Charlie Spiring offers tips to survive the bear

By Mark Noble | October 16, 2008 | Last updated on October 16, 2008
5 min read

He may be CEO of one of the country’s fastest-growing independent investment firms, but Wellington West’s Charlie Spiring was in advisor mode on Wednesday evening as he explained to more than 600 clients and prospects in Toronto how they could weather the bear market.

The Winnipeg-based Spiring remains a personal advisor on more than $700 million in assets of the $10 billion Wellington West manages. He was in Toronto to talk to 600 alumni from universities across Canada interested in, or already enrolled in, Wellington West’s Clearsight Investment program.

Referring to himself as a “bear market baby,” since his first year in the business was the bear market of 1981, Spiring says he’s been through seven bear markets and has created a set of strategies he likes to use to create value in a portfolio and minimize risk during these types of downturns.

First, Spiring says investors should “follow the leader,” meaning they should have a role model or investor whose investment style they agree with and who has a track record of long-term success.

“Go and follow the brightest [investment] minds in the world. Be patient like the brightest minds in the world,” Spiring says. “There are lots of great leaders out there. As an investor, you have to figure out who is your style, who are the people that are going to make that style work? “

The obvious example is Warren Buffet, who Spiring says is fully engaged in buying right now.

“Warren Buffet has been investing. He’s put in $5 billion in Goldman Sachs and $3 billion in GE. He never gets it right at the bottom or the top (although there are some advantages to how he gets in there), he sets the price on what he thinks is right and will get very good numbers,” Spiring says. “In fact, all of us can buy these stocks 20% to 30% better than Warren Buffet can because we’re smaller and a little bit nimbler than him, so we can sneak into the market and have the finesse to make the right purchase,” Spiring notes.

Secondly, before embarking on a buying spree, Spiring says clients need to have the appropriate asset allocation. For equities, he suggests what he calls a “core and explore” portfolio.

In this type of allocation, 60% to 100% of the portfolio should be allocated to core, long-term buy-and-hold stocks. Spiring says the investors hold the stocks through thick and thin, under the belief they will outperform in the long term.

“You figure out what your core long-term holdings are, no matter what, you’re not going to get spooked by market action or problems that are happening in that marketplace, and sell them,” he says.

Based on the risk tolerance of the investor, Spiring says you can allocate as much as 40% of a portfolio to the “explore” stocks, which are those he says are being “rented, not owned.” These are stocks the investor sells based on the shorter-term objectives and time horizons.

“The explore allocation is the tax shelter, the oil stocks, the gold stocks, the tech idea etc.,” he says. “Asset allocation is a fundamental part of the portfolio. I would bet most people in this room haven’t done the homework to know where they should be or they do not have the discipline to stick with it.”

To keep downside risk to a minimum during this market, Spiring urges investors to consider using long-term equity anticipation securities (LEAPS) in covered calls on stocks they purchase. This is where stockholders will sell a long-term call option for a positive sale price on the stock they own.

Using the stock of Potash Corporation as an example, Spiring says an investor could buy 500 shares of the company at $110 a share for $55,000. The investor could sell five calls at a 15-month length, for a strike price of $120 a share, for $21.25.

“At the bottom of the market cycle, I really want to sell long-term options, because they give me the most money for an out-of-the-money call,” he says. “That person is going to pay $21.25 today. Of my $55,000 invested, I’m going to get about $10,000 back, if that stock was to stay level for the next 15 months. Likely, it’s going to do anything but that; nevertheless you’ll make 22% just sitting on your money. The downside is, if the market takes off, you have to sell at $120 when the stock may be as high as $250. If that happens, you still make 35% on your return.”

For income investors, Spiring suggests looking at preferred shares rather than GICs, which right now are offering a fairly low rate.

“I think for the grey hairs in this world, rather than buy a GIC, go for preferred shares,” he says. “Most of these preferred are down 30% over the last 18 months. Why? Because there is a credit crunch.”

Spiring notes the spread between preferred shares and Government of Canada bonds is at historical highs, even on stable companies with good cash flows. For slightly more risk, investors in preferred shares will attain a much higher income yield and the potential for upside capital gains when the market recovers.

The same sort of logic applies to dividend yielding stocks. Spiring highlighted that a company like Royal Bank has a dividend right now of nearly 4.5% and a five-year dividend growth rate of 19.48%. Manulife is another example, with a dividend return above 3% and a five-year dividend growth rate of 22.55%.

“Find undervalued stocks. That’s a good place to start, and represents about a third of the equation. Secondly, look at your dividends — make sure you’re being paid a great dividend because if you have to wait another year or two for the markets to recover, those dividends are going to pay the way and get you the gain you deserve,” he says. “More importantly, you want companies with a high propensity to increase dividends.”

Finally, Spiring says advisors and their clients shouldn’t be deterred from what he calls “hedging your strengths.” That’s hedging out the risk on long-term core holdings, such as the financial sector exposure of a portfolio.

“On the Toronto Stock Exchange, 32% of the weighting is in financials. [Financials] are a major component of anyone’s portfolio, whether you’re an individual investor, in a mutual fund or in the Canada Pension Plan,” he says. “There are lots of times where I’m holding these and I may not want to sell them for tax reasons, or my clients are scared, or we just don’t want to sell them. I believe you can do some sector hedging that’s really important. You can actually go in and hedge the bank index. Hedge that 32% of your portfolio if you’re worried about banks.”

Spiring says too many brokers and advisors in Canada are scared to hedge, because the mandate of their firms is to buy and hold. He says there’s nothing wrong with riding a market-neutral portfolio sometimes — particularly in a market where everything is going down.

“When I hedge, I’m not trying to be smart. I just want to go market neutral sometimes, because I get nervous too. There are times out there, when I will hedge financial risk out of the market and sit there and watch it. I don’t care what happens; I just don’t want to make mistakes,” he says. “I think the majority of brokers in this country wouldn’t know where to go hedge, and even if they did, half their firms won’t let them. Their firms want them to convince clients to buy and hold stocks forever.”

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Mark Noble