Streetwise for Friday, September 7, 2018
Readers please note: I have been in Europe for the past week, and therefore it was necessary to select a past favorite for this week.
Fear, hope and greed are often driving forces on Wall Street and speculators play off those emotions to book a quick profit. However, you are an investor, not a speculator.
Rather than speculate, you are obligating yourself to undertake the necessary analysis of a corporation’s financials and operating strategy. There are no shortcuts to achieving excellence in any pursuit and using index funds is no exception.
Index funds or exchange traded funds (ETFs) as they are often called, will never enable you to achieve the success that is possible from investing in individual companies.
Before you become too intoxicated with unbridled enthusiasm, please remember that there have been great times, good times and some not-so-good times when it comes to investing. Nonetheless, over the years I have reached the conclusion that it is more difficult to lose money investing in stocks than it is to make money.
Nonetheless, investors and investment advisors often take what they think is an effortless short-cut, they advocate index funds. To quote an old Wall Street adage, you cannot beat the market by buying the market.
Yes, in the long-run the markets will move ahead and therefore so will index funds…after fees of course. Furthermore, index funds are a step, albeit a small one, above buying mutual funds, an investment avenue fraught with higher fees, higher risk and less return than buying individual stocks.
Virtually anyone can invest successfully. There are literally dozens of well-known, high-quality blue-chip companies with a long history of earnings and dividend growth with which anyone can build a solid portfolio using a deep discount brokerage house. No, you will not become another Warren Buffett next week, but you will enjoy steady investment gains over time.
While large cap companies such as Procter & Gamble are not going to grow as fast as they used to, stocks of that ilk should be the bedrock of every portfolio. Yes, I even like Intel despite the less than ebullient performance recently. The same can be said of Procter & Gamble.
With your foundation in place, you can move on to some high-quality small cap companies that will enable you to achieve higher returns in a somewhat shorter time, keeping in mind that risk and return go together.
Small cap companies, those companies whose market capitalization (number of outstanding shares multiplied by the share price) is less than a billion dollars, are always popular because they are the race cars of Wall Street. They can shift gears and change direction with a minimal effort as they find holes in the pack that others have not seen or cannot fit into.
Nonetheless, any small cap strategy is certainly not without risk. Research data for is less abundant and the punishment for not doing your homework can be quite severe.
In dealing with small caps, you want to look for companies that excel at keeping costs low and have a solid strategic plan designed around a patented core technology, or a highly visible brand.
You want to investigate a company’s relationship with its suppliers. Suppliers that readily advertise their relationship in conjunction with a company are happy suppliers. The same logic would apply to the customer base. A company must be able to show a successful pipeline through which it moves product to the end user.
Finally, are there any signs of acrimonious behavior or discord among the executives? This is more prevalent in small caps as founders are often forced to relinquish control to more experienced management. And remember that successful small caps can be subject to being acquired.
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, September 24 and 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.