Greetings Trade Secrets readers! We’ve got a little more than a month left in The Globe and Mail’s Trade Off stock-trading competition, so be sure to track the leaderboard and see who’s in the lead and what investments are working for them. It might just give you an edge during the final weeks of activity.
On that note, we’ll start this week with a quick breakdown of our tournament’s standout players. Beyond that, we’ll look at a few investing themes, including whether bigger is actually better when it comes to buying stocks.
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The leaderboard
Here’s a quick leaderboard update on the Trade Off game:
Are trillion-dollar stocks worth buying?
I love market milestones, and Apple Inc. had a big one in 2018, when it became the first company to reach a US$1-trillion market capitalization. These days, trillion-dollar valuations are hardly rare. More than a dozen companies have crossed that threshold since Apple first did eight years ago.
Big market caps – or the current value of a publicly traded company – are seen as a status symbol, but they’re not necessarily a reason to buy stocks, according to New York University finance professor Aswath Damodaran.
Known on Wall Street as the “dean of valuation,” Damodaran joined us on a recent episode of Ticker Take to highlight the difference between pricing a stock and valuing it. Pricing, he explained, is driven by how many people want to buy or sell a stock at any moment. He said that valuing a business is based on how much cash is coming in, how fast the company is expected to grow and how much uncertainty surrounds that potential growth.
I asked the professor to grade how the market has valued many of the trillion-dollar companies, including the tech stocks that make up the “Magnificent Seven.” While some scored better than others, none of the valuations were deemed worthy of an A grade. He says perfect scores would require certainty about the future, which we don’t have, especially in an era where excessive AI-related spending may or may not work out for the mega tech names.
If you’re putting your own money to work for the long term, Damodaran’s advice is to focus on cash flows and try to assess how likely they are to hold up over time.
Buffett’s wisdom is available free, forever
Warren Buffett is another investor who loves cash flow. The 96-year-old recently stepped down as Berkshire Hathaway Inc.’s chairman – a sobering reminder we’ll have to stop writing headlines about what Buffett himself is buying and selling.
“I don’t think he’s been sitting in an office picking stocks,” Damodaran told me. “I don’t think he’s done it for 10 years.”
I’m not sure we’ll ever see another stock picker who can have the same kind of influence that Buffett has had for decades. That said, the good news is his lessons are available for free, forever. A quick internet search will pull up many of the lessons he’s shared over the years about how to be a smart investor.
For what it’s worth, in the more than 100 episodes of Ticker Take we’ve done, pros have told us they’ve learned from Buffett more than any other famous investor. That means the knowledge has been passed on – and that’s a good thing.
Top tools for investors?
Speaking of investor lessons, long-time investor Paul Harris of Harris Douglas Asset Management Inc. shared his wisdom with me. He listed the five key metrics in his toolkit: gross margins, operating margins, return on invested capital, free cash flow and interest coverage. In order for him to buy a stock, all of those metrics have to screen well.
Trade Secret tips
This recent piece sharing a chef’s TFSA experience is a reminder of how you should think about savings accounts.
On a related note, here’s a helpful tool on how to navigate TFSA limits.
While we’re at it, here’s a longer list of tools for your consideration, covering everything from finding ETFs for your portfolio to tracking your performance over time.
Good luck with your stock market homework!
Until next week,
Jon
Jon Erlichman is the founder of Ticker Take on YouTube and a contributor to BNN Bloomberg.