The talking heads of Wall Street continue to be enamored with the so-called ‘headline” stocks that are not only trading well above their long-term intrinsic values, but many aren’t earning a cent, and may not for some time. A case in point: one of the financial shows (and they are indeed “shows” not programs), interrupted a discussion on an important economic topic to report recently released results for Yelp. Meanwhile one of the largest international energy companies in the world that was simultaneously reporting earnings – Total, SA – was not even mentioned throughout the entire broadcast. So you tell me what you think the fast money people want you to follow?
What I am seeing is a major disconnect between the trendy names that everyone wants to talk about vs. the more stable – okay perhaps boring – stocks. And I think this is dangerous. If you want to gamble – go for it. But that is not what the stock market is all about. Right now, with the market near all-time highs, the inexperienced trader believes everything can go up, even the overpriced high-fliers that may or may not be around in the future, given the ever-changing technological landscape and consumer preferences. This condition can cause a bubble in a few sectors like social media, high-tech names and biopharma, that can shake the confidence of the entire market should they run out of steam. Such was the case with the “dotcom” bubble of 2000, where the burst took down some of the more notable blue-chip names in its wake, but nowhere near the extent of the shares that made up the NASDAQ composite. That index lost 67% of its value from its peak in 2000 to its depths in 2002 and just recently recovered from the high point of 5,133 almost 15 years later. In contrast, the Dow Jones Industrial Average lost a bit over 27% during the same three-year period but is now over 15,000 points higher than where it was at its high of 11,497 in the early days of 2000.
I am not saying you can’t make money in some of these trendy names. You actually can make a lot, but you need to be nimble and get in at the right price (whatever that may be) and exit accordingly. Not everyone can do that. I know I can’t. So, what I try to instill here in thebuttonwoodproject is to be a long-term investor and unless you are a professional, not to be a trader. To be specific:
- Have a plan. Depending on your age (i.e. “long-term” may not be that long away for some of us) and your tolerance for risk, temper your portfolio toward growth stocks that are reasonably valued and/or stocks that provide income for your current or not too distant future needs.
- Understand downside risk. Once you set the plan in motion and have a well-diversified portfolio that meets the goals of that plan, preservation of capital must be included in the strategy’s guidelines. Okay, over a short-term there may be some choices that have lost value, but hopefully not the entire portfolio. If that’s the case, you’re probably not doing enough research and should seek professional investment help.
- Don’t be afraid to sell, even if it’s at a loss. A small loss will provide you with the remaining funds to put to use in another selection that (hopefully) will do better. Tax considerations for selling positions (gains and losses) play a role too, so that aspect of investing needs to be understood as well. Knowing when to exit (the most difficult part of managing your own portfolio in my opinion) is crucial. If the shares of a particular company no longer represent the original rationale as to why you bought them in the first place, it may be a time to sell.
- Review your portfolio “regularly”. That may mean monthly, quarterly but not less than yearly, depending on your penchant for such evaluations. If you have a bundle of investments in cash-related instruments, bonds, various stocks in a variety of industries and geographies, REITS, etc. you may want to “re-balance” from-time-to-time, to keep the allocation in sync with your financial plan. As some of the investments outperform the others, they will shift the percentages off from the original goal and you will need to get things back on track. This exercise is most important for your retirement accounts, but some people find it useful in re-balancing their taxable portfolio as well.
- Keep away from the ongoing wave of financial chit-chat, the TV shows of which need to talk about something every minute to fill their time slots. If you find these shows of interest for their overall stream of information, then you will need to keep your emotions in check and not race to your account connected keyboard or phone your broker after every remark by anyone who gets airtime. My favorite line is “Should this stock be in your portfolio?” Find out when we come back (from a commercial break, of course).
- Be well diversified. Depending on your total amount of investable assets, that can be between ten and twenty different stocks. If you don’t have time to manage and keep tabs on that, then a few mutual funds or exchange traded funds that track the overall market, selective sectors that are within the scope of your plan and some geographical diversity, will do fine.
- Thebuttonwoodproject is a source for ideas. ONLY! Long-time readers have probably noticed, I never used the word “buy” but instead prefer the term “stocks to consider” when adding a company to one of the lists. The blog’s portfolios are meant to be a guide and they include what I call “candidates”. You need to do your own research before you make the plunge. If you don’t have the time or the wherewithal for your own research, then I would again suggest a mutual fund (which also requires at least some analysis) or engage a professional money manager.
Morale of the story: Don’t Run with Scissors. The short-term gains may lead you bloody in the long run.