Chapter Nineteen: Investment strategies that work

And those that don't

Investment of savings is an important part of preparing for retirement and accumulating wealth. It is an area fraught with risk, populated by charlatans and con men posing as “advisors”, and requires some effort and some skill to be successful and avoid being scammed.

Choosing investments wisely is easier than most think, requiring little more than common sense.

To begin with, investing is not buying stocks and bonds as much as it is buying (in the case of stocks) an ownership in a business or buying an debt obligation of a business or government. In the case of stocks, it is important to think of stock ownership as ownership of a business and not some complex mix of shares, derivatives, mutual funds or exchange traded funds (ETF’s) which are all routes to ownership, little else.

A business can only increase your wealth if it is profitable, either currently or in futuer periods with those not yet profitable posing higher risks. As an owner, all you get is your share of whatever profits the directors of the company in which you hold shares decides to pay out as dividends to its owners. You don’t get any benefit of an increase in the instrinsic value of the company unless it is reflected in dividends or you sell your shares, pay taxes on any gain, and find some other business at least as good as the one in which you had and sold your interest. Selling shares reduces returns by the costs of the sale and the tax penalty it triggers, and governments and agents like brokers and advisors benefit at your expense. Trading ownership of firms with other investors does not improve the economics of the firms, and is not free. Investors as a class get lower returns as a result of trading. Some investors benefit but do so at the expense of some other investor who do worse, and the intermediaries get paid regardless of who gains and who loses.

Buy a copy of Peter Lynch’s book “One up on Wall Street” and see how easy it is to invest your own money without paying an advisor. Use common sense, and be patient. The market is an efficient mechanism for transferring wealth to the patient from the impatient (said Charlie Munger, I believe, with unerring accuracy).

If you buy into well-run companies when out of favor and retain your holdings for long terms, you should do well. Whitecap Resources (WCP.TO) is a good example. I bought 10,000 shares in 2021 at CDN$1.53 a share, still hold them, and get a CDN$0.73 dividend paid at the rate of CDN$0.0608 monthly, a cash return of ~50% of my cash outlay and hold a stock now trading at six times my cost. I have no plans to sell, treat it like an inflation indexed annuity.

Many natural gas stocks offer similar opportunities today, since gas prices are low and gas is out of favor. New money in Peyto, Birchcliff, Pine Cliff, Spartan Delta, Tourmaline, ARC Resources or Canadian Natural Resources should provide reliable income for decades to come.

Trading stocks based on advisors, tips, intuition, tarot cards, tea leaves, crystal balls, or sell-side research reports will make you broker money but leave you wondering why your investments aren’t working.