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When smart people do dumb things

Strategies to avoid all-too-common investment mistakes

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It hasn't just been a terrible year so far for investors in the stock market, it's been a terrible decade.

Equity mutual fund net sales, for instance, have been falling for the most part over the last few years, and overall fund net sales have slid from $3.7 billion in March to about $205 million in August, according to the latest data available on the Investment Funds Institute of Canada (IFIC) website.

Now, many firms are on the marketing offensive, pulling out the big gun experts and hosting seminars -- many of them free to the public -- to get the message out that people need to focus less on the short-term and more on the long view.

Here in Winnipeg, two prominent firms are hosting presentations for the general investing public next week.

On Tuesday, MGI Securities will host its annual Fall Investor Forum. The keynote speaker is Blake Moore, executive vice-president for Mackenzie Investments. Probably of more interest, he's a former NFL offensive lineman -- and his talk is befittingly titled: 'No pain, no gain."

Moore says although many people know they are investing for the long term, short-term events tend to drive their investment behaviour nonetheless.

"The short-term events are what we read in the paper everyday. It's Greece about to default," says Moore, who will be speaking at Niakwa Country Club. "It's the ongoing United States financial disaster that started in 2008."

But unless you need your money during the next decade or so, there's no reason it shouldn't be put to work in the stock market. After all, that's where the opportunity lies, Moore says.

"To say it another way, a lot of us tend to sell low and buy high. That's the opposite of what we're supposed to be doing," he says. "If you do a poll of professional market investors who are in the market right now, most of them would look at what's going on and say 'This is a great buying opportunity.'"

Share prices for good companies are considered to be low -- though they could go lower.

But even the most intelligent of folks make the mistake of buying high and selling low, says Hardev Bains, president Lionridge Capital Management, a Winnipeg portfolio management firm.

Lionridge and its partner Blackwood Wealth Planning recently hosted a luncheon event for a handful of invitees about common investment mistakes -- most often made during times of fear (bear markets) and times of greed (bull markets).

Bains started the presentation with a quote from Sir Isaac Newton, considered to be one of the most brilliant minds in history.

"I can calculate the movement of stars, but not the madness of men," Newton once said. It's thought he was referring to having lost his fortune investing in the infamous South Seas Bubble.

"Here's an example of very smart people making really dumb decisions," Bains says.

"Fast-forward 250 years later and despite all the knowledge, technology and innovation, smart people still do dumb things."

And the last decade has been fertile ground for mistakes -- like selling low and buying high.

But for Bains, a 'fundamental value' investor, these mistakes create opportunity.

"Market value" -- stock price -- is often driven by collective investor emotions, specifically fear and greed. Fear drives a sell-off, and greed compels people to buy when prices are high.

But the "fundamental value" of a stock is driven by its actual business -- earnings, debt load, growth prospects and cash flow.

During these volatile times, the stock price can substantially undervalue the "fundamental" or intrinsic value of a company because market anxiety often pushes stock prices lower than the long-term, fundamental value of a good firm.

Fundamental-value investors such as Warren Buffet buy and hold for the long term, but it's during tougher times that they find the "buy low" opportunities.

So despite the expected volatility for the next few years, those who can invest prudently today should expect to be rewarded over the next two to three decades, Moore says.

The reasoning is this: Even if the developed world -- the United States and Europe -- waxes and wanes economically, growth in the developing world will eventually drive the global economy. In turn, well-positioned companies -- regardless of where they're headquartered -- will benefit.

"You've got hundreds of millions of people in the developing world who are learning what it is to be a consumer," Moore says. "They want to buy a car, a fridge and a house."

Over the short term, returns for firms invested in emerging economies like Brazil, India and China may have their ups and downs, but growing populations, coupled with limited resources, eventually lead to higher prices for consumer goods and, more importantly, for the commodities needed to produce them.

Already, many developing nations are feeling the supply-and-demand price pinch for the most basic of all commodities, food.

It's a topic Union Securities will be discussing next Saturday at the Winnipeg Free Press News Café. Entitled Investing in Food, Fertilizer and the Future, the seminar will examine the long-term upside for commodity prices and Canadian firms involved in food production, such as Potash Corp. and Viterra.

The seminar will also take a look at the other side of the investment coin for commodities -- the short view.

"The real thing we do like about investing in food and fertilizer -- really, we're talking about commodities futures -- is you don't have to be long all the time," says Joseph Alkana, an adviser with Union.

Although retail investors should have a bullish, long-term outlook, many are catching on to hedging strategies traditionally used by institutional investors, Alkana says. These strategies involve positioning most of the portfolio for long-term gains while using specialized investments that are inversely related to the movement of the market. Essentially, when prices fall, these investments increase in value. In the past, generating returns off falling prices was possible only using specialized strategies like short-selling, or investing in options or futures.

These can be complex investments, requiring expertise, and they can involve more risk than most people are willing to stomach. Today, however, the average investor can buy exchange-traded funds (ETFs) that provide the same strategy without the complexity.

Still, these strategies are short-term and involve medium to high risk, so investors need to do their homework, he says.

But the benefit is that a little money at risk in your portfolio can go a long way to hedging the risk to your overall portfolio against short-term pain.

And Alkana says making calls on commodities prices is one of the more efficient ways to employ the "short" strategy, because rather than picking a specific company or market, you're making a bearish call on a broader investment that characteristically exhibits extreme downside volatility.

"When commodities do come down, they come down very quickly," Alkana says.

Although many commodities are generally expected to trend upward in price over the long term, that doesn't mean they rise in a steady line. Dramatic price decreases can be expected along the way, and a "short" position can take advantage of those drops and help smooth out overall portfolio returns over the long haul, he says.

"The gains for being short on certain plays -- even though you're long-term bullish -- those are also very nice gains to have as well."

Free investment advice and food (how can a Winnipegger resist?)

Curious-minded investors can check out two free seminars this week. Yes, investment firms might be trying to woo you into enlisting their services, but there's no law that says you can't do some financial tire-kicking and bone up on some market intelligence along the way.

Here are the coordinates:

MGI Securities Fall Investor Forum

Where: Niakwa Country Club, 620 Niakwa Rd.

When: Oct. 18; sessions at 2:30 p.m. to 5 p.m. and 7 p.m. to 9 p.m. Call Devan at 953-4400 to reserve a seat.

Speakers include:

-- Blake Moore, executive vice president of Mackenzie Investments and former NFL star with the Bengals and Packers: "No Pain, No Gain -- Some Thoughts on Global Markets"

-- Evan Spiropoulos, a small cap fund manager and expert on Greece addressing the financial crisis in Europe

-- Frank DiPietro, director of tax and estate planning, Mackenzie Investments, on tax-efficient investing strategies

-- Diane Gray, CEO of CentrePort, discussing CentrePort Canada, one of the top strategic infrastructure projects in North America

Investing in Food, Fertilizer and the Future

Where: Winnipeg Free Press News Café, 237 McDermot Ave.

When: Oct. 22 at 9 a.m. for breakfast; 9:30 a.m. for Q&A

ICE Futures Canada president Brad Vannan and Steve Teller, manager of regulator division, will lead a seminar discussing commodities investing and expected market for wheat and barley following forthcoming federal legislation to end the Canadian Wheat Board monopoly on marketing Canadian grain farmers' product.


Not billions, trillions

Growth in the emerging economies over the next two decades will be staggering. In Asia alone, consumer spending is expected to reach $32 trillion by 2030, compared with $4.3 trillion at the end of 2008, states an August 2010 report by the Asian Development Bank.

But emerging markets are not immune to problems in the developed world. The recent euro crisis, for instance, has negatively affected investment into nations like China, Brazil, India and regions such as Eastern Europe. Still, the IMF forecasts the sector collectively will have growth above six per cent this year and next, compared to less than two per cent in the developed world.

Republished from the Winnipeg Free Press print edition October 15, 2011 B12

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