Streetwise for Sunday, November 4, 2018

Some are proselytizing that economic growth in 2019 will nosedive into oblivion. And that is just plain wrong. It seems the doomsayers are trying to outdo each other with who has the most negative forecast going forward.

Yes, the markets are volatile, and it is true that companies are facing increased costs because of what is rapidly becoming a full-blown trade war with China with no end in sight. And there is no denying that interest rates are low by historical standards but they’re not low compared with where they have been through most of the bull market.

Wall Street has clung to the hope that this last earnings season of 2018 might have resulted in a calming force to counteract the ongoing global and political upheavals. For a host of reasons, calm has not been restored and October became one of the most volatile months this year.

Certainly, the most pressing issue has been and continues to be the strength of the economy itself. Rising costs, for everything from freight to labor to raw materials have taken center stage amid a backdrop of geopolitical flareups alongside the ongoing trade war with China. The result is a rising tone of anxiety over a central pillar of the bull market – next year’s earnings estimates.

The unfortunate result is that Wall Street has become scary for even the experienced investor. The “sky is falling” mentality has created a paranoia to the point that the slightest bit of disconcerting news can send shares prices tumbling. Yet, this is not the time to put money under a mattress.

Instead, ask yourself if the latest event du jour likely to have a detrimental effect on those enterprises whose long track record of many years has shown them quite able to deal past economic imperfections? The likely answer is no, probably not.

Remember that in volatility there is profit. Therefore, now is an excellent time to consider re-balancing and rejuvenating your portfolio. You want to remove those holdings that when viewed in the harsh light of reality are fundamentally dead and replace them with companies with a brighter future going forward. Moreover, you do not want to let extraneous “noise” negate your taking advantage of investment opportunities.

Often called end-of-the-year bottom fishing, the methodology is quite simple. You want to look for companies whose shares have been beaten down because of tax loss selling or have succumbed to an understandable but over-done Wall Street sell-off. And has been no shortage of panic selling of late.

What you are searching for are those unloved companies whose shares are seeking a munificent buyer. However, do not dwell on the negative. Instead, try to view the problem from the perspective that both the economy and corporate profits are and will increase over time.

You cannot judge the efficacy of company solely on the performance of its share price, high or low. Utilizing methodologies such as discounted cash flow and intrinsic value, your investment objective should be to create a return that at a minimum exceeds the sum of the risk-free rate of return (the rate paid on a 10-year Treasury note currently about 3.2 percent), combined with up what you will lose through taxes and inflation.

Then add in a couple of points for the Gipper, as was so profoundly said by Knute Rockne in his “Win One for the Gipper,” speech to the Notre Dame players at halftime of the 1928 Army game as he was trying to salvage his worst season as Notre Dame’s coach.

To simplify the equation, consider that the guideline for my students is a minimum compounded annual return over a 2 to 3-year period of 10 to 12 percent. However, it is foolhardy to believe that you can always pick winners. Swinging from the rafters is a game for monkeys, not investors.

To find those stocks you are going to need an edge. If you want to become a market-trouncing master strategist, your knowledge of a given company must be superior to that of others. And while it may not make you the life of the party, when someone asks if you have invested in the latest “hot” stock, simply tell them that you prefer to be the tortoise and not the hare.

Lauren Rudd is a financial writer and columnist. You can write to him at Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to