evaporate anytime, so its too risky for me. 

There is no way I'd even dream of buying xin. Global diversification seems to be a fad that isn't really paying off with xin. Templeton was a master at global investing, but he also claimed to be a value investor and stock picker. He managed 20% for a couple of decades, and ended up with a lifetime 14% with his growth fund. Stockpicking can really pay off. All one needs is one or two good growth stocks in a life time, while too much diversification spells almost no returns.


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## Pluto (Sep 12, 2013)

fireseeker said:


> As James suggests, every single sector has had 10-year stretches of virtually no returns.
> From Jan 2001 to Jan. 2011 the Nasdaq composite went from 4,000 to 3,100. It was a terrible investment.
> Today it's at 8,000. January 2011 was a sensational time to invest in the Nasdaq.
> 
> ...


1. That's why I don't invest by sector. I have individual stocks. 
2. I don't know if oil stocks are undervalued or over valued. I know that they don't control the price of oil and I know they experience sudden busts caused by over supply that go on for very long time. Why bother? Why not buy stocks that have pricing power? Its the same with mining of whatever. Boom and bust. I'll leave that stuff to the traders.


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## james4beach (Nov 15, 2012)

Banks are also boom and bust businesses. They have no control over when housing slows down, or when the global banking sector has a derivatives blowup catastrophe. If and when that happens, Canadian bank stocks will do very badly for a prolonged period. So should you avoid the Canadian bank sector because they are boom & bust and have no control over these factors beyond their control? No matter how great RBC or TD's management is, if Canadian housing crashes, they will do very badly.

I think virtually all companies are exposed to economic cycles within their sphere. With commodities it's obvious, but with banks and other leveraged companies (REITs) it's things like credit cycles.

My approach is to diversify broadly enough so that, hopefully, all of these different cycles don't tank my net worth at precisely the same time. To further reduce the odds of "everything tanking at the same time" I diversify into bonds and gold, which also have their own cycles.

Everything will have bull & bear phases. I think the point in diversified investing is to go broad enough that you benefit on average and aren't vulnerable to alignment of cycles all going down together. If you were to draw a timeline on a piece of paper from 1900 to now, and mark the strong/weak periods of various things (stocks, bonds, gold, commodities, housing) you would see cycles in each of them *and* they would occur at different times.

There's no hope of timing any one of those cycles of predicting which one is strong/weak next. This is why I like diversified investing instead of strategic / tactical allocation, trying to predict "what is hot" for the next few years.



Pluto said:


> 1. That's why I don't invest by sector. I have individual stocks.


Fair enough, but I think individual stocks tend to follow their sectors on average


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## hboy54 (Sep 16, 2016)

This debate is always framed as indexing vs stock picking. The opposite of indexing is stock picking, and there is nothing more to say on the matter.

What if the opposite of indexing is "not indexing". What if in the category of "not indexing" there are all kinds of ways to beat indexing? What if some people here have found some of these ways?

I own stocks, but to call me a stock picker is a gross misrepresentation of what I do and how I think about investing.


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## Pluto (Sep 12, 2013)

Everything is cyclical due to economic cycles, but some are worse than others. I try to buy the ones that bounce back. Last December, apparently the worst decemeber since the depression, my net worth took a hit - all my investmetns went down at the same time. Diversification didn't save me. but everything I own bounced back and I bought more shares at lower prices, whereas XEG is lower than 10 years ago. 

Buying individual stocks allows me to completely avoid a crappy sector. I avoid the worst sectors, and concentrate on what bounces back after a bear market. 
I do something similiar to what the indexes do: I ditch the losers, and keep the winners. that's how I ended up with no oil. I know people who do the opposite: they are eager to trim or sell all of their winners. Never go broke taking a profit they say. In the meantime they hang on to their losers forever and a day waiting for them to come to life. They end up holding mostly non performing stocks. They just can't bring themselves to take a loss and move on. 

So I start out buying with preconcieved ideas of what will do well. Then weeding out the non-performers corrects my mistakes, and I end up with winners. Its fairly simple. Its similiar to what indexes do, but with no commitment to losing sectors. Because they are an index, they have to represent losing sectors, but I don't.


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## hboy54 (Sep 16, 2016)

LOL Pluto. I do better than average in part because I run towards the sectors you avoid. You can choose to buy TECK.B at $50, or choose to buy it lower, say starting at $23 and on down to under $5.

BTE is currently my worst investment ever showing a low 6 figure loss, yet my ACB is under $4 with a decade range of $1.50 to $50. It is early yet, not even 5 years in. Took me 7 years to get a definitive win with OSB. MX once showed a round trip of $8 to $8 over a decade, but another decade on sits near $80.

Here we are, two people who do better by not indexing, seeing things 180 degrees apart.


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## Pluto (Sep 12, 2013)

^
Yes. you are a trader who thrives on the drama. Nothing wrong with that.


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## hboy54 (Sep 16, 2016)

Pluto said:


> ^
> Yes. you are a trader who thrives on the drama. Nothing wrong with that.


Trader? The last thing I am is a trader.


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## AltaRed (Jun 8, 2009)

You are a value investor and stay the course for years at a time. I agree you are the farthest thing from being a trader.


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## like_to_retire (Oct 9, 2016)

hboy54 said:


> Trader? The last thing I am is a trader.


Yeah, don't really understand the trader comment. You specifically told us you were not a trader.

ltr


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## Pluto (Sep 12, 2013)

Ok, not a trader. my mistake. Whatever.


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## like_to_retire (Oct 9, 2016)

hboy54 said:


> ..... BTE is currently my worst investment ever showing a low 6 figure loss, yet my ACB is under $4 with a decade range of $1.50 to $50. It is early yet, not even 5 years in. Took me 7 years to get a definitive win with OSB. MX once showed a round trip of $8 to $8 over a decade, but another decade on sits near $80.


Yeah, everyone has their own ideas about how to make money in this game.

Myself, I only invest in individual stocks, and in equal amounts to 8 sectors in Canadian stocks exclusively. I don't hold the Materials, Information Tech, or Health Care sectors, and the Energy sector is exclusively pipelines - no oil.

I hold a stock forever until its fundamentals look terrible and then it's gone, or they cut their dividend. The dividend rule is iron clad. In the far past, if I held a stock after a dividend cut, I was never rewarded, and quite the opposite. If you don't immediately sell a stock after a dividend cut, you're in for a world of hurt.

It's that simple. I totally agree with James that you need to diversify with sectors. I also feel that you need at least 3 stocks in each sector to lower company specific risk within that sector. I hold 24 stocks, in 8 sectors of Financial Bank, Financial Non-Bank, Energy, Telecom, Utilities, Consumer Discretionary, Consumer Staples, Industrial. This calculates to 12.5% in each sector. Most are blue chip dividend stocks, but there also a number of growth stocks such as CNR, MRU, SAP, etc, etc. I consider stocks that pay less than about 2% as growth.

This system has handily beat the Canadian Index as I have followed this method over 9 years now. Doubters will tell me I need to do it for 100 years to be significant. That's OK, everyone has their own ideas.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire, that sounds like a solid methodology


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## james4beach (Nov 15, 2012)

Well there we have it, another all time high on the TSX. Using XIU because it goes farther back...

YTD: 16.8% ... crazy!
5 years: 6.8%
10 years: 8.6%
15 years: 7.6%

A question for those of you near retirement: is this making you think you can retire sooner?


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## cainvest (May 1, 2013)

james4beach said:


> Well there we have it, another all time high on the TSX. Using XIU because it goes farther back...
> 
> YTD: 16.8% ... crazy!
> 5 years: 6.8%
> ...


No reason to think one should retire sooner IMO. 16% looks good but when you subtract the nearly 8% loss at the end of last year it's back down near the 10 year level return.


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## afulldeck (Mar 28, 2012)

like_to_retire said:


> Seriously, equities are risky. If I didn't want any risk, I would buy 100% GIC's.
> 
> Taking a stab at buying individual stocks in Canada compared to buying the index is a very small difference in risk, and worth the effort in my opinion. All the hand wringers will caution you against it, but it's something that won't break you right away. It's a long slow process that gives you lots of time to react and not take any significant loss. In fact, in Canada it's probably a slam dunk that over time you'll better the index. It's a lot better than 50% because most people just buy the index and go back to sleep.
> 
> ltr


So what strategy to you use?


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