Combining Intelligent Investing with Beating the TSX

As discussed in my recent post, my stocks have failed to outperform the TSX.  I think I can do better.  The basic pricinples of Benjamin Graham are sound, but I have not been able to apply them to build a diversified portfolio.  I want to use those principles – sound dividend and earnings growth – but apply them to build a broader portfolio.

AGU.TO Agrium Inc.
BBD.B Bombardier, Inc.
BMO.TO Bank of Montreal
BNS.TO The Bank of Nova Scotia
CM.TO Canadian Imperial Bank of Commerce
CSU.TO Constellation Software Inc.
ENB.TO Enbridge Inc
FTS Fortis Inc
HSE Husky Energy Inc.
L.TO Loblaw Companies Limited
MFC.TO Manulife Financial Corp.
NA National Bank of Canada
POT.TO Potash Corp./Saskatchewan Inc.
POW Power Corporation of Canada
RCI.B Rogers Communications Inc.
RY.TO Royal Bank of Canada
SJR.B Shaw Communications Inc
SLF.TO Sun Life Financial Inc.
SU.TO Suncor Energy Inc.
T.TO TELUS Corporation
TCK.B Teck Resources Ltd
TD.TO Toronto-Dominion Bank
TRP.TO TransCanada Corporation

The basic method is:

  • Start with the TSX 60
  • Remove former trusts
  • Remove any stock with dividend coverage below 125%
  • Take the top 23 stocks
  • I then deselected two of the banks to prevent over-concentration

Intelligent Investing, an update

It’s been around a year since I recommitted to Intelligent Investing.  So, how successful have we been?  Here are the results.

Buy Date Sell Date
Teck Resources


25-Apr -13


27-Dec -13

Power Corp


25-Apr -13


27-Dec -13



13-May -13


27-Dec -13



17-May -13


Still Owned


29-May -13


15-Oct -13



31-May -13


12-Jul -13



31-May -13


Still Owned


29-Aug -13


28-Apr -14



27-Dec -13


28-Apr -14



2-Jan -14


Still Owned

The average advance was 9.4%.  The average duration of ownership was 200 days, meaning that I turned over the portfolio around 1.75 times per annum.  This means that that the annual return was around 16.5%.  The TSX returned around 17% in the same period, while the S&P500 returned around 16%.  So, my returns are average.

None of these figures include dividends.

A New Asset Allocation

I have decided to get back to more fundamental value investing.  Accordingly I have reviewed my Investment Policy and have decided upon a new Asset Allocation.

My basic stance is that I should set the percentage of bonds to be equal to my age, which is 42.  Current highish market levels, especially in the US, indicate that I should lean slightly more towards bonds, but low bond yields indicate that I should lean towards stocks, and dividend yields also suggest a bias towards stocks. On balance I have decided to set my bond component to 33.5%. This is halfway between Benjamin Graham’s recommended minimum of 25% and the age-based 42%.

So, my new Asset Allocation will be 33.5% bonds and 66.5% stocks.  Also, I will not deploy all of my stock funds (the 66.5%) immediately.  I will wait until opportunities arise that offer a sufficient margin of safety, such as Power Corp and Teck Resources.  Accordingly, I expect to hold a considerable amount of cash where I cannot find value stocks to invest in.

Getting back to Intelligent Investing

I began this blog in April 2011 after reading The Intelligent Investor by Benjamin Graham.  I just re-read it and realized how far from his teachings I have strayed.  This is pretty normal, in fact Graham describes the psychology of the typical investor and I have fallen into some of the bad habits that he prescribed against (e.g., buying gold and speculation, which have both cost me money in recent weeks).  It’s time to get back onto the right path and follow Graham’s advice.  Accordingly I am recommitting to my original Investment Policy, which was written with Graham’s teachings in mind.

My Investment Policy is:

(1) I am an investor. I buy assets that are well priced based upon their inherent value (e.g., their dividends and prospects for dividend growth, and their earnings and prospects for earnings growth).

(2) I will invest in stocks and bonds of well known companies only (no speculative companies, no real estate, no gold).

(3) I will keep between 25% and 75% of my portfolio’s value in stocks and between 25% and 75% in bonds, depending upon my assessment of the likely return from the stock market versus that from bonds at the time.

(4) I will buy or hold stocks based upon two selection criteria:

Dividend: the company must pay a dividend, the higher the better; and

Return on Investment: the company must be priced such that the likely annual return is above 10%, with a 10% margin of safety (using an IRR calculation).

These two criteria are mandatory, but I may apply additional criteria to screen and select stocks. For example, I will not consider a stock with a PE Ratio above 20 and I generally look for stocks with a PE Ratio of 17 or less. I also look at the PEG Ratio.

(5) I am not a speculator, meaning that I do not buy assets based solely upon recent price advances in the hope that I will find a greater fool to sell them to later.

(6) I will not invest on margin as this is speculation.

But, we remember that Graham said:

“We are thus led to the following logical if disconcerting conclusion: To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street.”.

So how is my policy different from those on Wall Street? Well, I have never worked on Wall Street, but I know that they have one fatal flaw: impatience. Investment banks and money managers have customers who crave continuous returns. This is especially true of publicly traded investment banks, who are beholden to analysts from other banks and to quarterly reports. Brokerages, who are paid by the trade, are also keen to have investors turn over their portfolios more than is necessary. I feel no such pressures. As another great investor, Warren Buffet, said:

“The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!'”

(7) I will be patient and will hold a good value stock or bond that has not yet paid off.

How does Warren Buffett value an acquisition?

Warren Buffett just bid to take Heinz (HNZ) private for $72.50 per share.  Heinz’ shares jumped from $60 to $72.50.

Buffett is an acolyte of Benjamin Graham.  Graham set out seven criteria for how to value a stock based upon price, earnings, book value, current ratio, and growth.  His criteria are in the second column of this table.

Graham Heinz
Revenue $2B+ $11B OK
Current Ratio 2+ 1.2 ?
Earnings 10 years + Yes OK
Dividend 20 years + Yes OK
Growth 3%+ ~5% OK
P/E 15- 19 ?
P/B 1.5- 7 ?

So how does Heinz measure up?  Heinz’ measures are in the third column of the table, and Heinz falls short on three of Graham’s seven criteria: current ratio; P/E ratio; and P/B ratio.

The lesson must be that even Graham’s criteria are only broad guidelines for acquisition (or Buffett has made an error).

Going for Growth (or is it speculation?)

It’s RRSP time again. I picked up Telus (T.TO) and BCE (BCE.TO) last month and now I have a little more cash to contribute before the deadline.

My Beating the TSX portfolio is now well rounded out after the recent Telus and BCE purchases, but I am not comfortable with Bank of Montreal (BMO.TO). After speaking with my financial adviser I have decided to swap it out for Royal Bank (RY.TO).

  • SELL BMO.TO @ $58.10
  • BUY RY.TO @ $53.41

So, what to do with the new cash? I have for a long time wanted to hold a more speculative or growth-oriented stock. Apple (AAPL) is the darling of the markets and might be over-bought, but fundamental analysis shows that its value is as good if not better than conservative names like IBM.

There are two upcoming catalysts that could move the stock a lot higher: 1) new products such as the iPad3, the iPhone5 and a new generation of the Apple TV product; and 2) a possible dividend or an acquisition that would put Apple’s $100B in cash to work. To be clear, this stock is does not conform to my investment policy, which requires that all holdings pay a dividend. Given its fundamentals, Apple is not a speculative stock. However, given it’s high growth rate in the past few years we must wonder if it offers good capital protection and we must confess that it is more speculative than our other holdings. Our mentor Benjamin Graham had this to say about speculation:

“If you want to try your luck at it, put aside a portion – the smaller the better – of you capital in a separate fund for this purpose.” – Benjamin Graham

So, with Benjamin’s cautious blessing, we proceed.

  • BUY AAPL @ US$521.05

Apple now makes up 4.5% of my portfolio, which breaks down like this:

  • Beating the TSX Stocks 47.9% (ten high-dividend Canadian stocks)
  • Bonds Fund 28.5%
  • US Equities Fund 12.6%
  • Gold 6.0%
  • Speculative Stock 4.5%
  • Cash 0.4%

This looks like a good and balanced portfolio.


One month after these trades they both look good. Royal Bank has advanced over 8% in a month, while BMO has advanced only 1%: a 7% advantage in only a month.


Apple closed today, 14th March 2012, at US$589.58: an advance of 13% in a month.  Nice!  This level of improvement calls for caution as analysts feel that Apple’s stock is advancing parabolically.


Resetting Bond Holdings to 30%

Since I began this blog I have made eight trades. Two of these trades, in the postmortem, look like bad calls.

On 13th June I increased my bond holdings from 30% to 40% because I saw a decline in stocks. Stocks rallied 3% in the following month.

Then on 25th July, after missing a stock market rally, I reduced my bond holding to 19%. Stock markets retreated 12% in the following month.

In hindsight it is easy to see my mistake: I was buying something because it had increased in price, rather than the reverse. This is precisely what Benjamin Graham advised us not to do. Worse still, I had deviated from my own Investment Policy.


It is interesting that the only good call I have made when trading the bond fund was back on 13th May, when I initially set my bond holdings to 30%. I did this not because of prices or market sentiment, but because of my Investment Policy: to hold between 25% and 75% bonds at any time. I will return to this policy and keep 30% of my portfolio in bonds.

  • BUY Bond Fund @ $210.39
  • SELL S&P Fund @ $93.84


One month after these trades, on 25th September 2011, this looks like a good call. Both funds have advanced around 0.5% but, more importantly, my bond fund is at an appropriate level within my portfolio and in-line with my Investment Policy.