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“The fishing was good; it was the catching that was bad.”
— A.K. Best, fishing author.
“Stock markets are swimming in the face of two major investor emotions. They are fear and greed.” — Adrian Mastracci, fiduciary portfolio manager.
All you have to do is rewind to the 2020 investment results. Especially those recorded during the months of February, March and April. They brought new meaning to volatility, in both directions.
Mention 2020 and practically every investor is glad it is in the rear view mirror. Tread carefully as those pesky markets are not known to march to your wishes.
Accordingly, I attempt to highlight some basic ideas that help in portfolio construction. Focus on expanding your knowledge, say of at least three strategies that improve your nest egg.
Each day now brings a new crowd of market optimists and pessimists. Along with various assortments of buyers and sellers. Just playback the last two weeks.
Be aware of the implications in both camps. Successful investing is about stickhandling one’s comfort zone between fear and greed.
Rules to live by
So, rule number one. No knee-jerk reactions please. Regardless of whether you’re buying or selling.
Rule number two. Markets operate on logic. Do you?
If you succeeded with these two rules, step aside and breathe. If not, rewind to rule one. The bigger question is why would you want to?
Some investors may seek to calm their fears by preserving capital. Others prefer to chase their greed by hitching onto growth wagons du jour.
A few more pessimistic data releases could drive the markets lower. Conversely, a few more ounces of optimism could propel investor confidence to higher levels.
Don’t just follow the crowd at the expense of your outlook. Instead, stick with the comfortable path to your destination.
Sacrificing investment quality to hunt for yield or performance is a dicey bet. I continue investing within the long-term strategies set out for each client game plan.
Spend some time revisiting the components of the action plan for when markets rise or fall. Neither outcome should be a surprise if you plan for both. Yes, both outcomes. Perhaps, the expertise of a fiduciary manager can assist your quest.
For example, investors heavy into stocks and mutual funds may consider taking some off the table. Stickhandling your investing pursuits between fear and greed is a logical approach.
3-Point strategy
There is no value in fretting whether the markets rise or fall from here. Start by accepting the fact that stock markets cannot be managed.
However, what can be managed is retirement portfolios. Follow this simple 3-point strategy:
▶ Invest within your sensibly designed asset mix targets.
▶ Sell some of your winning holdings as their prices advance.
▶ Buy some of the quality laggards that fit as their prices fall.
Your winners may rise further and the laggards may fall lower. Keep applying the 3-point strategy.
The important word for this is “some.” Recall the timeless advice from the children’s book: “Slow and steady wins the race.” It is a very boring strategy that works very well.
Too many investors ride the winners on the way up, then on the way down. Once exasperated, they finally throw in the proverbial towel and sell somewhere near bottom.
Sadly, many of them move on to repeat the same blooper. Clearly, these investors have to stop marrying their stocks.
Holding onto winners is definitely more exciting for investors. They have very little or no appetite for selling winners, even in small doses.
Regrettably, too many miss the warning signs when the time comes to exit. You may easily get caught flatfooted in the stampede.
Simply said, pay attention to your fear and greed strategies.
Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA started in the advisory profession in 1972. He is portfolio manager with Vancouver-based Lycos Asset Management Inc.
Buying and selling stocks is not complicated. Investment advisors and the financial industry, to justify their existence, do their best to make it as complicated as possible, with their weird and wonderful products, like mutual funds, ETFs, Index funds, preferred shares, bonds, etc. I recommend that you go to your bank and set up a self-directed trading account. Stay far away from investment advisors who will slowly erode you portfolio with their commissions and charges. Costs in investing are important. You do not need their involvement to do well in the stock market. You just need patience and common sense.
The stock market is an auction vehicle in which optimists bid on stocks they think are going to increase in value. If their bid is too low, it is not going to be accepted and nothing happens. If their price is attractive to another investor, who owns the stock and is a pessimist who thinks that the stock is not going to increase in value, then a transaction takes place and the optimist acquires the pessimist’s stock.
For decades I was in charge of a commercial risk database of 2 million businesses. I designed scoring systems for banks, insurance companies and trade suppliers that would warn them of potential losses far enough in advance that they could severe their relationship with customers. What did I learn? I learned that few start up companies last 5 years and long established companies that are large and profitable are obsessed with exceeding previous years sales volumes and profits.
While companies have minimal control over their share prices (millions of investors control share prices) they do have control over their profitable future. If sales start to slip, they can reduce staff and do all kinds of other cost savings adjustments, they can reduce prices, enhance their products, introduce profitable new products. , etc. What I found was that large corporations are like a living organism, the practices that work become part of the company’s DNA. They get perpetuated for decades.
I also learned that large companies do not go out with a bang. When they fail it is like a slow leak in a car tire. The signs of their impending doom are telegraphed far enough in advance that you can severe your relationship with them.
Most companies traded on stock exchanges are not start up companies. They are well established. I created stock scoring software (based on my previous risk scoring experience) that allows me to sort businesses from most to least likely to maintain a dividend payout of 6% and grow their share price by at least by 9% in a year. The score is 0 to 100. The highest score I have calculated in 78 and the lowest is an 8. I avoid buying stocks of companies scoring under 50. Dividends are important because they are usually derived from profits. Profits are largely controlled by companies.
Yes, it is possible to hold stocks for decades. I know because I have done it. Do you totally forget them after you have acquired them ? No, because eventually all companies disappear. In keeping a company healthy, you must be constantly adapting to change. It is hard for large, successful companies to accept that technologies have changed and they must totally transform their company to compete (example- Kodak was incredibly successful but could not accept quickly enough that the digital camera would destroy photographic film technology).
What does this mean. In my case perhaps every 3 to 6 months I will rescore the stocks in my portfolio. This forces me to look at things like operating margins, dividend payouts, book values, etc. Last week I sold a stock, the first in 6 months or more. Why? It was showing a price increase and paying a higher dividend then when I bought it. However, its operating margin was a negative number and it was using buybacks to push their share price up. Where was the dividend money coming from? It was probably being borrowed. This was a stock whose days were numbered.
I only invest in 20 stocks, to limit my loss possible loss in any one stock to 5% of my wealth, they pay on average a dividend of 6% and are all financially strong (there are 628 stocks paying a 6% dividend or more on the NYSE and the NASDAQ). Two of these financially strong companies I own are showing a lower share price than what I paid when I bought them. Why don’t I sell them? Because they are financially strong and have good scores. They will come back. I have seen this many times over the last 20 years.
I have put together 4 ten minute videos that outline how I invest. They are stored on YouTube. I should mention have lived very well off my dividend income while watching my portfolio more than triple in value. You can find the path to the videos in my website, “http://SaferBetterDividendInvesting.com
”. They will provide you with more details on what I do, if you are interested”….Ian Duncan MacDonald