When I started trading stocks, I did a lot of my learning in different online chatrooms where traders with their handles would list the stocks they were watching and their likely entry and exit points.
Some days, there was little action, and it was hard to find hot stocks. When this happened, the play in the chat room would be to ‘buy the market.’ This meant trading the market ETF (exchange-traded fund). As a very short day trade, ‘trading the market’ is always the dodgiest pursuit (we’re talking going UP and DOWN all day), but I found that for the long-term, this is the way to go for most investors.
Trying to create a portfolio that outperforms the market is a very involved commitment. Picking stocks means searching, researching, and analysis. If you can find some great picks to give your stock portfolio the boost it needs to look better than the market, then keep up the good work.
For the busy investor who recognizes the trouble involved with outperforming the market, market ETFs are a great choice. The commission and MER fees are lower than they are for mutual funds. Additionally, they’re liquid like stocks and you buy them the same way as you would for stocks through your brokerage account. As ETFs are funds that offer the diversification of the different stocks in a market index, you also receive the dividends those stocks pay out in the form of distributions. Add all these benefits to market performance, and you’ve got something good going here!
The following is a list of Canadian market index ETFs. There are a lot more, but these ones have higher volume than most of the other market ETFs in the TSX.
A well-diversified, balanced fund portfolio should have some foreign holdings from the US and globally. Here are few US market ETFs:
The global index ETFs generally have lower trading volume, but in this situation with fewer choices, that’s all right. Here are some to check out:
These are just some of the ETFs. There are hundreds to thousands of others available at different prices.
As you’ve read previously in Stock Picking 3, there are also sector ETFs. There are ETFs for pretty much any investment objective you can think of. There are ETFs with fixed-income assets such as bonds and T-bills, ones that cover specific industries, commodities, and foreign currencies. Please keep in mind that some of the more specialized ETFs require more research and management of the assets in the fund, so they’ll have higher MERs than the market index ETFs.
When I was still newish to investing, my portfolio consisted entirely of mutual funds. It was well-diversified, but I know now that I could’ve done better financially had I invested in ETFs because of the significantly lower MERs and commissions. BUT–I didn’t know what an ETF was back then or even how to open a brokerage account, so it didn’t matter. In the last 10+ years, ETFs have been growing so much in popularity and variety that now you could achieve a well-diversified portfolio consisting only of different types of ETFs.
I don’t own any market ETFs as I like to pick stocks and I especially like picking cheaper stocks. But personally, if I were to invest in ETFs, I’d wait until the new year once it’s clearer where the markets are going with interest rates (will they go up or stay the same?), quantitative easing, and a new US president.
Many things can move the market. A major recession. An increase in interest rates. A major election. A major sector going up or down.
In the last couple of years, the oil sector took a big hit due to a saturated market with too many players getting greedy. A lot of the Canadian market is affected by oil because it’s one of our major commodities. So the Canadian market took a huge hit, along with our loonie. This impacted our businesses as it reduced our buying power outside Canada. Having said that, after being so down last year, we had a remarkable recovery and better performance than the US markets since January of this year.
Although the Canadian and US stock markets are different, I often check out the US stock market and sectors to give me an idea of the major trends going on in our part of the world. (I will definitely be looking at the US markets after the election results come out this November!)
The following is my list of sectors and industries that I like to examine. You may be more general or more specific as you can further categorize sectors by looking at the different industries that fall within them. I like to check these out from time to time to see if there are new opportunities, or if current opportunities look like they might run dry soon. Please note that this list doesn’t contain all the sectors and industries.
The way I check out these sectors is by looking at their respective ETFs (exchange-traded funds) or the biggest stocks in those sectors, marked by the blue ticker symbols. If you’re not sure what an ETF is, that means you definitely haven’t yet read my book where I explain ETFs and indexes in easy-to-understand terms (Read it! The eBook is $2 right now!). I look at more than one ETF for some of the sectors.
You can create lists of any stocks you want to keep an eye on when you use freestockcharts.com. I have a list saved for sector ETFs. I can just easily go through my list on freestockcharts.com and check out the charts. Also, you can look up a sector by typing something like,”Retail etf,” anywhere on the screen in FreeStockCharts and a bunch of options will come up and you can select from the multiple options.
I apply the same principles when looking at the charts of each sector as I do stocks. I try to see if the sector has been hot for a while (well above the airplane) or if it’s just starting to warm up (at or below the airplane), or if it’s been quiet and moving sideways (along the runway). If a sector has been moving sideways and just starting to move up, I’m more interested in stocks that fall in that sector because it means there could be new opportunities to buy at lower prices. In investing, this is called “sector rotation.” If a sector is hot, I’ll wait for it and its stocks to cool off.
Remember the main M.O. of a savvy investor is to always look for new opportunities, not to follow a trend that’s far into its season.
There is a lot of fear-mongering, even among savvy investors, with regards to stock picking and timing your investments with the market. It’s because people hate being wrong. No one wants to give wrong information. But for anyone who’s invested, you know you can be wrong for one month and then be right the next month and be well in the money. You can be right for one or two days and it’ll be months or, in rare cases, years before you’re in the money again.
It is hard to know exactly where the market is headed, but it’s easy to see where it’s been–to me, this is more important than making predictions. The way I see it, if it’s happened already, then you have something real to work with.
For the Canadian stock market, I look at these ETFs:
For the US stock market, I look at these ETFs:
I analyze the charts the same way I do for sectors and stocks on freestockcharts.com. I always compare stocks and sectors against the market. I ask these questions:
If the stock market is moving downwards (for the previous month or longer), but a sector has been moving sideways and is starting to heat up, it’s likely going to lead the market. I’ll be looking for stocks in that sector using the criteria I discussed in Stock Picking Part 1.
If a sector’s chart looks just like the stock market’s chart over the previous month or more, it’ll likely be affected by the market, so if the market goes down, your sector will likely go down with it too. An individual stock better have an amazing chart (LONG sideways trading–we’re talking about a LONG RUNWAY lasting months!) for me to buy it without a stabilized sector behind it.
If a sector is weaker than the market and it has been heading down on its own, I’ll avoid it and any stock in that sector until I see the sector stabilize and trade sideways again.
I’m not that concerned with what the stock market is doing. In the past, I’ve been shaken out of some great opportunities because I was staring too hard at the market, trying to predict its next move. As soon as the market sells off just a little bit, I’d freak out and exit my positions, only to have the market recover after (as it always does since the beginning of stock market history). What is most important to me is how a stock is trading relative to its sector and how the sector is trading relative to the market. I’m always looking to get in early, not late after the party has already started.
I recognize this is advanced information. You really can buy stocks of companies that you like without ever having to look at a chart and do well. This is more about my swing trading strategies which for me, it has been a great way to make money.
The main objective for investing in anything is to make money. With stocks, you make money two ways by selling your shares at a higher price than you paid and from dividend payments. Additionally, your decision to invest in a stock could be supported by a number of other reasons. Such reasons will guide you in the selection process.
Here are some reasons to buy a stock:
My investment objectives vary as I want to invest for the long-term (a fun and comfy retirement life) and the short-term (concerts, trips, and buying a couple of properties in Canada and somewhere hot).
For my retirement portfolio, it’s all about the long game and I’m looking to invest in something that will do me well for years, even decades. So, I look for stocks that have ‘blue chip’ qualities: they pay dividends, they’re well-known, well-established and have been around for a long time, and they usually offer more than one type of product or service which allows them to adapt to various consumer demands and trends. It’s also a bonus when the stocks are in defensive sectors such as utilities and consumer staples. I don’t do much analysis here, I apply a very basic, rudimentary logic.
There is no guarantee these stocks won’t suffer when the economy is slow, but the idea is that even during tough times, they’ll do better or suffer less, and they’ll still likely pay you dividends. If their stock prices take a hit, I’ll likely buy more shares when they start to recover because they’ll be cheaper.
For my swing trades, I look for stocks that look like they’ll do well over the next few months to a year. I look for typically strong stocks that have been quiet for a while and haven’t seen much trading action. When this happens, it’s usually because their sectors have also been quiet. If all the stocks in a particular sector have been down for a while, I’ll narrow down my selection based on the stock price and volume. (See Stock Picking – Part 1.)
The selection process for my swing trades is more involved as I use a very basic form of technical analysis of a stock’s price history to help me decide on where I’m going to buy and where I’m likely going to sell. Technical analysis is about analyzing the price history of a stock in relation to its trading volume, sector, and market environment.
Many people dispute the validity of technical analysis and prefer to examine the fundamentals of a company’s value in relation to its share price instead. They’re all valid to some degree and many financial pros analyze both the technical and fundamental information.
I prefer to analyze charts because I’d rather see if I’m paying much more than others who got in earlier than me. The lower the price I pay for a stock, the more confident I am in the trade. It’s not a guarantee that the price won’t go lower, but even if it does, I will suffer less by getting in at a lower price than if I bought a stock after it became hot and expensive. I never buy a stock after it makes the news because it’s usually too expensive by then.
Above is a very basic chart of a stock that I actually own. I consider a stock to be ‘quiet’ if it’s trading sideways (the first horizontal line). Think of a stock’s price in terms of flying in an airplane; trading sideways is like starting on the runway. I try to buy either when it’s still on the runway or just as it’s taking off (no higher than where the airplane is). So I just have a quick glance at a stock’s chart to determine if it’s just taken off or if it’s gone far beyond the clouds. If it has long taken off already, I’ll just wait for another sideways setup. Sometimes this wait time could take months to years and I’ll just keep checking the charts every now and then.
For years, I’ve been using freestockcharts.com to look up charts for Canadian and U.S. stocks. It’s FREE and the features and tools for the charts are very similar to what you would use if you had a pro trading account with a brokerage. To look up a stock, you just type the company name and you can select it from the list of options it provides. Sometimes a company will trade on both the Canadian and US stock exchanges, so be sure you’re selecting the proper exchange for you. There are many short and informative tutorials available on its site and on YouTube.
You can decide to buy a stock using very basic logic. It can be as simple as, “My bank is great. I’m going to buy its stock.” And there you go, you own a dividend-paying stock. Those who want to build a more diversified stock portfolio seek more information and try to pick stocks using some strategy.
My process for picking stocks is quite simple and involves less information than what is required by trained financial professionals. I don’t manage other people’s money, only my own, so I’m less stressed out about aligning a certain number of factors before buying or selling a stock. My strategy is quite loose in form, but I feel that being rigid will lead to over-analyzing and worry. I’d rather be relaxed and let my trades work when they do because if I panic or get too excited, I’ll sell them too soon.
With stocks, I operate on different time frames. I sometimes day trade, and I always close the position within a day or less. My main thing has become swing trading, which means I’ll hold a position anywhere from over a day to a few weeks or even a few months. And then I’ll do real investing where I’m looking to hold a solid dividend-paying stock until I retire.
I don’t recommend that anyone day trades, it’s a far too risky way to handle your hard-earned money and it’s not investing at all. It’s gambling. Many might argue that swing trading isn’t investing either, but it depends on how you look at it. I see it as shorter term investing. Your level of involvement can vary from being very active by watching stocks and the markets, and managing your trades all the time, or you can be more hands-off and just be willing to do such things occasionally. I’m very hands-off with my swing trades. Most of what I’m going to be talking about is related to how I pick stocks for swing trading.
I need to declare that when it comes to managing my money, I have a higher risk threshold than the average person. Over the years, I’ve enjoyed big wins and suffered abysmal losses. My confidence comes from years of experience, training, research, lessons, trade analysis, and self-examination. I’m finally in a place where I’m quite happy with my stocks and current strategy. I’m also happy accepting that if the markets change, I might have to adapt my strategy.
What I’m revealing here today is just to share my method among the curious, not to teach it or to say this is what you should do to make money. My only hope is that you’ll pick up some good ideas and know how to apply whatever is useful to your own decisions.
Just remember that there is no fail-proof way to invest, nor is there one way to make money from investing. Investing is just one aspect of personal finance, which is how you manage your money and make financial decisions. I feel that the other aspects related to personal finance — working, budgeting, managing debt, and saving — are just as important, if not more.
I’m going to break down my explanation into parts. Each part will be blogged separately over the next few weeks.
I look for stocks that trade a lot in the TSX. I narrow the search process down by looking at the larger stocks in the TSX that are listed in the S&P/TSX 60 Index or the S&P/TSX Composite Index. If you click on those links, you can see the index’s stocks under ‘Constituents.’ If you don’t know what an index is, it means you haven’t read my book yet! You can still refer to the Terminology page for quick reference.
I like stocks that have the higher daily trading volume which means the number of shares bought and sold in a day. So with TSX stocks, I’d like them to trade at least 10K shares a day; the more the stock trades, the more interested I am in it. My TFSA is less funded than my other trading account, so I tend to look for Canadian stocks that are under $20, preferably under $10 so that I can buy more shares.
Rarely do I buy stocks that trade on the TSX Venture Exchange, but if it’s for stocks in a relatively new industry (like cannabis), then I’ll buy the from the venture if it meets all my requirements.
I use the amazing Screener feature on finviz.com to find US stocks. For free, you can customize different search requirements and save those settings. I’ve created different “presets” for finding current financial stocks, tech stocks, oil stocks, pharma, transports, etc., that suit my preferences.
The one common feature I use in all my searches is “Average Volume,” so I usually prefer US stocks that trade over 500K shares a day. Some people look for stocks that trade much more, some are okay with less than 500K. If I have too big a list, I’ll also add “Current Volume” to the search criteria and I’ll select over 1M shares because it means it’s currently trading a lot more than its average volume and something unusual could be going on with those stocks.
I usually look for US stocks that are over $5 in share price, mainly because the higher-priced stocks often, but not always, move more in price so I can make a decent profit in a shorter amount of time. I have more money available in my US trading account too, so I’m able to shoot for higher-priced stocks.
If you’re interested in investing in exchange-traded funds, you can read about the various ETF strategies I recommend in this issue of Investor’s Digest of Canada!