Nothing is more disquieting to the markets, whether stock or bond – including those in foreign countries – than uncertainty. And seldom is uncertainty more worrisome than in periods when our domestic equity market is, as discussed here recently, reasonably valued – when the market is neither over- nor under-valued and economic signals are mixed to slightly positive.
Uncertainty reigns, as health care proposals, the possibility of cap-and-trade legislation, the looming end of the Bush-era tax cuts and financial regulatory reform are at the forefront of the Congressional agenda.
Of course, in the thick of all this is the Senate’s investigation of Toyota’s recall problems – an area of responsibility and authority that Washington claims to have under some typically vague powers not enumerated in the Constitution. (Could they be jumping on Toyota because they own, for the most part, “Government Motors,” formerly known as General Motors?)
The problem that all these concerns cause is that they compel an investor, encouraged by the litany of media coverage, to think in terms of a “top-down” approach to managing their investments. “Top-down,” also known as the macro view, looks at the big picture, including input about international economies and interest rates, unemployment, balance of trade, the Baltic Dry Ship Index, et cetera.
A top-down view can drive an investor to a level of indecision at worst and ennui at best, sometimes leading to the thought that, “I’ll wait until everything looks better before I put my money to work.”
It’s better, in times of uncertainty, to use a “bottoms-up” approach. In this case, that refers not to tossing back an adult beverage, but to looking at investing from the individual company level.
Most investment veterans will tell you that the overall direction of the market is the most important criterion in determining profit opportunities in individual stocks. They will likely also point out, however, that there are always companies whose stocks do well in the face of a declining or uncertain market. So is it a case of swimming against the tide when looking for individual issues to own in a puzzling market, or is it like a salmon that is only successful in meeting its goals by swimming upstream?
We say the latter. Look for good companies with admirable balance sheets, long operating histories, attractive dividends (there are many with yields well in excess of certificate of deposit and short-term bond rates), and the proverbial “wide moat” that limits competition from entering their markets.
Often these are companies with which we are all familiar, companies that have for years provided products and services that we use regularly – names like Coca-Cola, Verizon, Bristol Myers, Pepsi, Johnson & Johnson, Altria, 3M, Exxon Mobil, Microsoft, Kraft – the list is long. (In the interest of full disclosure, as of this writing we hold positions in these stocks for our clients.)
Occasionally these issues will provide short-term profits for traders, although they are considered by many as more appropriate for the serious long-term investor, especially the investor seeking consistent cash flows from the dividends they produce as well as the regular dividend increases that they have provided historically. Some would call them buy and hold forever; others hold them until they reach the investor’s determination of full or over-valuation.
Unless one is a very aggressive trader, at least some of these names belong in what we call the core of a portfolio, typically in an amount that is for any one of them between 3 percent and 5 percent of the total equity allocation.
Are they exciting? Nope. They’re nothing like trading tech stocks or commodities; they’re just sound companies that allow one to sleep at night – and make frequent deposits of the dividend checks.
If these appeal to you, and if you believe, as we do, that government spending and hyperactive money printing will lead to inflation and higher interest rates by year-end, we suggest you also consider a position in Treasury Inflation Protected Securities. That’s easily done with the ETF symbol TIP. Check it and the above mentioned issues out with your broker.
Clark Davis is a 37-year investment veteran and CEO of St. Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.[[In-content Ad]]
