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Author: CalgaryKen Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3296  
Subject: MI on the TSE - long post Date: 3/31/2000 10:30 PM
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I've said it before, and I'll emphasize it again: I'm relatively new at investing. As a novice, I've been attracted to the MI strategies presented by the Gardners in their famous books. However, I've been somewhat sceptical of these strategies as applied to the TSE, both because of postings on this and other Canadian boards, and because I firmly believe that you don't get much (e.g. return) when you don't invest much effort (e.g. MI). Nevertheless, the temptation to follow a recipe out of a book and expect success was just too tempting for me to leave alone.

I've spent the year with the proverbial, imaginary, $10,000 which I "invested" in TSE stocks following several of the MI strategies devised for application to the DOW. If you've dismissed these strategies already, click on "thread" now, and move along (there, I've given away my conclusion). For those of you still with me, and who are still wondering about these strategies, and how they might (or might not work) on the TSE, here are the results (all for the period of April 1, 1999 to March 31, 2000):

High Yield 10 [HY10 - rank stocks in descending div. yield order, buy equal portions of top 10 stocks (TRP, NOR, DFS, TA, BMO, CM, LDM, NA, A, BNS)]: -15.4%

Beating the Dow 5 [BTD5 - identify 10 top stocks based on div. yield, rank stocks in ascending order by stock price, buy equal portions of the 5 at the top of the list (LDM, A, NOR, TRP, DFS)]: -18.9%

Penultimate Profit Prospect [PPP - use BTD5 list, spend all your money on the second stock on the list (A)]: +4.1%

Beating the Dow 4 [BTD4 - use BTD5 list, discard stock at the top of the list, purchase equal amounts of remaining stocks (A, NOR, TRP, DFS)]: -3.5%

Foolish Four a.k.a. Unemotional Value Approach [FF - use BTD5 list, ignore top stock, puchase 40% of second stock on list, purchase 20% of the remaining 3 stocks (40% of A, 20% of each NOR, TRP, DFS)]: -2.7%

Unemotional Value 4 [UEV4 - identify 10 highest div. yield stocks, rank in ascending order by price, (if highest yield is also lowest price, delete this stock), purchase 4 cheapest stocks on the list in equal amounts (LDM, A, NOR, TRP)]: -30.5%

Unemotional Value 4+ [UEV4+ - as for UEV4, but purchase twice as much of the top 2 stocks than the bottom 2 stocks on the list (33.3% of each of LDM, A, and 16.7% of each of NOR, TRP)]: -32.6%

I also "devised" a simple strategy based upon the Graham Defensive Investment Strategy. On April 1, 1999, there were 8 "Graham acceptable" stocks (NOR, DFS, LDM, NA, AL, CP, MG.A, VO). Purchasing equal amounts of these 8 stocks returned: -5.9%

Lastly, I took a list of "recommended" stocks from my financial advisor (a member of the Wise, but actually, a pretty decent guy) and followed these stocks for the year. My measure of success was whether or not the stocks achieved the broker's target price by the end of the year. Out of 24 stocks: 7 achieved success by this definition (DTC, BBD.B, MLT, CMS, TIW, CCA, VDO), with the clear winner being CMS (purchased at $20, target of $27, price today of $62.50). However there were some spectacular losers on the broker list too: LDM purchased at $14.35, target of $26.00, today at $2.03).

I know, one year does not a mechanical investment strategy backtest make. Nevertheless, I am going to make some observations and draw some conclusions:

1. MI strategies developed for use on the DOW are suspect for application on the TSE. They may best be used to narrow down the pool of stocks from which one might consider buying one, two or a few stocks, but I have no confidence in any of the Foolish strategies as applied to the TSE.

2. It was a strange year, but then aren't they all? The single stock portfolio (PPP) outperformed the rest. But what a risky way to invest!! Not for me at all!

3. Companies traditionally considered to be stable and solid (BBD.B), and technology-based companies (e.g. TIW) did the best during the year. The old economy meets the new. [I know, this was a bad week for techno stocks, but we don't expect that to continue for long, do we?]

4. Nearly all the portfolios held substantial positions in LDM. Some bad luck, mixed with some shenanigans at the corporate level, devastated this stock. A significant amount of the losses are due to LDM alone. Having TRP in many of the portfolios didn't help much either.

5. The Wise were no better than the Fools. However, neither were they really much worse.

My overall conclusion - no way am I going to simply accept and apply an MI strategy, whether Foolish or foolish. I may use these, or other strategies being discussed on the Cdn. boards (e.g. KEY-TSE), to help narrow the field of stocks to evaluate and potentially purchase, but that's it.

I guess that this was a very long way of confirming that there's no free lunch, you must understand what you are buying, and why. I've learned from this, and I hope that you now have as well.

Thanks for sticking with me this long!

CalgaryKen
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