Risks of Equity Securities

Preference shares are less risky than common shares.

Putable common shares are less risky than callable or non-callable common shares.

Callable common and callable preference shares are more risky than their non-callable counterparts.

Cumulative preference shares are less risky than non-cumulative preference shares as they accrue unpaid dividends.



Risks (> = more risky than)

Common shares  >  Preference shares

Callable or non-callable common shares > Putable common shares

Callable common stocks > Non-callable common stocks

Callable preference shares > Non-callable preference shares

 Non-cumulative preference shares > Cumulative preference shares

Think Availability of Opportunities

Think Availability of Opportunities; Not Diversification or Acting Contrary to the Market


Portfolio Diversification

There can be no hard and fast rules about diversifying. However, a portfolio should contain a certain amount of cash and interest-bearing securities. These should be weighted towards

• higher yielding secure preference shares that have no downside price risk on conversion and
• property trusts or REITS that have low profit and price volatility.

These cash and interest-bearing securities will expand and contract depending on the availability of opportunities in equities.

Towards the end of a bull market, when selling presents more opportunities than buying, the cash and interest-bearing securities will be quite high. In the tail-end of a bear market, when opportunities are more plentiful, the cash and interest-bearing securities might be close to zero.

The amount of cash and interest-bearing securities you carry will depend on several factors, not the least important of which is your comfort level with the price volatility of equities.

Think of the Availability of Opportunities

Conventional wisdom tells us a portfolio should be spread over a diversified range of industries on the premise that a downturn in one sector of the economy will only affect a portion of your portfolio. A contrarian would argue that you should only buy into an industry that is suffering a downturn because prices will be cheap.

However, think not in terms of diversification or acting contrary to the market, but of the availability of opportunities.

Remember Mae West’s words: “Too much of a good thing can be wonderful”. Mae, however, was a woman of experience with the ability to know a good thing. Lacking that same experience, or the necessary time to acquire it, it’s easier to recognize and avoid what is not a good thing.

This approach will not guarantee that every selection will be wonderful. It may even eliminate a few stocks that may have turned out to be wonderful, but in eliminating most of what is likely to be a lot less than wonderful, it should deliver above-average results.