The first level of my Investment Process is asset allocation. My current asset allocation is:
- 25% cash
- 25% bonds
- 6% gold
- 44% stocks
I do not currently have any plans to change this. The next quarterly asset allocation review is at the end of June 2012.
The second level of my process is the establishment of core positions. My process requires that we perform a fundamental analysis of the stocks in my portfolio and my watch list. So, how do we establish a watchlist?
Step 1: I want to begin with biggest stocks on the TSX (those with market cap of more that $5B). I then remove any stocks that do not meet the basic criteria in my Investment Policy (dividend below 3%, P/E Ratio over 20). This gives me a list of 24 stocks.
Step 2: Canada does not have a strong technology sector (Nortel and RIM are bankrupt and nearly bankrupt respectively). So I prepare a list of all US technology stocks with market cap of more than $50B. This gives me 13 stocks.
This gives me my watchlist:
|GWO||Great-West Lifeco Inc|
|PWF||Power Financial Corp|
|CM||Canadian Imperial Bank Of Commerce|
|HSE||Husky Energy Inc|
|REI.UN||RioCan Real Estate Investment Units|
|BMO||Bank Of Montreal|
|POW||Power Corp Of Canada|
|COS||Canadian Oil Sands Ltd|
|IGM||Igm Financial Inc|
|BPO||Brookfield Properties Corp|
|BNS||The Bank Of Nova Scotia|
|NA||National Bank Of Canada|
|SJR.B||Shaw Communications Inc|
|RCI.B||Rogers Communications Inc|
|RCI.A||Rogers Communications Inc|
|TD||Toronto Dominion Bank|
|RY||Royal Bank Of Canada|
|CIX||CI Financial Corp|
|IPL.UN||Inter Pipe Fund Units|
|CSCO||Cisco Systems Inc|
|TSM||Taiwan Semiconductor Manufacturing ADR Representing Five Ord Shs|
|IBM||International Business Machines Corp|
|SAP||SAP Aktiengesellschaft ADR Rep 1 Ord Shs|
When American Depository Receipts (ADRs) and duplicates (A/B shares) are removed from the list, our watch list contains 32 stocks.
Step 3: Using a spreadsheet I analyze the fundamentals to identify stocks with the best IRR using the method outlined in my Fundamental Analysis page.
Finally, for diversification I attempt to find the one or two best stocks in each major sector. The resulting core positions are:
- Bank of Montreal (BMO.TO)
- Power Financial (POW.TO)
- Canadian Oil Sands (COS.TO)
- Intel (INTC)
- Microsoft (MSFT)
- Apple (AAPL) if it’s price falls a little
- Telus (T.TO) (IRR is a little low but Gordon Return is high so I’ll accept it for diversification)
- TransAlta (TA.TO) (IRR is a little low but Gordon Return is high so I’ll accept it for diversification)
I own all of these except Intel, Microsoft, Apple, and BMO. I own Shaw but it is not a core position. I will consider trading Shaw for BMO and might buy the others once I have more cash (e.g. when I change my asset allocation).