Complimentary Investing Styles

     Anyone who has read my past posts knows that my investing style leans toward the value discipline. Unfortunately, this method of investing has under performed for the last 10 years. So how do I make money in this era of growth investing? The answer lies in a complementary blend of value and growth stocks held in my portfolio. If all I held was value stocks, I would get depressed every time I reviewed my brokerage statements In order to stay interested in the current market and not always hold a bag of losers, I try to buy some of the hottest stocks with unreasonable valuations. Hopefully, these companies will continue to be successful and their earnings will grow into their valuations. I have learned my lesson by missing out on the gains of Amazon, Netflix, Alphabet, and Priceline. It doesn't take a lot a shares of an expensive stock like Facebook or Tesla to rack-up a nice gain in these rapidly appreciating stocks. While.these investments are garnering all the headlines, I also like to bottomfish for the afflicted companies like Boeing and Kraft Heintz. Sometimes these hardship cases take years to find their way. Sometimes they never do, but like I mentioned in my previous post, large, well established companies usually survive. My main concern is to not pay too much for an ailing company. This is when the lessons about ratio analysis and charting come into play. Buying at or near the bottom can be as rewarding as owning high flyers, it just takes longer. In summary, diversification is not just about owning stocks in different sectors and market caps, a complementary blend of growth and value will produce returns in almost any market environment. 

The Blind Squirrel Takes A Random Walk

     What the hell am I talking about? The random walk refers to a book written by a Princeton professor named Burton Malkiel. He penned "A Random Walk Down Wall Street" in 1973 to argue that individual investors are foolish in trying to "beat" the market and should just invest in a passive mutual fund instead. This "Efficient Market Theory" postulates that every event or potential outcome is already baked into the stock prices of any company involved. After all, there are some very smart people who make a very good living just watching everything that goes on in the world and adjust their large portfolios accordingly. I'm sorry Burton, but this blind squirrel just didn't buy into this academic crap when I was in college and I don't now either. The only reason that I don't outperform the market averages is because I'm too lazy to do the research necessary. There's an old saying that "Even a Blind Squirrel Finds a Nut Eventually", well buying stocks of companies that are struggling today can  reward investors tomorrow. Not all companies will survive but a little research can tip the scales in your favor to identify the winners. The key to making money in stocks is to simply be invested and stay invested. When things are not working out, find out why. In my 47 years of investing in stocks there are only a few times when things were hopeless for a position that I held. In this day and age, there are usually remedies for companies that can't seem to right their ship. Often an activist investor gains board seats and demands corrective action. Companies like Kraft Heintz, Boeing, Johnson and Johnson, General Motors, Ford, Schlumberger, and many others have a good chance to turn around. I was advised many times not to buy Tesla stock but look what it is doing now. Not many investors believed in Amazon until it took off like a rocket. I can still remember when Apple was a basket case and looked like it would fail. I didn't understand how Google could make money from a search engine but they did. I wish I wouldn't have listened to the pundits that covered the stock.

The Past, Future and Present

     First. I look back at 2019 and how the financial markets treated me. It was a very good year to be a stock investor. The S&P index has returned over 28% year to date. Information Technology has led the way with a whooping 47% return. Communication Services was also unusually strong at 31% as this is usually a boring sector with a rich dividend. The laggard in the group was Energy with only a 10% gain on the year. What created such a great environment for stocks? In two words: Interest Rates. I remember exactly one year ago today, on Christmas Eve, the market reacted badly to the 25 basis point increase in the fed funds rates by sending the averages sharply lower. December of 2018 was a correction that literally was a Christmas gift to anyone who had the nerve to buy at a discount. Investors who picked-up these bargains were richly rewarded throughout 2019. During the past year, rates have been cut 3 times, creating a perfect scenario for stock gains. Looking forward to 2020, the Fed has indicated that interest rates should remain stable, another positive for stocks. What could derail this rally? First, trade tensions escalate, secondly, and unexpected increase in inflation and interest rates, third, an unexpected outcome in the presidential election or impeachment proceedings. I recently attended a convention for Credit Union volunteers and was taught how to predict the future. It involves looking at what is trending at the present and assuming that the trend will continue. Recent performance has worked for horse racing, so why not stocks? I predict that energy stocks which have suffered for a very long time will be strong in the new year. Even though tech companies have gotten a little ahead of themselves, I think they will also do well. I expect stable interest rates at least through the first half of the year so Home Builders should do well also. Let's not forget that this economic expansion is in its eleventh year, a record. What often works late in a bull market is small cap stocks. The best way to invest in small caps is through a managed mutual fund that has a good track record and low fees. Finally, its time to do a little year-end tax planning by looking for losing stocks that could offset gainers sold during the year.

Minorities are Welcome

      Unlike the big garden that I grow each summer, this blog is not targeted towards minorities. Most of my garden is devoted to vegetables that local people in my area shun. If I want to sell Collard Greens, I must find a market in the Black Community. Eggplant is a big hit with the Orientals who have located in this area. Europeans love my tomatoes, eggplant, and sweet potatoes. If it wasn't for these folks, I would waste more food than I use. However, this blog is targeted towards the 75% of people who own no stocks or financial assets at all. Becoming a member of the minority who own stocks is the best way to secure a comfortable retirement and achieve your financial goals.  In this era of ultra-low interest rates, stocks are one of the very few investments that can actually produce a positive return after taxes and inflation. For a young working person, putting aside a modest amount in a retirement account each week makes a lot of sense, especially if your employer offers a match on your contributions. In the old days, just saving money in a savings account produced out-sized returns over time due to the power of compounding interest, but that is not true today. In order to achieve positive returns over a lifetime now, a saver needs the premium that stocks offer in the dividend and appreciation in stock price. Buying a low cost mutual fund within your employer's plan offers diversification and the opportunity to participate in the stock market. I also recommend buying stocks outside of any retirement plan as a hedge against any of life's unexpected surprises. There is even a well discussed acronym that describes today's investing environment: TINA. This stands for "There Is No Alternative" to stocks. I  must admit that as a member of the minority who owns stocks and financial assets, I sometimes feel some discrimination against us in the 25%. Taxes on interest, taxes on dividends, taxes on capital gains and increased record-keeping to track my basis and performance, are all distractions. There are even discussions from left-leaning politicians to tax the amount of your net worth. In the end, the positives far outweigh the negatives and I am happy to be a minority.

Dumb Luck

     I recently decided that with interest rates nearing record lows and could possibly could go lower, I should invest in a home building company. After doing a little research, I decided that KB Homes (KBH) would be a good choice. I placed the limit order on an aging computer with a faulty keyboard. Within a week or so, I received a confirmation that my order had been executed. When I finally got around to reviewing my portfolio, I realized that I had not actually bought KB Homes, instead, I bought a Korean bank holding company (KB). Oops. Apparently, the keyboard did not connect on the letter "H" and the symbol (KB) was purchased erroneously. By coincidence, the stock prices of the two companies were very similar. While researching my new holding, I realized that it had some features that fit my criteria for investment and the stock has actually gone up since purchase. This is not the first time that I have screwed-up an order and probably won't be the last. The first lesson here is to be careful when placing on-line orders, this could have been a costly mistake. The second point I would make is that good things usually happen when investing in the stock market. Over the long term, stocks of high quality companies will produce above average returns for investors, assuming a diverse portfolio. I never know for sure if the stocks I buy will be winners or losers but I do know that if I was not in the market that I would have no chance to participate in its gains. Just like buying a lottery ticket does not guarantee a win, not buying a ticket guarantees you will not win. A third and final point is to review your holdings on a regular basis to identify any dramatic changes to your portfolio. This morning, I noticed one of my holdings was up 40% in pre-market trading. I would be lying if I said I expected such a move in Biogen, I just liked the company's prospects and valuation. A recent half pot lottery conducted by the West Side Nut Club sold over 1.2 million tickets, resulting in a prize of over $600,000 for some lucky winner. Unfortunately, the holder of the lucky number, has failed to check their ticket and the money will soon be donated to charity. Talk about dumb luck!

Negative Interest Rates?

     At the time of this writing, I have read that there is about 15 trillion dollars worth of bonds issued worldwide that yield less than zero percent. This means that the borrower gets paid to use someone else's money. It shouldn't be like that. Just for clarity, if I borrow $1000 from you and promise to pay back $900 at a later date, that is a negative interest rate. How did it get like this? Many foreign countries are desperately trying to goose their economies by lowering interest rates. Each time rates are lowered, the effect is just not enough stimulus. Eventually the central banks of these countries reached zero rates and even lower in an attempt to ward-off a recession. Who is crazy enough to lend money that is sure to result in a loss? Apparently, lots of bond market professionals. When the price of a bond goes up, the yield automatically goes down, therefore, lots of people think that bond prices are still going to rise even though the yield is less than zero. Prices can continue going up because there is just too much money sloshing around in the world these days looking for a place to land. One systemic problem in countries like Japan, Germany, and France is that they have an aging population with lots of retirement savings and little need for consumer products like furniture, cars, electronics and appliances. Demand for these items keep factories busy. Currently many countries produce more than they consume, resulting in the need to export products to other markets. Without markets for these goods, factories will shut down and workers will be laid-off, possibly causing recession. I don't know how this will all end but I know it will end badly. Eventually all the tools in the Central Bankers' toolbox will fail to work and the world will slide into recession. Hopefully, the black hole of negative interest rates will not reach the shores of the United States, but some pundits are already predicting it will. I have disliked bonds for a very long time and like them even less now. I would rather be an owner than a loaner, that is why I prefer stocks to bonds. Stocks represent ownership in some of the healthiest companies in the world. When I see things get dicey, I like to buy stocks that are defensive in nature-like drug companies, utilities, and consumer necessities. People will continue to take their medicines, cool and heat their homes, and buy toothpaste and toilet paper until their out of money.

Liquidity

     Many years ago, when I worked on the factory floor of a filthy aluminum smelting facility, a fellow worker came in with some exciting news for his close friends. It seems that his wife worked for a life insurance company across the river and they were willing to sell company stock to willing investors. Several of my co-workers bought considerable amounts of stock based on the bullish comments of their friend. They bought the stock directly from the Chief Financial Officer (CFO) of the company, thereby eliminating the need for a stockbroker. Sounds great, right? Inside information about a small and growing company that someday may become another Prudential or Mass Mutual. Not exactly! The main problem with this investment is that the stock was not listed on any public exchange. In order to sell these shares, the holder would have to find a willing buyer himself, maybe even by placing an ad in the newspaper. In other words, the stock was illiquid. When things go bad or when I want to cash-out I like a nice easy way to exit a position. When a company has to sell its stock by solicitation, it usually means that they cannot or will not comply with the listing requirements of the exchange. Not all illiquid investments are bad, assets like precious metals, real estate, even CD's are designed to be held long-term. Scamsters often prey on unsophisticated investors with "private equity" and the results are usually a disaster for the holder of such stock. A better way to play this game is to buy an experienced company that invests in startups. These are called Business Development Companies or (BDC). This gives you the benefit of owning a piece of many small and growing companies, giving diversification, and liquidity by owning a publicly traded stock. Concerning the life insurance company- they were not required to provide investors with any financial statements that were audited by GAAP standards. There also was no analysts who covered the company and rendered an opinion about its investability. Basically your flying blind, handcuffed and upside down. Needless to say, many of my co-workers lost their entire investment in this company, but the lessons they learned lasted a lifetime.