Streetwise for Friday, September 28, 2018

“If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue, relatively, at least, companies that are out of favor because of unsatisfactory developments of a temporary nature.” Benjamin Graham

No matter how you slice or dice the data it becomes impossible to refute the fact that equities have been far and away the most lucrative investment over the years.

However, you need to also keep in mind that those statistics are for the market not a specific stock or group of stocks. Is that a condemnation of Wall Street? No, but it does bring up the next point. You need to carefully construct your portfolio.

No one has ever suggested that buying just one stock was a reasonable path to follow. Nonetheless, I receive continual requests for just such a recommendation.

You need to have a diversified portfolio of at least 10 to 15 stocks. (Statistically, you can show that beyond 15, the additional diversification as measured by standard deviation is minimal.

Does that mean not investing if you can only afford to buy one or two stocks? No, not at all, but you must try to pick investments with minimal risk and diversify as much as possible. I would rather see someone buy three shares of six companies than 18 shares of one company.

With today’s low fixed commissions, the transaction costs to invest as little as a few hundred dollars is insignificant.

Keep in mind that companies discussed here are discussed with a view to their downside as well as their upside. Earnings estimates are estimates based on analyzing data from a variety of sources that are designed to provide you with a starting point from which to begin your own research and draw your own conclusions.

At the same time let me repeat one of the most important axioms of investing. Never, I repeat never, invest money in equities that is not free and clear disposable income.

Wall Street does not come with a promise of a rose garden. There is inherent risk in any investment except Treasury bills. While Uncle Sam will pay interest and principal on notes and bonds, they are still subject price fluctuations due to the level of interest rates at any given time.

If you keep either of those instruments to maturity, you eliminate the fluctuation of your principal but then your purchasing power will be greatly reduced due to inflation.

Ok, so you are going to take my advice and either establish or add to a current portfolio and you are going to research and attempt to forecast the future of a company and not the market in general.

Which brings me to a question I am asked several times a day: what will you tell people to do when a recession does hit?

My answer remains unchanged. When the economy slows, and the markets retrench, and eventually both will happen, it will be like all change, an opportunity. Stocks will be on sale. If you confront reality early when times are good, are not under any pressure, and prepare yourself mentally and financially, you will be able to do what many large successful investors do – buy undervalued assets.

Keep in mind that during the period beginning in 2008, when the Great Recession was just getting under way, Warren Buffett was out buying stocks and lending money to companies that had failed to successfully plan for a downturn. Net result was a net profit of about 12 billion dollars in five years.

Finally, keep in mind that when I say prepare I am not even suggesting you sell. Companies with a track record raising dividends for 10, 15, 20 or more years can ride through whatever might happen in the year 2020, which is the earliest I see a recession.

Note to Readers: I will again be teaching Introductory Investment Analysis for the Ringling College’s Lifelong Learning Academy, now called the Osher Lifelong Learning Institute. Classes begin on Monday, October 1, (new date due to my requiring surgery) and will run every Monday for 8 weeks. Call 941-309-5111 or go to https://olliringlingcollege.org to register.

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.RuddInternational.com.