Exiting Telus, Entering Gold

After a routine scan of my holdings is see that Telus (T.TO) has fallen below my mandatory screening criteria of: 10% return on investment with a margin of safety of 10%; and providing a dividend. My analysis of Telus shows that the return I can expect on the stock is only around 9.5% at the current price (see chart below). I have owned the stock for almost 2 years and have seen the price run up by over 53%. I have also received an annual dividend yield of around 4%. It’s been a great investment but it’s time to take the money and run.

  • SELL Telus (T.TO) @ $54.21

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This gives me an opportunity to add gold to the portfolio. More specificaly, I’m looking at the Sprott Physical Gold Trust (PHY-U.TO), which owns physical gold bullion held in the Canadian mint. This will give me a gold holding of around 6% of the overall portfolio.

  • BUY Sprott Physical Gold Trust (PHY-U.TO) @ US$13.46

My investment policy does not address gold, only stocks and bonds. So what does Benjamin Graham say about gold?

“The near-complete failure of gold to protect against a loss in the purchasing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation by putting his money in ‘things'” – Benjamin Graham

In his commentary, Jason Zweig notes that this is one area where Benjamin Graham is commonly thought to be mistaken, and that gold has handily out-paced inflation in the years after Graham wrote his assessment.

I will limit my gold holdings to 10% of the overall portfolio.

POSTMORTEM

One month after this trade, on 7th August 2011, this looks like a very good call. Telus is down 8% and the Sprott Physical Gold Trust is up 8%. This chart (below) represents pretty much the ideal result of a smart trade.

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