There has been a lot of discussion here recently about whether or not certain stocks should be included in the Beating the TSX portfolio.   IPL, PPL, and BPY-UN have all landed on the list in the last few months.  Some investors see a place for these stocks in their portfolios while others look at their payout ratios or dividend histories and argue that some companies are just not worthy of the BTSX label.  Beating the TSX is a rules-based investment strategy, so the question is: Is it time to change the rules?

The criteria for inclusion in BTSX is simple: be listed on the TSX60 with a top-ten dividend yield.  Historically, the list has been re-constructed on an annual basis; this is still what I and many BTSX investors do with our own portfolios.  On this site, however, I publish an updated list monthly – not to encourage more buying and selling, but to accommodate those investors who are just getting started or who have cash they want to invest now. 

One of the primary goals of this blog is to help investors understand that managing their own investments is not just possible, but a very reasonable undertaking.  In considering the investment method we choose to use, it’s worth remembering how we got here.

Why do we become DIY investors?

The reasons will be variable, but I would wager that there are common themes.  One of these is that we just don’t buy into the mutual fund model.  Not only do we rail against exorbitant fees, but we understand that those fees don’t correlate with improved performance.  The science is clear: active management doesn’t work.  Why not?  Two main reasons:

1. Markets are mostly efficient, making it effectively impossible to predict individual winners and losers on a consistent basis
2. Behavioural finance has revealed unequivocally that humans are hard-wired to make all kinds of investment mistakes due to completely unavoidable behavioural patterns called cognitive biases

So, we come to the correct conclusion that we can invest our own money.  It doesn’t have to be complicated; indeed, simple systems like dollar cost averaging into index investing or Beating the TSX tend to perform better.  A simple methodical approach is the most effective way to sidestep those dangerous cognitive booby-traps like anchoring, loss aversion, and confirmation bias. 

So, we reject expensive professional management and adopt a rules-based approach.  Make a plan, pay less fees, accumulate wealth.  It’s empowering.

Five of the most important benefits of a rules-based investment plan:

1. Evidence-based:  rather than going rogue and investing on whims, BTSX is supported by decades of data
2. Avoid the behavioural gap: this is the difference between what investments return and what investors make, and it’s due to those cognitive biases that we just can’t escape unless we are following a rules-based approach
3. Focus on process not outcome: we can’t control outcomes, but we can control process – make that process as evidence-based and effective as possible
4. Easier, less time-consuming:  BTSX is simple; trying to figure out what the stock market is going to do is hard impossible
5. A solid foundation: making a rules-based approach the foundation of your plan makes it easier to customize the details

“But what about Stock X??”

Having said all that, stocks will appear on the BTSX list that we are not comfortable with.  In fact, a little digging will uncover all kinds of reasons to be negative about any stock.  Whether you make an investment or not depends on whether you value the positives or the negatives more.  But, certainly, given the value we place on stability of dividend payments, there are some companies that are more worrisome than others.

If you are not comfortable holding a particular investment, don’t buy it – I have always said this.  BTSX is a tool we can use to build a portfolio of dividend paying stocks, but it is not a doctrine that must be strictly adhered to.  On the other hand, making individual decisions that best suit your plan is different than changing the actual BTSX method.  Beating the TSX has a 30+ year history of out-performing the benchmark index using very simple criteria.  If we change those criteria, what good is that thirty year history?

Investment integrity

Some of you may be wondering why I am willing to include “lower quality” (by some estimations) stocks in BTSX when they pose a potential risk to our track record.  The answer is simple:  I am the steward of the BTSX method, not a manager of returns.  Fundamentally, this is what sets BTSX apart, and abandoning those values of simplicity, consistency, and accessibility would undermine the entire BTSX project.

So, to those of you who objected to IPL based on it’s payout ratio, or dismissed BPY-UN because of its short dividend history, I hear you.  In fact, I share your reservations.  But here’s why I will not be changing the Beating the TSX method:

1. BTSX is now a pure list.  The last seven years had excluded previous income trusts, but that anomaly has now been resolved to put BTSX back in line with the original method.  This means that there are no additional filters or decisions to be made.  It is transparent and accessible to investors of all skill and comfort levels.  The list is the list, and it comes with a thirty year track record.
2. I am not an active manager.  I can not predict the future, and I’m guessing you can’t either.  Sure, IPL, PPL, and BPY-UN have taken a beating, but who is to say that next year they won’t be big winners?  I know I can’t predict these things; if you think you can, I challenge you to write down ten stock market predictions right now, then check them in a year.  You might be surprised at your inaccuracy (but at least you can take solace in the fact that you’re not alone).
3. There are experts poking holes in every stock on the list.  There always have been.  Heck, that’s why many of these stocks are on the list in the first place.  But every stock has a time to shine; the trick is to buy before it enters the spot light.
4. BTSX is a tool, not a dictum.  If there is a stock you are really uncomfortable with, just skip it and buy the next one on the list.  Maybe you’ll do better, maybe you’ll do worse, but either way you’ll sleep better.  And if you systematically alter the method (avoid companies with payout ratios over 80%, for example), you can track your results (and I will he happy to publish your data).

This post has been several months in the making.  I know a lot of you were waiting to hear whether or not BTSX would be altered going forward.  I hope this answer is sufficient in both clarity and detail, even if it may not be 100% agreeable to all.

Lastly, I’d like to thank David Stanley and Ross Grant, the previous authors of Beating the TSX, who were both happy to engage in a detailed discussion of this tricky issue.  It is validating that all three of us came to the same conclusion.

BTSX May 2020 Portfolio

I wanted to stay away from market commentary this month . . . but, wow, what a snap back.  Even though the stocks on our list haven’t changed from last month, what has changed are the dividends – surprisingly, four of them increased (BPY-UN, POW, CNQ, and CM).  So, even though stock prices have gone up, the average yield is still high because of these increases.  BCE, which occupies the 11th spot this month, also raised its dividend.  Let’s hope the majority of these increases are a sign of strength and not wishful thinking.

Stay safe and happy investing.