Streetwise
Lauren Rudd
Sunday, November 22,
2009
The End Game and How To Play It
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.
As a rule, the period between mid-November and year-end can
provide some of the best stock buying opportunities of the entire year. While no
one would argue that the past year or two have diverged considerably from what
might have been thought of as normal, this is no time to put money under the
mattress or in a certificate of deposit, which are virtually equivalent.
It is during this period that investors often plan to do as
much as 80 percent of their annual buying and selling. Although the economy and
the stock market have seen better times, do not let the current state of affairs
negate your taking advantage of the ensuing investment opportunities.
End-of-the-year bottom fishing is quite simple. You are
looking for companies whose shares have been beaten down because they are being
sold for a tax loss or have succumbed to the understandable but over-done Wall
Street selloffs we see all too often nowadays. Or maybe they are simply the
victim of the waves of economic malaise that are also so prevalent of late.
Regardless, there are numerous unloved and undervalued companies whose shares
are looking for a munificent buyer.
Rather than dwell on the negative, you should view the
problem from the perspective that both the economy and the stock market are in a
recovery mode. However, regardless of whether a stock has posted a gain or loss
over the past year, you cannot judge the efficacy of company based on a one-year
performance of its share price.
Instead, your investment objective should be to create a
return that at a minimum exceeds the sum of what a 30-year treasury bond would
pay, combined with up what you will lose through taxes and inflation. Your
return should also exceed the return you would receive by purchasing an S&P 500
index fund.
To simplify the equation consider that the guideline for my
students is a minimum compounded annual growth rate over 3-5 years of about 15
percent. Moreover, 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 or if you
have invested in the latest “hot” stock or commodity whose returns have
skyrocketed, simply tell them that you prefer to be the tortoise and not the
hare with a goal of a 15 percent average compounded rate of return.
If you are prudent in your stock selection process and you
let time and diversification work to your advantage, while still keeping your
risk profile at a reasonable level, you will likely meet and even exceed that
objective without breaking a sweat.
What you want to look for are those companies that have been
able to weather the economic downturn and will 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?
Each year about this time I offer up 12 investment ideas, the
performance of which I then review a year later. However, the list is not
intended to be an instant portfolio where you simply add water and stir. On the
contrary, they are merely suggestions that are designed to be a catalyst to
stimulate ideas and thinking on your part about possible sectors and companies
you might want to investigate.
So start now with your research and
after the Thanksgiving holiday we will see how my picks of last year did and I
will offer up another list of 12 companies for your perusal.
