Streetwise

Lauren Rudd

Sunday, November 10, 2013

The Cookie Tray Is Coming Around, So Grab Some

With stocks vaulting to new highs, many investors are asking, “Is it time to sell? Should I be on the sidelines?” I recently wrote in my daily column that despite ever increasing gains in the equity markets, the daily volume was low. The reason was simply a herd mentality that a correction might be coming.

Of course there will be a pullback of sorts. And from there the markets will proceed to move higher. They always do. It is just that nobody knows when or to what degree, so why stew over it. To do so is utter nonsense. And when it does happen there will be those that say, “See I told you so,” as they bury their head in the sand and miss a great buying opportunity. That is no way to manage a portfolio.

Here is a piece of advice; the cookie tray is coming around so grab some while you can because you do not know when it will come around again. The markets have been performing exceptionally well. And while you should always remain cautious, gains are no reason to sell. Listen to the naysayers long enough and the urge to rush for the exits can be irresistible. The icy panic that grips you at the thought of your profits evaporating is overwhelming. Hey, whoever said investing would be easy.

However, today’s situation is a little different. The stock market continues to reach for the clouds for a variety of reasons, including an improving economy, higher corporate earnings, and of course a little assistance from the Fed’s monthly $85 billion bond (QE3) buying spree. Moreover the Fed seems to have made it abundantly clear it plans to continue the policy well into next year.

If a company and its share price are doing well, hold your ground. Do not let others, particularly those who stand to make a commission, press you into selling. Unfortunately a “low turnover portfolio” is the antithesis of what the brokerage industry desires.

Peter Lynch, former manager of the Fidelity Magellan Fund, in his book “One Up on Wall Street” writes how he bought Toys R Us at $1 a share and sold it at $5. While that was a very nice gain back then, there is one small detail...a few years later the stock was selling at $25. Lynch writes “When you have found the right stock and bought it and all the evidence says it’s going higher and everything is working in your direction, then it’s a shame to sell.”

Lynch goes on to say that you cannot let success spook you. Yes, you have to be on the lookout for deteriorating management, an upward cost spiral with inadequate controls, increased competition, or a lack of innovation. Nowhere on this list is the item, stock price is too high. However, rebalancing a portfolio when a position is proportionately out of line makes sense.

Warren Buffett has stated that he is quite content to hold on indefinitely so long as “the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest and the market does not overvalue the business.”

The problem faced by many investors is that they have this overwhelming desire to continually interact with their portfolio. Succumbing to this trait is like taking a stroll down the center of a busy highway. It is only a matter of time before you are run-over.

If you are a trading junkie then heed the words of the great Benjamin Graham, Buffett’s mentor and author of “The Intelligent Investor”. Note: If you have not read this book, get a copy and read it before making another investment decision. Also, ask your broker or money manager if he or she has read it. If they say no, get them a copy and then find yourself a new broker or manager.

Graham suggests (and I would disagree with the procedure today) that as the market rises you sell off some of your stocks and put the proceeds into bonds. When the market declines, you reverse the procedure. The chief advantage, Graham writes “is that such a formula will give the investor something to do.”