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Wiser Wealth: Doing the research and managing your risk

Brieanna McCutcheon , The Market Online
0 Comments| January 5, 2024

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The following is a transcription of the above video, and The Market Herald Canada has edited it for clarity.

Welcome to Wiser Wealth. We are back speaking with Howard Katz, managing director at Research Capital Corp. in Toronto. Previously we spoke with him about creating an exit strategy for your investments and have switched gears to doing your research and how to manage one’s risks.

TMH: Howard, how important is a company’s competitive landscape and positioning in your evaluation of the investment?

Katz: Competitive positioning is a very important consideration, sort of speaks to the defensive moat that you have around the business and the viability of the long-term prospects of that company. …

Competitive positioning definitely speaks to the longer-term ability for a company to generate profits and growth and above average rate of return. If you have a strong defensive positioning, it should imply that you can make a longer-term investment in that company because if it has a strongly defended position in the marketplace that to me indicates that they should be able to have a higher than average growth rate for a longer period of time, which would suggest that an investor should take a longer term position.

TMH: I’m just wondering in your experience, how do you adapt to valuation targets and exit strategies for companies in different industries, such as technology, healthcare or finance, which are all very different.

Katz: First, I take the step of doing a deeper dive of research into those specific verticals. And what I would add to that is that depending on what type of investor you are it may make sense for you to delve into all three different areas and do the appropriate research applicable to those areas.

But it’s not unusual as well that I see investors typically specialize in certain areas. A resource investor may be very knowledgeable in gold or silver companies or rare earths, etc. because there are some common elements to all mining investments.

And they would not necessarily be as aggressive or interested in investing in say a healthcare stock because their expertise doesn’t lie there because they don’t necessarily feel comfortable with the way healthcare stock is analyzed.

Or vice versa. A healthcare investor may not want to go into a mining stock. So, you know, my first comment is that an investor should consider whether they feel comfortable investing in multiple sectors or want to stay specialized in relatively few sectors. And then do the necessary research to understand the specifics of that industry and what some of the valuation drivers might be specific to those industries.

And I can tell you that just based on my career, a healthcare stock is going to behave very differently than a resource stock versus say a technology stock. They have different drivers and there’s very different ways of analyzing them.

The upfront work necessary to analyze them is quite a significant investment of time and resources.

TMH: And Howard, how do you manage, say, risk when an investment’s actual performance maybe moves from the initial valuation target, or how might that impact the chosen exit strategy at the time?

Katz: This speaks back to the idea of having some set of objectives ready to go from the outset and having that plan in place prior to making the investment. Your best plan is a plan that has been set out.

And plans do change and can be updated, but at least you have a baseline of where you are and where you hope to be at the end of a period of time.

And so, you can use that as a bit of a benchmark to basically analyze your progress against that baseline.

Having said that, when you’re looking at your exit strategy, I would suggest that you have that in mind from the outset. And then see whether the facts regarding that particular investment have changed or if they remain the same.

And if they’ve changed, then you can use that to update your thesis. If they’ve remained the same, you’ve hit your target rate of return, then again, in consultation with your investment advisor, I would suggest you look at that decision hard and whether you should stay in the stock or perhaps exit it.


The material provided in this article is for information only and should not be treated as investment advice. For full disclaimer information, please click here.

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