Are there any long-term investors left in the current market?
And, more importantly, should there be?
I think the answer to both questions is “Yes.” Long-term investing has a place even in this macro driven, let’s-all-follow-the-central-banks market. There are big, readily identifiable long-term trends to back with your money.
But…and I think this is crucial…long-term investing not only isn’t easy right now when all the profits seem to be going to the momentum players, but also making money from this strategy requires some rethinking of how to play the long-term game.
I put together some thoughts on this topic for a workshop I gave on November 15 at the American Association of Individual Investors conference in Orlando. This post is a version of that presentation.
It’s pretty easy to spell out why this market is so difficult for long-term investors. We seem to be in a period of repeated booms and busts beginning in 1999 with the Dot com/technology boom and bear and concluding (maybe but I don’t think so) with the Lehman/global financial boom and bust. The current market is one dominated by macro forces, and particularly by cheap money from global central banks. To take just one example, the Federal Reserve’s balance sheet had ballooned to $3.84 trillion as of mid October. That’s up from “just” $488 billion in January 2011. As all that money sloshes around the world in search of opportunities and hot markets, it produces extraordinary short-term volatility. My favorite example of that is August 2011 when from July 6 to August 10 the Standard & Poor’s 500 dropped 16.3%; only to climb 7.4% from August 10 to August 15; before falling 7.1% from August 15 to August 19; before climbing 7.9% from August 19 to August 30. Quite a ride for a year when the total net S&P 500 return for the year came to only 2.1%.
I could advise, as some dedicated long-term investors do, patience—if I thought this kind of market was only going to last for a few more months.
But it’s not. This market is likely to be with us for quite a while.
Why? Let me give you some of my reasons.
We’re witnessing the end of the 30-year bull market in bonds as interest rate drop from the double-digit 1980s. That drop in interest rates has to stop—unless we go to some form of electronic money that lets us set negative interest rates–at 0%. From here on out, stocks don’t have the fuel of falling rates that makes them look ever better versus bonds and that helps increase company profits by lowering corporate interest payments.
We can’t expect the world’s central banks to withdraw the cash they’ve pumped into the global economy any time soon. As I wrote in my November 4 post http://jubakpicks.com/2013/11/04/look-everybody-the-federal-reserve-has-no-end-game-for-getting-its-balance-sheet-back-to-normal/ the Federal Reserve has no end game. It will take the Fed more than a decade to reduce Fed balance sheet to “normal.” Same goes for the Bank of Japan. And, if the global and/or regional economy breaks the wrong way, for the People’s Bank of China and the European Central Bank.
And, finally, I think a number of the trends that pushed up global growth rates are now breaking in the other direction. An aging world grows more slowly. We’re seeing the end of cheap rural labor in China. We’re seeing the beginning of an age of competition for global capital.
With those long-term trends in place, I just don’t think “Be patient” cuts it.
But, fortunately, not all of the long-term trends are negative.
For example, globalization really is raising incomes in developing economies to create new classes of consumers. An aging world may grow more slowly in the aggregate, but aging does create big new markets. Food demand really is growing both in “volume” and for more “up-market” products.
And then there are lots of more “local” long-term opportunities. Just in energy, for example, there are long-term trends pushing toward technologies such as turbo chargers and carbon fiber that raise automobile mileage, toward big profitable investments in moving new sources of energy (U.S. natural gas) to new markets, and toward breakthroughs in battery technology that will “revolutionize” already revolutionary technologies in fields from electric cars to wind and solar power generation.
So what kinds of long-term investing strategy will work best in a short-term world? (Other than getting adopted by Warren Buffett or having your 12-year old daughter write the next “Angry Birds.”)
My suggestion? To create a limited number of narrow long-term opportunity silos holding limited numbers of stocks.
What’s that mean? And why am I suggesting this strategy? Read more
When on April 30 Cummins (CMI) announced that the first quarter would mark the low point in revenue for 2013, markets ignored the news and instead focused on the company’s big first quarter earnings miss. (You have to admit missing by 37 cents a share and reporting a 12.3% year over year drop in revenue does draw attention.)
But a month later, the company is standing by the comment and has added some detail. Truck sales in China, which were down 12% year over year in the first quarter have improved enough so that through April year to date sales are down just 2% year over year. In the United States orders look stable and in Brazil sales are trending slightly better than expectations.
I think all this is a tribute to management that continues to invest in technology—which then enables Cummins to gain market share on competitors. Read more
10 long-term picks for 2013? In this market? You’ve got to be kidding. There’s just too much volatility.
Precisely. Which is why long-term investing can make sense in this market. All that volatility can give you opportunities to buy great long-term stocks when everybody else is—for the moment—running for the hills.
But…and it’s an important “but”… the kind of long-term investing I’m talking about isn’t buy and forget. It’s not even exactly like traditional buy and hold.
I’d call it buy rarely and sell seldom. But do pay attention to the potential for wild swings in a market ruled by central bank cash flows. I don’t think it matters a whole lot whether you use something as traditional as dollar-cost averaging or a more complex system of market timing. The key is to find stocks of good companies that are positioned to ride trends of 10 years or more. You buy more shares when the companies are out of favor. You sell completely when the company shows signs of losing its way or when the trend itself changes. If you want to increase your potential returns, you can sell partial or entire positions when the fundamentals say a stock is overvalued or when technical analysis says momentum is fading.
This is the system behind my December 2008 book Jubak’s Picks (still available used from places like Amazon.com and Powell’s Books (powells.com.)) Since January 2009 I’ve run a portfolio built on this system on http://jubakpicks.com/jubak-picks-50/ . Every year I’ve done an annual update, buying 5 new stocks and selling 5 old picks out of the 50 stock portfolio.
The update for 2013 is a little late this year—May 3—but in this post you’ll find the usual annual five buys and five sells.
And you’ll find something a little different too—a continuation and extension of a list that I introduced into the portfolio in January 2012 Read more
This is a market that encourages short-term thinking even from long-term investors.
In a market supported and driven by central bank cash flows moves are big and sometimes even clear. Right now, for example, the government of Prime Minister Shinzo Abe is determined to weaken the yen. Despite the recent volatility that comes from the criticism of Japanese policy at the meetings of the leaders of the G7 and G20 economies, it’s hard to see this trend not running until the yen hits 100 or 105 to the U.S. dollar. For a month or two or three, buying shares of Japanese exporters makes sense, even if you think the long-term trend in the Japanese economy is down and down some more.
Sure, housing stocks like Pulte Group (PHM) and shares of oil refiners such as Marathon Petroleum (MPC) tied to the mid-continent oil boom in the United States, are up 123% and 93% respectively in the last year, but the trends behind these stocks are still going strong and the market momentum is still with them, so isn’t it worth jumping on board for a while?
Shares in pummeled sectors such as Yingli Green Energy (YGE) in solar or Banco Bilbo Vizcaya (BBVA) among European banks are up 106% and 33%, respectively, in the last three months. Is it too late to pile in? How about adding Trina Solar (TLS), up 56%, or Mediabanca (MB.IM in Milan), up only 19% in three months, on the theory that lightening can strike twice (or more frequently) as these sectors recover.
And don’t forget that the lessons of the volatility of recent years—2011 as an extreme example—and, of the boom and busts of 1999-2000 and 2008-2009—argue to go with the momentum but to be ready to hit the door running.
I think some of this short-term thinking is perfectly appropriate to the nature of the current market. This is a market dominated by central bank cash flows with all the volatility that suggests, for example. And I have advocated adopting short-term strategies such as swing trading around a position as well-suited to this market. And certainly momentum strategies have been alive and well as U.S. and some overseas stocks have raced to new all-time or five-year highs in 2013. (In fact I own both Yingli Green Energy and Banco Bilbao Vizcaya in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
But that doesn’t mean short-term thinking is the only thinking that will turn a profit in this market. In fact the very prevalence of short-term thinking suggests to me that some or many long-term opportunities are going undervalued. By long-term opportunities I don’t mean opportunities like those in the red-hot 3D printing sector—stocks like 3D Systems (DDD), Stratasys (SSYS), and recent IPO the ExOne Company (XONE). Those have been amply recognized by momentum players.
The opportunities I’m talking about are a little further out than this market is interested in seeing at the moment and perhaps a more nuanced story than those of the rise of a manufacturing technology that is 1) like your desktop printer and 2) will revolutionize global manufacturing.
Can I give you five quick examples? Thanks. I knew you’d say Yes. Read more
Deere’s (DE) first quarter fiscal 2013 earnings announced this morning before the market open in New York and the guidance for the rest of the year reminds me—in direction if not in degree–of the earnings Cummins (CMI) reported on February 6. Like Cummins, Deere announced a substantial 25 cents a share earnings surprise—15 cents for Deere if you back out lower than expected tax rates for the quarter. As at Cummins, sales growth didn’t keep up with the earnings surprise. Revenue climbed 11% year over year to $6.79 billion, just slightly ahead of the $6.74 billion Wall Street consensus.
And then, following the earnings announcement, Deere, like Cummins, lowered guidance for the next quarter. Not as drastically as Cummins, which talked of weakness in the first half, but Deere did guide down for the second quarter. The company lowered sales guidance for the next quarter to $9.78 billion from the Wall Street consensus of $9.83 billion. For the full 2013 fiscal year, Deere told analysts to expect 4% revenue growth to annual sales of $35.5 billion. The Wall Street consensus before the call was $35.3 billion. Deere also raised its forecast for 2013 net income to $3.3 billion from the consensus $3.2 billion.
The increase in full-year guidance is pretty much a reflection of the just announced first quarter surprise. Read more