Newsworthy and noteworthy investment notes
“Many of the winners during the last bull market will not outperform during this bull market.” As with other aspects of their lives, when making a choice as to what to invest in, one of the primary considerations of an individual is familiarity. In the past we have heard that stocks like General Electric or Citigroup or IBM are “safe” stocks, seemingly insulated from the volatility of the market. We also hear that should these stocks decline it would be wise for an investor to just “hang on and be patient” and they will come back. However, studies have shown that winners during a previous bull market are most likely not the most opportunistic place to invest during the subse- quent one.
For example, the alltime high of General Electric stock is above $60/ share. However, it now trades around $10share. Citigroup currently trades around $65/share. Not too shabby until you consider there was a recent 1:10 reverse split putting its alltime closing high north of $500/share. Finally, IBM, once a tech darling, is continuing to try to reinvent themselves by purchasing Red, an open source cloud computing company The company which had traded well above $200/ share closed today below $120. This is not to say that one or all of these are or are not sound investments at these prices. However, it does attest to the fact that the stock prices of seemingly good companies, household names, can decline precipitously and remain at depressed levels for years, even decades. Because many overpaid for these stocks looking for comfort and safety, they neglected the fact that they were overpriced and in industries that were in either a cyclical or secular decline.
Despite the paragraph immediately above, we can’t emphasize enough that properly constructed portfolios should include household names and indeed, many do outperform the overall indices. That said, a) there is no guarantee and b) that during every bear market the stock price of many household names decline and never recover. However, out of the ashes of any bear market, new names emerge. Consider the fact that Facebook, Amazon, Tesla, Netflix, Chipotle Mexican Grill and Travelocity were barely household names a decade ago, if some even existed as public traded entities. However, some have gone on to reward investors with returns that are many multiples of their original investments while some of the more safe, staid companies have languished.
First and foremost, prior to making any investment, we recommend that individuals do their homework and invest approximately 85% of their equity allocation in largecap, recognizable companies, but look to invest the balance into companies that are just beginning to make a mark in their respective industries. In our opinion, this approach should help enhance returns and yet provide the appropriate level of predictability and correlation to the overall stock market necessary for long-term success.
“Emotions are the enemy of a sound investment strategy.” Like a boat without a rudder many investors lack a specific plan of response should an investment soar upward or plummet downward. We believe that all investors have financial personalities and that if left unchecked, those personalities exhibit traits that are detrimental to long-term success in investing. A study by Henrik Cronqvist and Stephan Siegel first published on September 19, 2011 entitled “Why Do Individuals Exhibit Investment Biases?” identifies those traits from previous whitepapers. They are as follows. “They lack diversification and have a preference for familiar investments (French and Poterba (1991) and Huberman (2001)), trade too much (Odean, 1999)), are reluctant to realize their losses (Odean (1998) and Dhar and Zhu (2006)), extrapolate recent superior returns (Benartzi (2001)), and have a preference for skewness and lotterytype investments (Kumar 2009)).” A specific plan of response or detailed set of disciplines helps inves- tors overcome their biases and is an asset in helping one achieve success in investing.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.