Two Investing Strategies for 2023 and Beyond
Mountaineers venturing above treeline in winter carry essentials to thrive in any weather scenario, and sometimes experience every weather scenario in a single day. Investors who prospered in the 1970’s, a decade which saw two lengthy recessions, wild market volatility, and constantly rising interest rates, were comparably equipped! 2022 ushered in conditions substantially similar to the 1970’s, and following similar policy errors, making the roadmap of the 70’s a valuable commodity to us today. What two particular investment strategies can tame a long period of erratic stock market volatility while dramatically improving investment returns?
A ‘Forever Stock’ represents ownership in a business of such high quality that, apart from a fundamental change in the company or industry, should never be sold so long as it was acquired for a reasonable price (or better!). Forever stocks are always capital-efficient businesses with a strong brand and significant free cash flow, and generally become industry dominators. They are also generally dividend-paying, and frequently dividend-increasing companies, sometimes referred to as “Dividend Aristocrats”. The stock averages showed some of the worst returns in history in the 1970’s, but investors who owned ‘Forever Stocks’, and reinvested dividends when applicable, fared far better. I use a set of five strict valuation parameters for the 31 ‘Forever Stocks’ I track, but you can create your own list and set of parameters, just make sure they’re tested. A mountaineer who doesn’t test equipment near home is in for the occasional rude awakening, or worse. ‘Forever Stocks’ seldom go on sale, but when they do, BUY THEM, regardless of your macro-outlook, and check your numbers frequently so you don’t miss “buy zone” opportunities.
It's common knowledge on Wall Street that asset allocation, not security selection, is most responsible for investment returns. Investors widely exposed to energy, healthcare, and consumer durables this year have enjoyed massive relative outperformance, while those exposed to information technology, real estate, and consumer discretionary have suffered large losses. Diversification is an important principle not to be violated, but focusing on industries in favor, and avoiding industries out of favor, and until the trends have run their respective courses, can both smooth out the ride and radically improve your investment returns. I climb in the High Sierra’s often because the conditions are ideal, and I avoid the Rocky Mountains because both the snow and rock are unstable. The same principle can be applied to investing, and the market environment that appears to be entrenched for the coming decade offers ideal conditions to apply it. Remember, the trend is your friend, and what is in motion tends to stay in motion (and in the same direction). This is not market timing or day trading, both highly speculative endeavors, it is trend following by industry groups. Be acquainted with the 21 Key Industry Groups, and again, make sure your parameters for industry selection and avoidance are proven.
Think about it. Shaun
“There is wisdom in the abundance of counselors” ~Proverbs 11:14
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” ~Warren Buffet
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
All investing involves risk including the possible loss of principle. No strategy assures success or protects against loss.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
Asset allocation does not ensure a profit or protect against a loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
https://www.fivestarprofessional.com/spotlights/90982
Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.