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Usually the old mantra “Buy low, sell high” is what works.
Every once in a while it doesn’t and I feel out of step with the market. This has been the case for me this year.
Personally, I tend to be a moderately conservative investor. I like to invest in profitable companies. I like to invest in companies generating lots of free cash flow. I like to invest in dividend-paying companies. I really like investing in the companies that have paid increasing dividends over a number of years, thereby sharing their wealth with investors. I try to invest in companies which I consider to be “good investments” or trading below their intrinsic value.
The opposite is also true: I don’t like to invest in companies losing money, leveraging debt, not paying dividends or trading at a high multiple to their earnings. There are investors who enjoy this type of “buy high, sell higher” behavior.
Unfortunately, these latter type of companies are the ones experiencing rocketing stock prices.
Depending on the day, the top 5 companies in the S&P 500 and the NASDAQ 100 may make up 15-45% of the index value. This means that the other 495 companies in the S&P or the other 50 in the NASDAQ 100 share the remainder. The concentration in a few can be viewed as risky. It would seem that there’s a better percentage that one (or several) of the 495 might be considered “undervalued” and a good place to invest. That hasn’t been the case this year.
Overall, it’s been pretty frustrating! This has also been magnified this year as interest rates have continued to be historically low. Replacing part of an investor’s allocation from fixed income with dividends hasn’t boded too well either.
Typically, I’m what’s known as a value investor. According to Investopedia, “Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company’s long-term fundamentals. The overreaction offers an opportunity to profit by buying stocks at discounted prices—on sale.”
There’s another approach commonly called growth investing. Again, according to Investopedia, “A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. This is because the issuers of growth stocks are usually companies that want to reinvest any earnings they accrue in order to accelerate growth in the short term. When investors invest in growth stocks, they anticipate that they will earn money through capital gains when they eventually sell their shares in the future.”
However, this is what I believe: Over time, asset allocation works. Value and growth each have their “day in the sun.” Investing in profitable companies who share their wealth with investors through dividends portends good things. Based on history, interest rates will eventually go up. Stay the course, value investing will revert to the mean. The tide is turning... at least that’s what I’m currently thinking.
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Asset allocation and diversification do not ensure a profit or protect against a loss.