# Stockpicker's Dilemna 2022 and Beyond



## londoncalling (Sep 17, 2011)

Many argue that it is extremely difficult to beat the index. There are numerous threads here and elsewhere on the topic. This thread is not to try and persuade anyone to change their investing style, nor dredge up discussion on indexing vs stock picking. It is instead a place for me to post my thoughts and ramblings on the behavioural part of investing. I think there is a lot to be gained by having others dissect one's thesis and strategy. I am often paid to provide such a service to clients. So in that spirit, I welcome comments on what process other stock pickers use or even on my decisions to date. I will start by posting a brief summary of my portfolio activity, and the rationale at the time. IMO stock picking is balancing risk reward with probable and potential outcomes. Sometimes we make bad calls and deserve the poor result. Sometimes we make good calls with bad results. Sometimes we make bad calls with good results. Sometimes we make the right call with the expected result.

added: Once I complete the summary, I will use this thread to post a more detailed overview of my portfolio activities. These will be more helpful and accurate as they won't be burdened with hindsight bias and knowing the result. I intend it to act as a living document to improve my portfolio management and investing decisions over time.


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## londoncalling (Sep 17, 2011)

1. Holding when you believe you should sell

In late 2021 I purged my portfolio of many(but not all) of my legacy holdings that I bought when I knew a lot less than I do now. I still have a lifetime of learning ahead of me. Mostly the result of a bull market, some luck and a few good picks I have been able to meet or exceed the index most years. The year's that I have not done so I have performed close enough that the fees given to an advisor would have made up the difference.

Two stocks that I cut loose after holding way too long were Extendicare and Alcanna. I should have sold them years ago when their debt levels surged and they started to cut dividends. With so many positions in the portfolio and being a small weighting from such a small initial investment holding them or selling them did not have any impact on the portfolio. Since the sale EXE is down 12% and CLIQ has been taken out by SNDL which is down about 66%.

Lesson- If you think you should sell and the data confirms it. SELL


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## londoncalling (Sep 17, 2011)

2. Switching horses mid race

Also as part of the purge I swapped out Bird for Aecon. The rationale was poor performance and no dividend growth. Aecon had a much steadier track of dividend growth and a larger project pipeline than BDT.

Since the switch BDT has fallen 18% and Aecon almost 40%. Bird has also increased its dividend recently. 

Lesson - Sometimes the right rationale may not provide the right result. I still think my decision was right to sell Bird. The decision to buy Aecon may not have been. A 1 year timeline is not a sufficient holding period to weigh in on a long term investment.


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## londoncalling (Sep 17, 2011)

3. Buyouts are mostly chance

In March of 2022 Intertape Polymer was acquired and became a private company. The price jumped over 75% and offered a great return. The company had been an acquisition target in the past and the deal fell threw. There was a slight spread between the trading price and the offer. Also, there were future dividend payments to be paid prior to the closing of the deal. I had to decide to hold or sell. There is always a chance that a higher offer will come in but on the flip side there is also a chance that the deal will not close due to regulatory review or other reasons. In most cases it makes sense to sell and leave the arbitrage to the experts. 

I sold after taking the next dividend. I was elated with the quick profit but left with the decision of where to reallocate the funds. ITP had performed well over the years and I had recently increased my position a few months previous. Sometimes finding a good stock at a good price can be difficult and one runs the risk of their next pick not performing well. I believe this to be one reason(there are many) why indexers prefer to take the returns of the market. I redeployed the funds into initiating a position in JWEL, topping up my position in CNR and holding some cash for future deployment.

The market turned in the spring of 2022 and many solid stocks tumbled. In hindsight it may been better to hold on to the position till the deal closed. The new acquisitions are slightly higher they were in the spring but not by much. It just as easily could have resulted in decline.

Lesson - Good stocks get taken out and bad stocks get taken out. A stock buyout is often unpredictable but often at a premium to current share price.


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## Ponderling (Mar 1, 2013)

My approach is to have about 5-8 stocks in each of 11 sub-index areas TGAM reports them as. 
With equal weighting in each sub-index most of the time.
Rebalance about 2 times a year at the most. 

This approach means that the stock picking can happen in bite sized chunks. 

Say industrials sub is over weight - so what do we trim? Where do we switch horses. What nags appear ready to be shown the door. 
Then look to those under weight. Take the cash from an over weight sub index , and figure rebalance, and figure what position to add to instead of trim just like above.

Of course the accounts the funds are held in makes it a bit more complex, but I find the sub index approach takes analysis paralysis is much easier to overcome.


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## londoncalling (Sep 17, 2011)

Ponderling said:


> My approach is to have about 5-8 stocks in each of 11 sub-index areas TGAM reports them as.
> With equal weighting in each sub-index most of the time.
> Rebalance about 2 times a year at the most.
> 
> ...


If I am understanding your post you own between 55 and 88 positions. IMO, that is a lot of stocks to monitor but many think having 40 is a lot too so number of holdings is quite subjective. I find that with so many positions my bad decisions do not blow up my portfolio. Of course my multibaggers also do not move the needle up much as well. However, for me this is a marathon and not a sprint. 

What about diversification between domestic and foreign? Also can you extrapolate on how you decide which specific stock to trim within each sector? Do you trim by weighting or performance of a particular stock?


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## londoncalling (Sep 17, 2011)

4. Commodities are cyclical

I sold out of Western Forest Products in late 2021 and it took some time for me to look for a replacement. Although commodities are cyclical and often do well during inflationary times they do not necessarily move in sync. I ended up deploying the sale proceeds of WEF.TO into Copper miner Lundin Mining and Canadian National Resources (CNQ.TO). I haven't checked LUN.TO against other base metal companies since my purchase but WEF.TO is down around 37% while LUN.TO is up around 8%. CNQ.TO has increased its dividend, bought back shares and issued a special dividend this year. l I will look to get into a lumber play(likely not WEF.TO) at some point but it may take a year or more to do so. I find commodity stocks make great value plays. Buy a solid performer in the sector when the sector is performing poorly. That sounds like a classic value thesis of buy low and sell high but I find it works much better for commodities than others (ex. financials). I feel commodity cycles are easier to follow than other sectors. It took some time for me to learn that commodities are not buy and hold but are to be bought when they are most out of favour and sold when they are loved by the market.

Lesson - Although cyclical, commodities do not move together. Stock rotation within the sector if done carefully can improve results. Money can not be made by holding commodity stocks indefinitely.


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## Freedom2022 (Oct 14, 2021)

DOW components change over time.
May I add, buy and hold is not to hold forever.


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## newfoundlander61 (Feb 6, 2011)

I will continue to hold my current dividend paying stocks, I do very little new selling or buying just adding to current positions with my dividend income.


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## Ponderling (Mar 1, 2013)

londoncalling said:


> If I am understanding your post you own between 55 and 88 positions. IMO, that is a lot of stocks to monitor but many think having 40 is a lot too so number of holdings is quite subjective. I find that with so many positions my bad decisions do not blow up my portfolio. Of course my multibaggers also do not move the needle up much as well. However, for me this is a marathon and not a sprint.
> 
> What about diversification between domestic and foreign? Also can you extrapolate on how you decide which specific stock to trim within each sector? Do you trim by weighting or performance of a particular stock?


Well I usually pick for my first two or three in a sub category, the big cap stocks that spin a good dividend.
I also find that wide moat divvy paying stocks I lean to don't shine fast but plod along.
And often it is a long time before little more nimble companies can nip at there heels until they die or performance lags.

Then I look at research reports on my Itrade account for a stock. Some show rankings to comparable companies. Pick companies that are cousins to the big ones I start with.

I pick the winners usually between Canadian stocks held in non registered accounts , and US stocks in a USD denominated side of my RRSP.

For instance I own BCE, SJR, QBR, and T (Telus) for Telecom in Canada , and T (ATT) and Tmus for telecom in US.

Health care is a loosish category in my eyes. I own EXE, SIA for the CDN long term care and retirement homes, and then I find more big cap options in the US market. Like ABBV, PFZ, MRK, JNJ. Mostly big cap. 

Industrials have US components at well. RTX is a conglomerate that does a lot of things in civilian and military aviation, but the wide moat here is the jet engine business, 

Utilities: Canadian utilities often have US sides to their operations, but I do own US utilities as well.

Technology I do not try to keep up with- Mostly I just buy IYW 

Yes, there are loosers to unload and hold your nose from time to time.
But if you don't fret about the stuff daily it is not too much to get worked up over


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## londoncalling (Sep 17, 2011)

5. Business may change but fundamental analysis doesn't

This post is not about a buy or sell but is about how businesses change. One can be easily led to believe that a company that performs well will continue to do so indefinitely. Things change like management, economic conditions, legislation etc. that will affect future performance. Algonquin Power is one of my legacy holdings bought over a decade ago. It had done well in the previous low interest rate environment and was a very successful growth by acquisition company. The stock fell off a cliff recently. In hindsight one can point to many reasons as to why that could happen. The most obvious is the poor timing of its Kentucky purchase, debt level and rising interest rates. I viewed the Kentucky deal as a move to diversify their assets both by type and location. I knew there was a level of risk and uncertainty with the deal but based on successful integration of prior acquisitions I held the opinion that the purchase was a good long term move. However, management had changed and were perhaps not as astute as the previous management team in evaluation and execution. 

More importantly, interest rate increases had more than doubled debt carrying costs. After decades of low rates and QE the central banks had created a boy cries wolf mindset. A bit ironic that I was reconfiguring my personal finances and portfolio in late 2021 as I expected rising inflation and interest rate increases but I did not apply that to concept to all of my positions. I saw utilities as a safe haven in a rising rate environment but forgot that fundamentals matter more than that. To be honest i did not expect as rapid a pace of rate increases but I do feel it is necessary. There are several obvious lessons learned surrounding AQN. I reviewed the AQN and selling thread recently and some members cashed out in the last couple years capturing a real return while the bulk of my paper profits have been decimated.

Lessons - watch what you own more closely than the rest of the market. Debt matters in rising rate environment. Growth by acquisition works until it doesn't (watch Dilution, D/E and EPS). New management may not be able to implement the practices of the previous management effectively.


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## londoncalling (Sep 17, 2011)

I was finally able to complete my 2022 1 year return. I was pleasantly surprised as I thought that this would be the year that I did not beat the index. I ended up with a total return of -.44%. Essentially flat. 

Here are my picks that did well

ITP.TO 
CNQ.TO 
SAP.TO
SBUX 
CCO.TO
NTR
LUN.TO
MSFT

Here are my bad picks

NFI.TO
ARE.TO
AQN
TRP.TO

There are many others that had negative one year returns. I was fortunate to allocate funds during the year to buy the dips. I think holding commodities really helped my results as well as having 0 in tech at the start of 2022. Perhaps we will see further declines this year or perhaps the bear is done. Nobody knows.

Lesson - Not every year is going to have a positive return and if you are going to stock pick you need more winners than losers. Holding more positions limits the odds that you will have a single stock blow up your portfolio. Although the general market returns from 2021 are preferred over 2022 longer term results are a better indicator. Therefore external factors have more impact on return. 1 year results are irrelevant for long term investors.


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