Confessions Of A Scaredy Cat Investor

Includes: DIA, ENB, QSR, TRP
by: Dale Roberts

I'm the cranky writer. And I'm also the Scaredy Cat Investor. Who's afraid of the big bad market? I am.

So here goes. Here's the journey that culminated in me becoming a Scaredy Cat investor. I made my first trade while sitting in the offices of Taxi Advertising in Toronto. My art director partner made me do it, and I signed up for a TD Waterhouse self-directed account. My first trade was a few hundred shares of a small cap. I made the trade mid-morning. At 2 pm, my Art Director partner screamed with excitement. The stock had doubled or tripled just a few hours after I bought it. 'What the hell do I do?' I asked. We stood there staring at the computer screen, as one would stare at a dead body. We thought you should sell a stock when it doubles or triples.

Easy stuff this stock picking and buying and selling on triples. Hey, I was one for one. So of course I cashed in all of my balanced mutual funds and GICs that I could get my hands on, and piled them into my self-directed account. I was in control now. Sound effect: Evil genius cartoon laugh.

I think the time period was around early 2000. Turns out that the rest of 2000 and 2001 and 2002 weren't all that generous to us genius stock pickers. Tech. I loved you tech. And you hurt me so bad. And then you hurt me again. I was suffering from Investor Stockholm Syndrome. It wasn't supposed to be that way. The internet was here. It was new and exciting. All I had to do was buy the builders of the www. When there's a war on, heck, you buy the folks that make them handy bullets. Can't go wrong. Right?

My stomach felt like I was in that Super-Size Me overeating documentary, but I could only frequent Taco Bell. Looking back at my account statements, it was a nightmarish mishmash of mismatched stocks and funds. I had no loyalty. I had no patience. And most alarmingly, I had NO plan. I can discern that from 2001 to 2007, I was gradually transitioning from no plan - to a mix of ETFs sprinkled with some individual stocks that had served me well. Bank of Nova Scotia (NYSE:BNS) and TD plus TransCanada Pipelines (NYSE:TCP), Enbridge (NYSE:ENB) and Crescent Point Energy (CSCTF.PK) (Tim Hortons (THI) from IPO days) are long term holds that have done very well. I had discovered gold and that was starting to pay off. Bond ETFs were starting to show up on my statements. Thank goodness.

From there, I was able to generate some nice gains; 2007 delivered +23%, 2008 -21%, 2009 +30%, 2010 +30%, 2011 +6%. It gave me a 74% total return from January 1, 2007 to the end of 2011. The Toronto Stock Exchange delivered negative 5% returns excluding dividends during that period. And when 2008 hit, I was much better prepared, in portfolio composition, but not from a psychological standpoint. The wounds from 2000-2003 were still fresh. And there we were, experiencing gut-wrenching 50-60% market dives again. I wanted out of that movie.

While accumulating those nice returns over the last five years or so, I have continually sold my individual stocks and moved toward ETFs (and a Frankenstein model portfolio), with my largest position now a 1-5 year laddered Canadian corporate bond ETF. Not saying that makes sense to the outside observer. I beat the market by a considerable margin over the last five years, to say the least, but I can't take the volatility. I now have real money in our accounts. I want to protect my capital gains, the trade-off being more modest gains moving forward.

These days, there's no shortage of reasons for Scaredy Cats to be shakin' in their boots. I'm no longer worried about the lack of an investment plan. I'm worried about macro issues. Like the fact that the developed world is marching head on into a freight train called sovereign insolvency. That little thing. So I don't mind playing D-Fense. The Great Recession might have been a warning shot to what's coming. And in the same breath I will have to admit that I (like everyone else on the planet) have no idea what will happen with any asset class. Hey, predictions are hard to make, especially ones about the future.

The only good investment plan is the plan that we can stick with, and execute. Fear and greed make most investors do the wrong thing - over and over and over again. Very few investors can handle the roller coaster ride of an equity-heavy portfolio. In fact they have trouble even making money in good times.

Fidelity conducted a study on the performance of its flagship Magellan Fund during the tenure of its famous manager Peter Lynch. Lynch ran the Magellan Fund from 1977-1990, delivering an astonishing 29% average annual return. Despite his remarkable performance, Fidelity determined that the average investor actually lost money during his 13-year tenure. According to Fidelity, investors would run for the doors during periods of poor performance and come rushing in after periods of success.

It's incredible that actual investor behaviour and investor psychology is largely ignored by the investment industry. The good news is that there are some very simple ways to lower volatility, and greatly reduce the mistakes investors make.

My 'research' led me to conclude that an asset mix of 70% bonds and cash to 30% (mostly income generating) equities would greatly reduce volatility, while still providing some 'decent' returns. My current portfolio holds 65% bonds and prefs to 35% equities including Canada, US, and BRIC. The income generated is 5% plus. I've sprinkled in a covered call ETF to boost income.

Of course, gold can also further reduce portfolio volatility. See the Permanent Portfolio articles on Seeking Alpha for more on that incredible phenomenon. Only two very small down years in the last 40.

My current mix provides a low level of volatility that allows me to sleep at night. In practice the portfolio has delivered on the low volatility side of the equation. It has never dropped more than 2% from the new highs it continues to make. When the Canadian markets quickly dropped 15% in 2011, the portfolio had that 2% retracement. And while Canadian markets fell by 10% (not including dividends) in 2011, I scratched out a 6% gain.

With my Scaredy Cat Portfolio I can now share the same psychology (and approach) as Dividend Growth Investors. When the markets drop, I'm buying equities (and income) on sale. And I am certainly comfortable reinvesting my now significant dividends and income in dividend and dividend growth ETFs on both sides of the border. I can stay the course knowing that my portfolio is unlikely to experience even a 15% fall.

Pretty sleepy, I know. Hey, cats like to sleep. And so do investors. So I will spread the word. Someone has to represent the bulk of investors out there...the 99.9999999 percenters.


Disclosure: I am long ENB, TRP, THI, DIA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please note that Dale Roberts aka crankyguy, the crankywriter, the scaredy cat investor is not a licenced investor advisor, and the above opinions should only be factored in to an investor's overall opinion forming process. Consult a licenced investment advisor before making any investment decisions. Please. In addition to the tickers listed, I also hold long positions in,,,,,, listed on the Toronto Stock Exchange.