Streetwise for Friday, March 23, 2018
Lately it is almost impossible not to be overwhelmed by a never-ending stream of rhetoric that forecasts the markets demise. Yes, the tariff issue is of concern, as are rising interest rates and higher inflation. And each time a negative global event or crisis causes a temporary market decline, the prognosticators of doom will resemble vultures ripping apart a carcass.
Do not waste your valuable time glued to a television or computer screen trying to dissect the latest, supposedly gruesome, development. Discerning market direction on an hour-by-hour or day-by-day basis is a meaningless undertaking. Even weekly trends are of little use. What is important are long-term macro-economic trends, combined with fundamental financial data, which enable your investment to return a reasonable compounded annual growth rate (CAGR) over a two to three-year time frame.
It should be common sense that companies with superior products and significant market share, combined with a finely-honed distribution network, run by a seasoned management team, will see their share price increase over time, regardless of short-term market trends.
However, the real question is not about potential investments, that is the easy part, it is about you. If you cannot sleep at night because of market volatility, then please avoid Wall Street. You cannot put a price on peace of mind. However, not to take advantage of the current ongoing equity rally is like not showing up to collect a well-deserved Oscar.
No, Wall Street is not a level playing field. To paraphrase a concept from the book “Animal Farm,” by George Orwell, published in 1945, “All investors are created equal, but the rich ones are more equal.”
You are not going to interact, much less compete with the “biggies” of Wall Street. Rather you are going to run between and around the feet of the stampeding elephants. In doing so you will create a diversified portfolio of dividend paying blue chip companies that have a high probability of providing a reasonable total return.
At the same time, you must have the patience of Job (Among the many Old Testament examples of patience, Job was the exemplar of a patient man.), to allow share price performance to equate to corporate performance. Having a love affair with stocks is fine but you need to let be more than just a passing infatuation.
The truth is that if you employ a combination of fundamental analysis and a bit of patience along with a modicum of common sense, your investments will do just fine. Yet, it never fails to amaze me how intelligent and responsible people seem to disconnect their brain because of some off-the-wall piece of investment advice.
So how many stocks should you invest in? Well, if you have overwhelming confidence in your ability then one stock should be all you need. However, most of us are not that confident…or that foolish.
If you have a diversified portfolio of 15 or more stocks, you have removed individual stock risk. However, you still have market or systematic risk to deal with. Systematic risk is that which cannot be removed through diversification.
Interest rates, inflation and political upheaval, represent sources of systematic risk because they affect the entire market. One way of measuring this systematic risk is through the beta of a portfolio.
What kind of return should you expect from your portfolio? Warren Buffett once addressed this question quite succinctly. “Stocks are a decent way to make 6 to 7 percent annually. However, anyone who expects to make 15 percent from the market, or by having a broker pick stocks, is living in a dream world.”
I would argue that it is possible to increase that number to 8 to 10 percent plus a 2.5 percent dividend yield, assuming you invest in companies with a history of rising dividends.
Finally, never become so obsessed with Wall Street that you let it run your life. In a recent interview on CNBC, Buffett said, “If all you succeed in doing in life is getting rich by buying little pieces of paper, it’s a failed life.”
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.