Sell-side obsession with higher stock prices hurts investors

Investors benefit more from lower prices and dividends

I am always bemused to see sell-side analysts, brokers and talking heads who claim to be experts in wealth management get on BNN, Bloomberg or any of the plethora of other “investment” programs to tout stocks they say are undervalued and “going higher”. Of course, investors who buy undervalued stocks benefit if the stock price does rise and they sell at a higher price. Then what?

If you sell your interest in a strong, profitable and growing company, where do you then find another investment that is even better and if you know of one why not put your money in that company in the first place? If you hold that investment in a taxable account, you will not only pay commissions on the switch but also be exposed to taxes if you realize a gain.

That is not to see I don’t take gains when I see the outlook for the company in which I hold shares materially change. In my TD account, I have taken gains of almost CAD$400,000 this year. About half of that gain came from the sale of my entire holding in ARC Resources (ARX.TO) when I realized how badly that company’s ill-timed hedging strategy was cannibalizing cash flows. I sold at CAD$21 a share and reinvested the proceeds back into ARX at CAD$15 a share after concluding that management was not likely to keep throwing money down the toilet by “hedging” in an environment of energy shortages and the company should benefit from its extraordinary assets. The jury is still out on management.

It should seem obvious that investors benefit from buying companies at lower prices and suffer lower returns if they pay higher prices. All this stock market excitement about “going higher” has only two beneficiaries - the brokers and money managers who clip commissions and fees based on transactions and “assets under management”.

“Assets under management” is a cute turn of phrase since the money managers and brokers don’t “manage” anything except their incessant spiel that pretends they can identify stocks that are “going higher”. Yet 80% of them underperform stock market indices over any reasonable timeframe. The “assets” being managed are reported on the left hand side of the balance sheets of the operating companies making up the portoflios investors hold and the shares being labeled “assets” are really claims on assets not much different than all the other liabilities on the right side of balance sheets except for their right of common equity to any residue when all higher ranking liabilities are repaid.

Secondary market trading spurred by the sell-side advertising and talking heads on investment programs is a zero-sum game where gains by one investor come at the expense of another with the sell-side firms much like casinos’ in that commissions and fees comprise a “rake” and are parasitical to investors’ returns.

There are only two ways to make a small fortune in the stock market.

The first is virtually certain - start with a large fortune.

The second is to buy interests in profitable companies that are likely to grow in line with or at a faster clip than the economy managed by competent managers who are actually “managing assets” and keep those holdings for the long haul, enjoying what is hopefully a steady and growing stream of dividends.

The snake oil salesmen who tell you to sell A to buy B are as a group sucking their livelihood out of your investments without doing anything to make the businesses in which you hold shares any more profitable than if those snake oil salesmen did not exist. Legendary investors with long term successes did precisely that - bought and held good companies. Warren Buffett, Peter Lynch, John Templeton and Benjamin Graham are among the most successful investors of all time. They rarely traded stocks, and did so only when there was a change in the outlook for the companies in which they held shares that was other than temporary.

I am a “buy and hold” value investor (I don’t like the label which the sell side uses as a pejorative, preferring to describe themselves as “active managers” which means churning your account for more fees). I am happy with the results of my portfolio.

I have a heavy weighting in energy names like BIR.TO and SDE.TO and I expect these holdings to be a long term source of dividend income with Birchcliff (my cost is CAN$0.88 per share) planning a dividend of at least CAN$0.80 per share next year and eventually Spartan Delta (my cost is CAN$4.97 per share) which has yet to declare a dividend but is approaching zero debt and I expect will become a dividend payor next year. I am building a position in Pine Cliff Energy (PNE.TO) which is debt free, pays a monthly dividend, has a low decline rate and generates a ton of free cash flow at current commodity prices.

The global energy shortage created by stupid “climate policies” is deepening and the environment is a tailwind for energy names for the time being.

Good luck with your investments.