It has taken me years to come up with an investment strategy statement after really not seeing the importance in one. Whether it was buying undervalued deep value stocks, scooping up rental real estate or investing in private mortgages, one underlying theme dominated my investing — I just wanted the highest total return possible. Nothing else mattered. Not even kittens.
But there were a few problems with the strategy. I had some real duds during my deep value days, stocks that went to zero. Danier Leather was one, although I did get some of that back in what was the most bizarre bankruptcy ever. The bottom line? I owned a lot of crap, and it was crap I consistently had to monitor. I HAVE MY EYE ON YOU, SHITTY COMPANIES.
My ultimate goal has changed over the last few years. I’ve gone from wanting to grow my net worth at all costs to wanting a balanced portfolio with a certain amount of emphasis on protecting capital. I still want to grow my asset base, but I’m comfortable getting 7-8% a year versus 10%, which used to be my benchmark. Basically I like the financial position I’m in today and I don’t want to take the risk of fucking it up. So I’m focusing on being a little more conservative.
This investment strategy statement will include my thoughts on investing in stocks, real estate, private mortgages, and general portfolio management. Let’s get to it.
These days I look to buy quality companies that pay dividends at a fair price. I’m all the more excited if I can buy these stocks at a cheap price.
I insist on dividends for a few reasons. They allow me to immediately recoup some of my investment, which protects me on the downside. I think tracking passive income from dividends allows me to better ignore the market noise. They make my wife more comfortable, too, which is an underrated part of any investment strategy.
By focusing on quality and income, the price paid becomes less important. This means I don’t have to sit on cash for months or even years during bull markets. I find a reasonably-valued high quality business and then I buy some. And if it continues to be a good value I buy some more. Easy.
Now onto diversification, which comes hand-in-hand with the new quality strategy. I used to take big positions in stocks I felt were grossly undervalued. Now I take small or medium sized positions in just about everything. The portfolio has expanded to 25-30 names and I’m quite okay with that.
What I invest in
A top holding used to be anywhere from 7-10% of my equity portfolio. These days I have a lot of 3-4% weightings invested in high quality Canadian blue chips. Top positions include:
- Bank of Nova Scotia
- Bank of Montreal
- Brookfield Property Partners
- Automotive Properties REIT
- Canadian Utilities
- Pizza Pizza
Small or medium-sized holdings are a little different. I spread the risk around so they’re anywhere from 1-2.5% of the total portfolio. I think they’re good companies but they’re just not worth a big position for whatever reason. This list is a little longer.
- Boston Pizza
- Brookfield Energy Partners
- Transalta Renewables
- H&R REIT
- Artis REIT
- Brookfield Real Estate Services
- Laurentian Bank
- Polaris Infrastructure
- Smartcentres REIT
- Molson Coors
And then there are the stragglers left over from Nelly’s old days as a deep value guy. Some of these are down considerably from their peaks and are just waiting for a catalyst to shoot them higher. Others I think are misunderstood good companies trading at a fantastic price. These will get sold over time and the proceeds reinvested into higher quality names.
- Morguard REIT
- Advent-AWI Holdings
- Hammond Manufacturing
- Canaccord Genuity
Note: this isn’t a complete listing of my portfolio, but it’s most of it.
I’m comfortable having a portfolio of mostly equities for a few reasons:
- Blue chip names are less volatile than the market as a whole
- I’m okay with swings as long as the dividend income remains
- Better long-term return potential
But at the same time I do have a bond position of approximately 7% of the portfolio, today. Individual preferred shares also make up about 4-5%. This is cash I’ve put aside for the proverbial rainy day. No, I’m not talking about an emergency fund. This is my emergency investing fund.
I do not want to be in a position where I run out of capital during a great buying opportunity. This is why the bond component exists today.
In hindsight I probably should have put those bonds to work in late December, but I had ample cash. I bought aggressively and then made new contributions to my accounts. I figured I’d have more opportunity to load up while prices were low. It didn’t happen so the bond component remains.
Preferred shares are much more interesting. They offer attractive yields today (80-100% higher than my bond ETF), tax benefits (remember, they pay dividends, not interest), and potential to sell at a nice capital gain. The preferred share part of my portfolio did very well between 2015 and 2018. I punted several names for nice gains.
Preferred shares aren’t really a good portfolio insurance option because they tend to sell off at the same time as regular stocks. So I buy them as long-term income vehicles and basically leave them alone. I’m less of a preferred share trader these days.
My preferred share portfolio today includes:
- George Weston
- Fairfax Financial
I will add more anytime I see what I view as a high quality preferred falling to the 7-8% yield range. There are a couple on my watchlist today.
Real Estate/Private Mortgages
These continue to be a big part of my portfolio and I hope to slowly move capital from these assets and into stocks.
I like where I live. It’s filled with great people, affordable real estate, decent amenities, and it’s in one of the most beautiful valleys you’ll ever see. We’re located just over an hour away from a major city and one of Canada’s largest airports. I believe it really is a good place to live and urge y’all to join us here. It’ll be fun.
But I’m the first to realize living in a small town kinda sucks. There’s stuff to do, sure, but there’s never anything new to do. My routine doesn’t really change much on a day-to-day basis. Even meeting new people is tough; I recently agreed to serve on a local charity’s board and I already know four of the six members. These are the things that happen in a small town.
All of this is basically me saying that it’s hard to be super bullish on my town’s real estate over the long-term. I just don’t think it’s well positioned to grow. This encourages me to not be a buyer of my town’s real estate or lend against houses.
But at the same time the big downturn in the oil patch has opened up some very interesting opportunities in real estate, stuff I haven’t seen in a decade or more. We’re talking cap rates in the 15-20% range and potential for significant capital gains when the market recovers. We’re getting to the point where some sellers are feeling maximum pain.
So I’m changing my tune a bit. If the margin of safety is high enough I will invest in local real estate and take on additional private mortgages.
The portfolio in general
After years of stocks just going up, 2018 showed us equities can actually go down. These are the years I appreciate a big fixed income component in my portfolio, whether that’s in the form of preferred shares/bonds or in real estate/private mortgages.
I had a number of portfolio goals over time. I wanted to hit a $1 million net worth. Then it was to create a passive income empire that generated enough cash flow so we could make the choice not to work. Now the next goal is $100,000 annually in passive income.
Notice how the goal has changed from a total return perspective to more income-oriented. This means I’m going to build my portfolio accordingly. I’m going to buy dividend payers and assets that spin off a lot of cash flow. I’m less concerned with asset values going up, although I’m still going to put money to work in stocks that have upside potential.
I’m always going to be a value investor. I think my new version of value investing will ultimately make me richer with less stress than the previous method.
There you have it, kids. It’s my investment strategy statement. Have any questions? Fire away.