Our Market Forecast?
Our comment above is not intended to be glib or flippant. It is, in fact, what a fine investor from an earlier period, J.P Morgan, replied when asked the dull-witted question as to what the stock market would do in the coming days.
He gave the only honest answer a man can give. J.P. Morgan didn’t know what the market would do the next day. Neither do I. Neither does anyone else. But that doesn’t stop loudmouths and liars from screaming at you from TV, via e-mail and in your mailbox, “So-and-so’s Startling Prediction for Tomorrow’s Market! Buy Today!!!”
Don’t you fall for it. Build a portfolio, stock it with quality firms from around the world, be willing to sell when the time is right, and concern yourself more with asset allocation and secular timing than with mere stock selection.
So, rather than give a Market Forecast for tomorrow, we offer instead our Market Philosophy for a lifetime. Our most recent full-year results from following our philosophy are in the table below. These are the actual results real-world investors who followed our recommendations achieved when heeding our buy-sell advice in the two Investor’s Edge® equity Model Portfolios...
To achieve Certain Wealth in Uncertain Times ®
Anybody can make money when "the market" is going up. The keys are (1) not to give it back when the market declines and, (2) to identify contra-cyclical sectors, look beyond US borders, and delve into bear market mutual funds, convertible securities, high-yielding stores of value, rising rate funds, and so on, in order to not only "not give it back" but in fact try to make money in good times and bad -- in certain times and uncertain times.
Thus far, we've been able to do just that. In 2000, 2001, and 2002, all down market years, we made money for our subscribers. Past performance is no guarantee of future performance, of course, but rather than worry in a decline then sell in despair at the bottom or — almost as bad — decide to buy and hold no matter what, we try to re-balance with some frequency (a couple times a year, anyway) and we stress secular timing and asset and sector allocation over mere stock selection.
A client recently asked how I could write so favorably about a company, then be willing to sell it four months or six months (or, sometimes ten years) later. The answer is simple: stock selection is the least important, but potentially the most dangerous, investing decision. Let me explain further...
There are certain companies that are well-managed, well-capitalized, treat their employees right, and are growing their sales and their earnings while increasing their market share. I like those kind of companies! If the market conditions are favorable, and the companies are in a sector whose stocks I believe will do well over the coming six months to infinity, that company's stock might even be appealing. (Very often I really like a company, but wouldn't touch their stock because it is overpriced...) If the stock has experienced a decline in share price because of what I consider a temporary and/or overblown phenomenon (like missing some analyst's earnings guess by a penny) it may represent great value. That's when I want to buy it!
So if I like the company and I like the stock, why am I then willing to sell just a few months later? Well, if the same market factors are in place (the bull is still intact) and the sector is still attractive, I'll hold and hold and hold.
But, remember, stock selection is the least important investing decision. If the market looks infirm or terminal, I want out. Even the greatest company whose stock is cheap won't completely resist a secular decline. And if the sector turns cool (say, energy stocks if oil prices sink to $10 a barrel, dream on) then I will abandon the entire sector and wait for prices to plummet before re-entering.
The bottom line? I fall in love with a methodology and a discipline. I even fall in love with a great company's vision and execution. But I never, ever, fall in love with a piece of paper (the stock) that is just a minuscule ownership receipt in a particular company! Great companies are always being born or reborn. Sometimes their stock prices are attractive. Sometimes they are not. But the market and the sector have more to do with the price appreciation you and I will enjoy than even the best-selected stock.
Most people waste an investing lifetime saying, "just tell me what stocks will go up." This leads them to fall for the charlatans out there who give the marks what they ask for. Successful investing is more complex on the buy side and far more complex on the sell side. If it were easy, anyone could do it. Most fail. For me, with my particular discipline, if any of the key factors of market, sector, or share value change, it can trigger a decision.
Please don't seek shortcuts when viewing the Investor's Edge portfolios, either! I was told by a subscriber recently that his sure-fire way to do well was just to buy everything with a pound sign (#) next to it, meaning that I or someone else at Stanford Wealth Management owns the stock. I was aghast.
Don't buy just those I hold. Like you, I have money to invest some months and am out of Schlitz other months. If I just bought 10,000 AAUK for $200,000 (which I did not long ago) it doesn't matter how highly I regard a stock I uncover in the next couple weeks, I am out of money until I sell something or until I earn more money. I can't buy everything I recommend even though I'd like to! Since it is quite certain that I will never be burdened by the demands of inherited wealth, what comes in to my bank account comes my work and the capital gains I enjoy from my investment portfolio.
As I've matured (OK, "gotten older") more and more of the increase in my net worth comes from intelligent investing rather than business income. I live by what I buy and sell. My recommendations to you come from the research I do to keep the wolf from the door. I can't afford to chase some hot stock -- this is my nest egg. That's why I invest in a methodical, coherent, and disciplined manner. That's also, as I answered my client's question, why I am able to select, but also to abandon, the pieces of paper that represent my ownership in great companies in the right sector at the right time: if the company stops being great, or the market looks weak, or the sector looks tired, or the stock becomes overpriced, it is time to move along.
One final thought on stock selection and retention (the "keep it or not" decision): diversify, diversify, diversify. If you are going to use the kind of disciplined approach I use, you must buy more than one of the stocks I recommend. Just as you should not say, "just tell me what stocks will go up," don’t even think "this is the one (or two or three) I think will go up." What I write about, say, the insurance industry may strike a responsive chord with you, but that doesn’t mean you should buy only my recommended insurance stocks. These portfolios are a gestalt. You may not mirror the entire portfolio, but at least select a cross-section of sectors and companies! If you do, I believe you will slowly and surely gain "Certain Wealth in Uncertain Times®."
