Pot investing pitfalls, profiting on FAANG and how to survive an increasingly complex financial world

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Courtesy of Globe and Mail

I generally follow the X-Files slogan “trust no one” when reading market advice or analysis. There isn’t one hedge fund manager, economist or strategist worth following blindly in my opinion.

It’s a good thing I took undergraduate courses in logic (I think they should start teaching it in high school but that’s another matter) – assessing whether arguments are valid or not valid based on available evidence  – because that’s basically what investors are doing when reading research and market outlooks.

The main question when reading finance is not really “are they right or wrong?”, it’s more a matter of “does the conclusion logically follow from the evidence or is something unaccounted for?”. The goal for me is to read ten or so reports on the same sector or asset class, separate out the good arguments for buying from the weaker ones, and start running my own data from there.

This is, I think, an effective way to think in an increasingly complex world. In the case of climate change, for instance, I’m well aware that I’ll never understand the science. So reading multiple opinions, and measuring the strength of the conclusions, is really the only way to go about it.

There are many ways to do this, but for what it’s worth, my analytical process has three stages. The first, and most often overlooked, stage is to admit I don’t know the answer and to establish an open mind. The second is to confine research to credible sources and find as much material from them as possible. The last stage is judging all the arguments. The process has its limitations, time consumption primarily, but I can guarantee that investors adopting it won’t miss very much.

— Scott Barlow is The Globe’s in-house market strategist

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Stocks to ponder

Algonquin Power & Utilities Corp. and A&W Revenue Royalties Income Fund. When you’re investing in dividend stocks, buying after a dip has two big advantages: It gives you a higher initial yield, and – because the stock price is already reflecting whatever worries may be out there – it may offer protection from further downside. John Heinzl examines two higher-yielding dividend stocks that have recently tumbled from their highs.

Canadian National Railway Co. It’s the most widely held company among oversold TSX stocks this week. Scott Barlow focuses on the railway in his weekly RSI column.

FAANG stocks. Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Alphabet Inc. (parent of Google) have powered Wall Street to fresh highs and for good reason. Many of the so-called FAANG stocks benefit from business models that look perfectly attuned to today’s digital economy. So let’s address the question that may be rattling around the back of your mind. Is it too late to profit from this generation of tech superstars? Ian McGugan explains.

United Natural Foods Inc. Investors with a long-term time horizon may consider strategically shifting, or tilting, some of their portfolio to value stocks at this point. But keep in mind, most value stocks look to have some type of fundamental problem or challenge – think retailers with online competition, energy names with commodity price volatility or financials with persistently low interest rates. John Reese presents at a trio of stocks great value investors would likely adore.

The Rundown

Pot investing: ‘It’s not a game for the timid’
For the high-net-worth investor, the real opportunity lies in smaller companies supplying the growers – not the growers themselves. Brian Milner examines one of the many pitfalls awaiting those tempted to leap into the biggest horticultural investing craze since the Dutch went wild over tulips in the 1630s.

How not to give yourself a heart attack when investing in bond ETFs
Be careful how you gauge the returns of your bond ETFs as interest rates rise – you don’t want to scare yourself. Rob Carrick looks at how to properly measure total returns.

Determining the loonie’s fair value 
The most accurate measure has been the difference between Canadian and U.S. bond yields and, according to this indicator, the domestic currency is trading where it should be. The problem now is that bond yields themselves may be out of line, according to Scott Barlow.

Others

Gordon Pape: Three RBC funds that keep the focus on cash flow and minimizing risk

This fund offers a more diversified way to dip your toes into alternative waters

WisdomTree boosts Canadian presence with Questrade ETF acquisition

Not so fast on embedded-commission ban, study says

Despite recent gains, Canada lags in fintech adoption

Number Crunchers

These six Canadian dividend stocks look set to rise with the loonie

These 15 stocks offer a good mix of growth and safety

With these 10 Canadian dividend stocks, cash flow is king

Ask Globe Investor

Q – My children have set up an educational fund (RESP) at a bank for their two-year-old son. They have the proceeds in a mutual fund with risk geared to a student (higher risk in early years). They find the fees high. Their risk tolerance is average. They are looking to switch to ETFs. Would you have any thoughts and recommendations? – Bernie S.

A – It sounds like they have invested in a target date mutual fund, which automatically adjusts the asset mix to a more conservative balance as the child approaches college age. I did some extensive research and I could not find a comparable ETF that is available to the general public. There are many such ETFs that are offered to institutional investors (pension plans, group RRSPs, etc.), including 10 recently launched by Vanguard. But none that I could find that your children could buy directly.

I’m sure some will be available soon to the public but for now if they move from a mutual fund they are going to have to take responsibility for adjusting the asset mix of any combination of ETFs they select as their son grows older. Most people are not very good at doing that so my advice would be to stick with the target date mutual fund until an ETF becomes available to retail investors. 

– Gordon Pape

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Compiled by David Leeder



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