Some investors tell us that, while they like our approach to investing, they have a nagging concern about what one person called our “all-equities philosophy.” They wonder whether investors should hold some bonds to reduce the volatility in their portfolios. Often, their brokers will recommend that they do.

Our relative view of stocks and bonds is based on today’s realities

Our stance on equities shouldn’t be categorized as “philosophy.” It’s a matter of history. Specifically, it’s a reaction to today’s economic and investment situation. Up till the mid-1990s, in fact, we routinely advised that fixed-return investments, such as bonds, should make up anywhere from one-third to two-thirds of a conservative investor’s portfolio.

Back then, fixed-return investments paid 8% to 10% a year. That was close to the long-term returns available from the stock market. Of course, fixed-return investments leave you fully vulnerable to inflation, unlike stocks.

But back in the 1990s, we saw little risk of inflation. In addition, we felt interest rates were likely to move sideways to downwards for an extended period, and that’s a favourable environment for bonds.

Now, we believe zero is a good proportion for bonds with a term of any more than two to three years. The best you can get from bonds now is the 3% or 4% interest they offer. The worst that can happen is that you will lose money, or at least lose purchasing power.

Don't miss your chance to download Pat McKeough’s new FREE report, "Dividend Paying Stocks: How High Dividend Stocks Can Supercharge Your Income Investing." In this exclusive report, Pat shows you how to spot the best dividend paying stocks for your portfolio--and avoid the ones that could steer you into a financial disaster. Click here to download your copy and get started right away.

Stocks and bonds offer different odds

In our opinion, bonds now offer you a “heads-you-break-even, tails-you-lose” situation. That’s the exact opposite of our ideal investment, which offers odds that are more like “heads you break even, tails you win.”

As you probably know, a bond pays a fixed rate of interest during its life. Eventually, a bond matures, and holders get the bond’s face value, and nothing more. Note that receiving the fixed interest and face value at maturity is the best that can happen. Corporate bonds can go into default. Inflation can devastate the purchasing power of bonds and all fixed-return investments.

Bond prices and interest rates are inversely linked. When bond prices go up, interest rates go down, and vice-versa.

Bonds have been in a period of rising prices (a bull market) since 1981. That year, long-term interest rates reached an historic turning point when long-term U.S. Treasury bond yields peaked near 15%. Ever since, interest rates have gone through wide fluctuations, but they have essentially headed downward.

Today, interest rates just don’t have that much further to fall. But under certain conditions, interest rates could go substantially higher. Remember, when interest rates go up, bond prices drop.

Even so, brokers continue to sell bonds to their clients. That’s partly because most of today’s brokers had not yet entered the investment business when the bull market in bonds began in 1980. All they know is that bonds do tend to reduce the volatility of your portfolio, since they tend to rise when stock prices fall. Of course, bonds also generate more commission fees and income for the broker, compared to stocks, especially if you buy them via bond funds and other investment products.

Our investment advice: If you are reluctant to hold a 100%-stocks portfolio — and many people are — then one alternative to consider is to keep a portion of your investment funds in relatively short-term fixed-return investments, with maturity dates of a few months to no more than two to three years in the future. These fixed-return investments will lose value when interest rates rise, but not enough to make a serious dent in their value, because of their short terms. You can hold them till maturity, then get your money back and reinvest. Our advice is to stay out of long-term bonds.

Canadian Wealth Advisor covers safe money investments for turbulent times, primarily ETFs, REITs and well-established dividend-paying stocks. You can get a special risk-free introductory subscription to Canadian Wealth Advisor at a savings of $50.00 off the regular rate. Click here to get started right away.

This Week’s Reports

Pat McKeough’s investment ideas as shown on YouTube: Part 2

Energy stocks: U.S. firm aims to keep growing with shale gas and oil sands projects

Investor Toolkit: Futures trading can be fun, but don’t try it for profit

Why price targets can go just as wrong as any other prediction

U.S. convenience chain seeks further growth after resisting takeover bid

Related Posts

Pat McKeough’s investment ideas as shown on YouTube

Future is bright for these gas producers

Stock trading advice: When to sell a weak stock

Stock market investments: Beam focuses on alcoholic beverages after spinoffs

If you like what we do at TSI Network, we’d encourage you to share this Week in Review with a friend by forwarding this email to them. That way, more investors can benefit from our free, lower-risk investment advice.

Pat McKeough responds to many personal questions on specific stocks and other investing topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.

This week, one Inner Circle question concerned a potentially fast-growing stock market investment, convenience store chains. Pat looks at how one U.S. chain is doing following its successful fight to resist a takeover bid from a big Canadian chain.

Q: What are your thoughts on Casey’s General Stores as an investment? Thank you.

A: Casey’s General Stores, (symbol CASY on Nasdaq; www.caseys.com), operates over 1,700 convenience stores under the Casey’s General Store and Just Diesel brands.

The company’s stores are located in eleven Midwestern states, but they are mainly concentrated in Iowa, Missouri and Illinois.

Casey’s gets 71% of its revenue by selling gasoline, but its stores also offer food, including freshly prepared pizza, donuts and hamburgers, as well as beer and other beverages.

In the three months ended October 31, 2011, Casey’s revenue rose 32.1%, to $1.8 billion from $1.3 billion a year earlier. Earnings jumped 73.5%, to $37.6 million from $21.7 million. Earnings per share rose 94.1%, to $0.99 from $0.51, on fewer shares outstanding.

However, if you exclude the $0.30 a share that Caseys spent to fend off a hostile takeover bid a year earlier, its earnings per share would have been $0.81 in the year-earlier quarter.

Stock market investment: Caseys looks to expand in three Southern states

Casey’s holds cash of $86.2 million, or $2.24 a share. Its long-term debt of $673.5 million is a reasonable 32.1% of its market cap. The shares yield 1.1%.

Casey’s earnings have lagged behind its revenue growth lately, because strong competition for cigarette sales has hurt its profit margins. It is also paying more for food ingredients, including cheese, coffee beans, flour and meat.

The company has lots of room to expand by purchasing smaller chains and opening new stores. For example, it now plans to build a number of new stores on its recently purchased land in Arkansas, Kentucky and Tennessee.

Casey’s shares are up 54% since March 2011. Even so, the stock trades at a reasonable 15.0 times this year’s forecast earnings of $3.60 a share.

In the latest Inner Circle Q&A, Pat examines Caseys prospects in light of the potential risk of its acquisition policy. He also looks at whether it can boost its profit margins in an improving U.S. economy and gain from its plan to favour prepared food over fresh food. He concludes with his clear buy-hold-sell advice.

Inner Circle members see Pat’s analysis and recommendations on the stocks that other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this unique investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

Investors often ask us why we don’t publish price targets for the stocks we recommend in our newsletters and investment services. After all, stock price targets commonly appear in brokerage and media reports.

There are several reasons we do not follow this practice. The main one stems from a key piece of our stock trading advice: predictions are the least reliable part of the investment decision-making process.

Price targets encourage investors to rely on predictions about stocks. But big bets on predictions or opinions will always produce inconsistent results. That’s why successful investors recognize that predictions are of limited use in investing profitably.

Instead, we continue to recommend that you focus on investment quality and diversify by following our three-part investment philosophy (more about that below).

Don't take chances with your retirement nest egg. Protect your portfolio and make it grow with expert advice from Pat McKeough, cited by The Wall Street Journal as "one of only four investment newsletter advisors who have managed to serve their readers well over the long haul." Click here to learn how you can profit from Pat McKeough's The Successful Investor newsletter.

Stock trading advice: How price targets can cause you to miss some big gains

There’s another drawback to price targets. They can spur investors to quit buying or even sell their best picks way too early. By definition, your best picks are those that do much better than you ever expected.

To make serious profits in stock investing, you need to hang on to your best performers for years. That’s because even good stocks sometimes go sideways for decades, while others turn out to be “ten-baggers,” with gains of 1,000% or more. If you are too quick to sell stocks that have gone up, you may avoid some 20% setbacks. But you’ll also miss out on some 200% gains.

Price targets provide a rationale for selling whenever a stock you own hits the target. This generates more trading activity—and greater commissions. That helps explain the popularity of price targets in brokerage research.

Stock trading advice: How to increase your chances of finding a superstar

Instead of relying on stock-price targets, we recommend that you follow our three-pronged investment philosophy. That is, invest mainly in well-established companies; spread your money out across most, if not all, of the five main economic sectors (Manufacturing, Resources, Consumer, Finance, Utilities); and downplay stocks that are in the broker/media limelight.

That way, you protect yourself from an unforeseeable industry downturn. You also increase your chances of stumbling upon a market superstar — a stock that does much, much better than average.

Look at it this way. If it was so easy to predict share-price movements ahead of time, investing would be incredibly profitable and nobody would have to work. Of course, the universe isn’t built that way.

If you’d like me to personally apply my time-tested approach to your investments, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice on a wide range of investing topics. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Tip of the week: “Trading in futures is a necessity for farmers, but a risky business for most investors.”

Trading in futures is a long-established and perfectly legal way to bet on price changes in commodity, currency and financial markets. When you buy or sell a futures contract, you commit yourself to buy or sell a quantity of a commodity (or currency or financial instrument) in the future. The date and quantity are standard; you fix the price when you buy or sell the contract.

Here’s an example: Say you purchase a March wheat contract at $6.60. That means you’ve agreed to a contract for 5,000 bushels of wheat in March, paying $6.60 each, for a total of $33,000. The seller has agreed to sell that much wheat at that price on that date.

Since the transaction takes place in the future, the buyer and seller only put up a deposit of perhaps 5% of the $33,000. This provides enormous leverage. A 5% price rise represents a 100% gain for the buyer and a 100% loss for the seller.

Futures started out as a convenience for commercial interests. Farmers sell wheat futures to fix their income from this year’s harvest. Bakers buy wheat futures to fix their flour costs. But most futures transactions take place between speculators who are simply betting that prices will rise or fall. Most contracts get closed out prior to delivery.

Imagine having me build you a portfolio that’s tailored to your specific investment goals, temperament and financial situation. That's just one of the many ways you benefit when you become a client of our portfolio management services. Backed by my in-house team of investment experts, I’ll work to protect your money during times of market turbulence – and maximize your profits when the market rises. Click here to learn more about how you can profit from our Successful Investor portfolio management services.

Investing in futures is not the same as investing in stocks or funds

• Futures contracts have a fixed life, usually under one year. You can hold stocks or mutual or exchange-traded funds indefinitely.
• Futures contracts do not give you any income. Stocks, and some funds, do provide dividend payments.
• Futures are a speculation — a bet on price movements. To make money, you have to outguess other players by a wide enough margin to pay commissions. Stocks and funds are an investment because they let you profit from economic growth.

Our investment advice: In theory, high leverage makes it possible to turn a modest stake into a fortune in futures. In practice, most futures speculators wind up losing money. Successful investors recognize that investing in futures is a form of recreation. You do it for fun, not profit.

As a member of TSI Network, you may have already seen “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada.” If you haven’t yet read this new free report, click here to download your copy today. I’d also encourage you to share this report with a friend.

DEVON ENERGY CORP. (New York symbol DVN; www.dvn.com) is one of the largest U.S.-based oil and natural-gas explorers and producers. Its production mix is 65% gas and 35% oil.

In May 2011, Devon completed the sale of its Brazilian operations for $3.2 billion. It has now sold all of its international and Gulf of Mexico properties, which it saw as risky and expensive to develop.

In all, the company received over $8 billion in after-tax proceeds from these sales. It’s using these funds to buy back shares, purchase properties and pay down debt. So far, it has bought back $3.5 billion of its shares. Its long-term debt is $6.0 billion, but that’s just. 20.7% of its $29.0-billion market cap. The company holds cash of $7.1 billion, or $17.27 a share.

As well, Devon recently sold a one-third interest in five shale oil and gas fields to giant Chinese state-owned petroleum and chemical company Sinopec (symbol SNP on New York) for $900 million.

Get Pat McKeough’s latest buy/sell/hold advice on 5 stocks in the fast-moving agricultural sector absolutely FREE. You’ll learn all about these exciting investments in Pat's special report, "Commodity Investments: Fertilizer Stocks and Potash Stocks That Will Profit from Rising Food Demand." All 5 stand to gain from the long-term rising trend in agricultural prices — but not all are buys. Click here to download yours today.

Energy stocks: Devon sees daily production rise by 10%

In the three months ended December 31, 2011, Devon’s daily production averaged 680,400 barrels of oil equivalent, up 10.0% from a year earlier. Cash flow per share rose 3.2%, to $3.91 from $3.79.

Devon is now focused on its North American properties, which include conventional production, shale oil in Texas and oil sands in Alberta. The company will spend as much as $5.9 billion to explore and develop its properties this year.

The shares trade at 5.7 times the company’s forecast 2012 cash flow of $12.55 a share. Devon has raised its dividend by 17.6%, and now yields 1.0%.

In the latest edition of Stock Pickers Digest, we examine whether Devon can keep growing at its present rate and assess the impact of its shale oil and gas deal with China’s state-owned energy company. We conclude with our clear buy-hold-sell advice.

If you’re looking for stocks with the potential for gains of 50% or more in 6 months or less, you should subscribe to Stock Pickers Digest.

The latest issue of Stock Pickers Digest gives you our full analysis, including clear buy/sell/hold advice, on 20 stocks that may be suitable for the part of your portfolio you devote to aggressive investing. What’s more, as a new subscriber you can save $50.00 off regular annual subscription rate. Click here to learn how.

Now, with the stock market coming off last autumn’s lows, we think it’s an appropriate time to replay the interview. Pat discusses not only specific solutions for volatile markets, but also how his investment advice applies in all market conditions. Here is part two of the interview, entitled “Spreading investments” on YouTube. (View part one here: Pat McKeough’s investment ideas as shown on YouTube.)

Below is the transcription of part two of the interview.

Wealthy Boomer Interview Part 2

JC: Welcome to the second interview with Patrick McKeough, the publisher of the Wall Street Stock Forecaster, The Successful Investor, and recently has created the website tsinetwork.ca, which is also the Successful Investor. Welcome back, Pat.

PM: Thank you, Jon.

JC: I thought we’d discuss this: Fortune Magazine recently had an issue in which they focused on the forty stocks to retire on. It struck me that many of them are U.S.-based multinationals. In fact, some of them are probably Dow stocks. First, I wanted to ask, what do you think of just buying the whole Dow, all thirty through Diamonds [an exchange-traded fund, symbol DIA, that seeks to mirror the performance of the top 30 Dow stocks—Ed.]. In Canada, recently, BMO announced a sort of Diamond hedged back into Canadian currency. In either of those, I’m sure there are a number of them that you wouldn’t want to own.

PM: Well, I prefer to have a portfolio that—as you know—I’m constantly going on about our three key criteria, good quality investments, diversified across the five sectors, and that aren’t all in the limelight. That aren’t all things you read about every day in the media. I think you’re better off to concentrate—it’s essential to stick with good, well-established, healthy companies, like Fortune’s done there. But I think you need the diversification as well. Because there’s one precedent you might think back to.

At the end of the 60s, or early 70s, you might have heard the term, the “nifty fifty.” Those were the 50 stocks that everybody in the pension world agreed you couldn’t go wrong buying these stocks. They were one-decision stocks, meaning, when do you buy them? Then you just ride them off to infinity. And all that changed in ‘73-74 when all these one-decision stocks collapsed. So, if you’re thinking you can buy something and hold it forever, you’re at risk of having a big holding in the next crop of one-decision stocks, or the next “nifty fifty,” or nifty forty, that will suddenly go out of favour, all at once.

JC: Are you a subscriber to the “Dogs of the Dow” theory where you just pick off the high-yielding ones? I know stocks like Verizon and GE and AT&T are all paying decent dividends, even after the cut. What do you think about “Dogs of the Dow?”

PM: Well, I think any kind of rule can give you good results in some particular time period. But to the extent that it gives you really good results in one time period, it can go wrong in another time period. There’s an old expression, or saying, that high yield may be a danger sign rather than a bargain. And that’s the constant risk you’re faced with, with the kind of stock picking rule that puts too much weight on a single factor, namely, dividend yields.

So, I prefer to build a portfolio of diversified, well-established companies. You’ll have a variety of yields in there. Some things will yield 1%, some will yield 5%. But I think you’re better off doing that because the results may not be better in a good year, but I think they will tend to be better in a bad year.

JC: OK, I have one analysis here in that Fortune article. Now, they picked out three of them: Coke, Johnson and Johnson, and Proctor and Gamble—and McDonald’s—actually, the four. Any thoughts on any of those? Any of those happen to be your own recommendations at The Successful Investor?

PM: Two of them are. McDonald’s, I like, and Proctor and Gamble, I like. McDonald’s seems to be really good at anticipating trends, and catering its menu in a given country to what people want in that country. By the same token, Proctor and Gamble has got a wide consumer products range and a great distribution team, and so on. Whereas Coke—you know it’s not exactly comparable, but at one time, cigarette companies were just unbeatable. They were in the nifty fifty. And then things changed, and people didn’t want cigarettes any more. Well, is it inconceivable that something like that will happen with Coke? It’s not very likely to happen THIS year, but it’s certainly not inconceivable.

JC: Certainly, some people prefer PepsiCo because they have a little more diversity, you know, Frito Lay and a bunch of junk food surrounding it.

PM: And that’s our pick, incidentally, in that area.

JC: (laugh) Well, now I know! But beyond the Dow 30, is there a second tier which is not so much… the problem with the Dow is they’re all, as you say, in the limelight. But, on the other hand, the valuations of these stocks compared to 1999 are way down, in the low teens instead of 20, 30, 40 p/e ratio [price/earnings ratio—Ed.]. So, how many of the Dow 30 would you be recommending right now?

PM: Jon, to be perfectly honest with you, trying to name the 30 Dow stocks right now for me would be like trying to name the premiers of all 10 provinces—

JC: —or fifty states—

PM: —or fifty states! I just don’t look at it from that point of view. We look at the broad market of all stocks that might conceivably be included in the Dow, now or in the future, and pick from that list. The editors of the Wall Street Journal decide what’s going to be on the Dow list. That committee and my committee don’t have joint meetings—which is not a concept that I’m comfortable with. That a group can put together a list—well, it’s not so much that I’m not comfortable with it, that’s just not the way that I focus my efforts.

JC: What else would you like, outside of that list? From the broader S&P 500 universe, for example, what would be some not in the broker/media limelight, that you warn against?

PM: One would be Beckman [Beckman-Coulter subsequently accepted a takeover bid at a rich premium—Ed.] It makes lab equipment for increasingly sophisticated blood tests that an aging population is going to need more of. Every time it sells a laboratory set-up, it’s got a new customer for the supplies that go in the laboratory. So, that’s the kind of arrangement I like. They used to talk about, in the previous century, how Gillette would pretty well give the razors away for free because it would make it up in the blades. Well, I don’t think Beckman gives away the lab equipment, but it certainly builds an annuity out of selling supplies to the people that own the companies and the laboratories that own its lab equipment.

JC: It’s like Orion Tea with this craft machine that they recently came out with. You got to buy these little tea disks. It was in our paper a couple of weeks ago. Another interesting example like Gillette.

You raised a point there. This whole idea of the aging and the boomer trend, the “boomer retirement trend”, and people will mention, like you just did, medical services. Big pharma is another one. Is that another trend you see? I think Walgreen’s is one of the ones Fortune mentioned, for example.

PM: Those are all respectable companies, and they’ve got a great record to date, but it seems to me that there’s a lot of competition in the pharmacy business, from Wal-mart and so on. As far as making pharmaceuticals, I think people underestimate the risk in that business.

You have to spend an awful lot of money to get a new drug even into human tests. And then, there’s a long time delay, a lot of competition and a lot of expense to get it on the market. And once it’s on the market, there’s nothing to say a better drug won’t come along six months later. And even if a better drug doesn’t come along, you’ve got people trying to knock it off with a similar formulation, and eventually the patent protection wears off. So, I think people got carried away with drug makers in the 90s, and there’s still some carry over from that.

JC: OK, so, instead, for that theme, you’d prefer, well, you already mentioned—

PM: I mentioned Beckman, yes—

JC: Another one, to close off with?

PM: Wal-mart! I think Wal-mart’s really good at stealing people’s lunch. And they can do that in the pharmacy business.

JC: Actually, it was interesting, I noted, the other day when I was in Wal-mart and inside Wal-mart was McDonald’s, and they were also selling Coca Cola. So, it’s like stocks embedded within stocks, within stocks.

In any case, we’ve finished our time. Thank you very much, Patrick McKeough, publisher of the Wall Street Stock Forecaster, The Successful Investor newsletter, a bunch of others, and of course for more information, you can go to www.tsinetwork.ca and we can catch your tweets at pmckeough@twitter.com.

PM: Thank you, Jon.

A Note from Pat McKeough on his Wealth Management Services

Imagine having me build you a portfolio that’s tailored to your specific investment goals, temperament and financial situation. That’s just one of the many ways you benefit when you become a client of our portfolio management services. Backed by my in-house team of investment experts, I’ll work to protect your money during times of market turbulence — and maximize your profits when the market rises. Click here to learn more about how you can profit from our Successful Investor portfolio management services.

This Week’s Reports

2 big risks to avoid with Canadian penny stocks

Best Canadian stocks: CGI looks to acquisitions and cloud computing to spur growth

Investor Toolkit: Why you should avoid stocks in the limelight

Pat McKeough’s investment ideas as shown on YouTube

World stock market: Telefonica strives to offset European challenges with Latin American growth

Related Posts

7 profit-making strategies for finding the best Canadian penny stocks

3 more powerful tips for spotting the best Canadian stocks

Pat McKeough writes about Real Estate Investment Trusts in The Globe and Mail

Growth stocks: Outsourcing specialist Cognizant gains from India

If you like what we do at TSI Network, we’d encourage you to share this Week in Review with a friend by forwarding this email to them. That way, more investors can benefit from our free, lower-risk investment advice.

Pat McKeough responds to many personal questions on specific stocks and other investing topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.

This week, one Inner Circle member asked about one of the largest telecommunications firms on the world stock market. Pat looks at the prospects and potential pitfalls ahead for a company that seeks to expand its presence in international markets.

Q: Pat: I have been looking at Telefonica. About two-thirds of their business is outside Spain, with a good part in Brazil, and it seems to be growing. I think it’s a hidden gem. Your view?

A: Telefonica SA (ADR, symbol TEF on New York; www.telefonica.com), provides a range of telecommunications services, including telephone, mobile, Internet, data and entertainment. Telefonica mainly operates in Spain, Portugal and a number of Latin American countries.

In July 2011, the company started implementing its plan to lay off 20% of its Spanish workforce (or 6,500 workers) over three years. It will also cut other costs in Spain and use these savings to increase its investments in Latin America, particularly Brazil.

The company has 231.9 million wireless subscribers, 40.4 million traditional telephone (or land line) customers, 19.0 million Internet users and 3.2 million pay TV subscribers.

Telefonica’s growing Latin American operations have helped offset weakness in Spain and Europe. The weaker euro is also enhancing the Latin American business’s contribution.

Telefonica now gets 46% of its sales from Latin America, followed by Spain (28%) and the rest of Europe (26%).

World stock market: Telefonica expands its partnership in China

The company has also expanded its alliance with China Unicom, the second-largest wireless carrier in China. In October 2009, the companies bought $1 billion of each other’s stock. In January 2011, they bought a further $500 million of each other’s shares.

These share purchases increased Telefonica’s stake in China Unicom to 9.7%; China Unicom now holds 1.4% of Telefonica.

In December 2011, Telefonica announced its first dividend cut in a decade. The 2012 cash dividend will amount to 1.30 euros per share, down 18.8% from 1.60 euros in 2011. The ADRs still yield a high 9.8%, based on the new rate.

In the latest Inner Circle Q&A, Pat looks at the risk posed by Telefonica’s relatively high debt. He also examines just what impact Telefonica’s initiative in the Chinese wireless market could have on the company’s future growth. He concludes with his clear buy-hold-sell advice.

Inner Circle members see Pat’s analysis and recommendations on the stocks that other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this unique investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

Now, with the stock market coming off last autumn’s lows, we think it’s an appropriate time to replay the interview, entitled “40 stocks to retire on” on YouTube. Pat discusses not only specific solutions for volatile markets, but also how his investment advice applies in all market conditions. Here is part one of the interview (part two will be posted on Monday, February 20).

Below is the transcription of the interview.

Wealthy Boomer Interview Part 1

Jonathan Chevreau: Welcome to another Wealthy Boomer interview. Today our guest is Patrick McKeough. He’s the publisher of the Wall Street Stock Forecaster, The Successful Investor, some other newsletters, he’s a portfolio manager, and he recently launched tsinetwork.ca.

Welcome Pat

Pat McKeough: Thank you, Jon.

JC: So the new website is aimed at anybody and not just your paying subscribers, correct?

PM: That’s right, my paying subscribers can get current issues of their newsletters and the archives since they subscribed with a user name and password. But anybody who comes online can get samples of our work and other stuff we put out that isn’t part of the paid service. It’s more intended to give people a flavour of what we do, and to give them some analysis of markets and some direction as to what they should do with their investments.

JC: And of course you, like myself, joined Twitter this year. Are you finding that an effective way to get to your paying clients or are you starting to reach other people?

PM: It’s hard to say. You put stuff out there and you watch the number of followers go up and you assume there’s some interest there on their part. I find it’s kind of fun, too, just to be able to immediately throw out …

JC: A tweet!

PM: A tweet, yes, a thought about something and see how it looks in print. It almost acts like a notebook of things I might want to write more about.

JC: Now I recently received a mailer; I know you have some good direct mail pieces. The message, I think, was it’s time to buy. What is your message right now, in terms of the market bottom in March? Is now the great buying opportunity or are you a little cautious?

PM: I think the big mistake people make is to try to really fine tune it, because you’re never going to succeed in that. March was when we were planning that piece and of course it takes two or three months to get one of those things out in the mail. I think it’s still a good time to buy; the market is way up from March levels, but it’s way down from a year and a half ago. And I think if you look two, three or five years ahead, you’ll look back on this as an extremely attractive time to buy—but it may not seem that way two months from now.

JC: As I’ve done pieces with you over the years, two things stand out. You’re not really big on global stocks, you prefer North American stocks: Canadian and American stocks, quality blue chips. And you’re also not very keen on bonds, particularly at this market level. Can you talk to those two points?

PM: In the first place, with North American stocks alone, you have a common language and good investor protection laws; those are things you’re not really guaranteed in a lot of foreign investing. It seems to me that if you invest in a good portfolio of well-established multinationals, including Canadian and U.S. multinationals, you’re getting exposure to the growth in the third world. But people look and say, yes, but you don’t get a 50% rise the way you might in Brazil or China or India in a good year. That’s true, but there’s a speculative element in those markets. You can get a 50% rise in a penny stock segment of the Canadian market. So there’s a lot of volatility in foreign markets that won’t necessarily work to your benefit over a period of years or decades. So that’s why I prefer to go through well-established North American companies.

JC: And what are the five sectors you constantly tell people to spread their money around?

PM: Manufacturing and industry; resources and commodities; the consumer sector; finance; and utilities. And that’s going to cover just about 99% of anything you might want to buy in your investing career.

JC: Now you do have some global stocks. I think I’ve seen a few Japanese stocks once in a while in your Successful Investor. But are those ADRs in general?

PM: ADRs.

JC: So you still have that security of being on an American exchange.

PM: And the ADRs we recommend are of big companies that do follow North American standards of disclosure, and so forth.

JC: So an example might be … give me one or two?

PM: Sony would be an example. It spends a lot of money on research. It has a huge portfolio of assets and great worldwide distribution channels. It’s had a rough couple of years, but a lot of companies have had a rough couple of years.

JC: Toyota?

PM: Toyota is another one. It certainly has had a rough couple of years, but it did much better than any of the North American competitors.

JC: Now going back to the bonds. Right now there are a number of high-yielding dividend-paying stocks that are paying six or seven per cent, even some of the Dogs of the Dow which I wrote about quite recently. How do you compare that, if you have a bond that pays four and a stock six, although with the stock you have the danger of a dividend cut and capital losses? What do you think of the stock-bond tradeoff right now from the focus of yield?

PM: In bonds I prefer to stick with things that are government guaranteed. Because it seems to me that you have a ceiling on what you’ll make on the bond market. The thing has a fixed return and you know what that return is and when you’re going to get it. So bond prices can really fluctuate, but there’s no growth. So if you’re not going to get any growth, then I prefer to have no risk to go along with it. So if I’m tempted to invest in a company, I’m going to buy its stock rather than its bonds, because in a prosperous company, the stock will pay off more than the bonds. You know, the universe is kind of constructed that way—the company has to make enough money to pay off the bondholders and have something left over for its stockholders. And if it’s earning a higher return on the equity portion than on the bond portion, over long periods the equity side is going to mount up faster than the bond side.

JC: I did a few pieces in recent weeks about Zvi Bodie at the University of Boston. He wrote a book called Worry-Free Investing, and he basically said you don’t need to take stock market risk because he believes in real return bonds, orTIPs in the States, Treasury Inflation-Protected Securities which are indexed to inflation. What do you think of that thesis?

PM: I guess there’s something to be said for that as a portion of your portfolio. But it’s based on a lot of assumptions that what you buy will go up and down in the same framework as the inflation measure used in the particular real return security. It’s not something I feel really strongly about.

JC: It’s true that the governments issue the bonds and the inflation measure is measured by their own criteria, so it does make it somewhat suspect. But clearly you believe, and in our next segment we’re going to talk about this—the forty best stocks to retire on—but generally you feel that even retirees need good solid dividend payers, correct?

PM: I think retirees as much as anybody. When you retire in this country or this continent, you might do it at 60 or 65 or 68, but you can probably expect to live to be 85 or 90. In that period of time, if you’re giving up 2 or 4 per cent a year based on the difference between a fixed-return investment and an equity investment, it’s going to make a huge reduction in the amount of cash flow and capital you have over that 20 or 30 year retirement period.

JC: Last question for this segment. Generally, people are talking about buy-and-hold being dead. But when I read you, I see that a lot of your picks seem to be stocks one would be comfortable holding for many years, if not forever.

PM: Well, I think buy-and-hold is really a bad way to describe it. People that do well in the market over long periods buy and watch closely. It’s not as if they buy and forget about them. I think you can buy and forget about good stocks for long periods of time and do quite well, but then unpleasant surprises can pop up all of a sudden. Also, the popular attitude toward what is often called buy-and-hold will tend to be against it at the time when it’s most favourable to your finances. Just like at the top of the market, everybody figures one way, and it turns out that conventional wisdom is wrong. Same thing at the bottom of the market; people make assumptions that are probably 90 degrees out of whack with what they should be doing.

JC: OK, thank you very much Patrick McKeough of the tsinetwork.ca. Next time, we’re going to talk about the 40 stocks that people can retire on.

PM: Thank you very much.

Part two of this Wealthy Boomer interview will be posted on Monday, February 20.

A Note from Pat McKeough on his Wealth Management Services

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