In my inaugural post, I thought it would be interesting to reflect back on eight valuable investing lessons I learned on my journey to becoming a Stodgy Investor.

Investing in the 1980-90’s

My first investment was the famous Series 36 Canada Savings Bond (CSB), issued in November 1981. The bond offered a 19.5% interest rate in year 1 of a seven-year term. The simple interest rate of the bond was 12.11%. The inflation rate, based on the Canadian Price Index (CPI), was 12.17% in the year prior to the issue date and averaged 4.62% from 1982-1989. Not surprisingly, I held the Series 36 CSB until its maturity.

After I graduated from university, my family’s investment advisor offered to take me as a client. During our initial meeting, he summarized his investing philosophy. One of his beliefs was that investors should manage portfolio volatility by setting appropriate allocations to fixed income and equities. Once the stock/bond allocation was made, future asset purchases would always serve to rebalance the portfolio back towards the initial asset allocation. As he explained at the time, rebalancing is a simple way to buy the asset that has been out of favor at a good price and bring it back to its target weight.

One of the visuals that my investment advisor provided me was S&P 500 charts of all the bear markets dating back to 1929. This was his way of illustrating the risk of investing in stocks. He wanted his clients to choose an appropriate allocation of bonds for their personal situation in order to reduce portfolio drawdowns during bear markets. I still have the handout to this very day.

For my fixed income investments, I religiously purchased a stripped bond with ten year duration every year in my registered retirement savings plan (RRSP). After doing this for a decade, one stripped bond would mature every year and be replaced by a new stripped bond that would mature ten years henceforth. This is commonly referred to as a stripped bond ladder. This strategy worked very well during the 1980-2000 timeframe as interest rates were relatively high.

For my equity investments, the two options at the time were to buy lot quantities (a lot is 100 shares) of individual stocks or equity mutual fund units. Initially, I decided to take the mutual fund option.

My Mutual Fund Experiences

The mutual fund industry enticed novice investors with professionally-managed portfolios and no initial purchase fee (no-load funds). This allowed a new investor to instantly have a diversified portfolio. However, there was a big catch – investors were saddled with management expense ratios (MERs) of 2-3% that were paid from the fund each year. The mutual funds also penalized investors who withdrew money from their funds within the first six years after initial purchase, although firms allowed investors to move money between their funds at no cost.

The mutual fund industry actively promoted their fund managers to attract clients and increase their assets under management. I entrusted my money to two prominent fund managers named Bob Krembil and Charles Brandes. The big challenge with mutual fund investing was to pick managers that would deliver solid investment returns for at least six years. This was easier said than done for a manager due to the constant headwind of MER fees that reduced investment returns. There were also fund manager turnover issues, which I will discuss next.

My Experience with Trimark Financial

Bob Krembil, Michael Axford and Arthur Labatt (from the brewery family) co-founded Trimark Financial in 1981. Krembil quickly earned a reputation as an excellent value investor. Trimark flourished during the 1980’s and early 1990’s. I purchased units in Trimark Canadian sometime during this time period. As the technology bubble grew during the late 1990’s, the Trimark funds began to severely underperform the market as Krembil and his fund managers could not find much value in the technology sector. Trimark experienced heavy fund redemptions during this time period.

My investment advisor and I reviewed the performance of my mutual fund holdings on an annual basis. Each mutual fund was compared to its peers in the same equity category. If a mutual fund underperformed its peers over a three year period, we generally looked for a replacement fund.

During our 1999 annual review, my Trimark fund was highlighted as a poorly performing fund and it was replaced by a Janus technology fund. The decision looked brilliant for the first year as the technology bubble continued to inflate. Unfortunately, the technology fund gave up all my gains and more after the bubble popped in March 2000. To make matters worse, Janus Capital specialized in technology so there was no suitable value fund to move my capital into. The only options were to ride out the technology crash or pay a 4% penalty to withdraw my funds. Talk about a lose-lose situation!

For the record, Trimark continued to have its challenges as well. In May 2000, Trimark Financial was sold to Amvescap (AIM mutual funds) and Krembil subsequently left Trimark in November 2000.

My Experience with AGF Mutual Funds

Charles Brandes was a well-known value investor who followed the Graham and Dodd¹ investing principles. His investment firm, Brandes Investment Partners, was hired as sub-advisor to manage several AGF mutual funds in 1994. I purchased units in the AGF International Value Fund, which was managed by Brandes.

The AGF International Value Fund had an excellent track record for many years, but also went out of favour during the latter stages of the technology boom. I held on to my units of this fund through this time period. Unfortunately, Brandes gave notice to AGF in 2002 and subsequently started his own mutual fund company. I decided to remain with AGF and gave the new Fund manager, Harris Associates L.P., a chance. This turned out to be a poor decision as the new managers generated poor returns and were eventually replaced in 2006.

Four Valuable Investing Lessons

I learned a lot of lessons during my first 20 years of investing. Following are four lessons that resonate the most.

The first valuable lesson I learned from my financial advisor is to know your risk tolerance before you invest. There are very few investors that can be 100% invested in stocks and not panic when the stock market tumbles by 50% or more. I understand my personal risk tolerance and allocate a portion of my portfolio to fixed income or cash equivalents to provide a cushion from large market gyrations. I thank my investment advisor for teaching me this lesson at the beginning.

The second lesson is the importance of really knowing what you own. My takeaway from my bad experience in switching to a technology fund in 1999 was that I should have demonstrated more patience with the investing strategy I was following. I take full responsibility for not spending enough time to fully understand the mutual fund that I owned. That being said, it is difficult to understand mutual fund holdings because investors are only provided limited information about sector weightings and top holdings on a quarterly basis. The problem with relying on a mutual fund manager to select stocks for a portfolio is that the investor has not much more than performance data to evaluate the manager.

The third lesson I learned is the importance of doing your homework before making any investment decision. It really pays off to document the reasons why you want to make the investment. It is important to recognize that the investor has two chances to be wrong when they later decide to sell an investment and replace it with another investment. I obviously made a huge error when I switched from a value mutual fund to a technology fund in early 1999. I attribute this poor decision-making process to not understanding the huge disparity in risks associated with the holdings in the two mutual funds.

A hands-off approach may work best for most investors, but it didn’t work for me. In hindsight, I should have committed to buying common stocks right from the beginning and accepted the risk of poor diversification during the early years. Of course, novice investors have better options these days thanks to low-cost exchange traded funds (ETFs).

The fourth lesson is that investing is a lifelong journey. Every investor is destined to make mistakes at the beginning. The most important factor is that you learn from your mistakes so that your decisions get better as time goes along. This will enable you to effectively manage your growing portfolio as you get older.

The purpose of this blog post is to let my readers know how I became a Stodgy Investor. In the second part, I will discuss my transition to buying individual stocks, do-it-yourself (DIY) investing and more lessons learned on my journey. My investing strategy is to be a long-term owner of high-quality companies that consistently increase their revenue, earnings and dividends over time. This strategy has served to make many investors wealthy, while managing risk. “Stodgy” investors stick with their investing process when the going gets tough, make excellent returns over a complete business cycle and sleep well at night.

Footnotes

¹B. Graham and D.L Dodd, Security Analysis, McGraw-Hill, 6th edition, 2009.

Four Questions for Consideration

Here are four questions that every investor should consider:

1. Do you know your risk tolerance and is your portfolio suitable for you?
2. Do you know every investment you own and why you own it?
3. Do you keep a journal to document your investment decisions?
4. Do you review your previous investment decisions so you can become a better investor over time?

Questions 1 is a particularly difficult one for investors starting after 2009 that have not experienced a prolonged bear market, although there is a reasonable chance that they may be experiencing one right now. I look forward to hearing your thoughts on these questions in the comment section.