BTSX – Then, Now, And In The Future – Part 2

This is Dave Stanley, back with Part 2 of our article to share with you some great results from our BTSX experiment and mention some changes the column is undergoing.

While BTSX is a passive investment method, meaning that stocks are chosen solely on the basis of their dividend yield, the index components are selected by humans and mistakes can happen. Fortunately, there is a tendency towards the use of capped indexes. Thus, the S&P/TSX Capped Composite Index includes all constituents of the S&P/TSX Composite Index with relative weighting of each constituent capped at 10%.

Now I am going to turn this column over to Ross Grant. CMS readers were very fortunate that Ross agreed to carry on with the BTSX experiment after I retired and his results have been excellent. I had always viewed the BTSX methodology as more a set of suggestions rather than rules and Ross introduced some badly needed changes that further adapted the process to the Canadian market. Thanks Ross!

I first read one of David Stanley’s BTSX articles in 1996. I thought it sounded like a promising strategy, but I wanted to witness the results over time before committing any funds to it. I am sure that this has been the case for many of you over the years. After 4 years of BTSX articles, I finally started with a small investment. By 2007, I had moved the majority of my investments over to BTSX and the similar Dogs of the Dow Strategy. That year, my wife and I retired at age 43, believing this strategy would provide the returns we needed to maintain our lifestyle over the long-term. I wanted to be confident that we could maintain the same lifestyle into retirement as pre-retirement. I knew if the strategy didn’t pass the test of time, we would always have the option to return to work. After surviving the financial crisis by riding the stock market down and then back up again, I was much more convinced that BTSX would produce the results we needed for many decades to come.

It occurred to me that someday one of my children would ask, “How did you and Mom retire so early?” In 2014, I decided to capture our story by writing an e-book to share the practical application of the BTSX strategy. That year, David asked me if I would like to take over writing the BTSX annual articles and over the last four years I have issued the results and new annual stock lists. My goal was to detail the BTSX strategy and how it could be applied to help readers obtain the goal of financial independence.

I made a couple of modifications to BTSX with David’s blessing. First, I moved the end date of the calculations to Dec 31st to coincide with the end dates for annual returns of major indices, making results easier to compare. The second change I implemented was a rule to sell a stock immediately if there was a dividend cut. The stock would be replaced with the next stock on the BTSX list that I recalculate on the date of the dividend cut. I watched too many dividend cutting stocks produce poor results for many years after that first dividend cut.

Below you will see the results of my last 17 years.

The 12% average total return was similar to David Stanley’s results. If an investor is able to continue to generate this rate of return over the long-run they should be quite happy.

Having met my objectives for writing the BTSX articles, I have decided to focus on other hobbies and increased travel. I will be passing the BTSX torch along to Matt Poyner whom I was introduced to after reading several of his CMS articles. I was impressed with his advice and felt compelled to contact him. We have exchanged several emails over the years and recently met for an informative and enjoyable lunch together with David Stanley. I am sure Matt will have much to share with you in the coming years.

Here are some investing tips that to leave you with that I found extremely important:

Closely manage the spending of your money on the necessities in life so you will have more funds available for discretionary spending.

Minimize your investment costs, like MERs, as much as possible. If you engage financial advisors, ensure they are choosing funds with the lower costs. Better yet, invest on your own if you are interested and able to eliminate MERs completely.

Minimize your income taxes. Investing for dividend income and capital gains will leave you with more after tax dollars than earned income or pension income.

Focus on dividend-paying stocks. These companies tend to be well established and have a philosophy of returning profits to shareholders in the form of dividends.

Understand the impact of inflation on your investments. It is important to realize that a portion of all your investment returns must be reinvested to cover the impact of inflation. This will allow you to maintain purchasing power. If inflation is 2%, then your portfolio must be 2% larger the next year to generate income with the same purchasing power as the previous year. The negative effect of even a small rate of inflation over decades can be devastating to an investor, if not planned for appropriately.

Aim to live on 4% of your retirement portfolio to improve the odds of not outliving your money. This has worked well for us.

Have a disciplined strategy that will allow you to buy low and sell higher. Your strategy should have a good long-term track record. BTSX was my choice and I plan to continue to use it. Don’t rely on your emotions to make the right calls at the right times.

Hopefully you have benefited from the knowledge I have shared, as much as I have benefited from sharing it with you. Remember that the markets will rise and fall and eventually rise again. Our financial prosperity is far more dependent on our long-term results over decades rather than the impact of a single good or bad year. Focus on the long term!

Now Matt Poyner has some thoughts on the future of Beating The TSX.

There is something deeply gratifying about seeing an underdog succeed: David and Goliath. Rocky Balboa. Harry Potter.

When it comes to investing, we are all underdogs. Our brains are wired to hoard berries and run from tigers, not to comprehend complex systems and plan decades into the future.

So, isn’t it amazing that average people can and do succeed as DIY investors?! Much of the financial industry is designed to encourage the learned helplessness of the retail investor but thanks to resources like the Canadian Moneysaver, there is a growing faction of rogue individualists determined to do it themselves - and to do it right.

David Stanley and Ross Grant are two of those people. Without formal training in finance or investing, they managed their own investments so successfully that they became mentors to many others, including yours truly. How did they do it?

They had no market-timing insights. They had no special skill at picking hot stocks. What they had was a plan.

The truth is that there are a lot of effective investment strategies out there— there is no “one size fits all” solution. For some people, the only way they are going to sleep at night is to have a financial advisor taking care of everything for them. Fair enough. For others, the sound rationale of investing in index ETFs makes it the only way to go. Great. But there is another way.

Ten years ago, when I was a relatively new investor wading through the bewildering array of “expert” opinions and hot stock tips, I read an article that immediately stood out from the rest. Not only was it published in a magazine devoid of ads (i.e. conflicts of interest), but it was a simple strategy with over 20 years of compelling data, written by a man with skin in the game and no ulterior motive but to share knowledge. The article was, of course, Beating the TSX by David Stanley.

Enticed by the compound annual growth rate, it didn’t take me long to put this plan into action for myself. I liquidated my small rag-tag collection of funds and equities and invested in ten blue-chip dividend-paying stocks. I joked that I was now investing like an old man. But it felt strangely good.

And that’s when the magic started happening. Sure, the returns were solid, but that was only half of it. I found that I no longer cared about what the stock market was doing on a daily basis. I wasn’t interested in anyone’s hot stock tips. Instead, I marveled at the consistent flow of stable dividends. I was happy to focus on the income-generating power of my portfolio rather than the volatility of its market value.

I am no investing genius. The truth is I stumbled upon an excellent strategy and accumulated investments through a solid bull market. I’d rather be lucky than good - but this is the only kind of luck you can count on in investing - finding a good plan and sticking to it no matter what the market is doing.

When Ross Grant took the reins five years ago, I read his book with great eagerness. What I found was a validation of the method and new motivation: early financial independence. I was starting to think about money differently—not just as a means to buy nice stuff but as a means to buy my time back from a job that was becoming more and more draining.

As you may know from my last article, it is five years later and through a combination of accumulated assets and voluntarily simplifying our lifestyle, our family is now financially independent.

What are we doing with this freedom? I’m 41, healthy, and my kids still like me (most of the time.) This is not the time to sink more time and energy into a maxed-out career. It’s time for an epic family adventure: we are selling almost everything to travel around the world for a few years. Funded by... you guessed it: dividends.

Serendipitously, this shift in our trajectory came at the same time as the offer to take on writing the BTSX articles. I could not be more honoured and excited for the challenge of taking on such an important role. I know how crucial these articles have been for me over the years and I am committed to maintaining the high standards of my mentors, Dave and Ross.

What can you expect as readers going forward? Although I am sure my interests in behavioural finance and evidence-based investing will become apparent in time, I have no intention of making any fundamental changes to the system. Ross’ “tweaks” of using the calendar year and swapping out stocks that cut their dividends make sense to me and will be maintained.

I’m a big fan of shaking things up every now and then and exiting one’s comfort zone. But there is value in the consistency of the BTSX articles over the years and I wouldn’t want to jeopardize that. Sometimes the best place for change is in your pocket.

Having said that, I am certainly open to friendly insights and opinions from the CMS readership. No matter where we are on the planet, feel free to get in touch.

Matt Poyner is a DIY investor currently traveling the planet with his wife and four boys. He can be reached at bfsw2018@gmail.com. Their travel blog is www.big-family-small-world.com.

Ross Grant is the e-book Author of Destination: Early Financial Independence, available on Amazon and Kobo for $5.99. Free e-reader software is available for PCs, MACs, etc. to view the book. Please email Ross if you need the links. You can reach him at RossGrantEFI@gmail.com

David W. Stanley, Guelph, Ontario