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Hit ‘Em Where They Ain’t

History buffs may recall the folksy aphorism that General Douglas MacArthur used to describe his island-hopping campaign against the Japanese during World War II: “Hit ‘em where they ain’t.”

We’ve found that this saying has broad application to other areas of life as well, including investing.

As value-oriented investors, we try to find stocks before they become household names. But we also like to scoop up big-name stocks that have fallen out of favor with the market, as long as their businesses remain otherwise fundamentally sound.

Both approaches involve going where most investors “ain’t.” And that helps us build positions in good stocks at the right price.

Although it’s impossible to time the market and certainly impossible to time any one stock, patient investors who wait to buy solid companies at reasonable prices will be well rewarded over the long term.

But we’re not just value investors, we’re also income investors. And as income investors, the “hit ‘em where they ain’t” strategy literally pays dividends.

When you buy shares of a dividend stock after it’s fallen in price, you’re getting an opportunity to lock in a higher yield than those who piled into it near the top.

And because most of our subscribers are based in the U.S., there’s a third way in which we benefit from the “hit ‘em where they ain’t” strategy. While U.S. investors couldn’t get enough of Canada during the energy boom, they can’t seem to run away fast enough now that energy prices have collapsed.

Just how bad is it? According to Statistics Canada, foreigners have invested just CAD5.1 billion in Canadian equities on a year-to-date basis through the end of September. By contrast, they invested CAD28.7 billion during the comparable period a year ago.

The good news is that the summer swoon is over. During July and August, foreign investors pulled CAD12.4 billion out of Canadian stocks.

While some of those outflows were related to mergers-and-acquisitions activity involving tendered shares, the year-to-date trend is unmistakable. Could the summer have marked the sort of capitulation we look for as a sign that the market has bottomed?

It’s too soon to tell, though the S&P/TSX Composite Index is off its low from that period. And September saw investor inflows moderately rebound, to CAD3.2 billion.

Meanwhile, the Canadian dollar could face additional selling pressure if the U.S. Federal Reserve finally raises rates at its December meeting.

But a further decline in the currency could provide a nice entry point for investors with a medium- to long-term time horizon.

The Canadian dollar has fallen from parity with the greenback just a few years ago all the way down to USD0.75. And since markets have a penchant for drama, we wouldn’t be surprised to see the exchange rate drop to USD0.70 following a rate hike.

So if you’re a U.S.-based investor looking to deploy new money, buying Canadian stocks is like doubling your coupons at the supermarket.

Of course, it is isn’t always easy buying out-of-favor stocks. Most investors, even the professionals, like the immediate affirmation of a rising share price.

After all, it’s no fun waiting to be proved right about an investment. But in this environment even the very best companies face selling pressure.

One of the ways we try to overcome this innate psychology is by dividing our usual investment into thirds. We know we won’t time our investment perfectly.

But our hope is to get a better average price than we would have with a lump-sum investment. In the meantime, this strategy allows us to keep some of our powder dry, which helps us sleep at night when dealing with a difficult market.


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Stock Talk

Tysonstom

Tysonstom

I doubt seriously that you can validate your statement “General Douglas MacArthur used to describe his island-hopping campaign against the Japanese during World War II: “Hit ‘em where they ain’t.”
(see Wee Willie Keeler). So how can I trust the rest of your article?

Jim Fink

Jim Fink

On the eve of World War II, MacArthur was visited in his Manila headquarters in the Philippines by journalist Clare Boothe Luce, who wanted to profile him for Life magazine. Luce asked MacArthur his theory of offensive warfare. “Did you ever hear the baseball expression, ‘hit ‘em where they ain’t?’ That’s my formula,” he jauntily explained. But when she then asked him for his formula for defensive warfare, he hesitated before finally answering. “Defeat.”

https://www.washingtonpost.com/opinions/the-most-dangerous-man-in-america-the-making-of-douglas-macarthur-by-mark-perry/2014/03/28/74aa68e4-b049-11e3-a49e-76adc9210f19_story.html

https://books.google.com/books?id=JMasv-R-gjwC&pg=PA70&lpg=PA70&dq=douglas+macarthur+hit+em+where+they+ain%27t&source=bl&ots=X8WntUK0oI&sig=WwyaEsDvGi2G7Io9yMw3KlsrLKE&hl=en&sa=X&ved=0ahUKEwiU0ZW9n7PJAhVHKCYKHR6gDcIQ6AEIKTAC#v=onepage&q=douglas%20macarthur%20hit%20em%20where%20they%20ain%27t&f=false

Alan

Alan

I have always liked CAD equities – especially those with good/sustainable yields. Do you have any recommendations along these lines in buy/write form and/or calls & puts? Alan

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