Hello again! It’s time for your weekly dose of Trade Secrets, The Globe and Mail’s newsletter for its Trade Off stock picking competition.
One piece of housekeeping before we get going: Registration for Trade Off closes on Aug. 9. Between Aug. 10 and Oct. 30, Trade Off players participate in a no-risk stock simulation game using $100,000 in virtual cash for a chance to win a $5,000 grand prize. If you’ve been meaning to sign up, this is the week to do it. You can still play the game if you register after the deadline, but you will not be eligible for the leaderboard or any prizes.
That leaves a couple of weeks to think about what stocks you actually want to own. Most investors never give themselves that kind of runway, so be sure to use it.
Can Canada’s outperformance continue?
Trump’s tariff spat with Canada is back in the headlines. While it could mean economic uncertainty, Canadian stocks have largely shrugged it off so far. The Toronto Stock Exchange has enjoyed a solid year, compared to the S&P 500. At a time when AI winners in the U.S. have looked wobbly, the non-AI makeup of Canada’s benchmark index has benefited investors.
According to Bloomberg data, nearly 70 per cent of the TSX is composed of banks, insurers, pipelines, oil and gold. Those are the kinds of old economy businesses that don’t care much about AI spending or semiconductor chips exports.
But last week we pointed you to David Rosenberg’s column making the case that Canadian bank stocks have run too far. The Big Six are now trading well above their average price-to-book ratio in the past decade.
Investors may continue to cheer on Canadian holdings, but the easy gains may be off the table.
Watch the July hangover
The other thing shaping your Trade Off starting point is what just happened with crowded trades.
Strategists at Wells Fargo say this July ranks among the biggest momentum reversal months since 1990. Chips took it hardest, but infrastructure, renewables and even rare earth names got dragged along. They argue that this was a result of investors unwinding popular bets rather than anything breaking in those businesses.
Where it goes next is genuinely contested. UBS analysts have argued that the selling is mostly done and told clients to start buying. Citi is not convinced, pointing out that positioning in Nasdaq names hit a one-month low and analysts there are warning that the unwind may still have room to run.
Some of this may sort itself out before the Trade Off game begins on Aug. 10, but it tells you something about the market mood you’re walking into.
How many stocks should you own?
Here’s a question worth settling: What’s the right number of stocks for your Trade Off portfolio? The stock picking simulation game lets you hold as few as five names or as many as 20, with each one comprising between 5 and 25 per cent of your portfolio. Load up on four or five big positions and you are making a very different bet than someone spreading across 20 stocks.
Over 12 weeks, a concentrated portfolio is what usually gets you onto the leaderboard, because you need a couple of big winners to stand out from thousands of players. Over 20 years though, that same approach is sometimes how people blow themselves up. Just know which game you are playing!
If you want to see what the concentrated end of that spectrum looks like, this week on Ticker Take I spoke with EMJ Capital president and founder Eric Jackson, who spends his time hunting for what he calls 100-baggers. He will not open a new position unless he thinks the stock can return 50 times over five years, and what he is really after is 100 times. Be warned, though. Mr. Jackson says the strategy takes a stomach most people do not have. He has had a few of these investments work, including one beaten-down name he bought near its lows, which has since climbed more than 100 times over. It’s worth watching for the thinking behind it, whether or not you would ever invest that way.
Trade Secret Tips
Here are a few Globe reads that may help you with your Trade Off stock picks.
We referenced diversification earlier. This helpful piece investigates what you are actually diversifying for, whether that is smoothing out the ride, surviving a once-a-decade drop or simply never wanting to lose money. Each of those calls for something different.
Meanwhile, here’s an interesting TFSA case study. Albert built an $875,000 tax-free savings account while holding around 50 stocks, with no single position above 5 per cent of the total. That runs against the usual wisdom that you have to concentrate to beat the market, and it is a nice counterweight to the way a contest makes you think.
And finally, a friendly reminder about The Globe’s helpful tools for figuring out your financial picture. This calculator weighs the after-tax cost of your debt against the after-tax return on your investments, so you can see which use of the money actually comes out ahead.
Trade Off, of course, runs on virtual cash, so practicing costs you nothing. But with real money, this is the question to settle first.
Good luck with your picks!
Jon
Jon Erlichman is the founder of Ticker Take on YouTube and a contributor to BNN Bloomberg.