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Let me be perfectly honest here.
I think stock picking is a risky venture, and advising people about what stocks to pick is even riskier. The stock market reminds me of that Jeff Goldbloom character in Jurassic Park, who kept worrying about how chaos theory would apply to the whole endeavour. Chaos theory essentially predicts the outcome using the inherent unpredictability that can arise in complex systems, and what could be more complex than the value of a company on the public stock market - except maybe growing a bunch of dinosaurs in a strange time and place.
That doesn't prevent people from trying, from the loud and confident: Jim Cramer; to the quiet and diffident, uh, hm. Perhaps due to the competitive nature of stock market advice, there are no quiet and diffident stock advisers. They're all loud and confident, and they all say the same thing: "The numbers add up; I've done my research and proven my case. You don't have to buy this puppy if you don't want to, but don't come running to me when it makes 200 per cent over the next three years. Or, for that matter, if it loses 200 per cent. Nobody's making you buy it."
No, we're just making our case so attractive, it preys on your mind day and night: "Maybe if I just hatch a little dinosaur? Who's to know?"
It is true that a lot of people have made a lot of money on the stock market. Take Warren Buffett. I love his advice: "Rule Number 1, never lose money. Rule Number 2, never forget Rule Number 1." He's a solid customer.
Having said that, it's tough to invest in Warren's company Berkshire Hathaway right now. BRK.A: (NYSE) is worth $111,700.10 US a share, and it's down $299 today!
I suppose you could buy a B share. It's only trading for $3700 US, but it's also down $13.25.
You get what you pay for. When avoiding chaos costs $111,000 a share, and when Berkshire Hathaway's two principal rainmakers Warren Buffett and Charlie Munger are 76 and 83 respectively, chaos starts to look like an option.
But it's not the only option. Whenever I think of Warren Buffett, I think of Rich Dad, Poor Dad, that book about how your father influences your financial acumen. Well, my Dad was a lot like Warren Buffett - humorous, unpretentious, frugal, hard-working, but he was, unlike Mr. Buffett, dirt poor. But he was rich with the advice.
When I was 10, my dad told me it was time to make a choice: I could continue to get 25 cents a week allowance, or I could get a job if I wanted more, and make it myself. I went out and go a paper route, and I've been working ever since.
Then my dad told me to avoid the stock market. "A bunch of crooks", he said simply. However, he couldn't help himself. At the dinner table, the principal pulpit, advice leaked out like the stuffing from the Scarecrow. Gradually, over time, I assembled a portfolio of Dad's top 5 favourite stocks. Here they are:
I contend that this advice stands up to anything Warren Buffett will offer. Warren is avuncular and sagacious and rich; my old man was sarcastic, suspicious and poor. In other words, he had nothing to lose. You could argue that his advice was as worthless as his portfolio, but let's just take a look at Dad's top 5 and see.
Southam, Inc: the owner of a number of newspapers across Canada, including the Winnipeg Tribune, for which my father toiled and never fogave the parent chain for shutting it down, has evolved/morphed into the Canwest Global Communications Corp. with a $1.6-billion market cap and a stock price (CGS:TSX) of about $9.50 and earnings per share of $1.39. Not bad, considering the guy who sold Southam to Canwest is on trial in Chicago for fraud and waiting to see if he'll go to jail. See point #1.
Bank of Montreal: Thanks in no part to my father's account, the Bank of Montreal continues to prosper, despite recent problems, trading at $69 (BMO:TSX) with earnings per share of $1.39. A survey of analysts recommends "hold." Canada's oldest bank is about to buy two more banks in Wisconsin ( a solid little state), so it's good to see they're still working the family fortune. (Yes, it's my bank too).
The Phone Company: This is a tough one to nail down. I don't really think he meant MTS, the Manitoba Telephone System, as much as a grand conspiracy of technologists in white lab coats who were doing things to us with wires. The current foremost Canadian example of that remains Nortel Networks. I think the old man was really onto something here … since plummeting from its all time high of $1441.90 (NYSE:NT) to $4.30, Nortel only needs to return 33,433 per cent to recover. But here's something that would cause the old man to start reaching under the cushions on the couch - since hitting bottom, the return on Nortel has been 500 per cent and it's still relatively inexpensive at $24.50. Hm.
Coca-Cola: Here's a stock both rich dad Warren and poor dad, my dad could agree on. This is the jewel in the crown of Berkshire Hathaway; 17 per cent of Buffett's billions are riding on this fizzy brown water that will rot your teeth. I see absolutely no reason why this should be valuable commodity. No doubt I think that because I'm the son of a poor man. I know, I know, it's a "wide moat brand", which means it has held its competitive advantage through the years. People are somehow convinced it's better than Brand X, and this is reinforced by the predatory practices of the company's marketing and distribution arms to make sure it stays #1. It has continued to stay strong, rising 23 per cent in the past 12 months, despite the decline of U.S. dollar and increased awareness of the role sugared soft drinks play in childhood obesity (a variation on the rot-your-teeth caution). Go figure.
Imperial Oil: You want to buy this stock, really you do, whatever the price (currently about $50 a share). Oil is less than three percentage points from its all time high, trading as I write at $76.58 a barrel. Imperial Oil is a wholly owned subsidiary of Exxon Mobil Corp., the world's largest company. We are all going to hell in a handbasket, and the handbasket runs on petroleum from Exxon Mobil Corp. It is the largest company in the world and will stay that way as long as the world is dependent on petroleum. Imperial Oil is busy helping its parent company continue to gain access to the world's shrinking petroleum resources by leading the effort to extract the stuff from the Athabasca tar sands. Warren Buffet can complain that "the point is, to buy things cheap", so he bought into PetroChina instead, which made 80 per cent of Exxon's profits, even though it was selling for a quarter of the price of Exxon. But a guy whose share sell for $111,000 doesn't have a lot of credibility with the poor dad investment strategy.
The point here, and I think there is one, is that you can make a case for just about any investment strategy, especially if you do the following: buy stocks you can afford, then watch them like a hawk. It's hard work, but it's better than a paper route.
Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.