A submission I prepared for The Globe and Mail column 'Me and My Money'. Hope you enjoy and profit from it. Michael
20 stocks, broadly diversified across sectors, and ranging from well-established to small cap, in both the Canadian and American markets. The portfolio is built using advice from Patrick McKeough’s Successful Investor newsletters, which Mr. Epp first read about in The Globe and Mail. ‘Mr. McKeough’s advice is worth every penny, and you know there is no commission-based motive underlying the advice you are getting’. The net result is a 14.5% return compounded over the last 15+ years, which includes the 2008-09 crash.
Worked for many firms over many years, is currently self-employed with his own architectural firm. www.michaelepp.com. Started investing seriously at age 40, 15 years ago, with an initial stake of $25k. ‘Getting to the initial 25 was the hardest part, in some respects. I never owned a car, which is how I got my seed money’. Current value of portfolio is in the multiple six figures.
How He Invests
Passively. ‘The success of my approach relies on ‘acting like a machine or an algorithm’’, says Mr. Epp. This automatically means buying low and selling high. ‘As soon as one of my holdings increases in value by 50%, I sell it back down to its normal weighting in the portfolio [5%], and invest the proceeds of the sale in the stock which is currently the most beaten down of my holdings. This is harder to do than it sounds, because it is counterintuitive, but it becomes easier over time, with practice. Also, all dividends have been reinvested, right from the start. The annual cost of the newsletters currently represents about 0.1-0.2% of the value of the portfolio – obviously, in percentage terms, this was much higher at the beginning when the portfolio was much smaller -- and trading costs are one to two hundred dollars a year at most. The results speak for themselves’.
Getting out of Mutual Funds and into a self-directed account with Credential Securities. That was in 2001, and ‘I’ve never looked back. I still recall my adviser calling me up and quoting me a dollar figure for selling out all my positions. I was ready for her, and quoted back the percentage cost of selling out. The result on the other end of the line was silence’. Second best move: holding Teck.B shares right from the beginning. ‘I was selling it all the way up last year, when it went from $3.50 to $35’. Net result: ‘My first six-figure year’. Third best move: Diversifying into the American market about 10 years ago.
‘Selling a small-cap miner at a 50% loss during the 2008-09 bear market. It eventually lost 95% of the value I had bought it at, before rebounding and being bought out. If I’d held on, I would have made a 200% profit. I shudder to think what I’d have made if I’d bought more at the bottom. This was one of those occasions, thankfully rare, when I let myself be ruled by emotion, and I paid for it’.
‘Have a system and stick to it, through thick and thin. This can be very hard; you have to master your emotions. As described above, have a simple ‘algorithmic’ approach that takes emotion out of your investing as much as possible [and read Daniel Kahneman’s excellent book Thinking Fast and Slow, and Nassim Taleb’s The Black Swan]. Avoid the impulse to continually check up on your stocks’ performance. Buy quality and hold, a la Benjamin Graham – I doubt whether I spend more than 8 hours a year managing my portfolio. Don’t fall into the ‘this time it’s different’ trap. Stay in the market – over any given time period, if you miss the ten biggest days in the market, you’ll miss half your profits. I recommend Patrick McKeough’s newsletters. Look at it this way: if you were going on safari, you’d hire an experienced guide, wouldn’t you? The odds of bagging a lion, instead of being eaten by one, are accordingly increased. Remember that the stock market is one of the few fair fights in our society – the market doesn’t care what you look like, what you believe, or what kind of house you live in or car you drive. Trading costs being what they are – Credential’s have dropped 60% as of a couple of years ago -- you can start with $1000. Train yourself to think in percentages, rather than dollars: ‘Hilary won the popular vote by 2 million’ is misleading in a way that ‘Hilary won the popular vote by 1.5%’ is not. And remember, “bears make money, bulls make money, but pigs get slaughtered”’.
Final Word: ‘If I can do it, you can too. The best time to start investing was 20 years ago; the second-best time is right now’.
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