I’ve been quite fortunate in my career to work with some exceptionally bright money managers. Over the years, I have tried to be like a sponge and learn what I can from these experts. How managers react in a financial crisis can be particularly telling. In addition, many smart fund managers have certain ‘rules’ that they consistently follow for success. I don’t buy new stocks anymore, because of the chance of conflicts with the customers of 5i Research, so I thought at least I could share some of these pearls of wisdom I’ve picked up over the years from some very smart people.

The 20% Rule: This rule states that, when a stock or commodity has moved by 20% in a short period of time, then “something has changed”. The thesis of this rule is that, of course, small fluctuations in a stock or commodity are common, and generally may not mean anything. But once there is a big move (20%) then there may be a significant change. For a stock, it might mean stronger earnings that are finally getting noticed, or it could even mean a stock being accumulated for a potential takeover. A 20% move in a gold company could also mean some ‘leaks’ have occurred prior to good (or bad) drilling results. A 20% move in a commodity might mean a global change in demand. Oil, for example, has recently very quickly gone from $77.69 on June 28 to $94.36 this week. This is a 21% move in six weeks. Does this mean global demand is improving? Sorry, we can’t exactly predict that, but clearly something good is going on in the space, and all oil producers are going to benefit. Maybe there is a beaten-up oil producer that might report better numbers next quarter? Smart investors will start sniffing around the oil space after this move.

Water the Flowers; Pull The Weeds: We love this rule, as it simplifies the ‘stick-with-your-winners’ concept, and reminds you to sell your losers (weeds). If you are looking for a 10-bagger in a stock, you will never get it if you sell too early. What’s more, when a company’s stock is doing well, it is often a sign you should actually buy more (give it some more water), rather than sell it. Everyday, we check the new high lists. Often, it is the same names that appear in the list, day after day after day. Companies such as TELUS Corp (T on TSX), Chesswood Group (CHW on TSX) and Brookfield Infrastructure (BIP.UN on TSX) keep going up daily, and might be worth checking out to see if the gains can be sustained. Keep in mind that these ‘flowers’ are growing even in a stagnant overall market, so you need to consider how they might do if conditions improve.

Here is the website for Telus Corp. (T) click here

Analysts are Always Too Conservative: Some managers have done well by always considering the ‘blue-sky’. Equity analysts, because their views are in print for the whole world to see and remember, tend to be exceptionally conservative. If they think a company is the greatest thing in the world, they will surely call it a ‘strong buy’, but they will temper their target price “just in case” they are wrong. In other words, an analyst looking at a new company’s gold discovery might have a target twice the stock’s current price. Smart fund managers, on the other hand, play the ‘what if’ game. What if the recent gold zone is extended? What if the zone goes deeper? What if two separate gold zones get linked together by mineralization? Smart managers can see a gold company go up ten-fold under the right conditions. These managers are not ‘dreamers’ but simply are able to consider the best scenario and how much a stock could go up in that scenario. Analysts, meanwhile, are always pointing out the downside and the risks. Goldquest Mining Corp. (GQC on TSX-V) is up an astounding 2000% so far this year. Still, only one analyst is one it, and he is restricted from commenting on it. Fund managers, though, are extrapolating how big its Dominican Republic gold deposit might be, and are still comfortable buying it after the big rise.

click here for the Goldquest website.

A last rule might be called the ‘diamond’ rule. Sometimes, you will find a diamond in the stock market (a great company or gold deposit, not an actual diamond!). If no one else likes it, or you have found it in the bottom of the garbage, doesn’t change the fact that it is still a diamond. Often, you just have to pick it up, polish it up, and tell people about it. Soon, other investors will be rushing over to bid for your diamond, even though they ignored it all this time. With stocks, maybe you have found a great company that trades at five or six times’ earnings and pays a dividend. Because of market conditions, no one else likes it right now. Does that make it a bad company? Not a chance. It might be a diamond just waiting for conditions to improve. Smart managers know this, and are willing to give their favourite names enough time to sparkle.