On Jul. 29, 2004, David Dittman and I published the first issue of Canadian Edge. Now 100 issues in, it’s a good time to take stock in what we’ve learned from the experience–and what we can use to help us going forward.

To be sure, we’ve made our share of mistakes over the past eight-plus years. But despite the missteps, the Canadian Edge Model Portfolio has been one of the most profitable investment vehicles around over that time.

In the September Portfolio Update I featured a table, “How We’ve Fared,” that showed yearly performance of the Model Portfolio.

Through the end of 2011 the combination of Conservative Holdings and Aggressive Holdings had a compound return of roughly 165 percent.

Added to the roughly 10 percent we’ve picked up this year, that expands to around 190 percent. And that’s at the same time when the S&P 500 Index returned less than 15 percent and the broad-based S&P/Toronto Stock Exchange Composite Index returned about 67 percent.

Those gains have been somewhat lumpy. For one thing, realizing them would have required selling more frequently than the typical income investor is used to, swapping busted stocks for better ones. Investors would have also had to hold on following the October 2006 “Halloween Massacre,” when Canadian Finance Minister Jim Flaherty essentially pronounced a death sentence for income trusts.

Canada was mostly spared the beginning of the 2007-09 bear market. In fact, the broad-based S&P/Toronto Stock Exchange Income Trust Index (SPRTCM) nearly matched its 2006 highs in mid-2008, when USD150 oil prices drove many energy-producing companies to new highs.

By the end of the year, however, the SPRTCM had given up all that and a lot more, falling by more than half to an index low of 84.02 on Mar. 9, 2009. Even the strongest Canadian Edge Portfolio Conservative Holdings lost ground to the onslaught, which was exaggerated for US investors by commensurate losses in the Canadian dollar exchange rate. Damage was far worse to commodity-price-sensitive Aggressive Holdings, as of all our energy producers only Vermilion Energy Inc (TSX: VET, OTC: VEMTF) avoided a dividend cut.

It took a great deal of fortitude to stick around to ride the historic gains that have followed off the March 2009 bottom. And then came January 2011, the widely protected day of doom as income trusts converted to corporations and had to adjust financial strategies to paying taxes.

Of course, most trusts fared far better at conversion than almost anyone thought possible, with most cutting dividends only fractionally, if at all.

But holding on through that uncertainty did require having the courage of your convictions that good companies would shine through no matter how they were taxed. And that certainly was not a majority opinion even to the end of 2010, when trust after trust was announcing virtually pain-free conversions.

More recently there was the market’s negative reaction to Washington’s inability to resolve the debt ceiling debate until nearly defaulting, followed by the S&P downgrade of the US government’s credit rating.

Even as Canadian stocks retreated, the drop in the Canadian dollar magnified losses for US investors, as global capital flooded back to the US as the safe-haven of last resort.

Holding on through all those gut checks was definitely not easy. Fortunately we’ve also had some solid trends on our side.

Check out our graph “A Stable Country,” which shows Canada’s quarter-by-quarter growth in gross domestic product and its inflation rate since 1993.

There have been some periods where the Canadian economy shrank, notably from late 2008 until late 2009.

By and large, however, the record is one of steady advancement. And even 2008-09 was far less severe a period than it was in the US, which suffered several quarters in a row during which the economy shrank at an annualized rate of more than 7 percent.

As we’ve pointed out many times, Canada’s ability to dodge the worst of the Great Recession was in large part due to its expanding trade relationship with China. Even as US demand for the country’s natural resources faltered, Asian demand continued to rise, providing a shot in the arm for a range of businesses from energy producers to railroads.

In fact Asian demand has permanently changed the supply/demand equation for natural resources across the board, from copper and uranium to oil, with the result that prices are unlikely to ever go back to 1990s levels. That’s bad news for consuming nations. But it’s great news for producers such as Canada.

Perhaps more impressive is the country’s steady inflation rate for the period. The annualized rate for any given quarter only rarely reached as high as 3 percent and was usually at 2 percent or less.

That’s been a major factor behind yet another bullish trend for investing in Canada: the rise in the Canadian dollar itself. In mid-2004 it took CAD1.33 to buy one US dollar. Today, that’s down to about CAD0.98, as the loonie has passed parity.

The Canadian dollar has also enjoyed strength from a stable government, as Stephen Harper’s Conservative Party enjoys an absolute majority for at least the next three years until October 2015, when it must call an election.

This government has reduced regulation to make the investment climate more favorable, cut corporate taxes to the lowest level of any developed nation–a fact that helped many income trusts avoid dividend cuts at conversion–and has brought Canada closer to a post-2008 balanced budget than any other developed nation outside Australia.

That’s all bullish for the Canadian dollar as well as Canadian stocks.

Finally, there’s Canada’s banking system, which never overloaded on subprime debt in the last decade and therefore maintained strength during the 2008 financial crisis. Canadian banks continue to rank among the highest in the world in terms of capital ratios and basic conservative management.

On balance these strengths have kept Canadian markets on a generally upward course since mid-2004, despite the volatile environment. But the real key to our success has been stock selection.

When we started Canadian Edge the appeal of Canadian stocks– and particularly income trusts–was crystal clear: high yields. Equally, however, it was boom time for new issues of income trusts, as companies took advantage of the popularity of yields and trusts’ unique features under Canadian tax law. And as with any boom there’s a fair share of junk that should be avoided at all costs.

We made it our goal to avoid that junk by restricting our coverage universe only to proven companies. For the Canadian Edge Portfolios, meanwhile, we tried to narrow our focus only to businesses with proven track records for paying dividends and to companies with the best chance of increasing those payouts consistently over time.

Our track record certainly wasn’t perfect. But check out the table “The 10 Originals,” which shows our initial “Top 10” Portfolio as it appeared in July 2004.

The key takeaway is that six of these companies are current Portfolio Holdings. In fact five of them we’ve held ever since that first issue: ARC Energy Trust, now known as ARC Resources Ltd (TSX: ARX, OTC: AETUF), Great Lakes Hydro Income Fund, now Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF), Pembina Pipeline Income Fund, now Pembina Pipeline Corp (TSX: PPL, NYSE: PBA), RioCan REIT (TSX: REI-U, OTC: RIOCF) and Vermilion Energy Trust, now Vermilion Energy Inc (TSX: VET, OTC: VEMTF).

Those five stocks have given us an average total return of 380 percent since July 2004. And they’re far from done, continuing to expand businesses and set the stage for rising dividends long-term.

As for the rest of the group, Boralex Power Income Fund was bought out by its parent at a price that basically resulted in us breaking even including accumulated dividends. Calpine Power Income Fund was also acquired, though at a much better price.

We sold Noranda Income Fund (TSX: NIF-U, OTC: NNDIF) within a couple months to putting together the Top 10 Portfolio, largely because it had seemed to run into regulatory problems. Those suspicions never materialized but the company nonetheless had a comeuppance a few years later, eliminating dividends at the end of 2009.

We re-entered the stock in December 2011 as a speculation that dissident shareholders would be able to force thought a dividend increase (see Portfolio Update), and we’re still waiting on a resolution. Noranda is also the only original member of the Top 10 that has also not converted from an income fund to a corporation at this time.

Finally, we took losses on Superior Plus Income Fund, now Superior Plus Corp (TSX: SPB, OTC: SUUIF) and Yellow Pages Income Fund, now Yellow Media Inc (TSX: YLO, OTC: YLWPF), as their businesses came up against challenges and dividends were cut.

Unfortunately we gave up on Superior a bit early–its stock has revived–and bailed out of Yellow Media only after losing nearly 90 percent of principal. The only saving grace was accumulated dividends, which softened our losses.

Even despite that, however, the 10 Originals have returned nearly 200 percent since July 2004 as a group. That’s against a 15.3 percent increase in the S&P 500 and it also tops both the S&P/Toronto Stock Exchange Composite Index and the S&P/Toronto Stock Exchange Income Trust Index by a wide margin.

All anyone would have had to do to realize that return was just buy these 10 stocks and hold come what may. And as even a brief scan of the Portfolio tables shows, they weren’t even the best performers.

Lessons of the Past

Unfortunately, not every Canadian Edge reader was able to duplicate those returns. And I’m also the first to admit they could have been a lot better, particularly if I had been able to dispose of losing stocks more effectively.

My outlook for the next 100 issues of CE is we’re going to have plenty more opportunities to buy good stocks cheap, as we have the past eight years-plus. The Canadian dollar looks set to remain strong for some time, with US dollar parity the new normal.

The slowdown in Asian economies may keep a lid on prices for the rest of 2012 and into 2013, barring some political event.

But the long trend for commodities is up, and Canadian development of its bounty is just getting started.

Finally, nearly two years after income trusts converted en masse to corporations, the dividend-paying model continues to prove its durability and appeal.

The result is companies paying from cash flow are starting to be accorded the same respect by investors as corporations paying from conventional earnings per share.

And dividend growth is starting to rev up again from former income trusts, as they get comfortable with tax burdens as corporations.

This last is likely to prove the greatest catalyst going forward for solid returns from Canadian stocks. Consequently, lesson one from the past eight years is simply to keep doing what we’re doing. That’s highlighting the companies in each sector with the brightest prospects for growth.

Equally important is recognizing in a timely fashion when a company no longer measures up on the numbers. When that happens it’s imperative to move along to a stronger company, even if it means taking a loss. Otherwise you’re just holding and hoping and thereby running the risk of a much bigger debacle in the future.

To be fair to myself, I did eventually recommend selling Yellow Media. But I only moved after the stock had cut its dividend for the third time in a little more than two years, and only then in response to management abandoning its long-held guidance that digital media growth was keeping pace with its print directory losses.

We did avoid the bitter end. Yellow Media has since eliminated its dividend, and shares have become nearly worthless as management has attempted to recapitalize by swapping debt for stock. But the losses we did take were a serious drag on results up until I did sell, meaning returns would have been far better in 2011, 2010 and even 2009 had I sold after the initial dividend cut.

Getting the most out of lesson two means being vigilant about searching for clues that any of my recommended companies are weakening as businesses. The optimal time to sell is when evidence has become impossible to ignore but nothing dramatic has yet happened. At such times swapping for a stronger company comes with relatively few costs.

That’s basically my rationale for swapping energy services Aggressive Holding PHX Energy Services Corp (TSX: PHX, OTC: PHXHF) for Poseidon Concepts Corp (TSX: PSN, OTC: POOSF). (See Best Buys.) PHX may recover. In fact I think it still will. But at this point Poseidon’s fluid management business appears to give it upside to rising North American energy production and downside protection if conditions cool off the next few months.

This is the kind of trade I intend to make more often in coming months, when conditions warrant. There’s no reason to hold a weaker stock in a sector if there’s stronger fare available at a good price.

If history is any guide, however, I’m not always going to be early enough with selling. In fact odds are one of our holdings will cut its dividend sometime in the next 12 months, as Pengrowth Energy Corp (TSX: PGF, NYSE: PGH) did this spring following the drop in oil prices.

My mistake with Yellow was not selling immediately after the first dividend cut. Consequently, it follows that selling Pengrowth immediately following the reduction would have been the best way to avoid future pain.

In the end, however, I decided not to sell because I believed energy prices would rebound and that the new dividend level had been set conservatively enough to survive until that happened.

This calculus has been partly rewarded in recent weeks. But it does beg the question of whether there should be a real line in the sand never to cross.

At this point my answer is something of a split decision. If the company is in a non-cyclical business that’s not affected by energy prices, my view is yes. Any dividend cut is a reason to sell, and I plan to be quick to do so going forward.

On the other hand, the reason we hold natural resource companies is because we’re bullish on the price of what they produce going forward. And getting the most of our investment means being willing to ride out near-term price volatility, even if it means taking an occasional dividend cut.

Obviously there are limits to this. For example, I’ve consistently recommended selling the smaller and more leveraged energy producers, for which lower prices even in the near-term threaten survival. But so long as resource companies are expanding output and reserves I’m willing to be give them somewhat more rope.

Lesson three from the past eight-plus years is that movements in price don’t necessarily mean anything is right or wrong at a company’s underlying business. And if such gains or losses do occur without a corresponding change in the value of a company they’ll eventually be erased.

We saw that happen this year in quite graphic fashion in both directions. In April, for example, Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) was down as much as 40 percent for the year, as investors fretted about energy prices. The company, however, continued to post strong results, building reserves and production. The result is that massive loss has been wiped out and is now a nearly 10 percent gain.

Keyera Corp (TSX: KEY, OTC: KEYUF), meanwhile, shot up over USD50 a share in January, riding a buying wave that began in autumn 2011. The stock then proceeded to fall like a rock to the high USD30s before stabilizing and making another run on USD50 in recent days.

This kind of action might make an observer wonder if there were real developments at Keyera. But the company continued to invest effectively in energy midstream assets to boost cash flow, just as it had done consistently in prior years. There was no drama there, but that didn’t stop investors from piling in and out and their momentum made the stock one of the most volatile in the CE Portfolio.

I advise this way to deal with this kind of empty volatility. First, always be aware of when your holdings report important numbers such as earnings. I provide this information in Portfolio Update for those recommendations.

If a stock you own unexpectedly surges or plunges following one of those dates, try to find out if the reason was in the numbers or guidance released. I report on Portfolio earnings in Flash Alerts, so that’s one way to keep up. So long as dividends are well covered and guidance is maintained, there’s little reason to sell a stock that’s fallen. In fact, damage is likely to be erased as facts become more widely known.

Second, never pay more than my target buy-under price for any stock. These are set with a return of 10 percent–yield plus annual dividend growth–in mind for the safest companies (CE Safety Ratings of “5” or “6”) and commensurately higher prescribed returns for riskier fare.

If you pay no more than what I advise, there’s still no guarantee you’ll see instant profits. In fact a stock can remain well below its buy target for a long time. But over time, so long as the underlying businesses stay healthy and growing, those stocks will rise.

Conversely, stocks that trade above buy targets will almost always come back to earth, eventually, unless there’s a development that increases the company’s value such as a dividend increase. Waiting for a lower price or boost in company value can take time as well.