Streetwise
Lauren Rudd
Sunday, November
30,
2008
It Is End Game Time
They call the conclusion of a chess match the end game and it
takes special skills to master that part of the contest. In the stock market, we
have the end-of-the-year-game. What makes this time of the year so unique is the
tax-loss selling and profit-taking (such as it is this year) that occurs.
Normally the period between mid-November and year-end can
provide some of the best stock buying opportunities of the entire year. In the
past investors planned to do as much as 80 percent of their annual buying and
selling during this period. Unfortunately, the economy and the stock market have
seen better times. However, the current state of Wall Street should not negate
your taking advantage of the investment opportunities currently available.
End-of-the-year bottom fishing is quite simple. You are
looking for companies whose shares have been beaten down because of the malaise
gripping the investment world. Or they could have succumbed to the
understandable but over-done panic we see all too often nowadays. Regardless,
there are numerous unloved and undervalued companies whose shares are looking
for a munificent buyer.
In the past I have provided those who are short of investment
ideas with some candidates, the performance of which I then review a year later.
Never intended to be an instant portfolio where you simply add water and mix,
the ideas were designed to be a catalyst to stimulate your own investment
thinking.
Rather than discourage you with the toll the market has taken
on last year’s selections, we should instead view the problem from a fresh
perspective. Recognize that virtually every stock has suffered some damage over
the past year. Furthermore, you cannot judge the efficacy of any stock selection
based on a one or two year return.
Your short-term investment objective should be to exceed the
annual performance of the S&P 500 index, preferably by 3 to 5 percentage points.
Longer term, you want to exceed that same index’s 40-year average rate of return
of 10.8 percent.
However, let me reiterate a point I have made before. It is
foolhardy to believe that you can always pick just those companies whose shares
will show the highest price appreciation during any given year. Swinging from
the rafters is a game for monkeys, not investors.
Although it may not make you the life of the party this
holiday season, if someone asks you about your investment philosophy, simply
tell them that you try to exceed a 10.8 percent average compounded rate of
return over a period of 3 to 5 years.
If you are prudent in your stock selection, and you let time
and diversification work to your advantage, while still keeping your risk
profile at a reasonable level, you will likely leave that objective in the
dust...without breaking a sweat.
No, exiting the market and stuffing your life savings under a
mattress or in a Certificate of Deposit (they are equivalent), is not an option.
Instead you want to look for those companies that will best be able to weather
the economic downturn and then blossom as the economic revival unfolds.
To find them you are going to need an edge. If you want to
become a market-trouncing master strategist, your knowledge of a given company
must be superior to that of the great unwashed. So where do you begin?
Six companies that have the potential to build on current strengths, synonymous
with compressing a spring, and then uncoil with augmented potency during the
next expansionary period would include Best Buy and Hasbro. On the technology
front, Hewlett-Packard and Intel are possible candidates. Finally, in the arena
of consumer non-durable goods, Procter & Gamble and Clorox seem to stand out.
Next week we will see if we can add to this list with six more companies, some
of which will be small cap stocks to balance things out.
