Streetwise for Friday, January 12, 2018

The euphoria of the markets over the past year has brought numerous questions of whether to continue to hold stocks with large gains, take profits and maybe invest companies that are lagging the market, or sell and remain in cash because you believe a market retrenchment is inevitable.

There are no single pat answers although I certainly would refrain from throwing in the towel, thereby converting unrealized gains into taxable profits and enabling Uncle Sam to collect off the top (tax deferred accounts aside).

In my opinion there is a strong probability that the markets will continue to rise throughout 2018, (with an occasional minor correction or two along the way). If that occurs and you continue to remain on the sidelines, you will be asking yourself why; why you did not take advantage of Wall Street when investments were on sale.

Security prices go through cycles of strength and weakness and the fluctuations may or may not coincide with various economic or market trends. To be a proficient investor, you need to always be aware of companies whose share prices are facing temporary difficulties resulting from exogenous events that are beyond a company’s control.

It is possible that the latest tax legislation from Congress, in combination with an economy that is on the edge of full employment, will produce a bit of an inflationary cycle, forcing the Fed to raise interest rates faster than previously anticipated.

While a more aggressive stance by the Fed will be felt to some extent by most everyone, it is unlikely to have much of a detrimental effect on a company such as Church & Dwight and its sales of Arm & Hammer baking soda. The same would apply to a company such as Clorox.

Benjamin Graham, legendary investor and author, extolled the virtues of a simple portfolio policy…the purchase of high-grade bonds plus a diversified list of leading common stocks. A policy that most anyone could carry out with little difficulty.

Unfortunately, the bond portion of that statement is not applicable in today’s investment climate, due to rising interest rates and the potential for an increasing rate of inflation. The former will mean declining bond prices and the latter a real (after inflation) return that can quickly turn negative.

Fixed income securities, by definition, do not offer inflation protection (Treasury inflation protected securities (TIPS) aside), meaning the purchasing power of your interest payments and your future principal repayment will decline over the life of the bond.

Those who study Graham will come to realize that the art of investing has an unappreciated characteristic of producing a creditable but unspectacular return, while requiring only minimum effort and capability.

To improve upon this easily attainable return requires substantial effort and more than a trace of wisdom. Bringing a little extra knowledge and cleverness to bear upon your investment decisions is unlikely to produce the expected increase in performance.

No, financial prophets do not exist. No one is going to lead you to the land of safety and high returns. You must find your own way and there are no sure and easy paths to financial success and riches on Wall Street…or anywhere else.

Yet, all too often people tell me how they were unable to resist the temptation to act because of what they heard at some free lunch or dinner, or on television, or read in the news media.

It will never fail to amaze me how otherwise intelligent people seem to disconnect their brain because someone whom they have never met, never will meet, somehow convinces them to take a specific action with their portfolio, or face dire consequences. And when they see the result, it is too late.

Note to Readers:

My 8th annual talk sponsored by the non-profit American Association of Individual Investors (AAII), titled: Wall Street 2018 – Where Do We Go Now?”, will be on Thursday, January 18, at the Hyatt Regency, 1000 Blvd. of the Arts. Registration/Social/Refreshments 3:00 P.M., Program 4:00 to 5:30. Please call 941-706-3449 to register. $10 per person at the door.

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