Streetwise

Lauren Rudd

Sunday, November 24, 2013

The End Game

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. In the past what has made this time of the year so unique was the inevitable tax-loss selling and profit-taking that occurs as portfolios are pruned and tuned ahead of the rapidly approaching New Year. While that will continue to occur, Wall Street’s herd mentality is also creating bargains.

For example, the major equity indexes fell this week after the Federal Reserve released the minutes of its last meeting, which indicated that the Fed might scale back its stimulus program at one of its next few meetings. Keep in mind that the meetings are about 6 weeks apart, which means that “next few meetings,” translates to 18 to 24 weeks or 4 to 6 months, or a March–June timeframe.

While Fed officials said such a move would happen only if economic conditions warranted it, Wall Street’s "The sky is falling mentality," is paranoid to the point that it believes the tapering could begin any minute. What if it does? Will corporate profits be driven downward? No, but interest rates will move a bit higher and share prices a bit lower...temporarily.

Nonetheless, the period between mid-November and year-end provides some of the best stock buying opportunities of the entire year; therefore this is no time to put your money under the mattress. Rather this is when you want to consider re-balancing and rejuvenating your portfolio to match the economic outlook for the coming year, an outlook that will likely be good but not great.

Specifically, you want to remove those holdings that when viewed in the harsh light of reality are not going anywhere and replace them with companies with a brighter future going forward. You are looking for companies whose shares have been beaten down because they are either being sold for a tax loss, or have succumbed to over-done Wall Street sell-offs. Or maybe a company has simply been the victim of the malaise that seems to periodically wash over Wall Street.

Do not let extraneous “noise,” or virulent negative commentary designed to attract media attention, sway your investment decisions. Realize that the economy is in a recovery mode, albeit a slow one. At the same time, the stock market is likely to continue its upward momentum well into next year. And there are numerous unloved and undervalued companies whose shares are looking for a munificent buyer.

However, you cannot judge the efficacy of company solely on the performance of its share price. Utilizing methodologies such as discounted cash flows and intrinsic value, 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 while compensating you for a certain degree of risk.

To simplify the equation consider that the guideline for my students is a minimum return over 3-5 years of 10 to 15 percent. Yet it is foolhardy to believe that you can always pick winners. Swinging from the rafters is a game for monkeys, not investors.

A prudent stock selection process, combined with a reasonable asset allocation and risk profile, will likely enable you to close in on that 10 to 15 percent objective as you research our dividend paying companies correlated with an expanding economy. To find those stocks 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 others.

While it may not make you the life of the party this holiday season, when someone asks if you have invested in the latest “hot” stock, such as Twitter, simply tell them that you prefer to be the tortoise and not the hare.