A valuable asset for portfolio knowledge

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This article was published 19/05/2018 (2943 days ago), so information in it may no longer be current.

Pat McKeough has been writing about investing longer than some investment experts have been drawing breath.

The publisher and editor of The Successful Investor investment newsletter — now the TSI Network — began his career in investment at age 16, more than five decades ago. Since then, he has become one of the best-known do-it-yourself and investment advice writers in Canada. He’s also a well-respected portfolio manager, managing more than $800 million for people drawn to his conservative stock-picking style.

Called “one of the top investment letter editors on the continent” by MarketWatch (owned by Dow Jones & Company), McKeough is now packaging much of his wisdom into a new book called Pat McKeough’s Successful Investor Toolkit: Easy-to-learn rules that successful investors use to make more profits and avoid losses.

Talking recently with the Free Press, McKeough says the genesis of the book was the common themes among the thousands of questions from newsletter readers.

“I found many people ask the same questions, so this is putting the answers all in one volume,” says McKeough, a licensed portfolio manager and chief investment officer with Successful Investor Wealth Management since 1999.  “It’s not a Q-and-A format (in the book); it’s more like articles (on each subject) from a few hundred to 1,000 words.”

Geared for everyone — from the novice to the well-heeled DIYer — it covers a variety of topics, including managing your emotions as an investor; stock market history; a checklist of criteria for picking stock conservatively; and how to avoid common investing mistakes… to name a few.

For the newbie, it’s essential reading — the ideal introduction to a value-based approach that will help you steer your portfolio away from hazards.

“My idea of conservative is ‘Don’t get taken in by the bright, shiny things — like a growth rate on a company that isn’t sustainable,’” he says.

If you’re looking for someone to validate your desire to invest in cryptocurrency and cannabis stocks, don’t expect to find advice supporting these investment ideas between the covers of this book.

“Yes, lots people want to smoke marijuana, but that doesn’t mean a new company can set up in a new industry and get anywhere with it,” he says.

He likens the burgeoning industry to computers in the 1980s or the auto industry early in the 20th century.

“Computers were new, and everybody wanted one,” he says. “Many companies went into business to produce computers, but only a handful really prospered.”

It was the same deal with the automobiles. Many companies at first made cars, but only a handful are still around today.

For that matter, McKeough is wary of any new stock.

“It’s one of those things where it’s much easier to launch a stock than it is to launch the actual business that can grow and prosper on a continual basis over many years.”

He adds initial public offerings (IPOs), in which private companies first list on the stock market, are usually most advantageous to those selling shares. The launch of these stocks is often surrounded by lots of hype and little information about how they will actually make money.

McKeough suggests prudent investors should let others take those risks. After all, it’s not your job to help the economy expand by raising capital for new companies.

“Investors should not be buying stock to further the growth of mankind,” he says. “If they want to do that, they can take their profits and contribute to worthy causes.”

When it comes to investing for your future, you can’t afford “to be generous,” he adds.

Rather than helping find the next big thing, McKeough aims to show investors how to find value hiding in plain sight. For example, he makes a case for investing in Coca-Cola Co, demonstrating how a company can carry a lot of debt and still be a conservative stock investment. The soft-drink maker, he writes, owes close to US$14 billion, which represents about 41 per cent of shareholder equity (calculated by subtracting total liabilities from assets).

That may seem troubling on the surface, but he notes Coca-Cola’s debt represents only about 8.5 per cent of its market capitalization (current stock price multiplied by total number of shares outstanding). This suggests that much of Coca-Cola’s value is tied up in its intellectual property — the Coke secret formula, which is apparently listed among the company’s assets for US$1. Additionally, the company’s brand is worth billions in market capitalization. Again, this strength does not show up tangibly on the balance sheet.

McKeough writes that when you account for its brand and hard-to-replicate flagship soft drink, Coca-Cola’s market cap of more than US$160 billion appears reasonable. What’s more, is its US$14-billion debt looks much smaller and less disconcerting than it may at first appear.

In contrast, he notes junior resource companies often have high shareholder equity and very low debt. Consequently, many investors may assume these are good opportunities. But the numbers are misleading. Shareholder equity is artificially bloated, and debt is minimal because lenders are unwilling to fund these risky ventures, leaving stock investors to take on most of the risk.

Time and again, McKeough strives to give readers a better understanding not just of the metrics of investing (measurements of value). Rather, he tries to help them learn to recognize and interpret the nuances that can affect those metrics.

Perhaps most importantly, the Investor Toolkit is accessible. Easy to read, McKeough’s book makes the art and science of investing less opaque. What’s more, you don’t have to read the entire book to glean knowledge you can use.

“It’s not something that you have to memorize and read from cover to cover.”

The book is meant for browsing. Just thumb through the index for topics that catch your eye.

“A lot of successful investors will pick up a few things they may not have thought of before that they stumble upon in the book.”

For those new to investing looking to build a strong foundation, they’d be hard-pressed to find a better choice.