Streetwise for Friday, August 30, 2019
There has been an overwhelming number of questions asking where the markets are going and what should individual investors do, given the recent volatility?
While I try to answer the volatility question on a regular basis in a variety of ways, let’s take another crack at the problem. To start, as I have said in the past fear, hope and greed are often the driving forces on Wall Street. Furthermore, speculators play off those emotions to book a quick profit. However, you are an investor, not a speculator.
Try to ignore the Street’s daily volatility and instead obligate yourself to undertake the necessary analysis to determine the strength of a corporation’s financials and operating strategy.
Yet, everyone wants a shortcut to riches with little or no work. The answer so often given is to use a passive strategy via exchange traded funds or ETFs.
Unfortunately, there is no shortcut to achieving excellence in any pursuit and using index funds will not enable you to achieve what is referred to in the industry as alpha; or a return that exceeds a specific index. To quote an old Wall Street adage, you cannot beat the market by buying the market
AS far as the market’s future is concerned, keep in mind 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 that effortless short-cut of letting others do the thinking. Yes, in the long run the markets will move ahead and therefore so will index funds and mutual funds, an investment avenue fraught with even higher fees, higher risk and less return than buying ETFs or individual stocks. It is just that equities will do better.
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. 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 the latest high-tech startup, seasoned large cap companies should be the bedrock of every portfolio.
With your foundation in place, you can satisfy a desire for greater action, it that motivates you, and add some high-quality small cap companies. They will enable you to achieve higher returns in a somewhat shorter time, keeping in mind that risk and return are different sides of the same coin.
Small cap companies are those whose market capitalization (number of outstanding shares multiplied by the share price) is less than a billion dollars 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.
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 highly visible brand.
Always 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 a 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 are always subject to being acquired.
Note to Readers: I will again be teaching Introductory Investment Analysis for the Osher Lifelong Learning Institute, part of the Ringling School of Continuing Education. Classes begin on Monday, September 30 and run every Monday for 8 weeks. Call 941-309-5111 or go to www.OLLIatringlingcollege.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.RuddReport.com.