Investing ‘should be as exciting as farming’
Portfolio manager Darren Coleman says investors should focus on the milk, not the cost of the cow
By: GAIL JOHNSON
Date: December 1, 2015
To help his clients better understand their investments, portfolio manager Darren Coleman uses a farming analogy. Think like a dairy farmer, he suggests: Instead of focusing on how much the cow is worth, consider how much milk it can generate.
So, rather than fixate on how much a given fund may go up or down, people should look at how much income their portfolio can provide over time.
“Investors need to think about not what works every time but what works over all the time,” says Mr. Coleman, of Coleman Wealth and senior vice-president of Raymond James’ private client group in Toronto.
“Buy wonderful businesses, treat them as if you were an owner, and benefit from being an owner. It’s a very Warren Buffett style of investing. It’s very dull. I use farming analogies because I think investing should be as exciting as farming.”
Mr. Coleman got his start in the industry in 1992, after graduating from Ryerson University with an honours bachelor of commerce degree. With designations that include Chartered Investment Manager, Financial Management Advisor, and Fellow of the Canadian Securities Institute, he became a professional financial planner.
He insists that his work isn’t just about managing people’s wealth but about helping them become better investors. There’s clearly a real need for that kind of guidance.
For proof, look no further than the annual Quantitative Analysis of Investor Behavior report by Dalbar Inc., a Boston-based financial-services research firm. According to its 2015 report, the market in the United States, as measured by the S&P 500, returned 9.85 per cent on average per year from 1994 to 2014, while the average investor in U.S. equity mutual funds realized an average annual return of just 5.19 per cent during the same period. Investors underperformed by 4.66 per cent, almost entirely due to poor investor behaviour.
In Mr. Coleman’s view, it takes some old-fashioned values to be a good investor.
“Investing doesn’t have to be that complicated, but people make it complicated because they’re not patient,” he says. “Being patient is hard in this world. Delayed gratification for my grandparents was saving for a house. Delayed gratification for my kids is a slow Internet connection.
Becoming a better investor “means buying quality businesses, being diversified, having a robust amount of dividends … and looking at how well that dividend is growing through time.
“These are very basic principles, but it’s amazing how people forget about them. If dividends are rising, why care about the price of the stock? Dairy farmers worry about the milk and not the price of the cow. Interim volatility should be something you learn to ignore as best you can.”
He’s not one to try to time the market but rather looks for solid, successful businesses that perform well over the long haul. He admits that he’s not overly keen on energy stocks, which is somewhat unusual for a Canadian adviser.
“We’ve worked hard to focus on things we can control and don’t spend a lot of time on things we cannot control,” Mr. Coleman says. “I don’t spend much time trying to figure out if this mutual fund will beat that mutual fund in next 30 days or if this stock will outperform that stock in the next quarter; I don’t really know. But I know if I own TD Bank or Royal Bank or Microsoft or McDonalds or Starbucks, these things make money over a long period of time and pay some wonderful dividends as they go.
“Energy to me didn’t fit the criteria of a wonderful business,” he explains. “It’s kind of a crummy business. There’s a massive capital investment, a volatile commodity, very high costs and low profit margins.”
He says he and his team are bullish on the U.S. and European markets. He says his group got out of Nortel Networks well before the company imploded, never invested in Bre-X, and avoided the effects of the dot-com crash.
However, Mr. Coleman stresses that his group never makes investment decisions in isolation. Rather, choices are based on how investments fit into a client’s overall financial plan.
“One of the things we spend time on is not just picking investments but understanding the outcomes we’re working toward,” he says. “We talk about things like retirement, looking after mom and dad, and debt, and we frame all of our investment decisions around those assumptions. What rate of return does the portfolio need to generate and deliver within that framework?
“Most people don’t pay any attention to that or think they have to meet some kind of arbitrary benchmark like cholesterol,” he adds.
“But investing isn’t like that. Once people understand why they’re doing it and what they’re working toward and have a great framework for a plan in place, they invest better.”
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