Buddha as an investment strategist

Behavioural finance author Ken Norquay adopts a Buddhist prayer to offer his take on some strategic investment advice for the new year.

We've just been through what I call The Season of Happy-Happy New Year, Happy Christmas, Happy Holidays. It's that time of year when we wish our fellow humans to be happy. Our Buddhist friends take it one step further: "May everyone be happy; May everyone be free from misery." (Buddhists think about their suffering a lot.)

In the investment world, happiness equates to making money, and misery is losing money. Readers who follow my work know that I identify with the two-step Buddhist approach: We try to make money when the market goes up and not lose when it goes down. Be happy AND be free from misery.

Standard operating procedure for the financial planning industry is to encourage mutual fund investors to ride out the ups and downs, and be happy with long-term, average returns. Our approach is to increase long-term returns by avoiding the market in the high-risk down turns. But, investing is not about my approach, and it's not about the investment industry's approach. It's about your approach. What brings you happiness and what brings you misery? What is your approach to investing?

Investor, know thyself

In my stock market book, Beyond the Bull, I examine this question from five points of view:

1. Know your investment persona: As an investor, what is your past experience, what do you know now, and what would you like to learn in the future? Do you have an 'investor's personality'? Roll those dice-or 'safety first'? (Note: It's not about your investments, it's about YOU, the investor.)

2. What are your investment techniques? What are the basic rules of your game as an investor? What will you buy? When? When will you sell? Why? Why not? When we ponder our investment techniques, we ask all the questions, examine all the possibilities and plan our future actions.

3. We follow Nike's famous slogan: "Just do it!" We enter the investment arena, equipped with knowledge of our investment techniques and ourselves. Investing is like the rest of our lives: live and learn.

(Together, these first three perspectives make up our investment plan. The simple act of creating this type of investment plan sets you far above the average investor. Most of today's financial plans merely describe what investment products you will buy and how your product mix will change as you age.)

4. We explore the investment techniques of others. What can we learn from pension fund managers? From day traders? From stockbrokers? From penny stock promoters? From investment advisors? From financial reporters?

5. We deeply and sincerely focus on what we do not know. The unknown. There is knowledge that some people have and others do not; knowledge that others have and I do not; knowledge that no one has. (Important: remember the ancient Chinese proverb: "To know and not to act is not to know.") Also ponder the concept of luck. Did we make money because of something we knew, or was it just good luck? Use the same thinking for bad luck.

As we ponder points four and five, we naturally go back and revise points one, two and three. By thinking in this five-point way, we evolve as investors. We gain judgment and wisdom. We become better investors.

As we wish each other joy and prosperity in the New Year, let us review the old year's financial trends. Our approach calls for owning lots of investments that are in up trends, and owning little, if any, investments in down trends.

Keep your eye on the trend

The US stock market (S&P500) reached a new high in December 2017, confirming its long-term up trend. The lacklustre Canadian market also touched a new high in December, confirming an intermediate-term up trend. The American S&P500 is 73 per cent above its pre-2008-crash high, whereas the Canadian TSX Composite is only 7 per cent above its pre-2008-crash high. For now, Canadian and US stocks are making investors happy.

Note: We are beginning to see evidence of speculation in the financial markets. Check out the hype around Canadian marijuana stocks and Bitcoin. Gambling fever is finally spreading beyond real estate. Speculative fervor is a hallmark of long-term tops.

Long-term interest rates reversed from down to up in July 2016, nearly 18 months ago, both in Canada and the United States. Both US and Canadian central banks confirmed this up trend by increasing short-term interest rates. Normally, a bond-market top (i.e., a long-term, interest-rate bottom) precedes a stock market top by about half a year. But not this time: it's been a year and a half and the stock markets are still going up.

The US dollar (USD), as measured against the basket of non-US currencies, has been in a long-term up trend since the banking crisis of 2008-10. But the USD has been in a short-term down trend this past year. There is some conjecture about the trend of the USD because of President Donald Trump's "America First" style. Our advice: Keep your eye on the trend, not on the rhetoric.

The Canadian dollar (CAD) vs. USD reversed itself from a down trend to an up trend two years ago in January 2016, coincident with the trend of oil prices. During the subsequent two years, the CAD has "un-linked" from oil prices: the loonie is no longer strictly a petro-currency.

Oil prices (vs. USD) reversed from a down trend to an up trend almost two years ago, confirmed by new 2-year high prices in both November and December of 2017.

Gold prices (vs. USD) reversed from a down trend to an up trend in December 2015. Although statistically the trend is still up, it is weak. Gold has not made a new high since July 2016, although it came close in September of 2017.

Based on the up trends of gold and oil prices, we had been recommending junior oil stocks and gold mining stocks for traders. Because the overall stock market averages confirmed their up trends too, conservative investors may participate in mutual funds, exchange traded funds (ETFs) or individual precious metals or energy stocks.

Trending up

Last month, we published a list of up-trending industry sectors on the Toronto Stock Exchange. This month we will highlight consumer staples stocks. Below is a list of TSX traded stocks that are in up trends, and made a new high in 2017. (Note: the term 'new high' refers to the price of the stock trading at the highest level since the beginning of the current up trend.)

?- XST-iShares S&P/TSX Capped Consumer Staples Index ETF

?- ATD.B-Alimentation Couche-Tard Class B

?- BCB-Cott Corporation

?- EMP.A-Empire Company Limited

?- WN-George Weston Limited

?- L-Loblaw Companies Limited

?- MFI-Maple Leaf Foods Inc.

?- PBH-Premium Brands Holding Corporation

?- NWC-The North West Company Inc.

These stocks are in long-term up trends, and the Canadian stock market is in an intermediate term up trend. Based on my 'Happy New Year' theory (own stock in up trends), these stocks could make us happy (go up) in 2018. However, they have to be bought and sold in accordance with your personal investment techniques. Go back to the beginning of this article: when will I buy, when will I sell, why . . .

Own an investment technique

Most of today's investors do not have investment techniques. Instead, they rely on their advisor. It's the advisor who has the technique. It's OK to ask your advisor about his/her investment techniques. Most advisors will not be familiar with the idea of having a technique; it might be better to ask about their reasons for recommending buys and sells. Some refer to this as their 'investment philosophy'. Most will be delighted to tell you, and pleased that you are interested. Take notes. When I was an investment advisor, I told one client that I used stop loss orders to limit or prevent loss. One time, I failed to do so. As a result he lost more than he should have for that particular trade. He fired me! And, I deserved to be fired. If you have an investment technique and don't use it, you don't have an investment technique.

Based on December's new high for the S&P500, we can continue to own and buy stocks. "May you be happy."

Based on our reversal model and December's new high, our S&P500 sell signal moves up to 2500. If the S&P500 closes below 2500, we start selling our stocks. "May you be free from misery."

This is an edited version of an article that was originally published for subscribers in the January 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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