Investors need confidence in company’s managers

You may have heard the old adage: If you don’t like company management, vote with your feet and sell the stock.

Benjamin Graham, author of the 1949 classic The Intelligent Investor, calls that attitude “fatuous and harmful,” for it does nothing to improve bad management and merely shifts the problem to someone else. Graham was a believer that “investors make money not out of each other but out of … businesses.”

In the daily hype surrounding the stock market, the purpose of owning stocks is often lost on the average investor. The prevailing sense that investing is gambling or sport (words such as “bet” or “play” when referring to investing make me cringe) is unfortunate. Investing is neither. When we buy shares in a company, we are buying the company’s management team as well as a portion of the company’s future earnings. This is our management team, and we are counting on them to execute a sound business strategy and robust earnings growth.

Because the nature of stock ownership is a little less tangible than say, real estate, it is even more imperative we have confidence in the management team. This past weekend, Barron‘s published its annual listing of the “World’s Most Respected Companies.”

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Play your own game–invest, don’t trade.

Trading and investing are not the same thing. When we use the two words interchangeably we muddle the message. We confuse the issue.

The word trade comes from the 14th century Old English: tredan. The original meaning referred to a way or course — a manner of life. But by the early 1500s the meaning had evolved to include buying and selling as a means of exchanging commodities.

A trade, therefore, is a short-term activity with a very specific purpose — an acquisition or disposition.

Investing, on the other hand, is an activity with a longer-term intention. The word’s source, investire, is from the 14th century Latin meaning to clothe. By the 16th century, this word, too, had evolved into an activity that gives capital a new form. For our purposes: a greater, larger, plumper form.

RELATED: Checking back on our 2014 stocks to watch

MORE: Temper speculation with common sense

The differentiation between trading and investing matters because too many of us freely interchange the use of and meaning of these words. They are antithetical. They are mutually exclusive. Traders intend to produce a quick, short-term gain (though the statistics would show more frequently a loss) and investors seek to increase their wealth through the long-term ownership of sound businesses.

Our friend, Benjamin Graham, author of “The Intelligent Investor,” said it like this: “But everybody knows that most people who trade in the market lose money at it in the end…they are not investors.”

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Following up on our 2014 stocks to watch.

Last July we examined two industry leaders in two very different cyclical industries: Oracle Corporation —a stock I own — and International Paper.

ORCL is a leader in enterprise software and IP is a leader in paper and packaging (think: corrugated boxes and paper cups). At that time the two companies traded at comparable valuations of approximately 13 times estimated earnings. Both stocks paid a dividend. ORCL yielded 1.2 percent, while IP yielded a more substantial 2.9 percent. Both stocks were cheap as measured by their respective p/e’s, and, in particular, when compared withtheir peer group companies and the S&P 500.

RELATED: Tengler: Long-term strategy key to investing success

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Despite their similar valuations in July 2014 both stocks had very different earnings histories. ORCL’s five-year earnings registered in the mid-double digits, and was expected to slow to the low double digits in the subsequent five year period. IP’s five-year earnings growth, on the other hand, was flat due largely to a restructuring; five-year estimated earnings growth was expected to grow in the mid-single digits.

Read more here:  The Arizona Republic

Temper speculation with common sense

For Benjamin Graham, the greatest risk facing an investor is not the market, but short-term, emotional reactions to stocks. Nancy Tengler discusses the importance of emotional discipline.

 

Successful investors are students of history. Just as philosopher George Satayana famously declared: “Those who do not remember the past are condemned to repeat it,” so it is also true: Investors who do not study the historical performance of stocks are doomed to make costly mistakes.

No one understood that point as clearly as Benjamin Graham, author of “The Intelligent Investor.” And no one has articulated it so well. According to Graham, intelligent investing requires an informed (though not necessarily exhaustive) understanding of the companies we are buying. He does not argue that individuals must be endowed with superior intelligence; rather, they must possess the discipline to exercise “firmness in the application of relatively simple principles of sound procedure.”

For Graham, the greatest risk facing the individual investor is not the market but our short-term reaction (often emotional) to stocks. We sometimes find ourselves “beset with confusions and temptation… frequently unconscious toward speculation, toward making money quickly and excitedly, toward participating in the moods … of the crowd.” In other words, Graham warns us to be wary of our natural proclivity to desire instant success. Gambling, lotteries and speculative trading appeal to the eternal hope etched on our imagination; the hope we just might win, we just might get rich quick.

Read the rest of this column by clicking here:  The Arizona Republic

Why Rising Interest Rates Won’t Necessarily Be Bad for Stocks

When Benjamin Franklin said, “An investment in knowledge pays the best interest,” he may have been anticipating the low to zero interest rates savers and investors have been contending with for years.

Now it seems that rates have finally begun to rise, and contrary to conventional wisdom, that won’t necessarily be bad news for stocks.

Since the end of January, the S&P 500 has returned a positive 7.1 percent, while the price of bonds has declined and the 10-year Treasury yield has risen 0.6 percent. Investors have been busy selling bonds in anticipation of the inevitable (and much-anticipated) hike by the Federal Reserve Board while economists and pundits handicap the date of the upcoming rate increase. June? September? 2016?

Click here for the rest of the column: The Arizona Republic

When Market Levels Seem High Focus on the Best Companies with the Cheapest Valuations

The age-old maxim —”sell in May and go away,” is often quoted by traders as a sure-fire strategy. And, for seemingly good reason.

According to Yardeni Research, since 1928, the S&P 500 has risen an average of 1.9 percent from May to October but an impressive 5.2 percent from November to April. Yet since the beginning of this bull run the old adage has not held true. If you had sold in May during this cycle you would have underperformed the overall market by a cumulative 70 percent. Since 1926, the stock market has generated positive annual returns more than 70 percent of the time, so it turns out that despite market tradition, being out of stocks is often riskier than remaining invested.

So what strategy should an investor follow—if exiting is either too risky, or at the very least, undesirable—when convinced that the market is becoming fully, or overvalued? One of my tried-and-true investment rules? Buy stocks like you buy toilet paper — focus on price and yield.

For the remainder of the column, click here: The Arizona Republic