Invest in companies first

Mistake: Investing in stocks instead of companies.

Method: Explain the fundamentals of the company or industry and how they led you to choose the stock.

If you rent an apartment, you’re probably focused on the monthly cost. If it gets too high, you might just find another place to live.

Own a home, however, and you’ve likely researched the strength of that investment—the features of the home, your upgrades, the care and maintenance you put into it, and the appeal of the neighbourhood.

As a result, any changes in the housing market worry you less. You know your home has long-term value.

People who invest in stocks instead of companies are like renters, says Daniel Cheng, portfolio manager at Matco Financial Inc. in Calgary. They’re overly concerned with the current price, and not interested enough in the fundamentals.

“[Good] investors treat the stock like a piece of the company instead of a piece of paper,” he says—in other words, they apply the same level of care as they would to a home purchase.

Knowing what makes a company valuable helps you hang on to winners. Help clients understand that.

• Separate company performance

  External events can hinder the market performance of otherwise sound companies. Think of a state-of-the-art computer that has a bad Internet connection, says Pavan Arora, CFA, director of PARK Private Wealth in Toronto. No matter the computer, it won’t work to its maximum until that connection is repaired.

  Why companies succeed

  Harvard prof Michael Porter’s five forces of competitive advantage are:

  • Threat of new competition
  • Threat of substitute products or services
  • Bargaining power of customers
  • Bargaining power of suppliers
  • Intensity of competitive rivalry

  Similarly, a great company may not shoot the lights out in a bearish environment. So help clients separate what’s happening in the markets from the company’s prospects. Talk about the company’s strengths—its profitability, return on equity, reinvestment rate, and dividend yield.

  Then, show them how similar past market conditions have dampened the company’s revenue, and how it bounced back each time. You can also demonstrate how positive business cycles affect earnings to show the importance of holding on.

• Consider buying the company

  Here’s an interesting mental exercise to do with clients: Ask them, “If money were no issue, would you buy the company outright?” says Valerie Wowryk, CFA, director, wealth management & portfolio manager, at Richardson GMP Limited in Winnipeg.

  That makes them think about the company separately from how its stock is faring. If the answer is yes, it shows they see the business’s long-term viability.

  Wowryk adds it doesn’t matter if you’re buying 100 shares of the company or 100% of it. You still want to invest in a company that has a great valuation, ideally at a slight discount to its fairmarket value. Tell clients to consider themselves partners of a business, not just shareholders, she says. “If you like the sustainable economic advantage, forget about the day-to-day fluctuations.”

• Discuss the right metrics

  Explain how the company performed in the last quarter, not just the stock or the markets, says Wowryk.

  Show there was a new product or business unit, or a change in management. Detail what’s moved the company closer to, or farther away from, a fair value. If review meetings are all about the stock price, says Wowryk, “How can you expect your clients to focus on anything else?”

Stuart Foxman is a Toronto-based financial writer.