Since the first day I started working in the stock and bond business, the old timers – the guys I have always sought out as a great source of advice – have said almost without exception, “The markets don’t change.”
This mantra was in response to those in the business who, following a big run-up or downturn in the market, would make the claim that “It’s different this time.” The claim was usually made to support buying at the top of a market or buying when things seemed over-priced.
Until now, the old timers’ advice was always correct. Markets have been the markets. They run up, they fall down. They fall a lot faster than they go up – and if you wait until everyone gets in to convince you its okay to do it, you will lose money.
This time, though, I believe some things have changed. The changes may be of a temporary nature, but this definitely is not your grandfather’s or father’s market. And you’re going to have to prepare yourself mentally to deal with these changes… or get out of the market. You can stay in and try to do the jump in and out game, but you’ll get crushed even faster by doing that than you would have in the past.
Essentially, you’re going to have to adopt a different trading discipline for the next three to five years. (The majority of small investors have no trading discipline anyway, so this will be a new concept for them.) There is still a lot of money to be made in stocks and bonds. It will just take a few shifts in expectations and procedures to get to it.
The biggest change is that this is not a trading market. Some will continue to get lucky with their guesses, and the select few who always seem to make money will keep on making it. But going forward, the big money will be made by those who can wait it out and use dollar cost averaging to their benefit.
Trading requires at least some predictability. But now, the small degree of predictability the markets had has been driven underground by the huge collapse in confidence. The market is jumpier today than at any time in our history. The slightest suspicion, wind shift, or rumor makes it plummet. We will see more falls over the next five years than at a rock climbing competition.
The trader’s position has always been just this side of insane, but now it has crossed the line. With virtually no fundamentals, no confidence that the changes put in place by the Obama administration will produce any lasting results, the debt, the monetization of the debt, the politicizing of the banks, and a world community that has grave misgivings about the future of the global economy, you’d have to be crazy to think you could predict anything.
What will work going forward is positions in companies like Clorox (CLX). There are the usual reasons to own a stock like this, as well as the new reasons that work within the new market rules.
First, the usual reasons: The company recently raised its earnings projections. It will earn around $3.70 this year and $4.17 next. The dividend is $1.84, about a 3.4 percent yield, and there’s plenty of cash to pay it. Its profit margin is rising, it has abundant cash, it’s paying down its debt, and it has stable brands (Clorox Bleach, Kingsford Charcoal, Brita, Glad Bags, Burt’s Bees Skin Care, and Greenworks Detergents).
A solid company with reasonable prospects.
In this economy, that is what I call a slap in the face investment. It is about $51 per share, was as high as $65 in the last 52 weeks, was as low as $46, and has been showing a very nice upward trend for the past three months.
The new reasons to own CLX: It isn’t sexy, it will not run off the charts with breaking news, it pays a good dividend that appears to be safe, it won’t be subject to big swings, it won’t fall off the charts because of a rumor, it is expected to show an incredibly boring growth rate of around 15 percent going forward, and – most important – you can own it, wait out the market volatility, and still retire on time.
In fact, this stock has everything you will need to survive the next five years as an investor: stability, fundamentals, solid management, dividend income, and products that consumers need and will keep buying.
Why is dividend income a factor here? Because I expect to see major – and I mean major – swings in this new market. And while you’re waiting it out, if you don’t have some type of money showing up in your account from a bond or a safe dividend, there will be extended periods when you probably won’t see any money at all.
The second strategy to use in this market is dollar cost averaging. Take advantage of the big price swings. Make the volatility work for you. As Warren Buffett said recently, “I love when things are this bad.”
Investors must learn to cheer when the market crashes. It’s a buying opportunity. If you’re in the right stocks, you have virtually nothing to worry about except where you’ll get more money to buy into the dips.
Shift your expectations and investing style for the next five years or be prepared to be very disappointed. Get out of the Stock of the Month Club, get back to boring, solid companies you can live with.
This is the same advice my old timer friends in the markets have been giving me for years. Maybe things haven’t changed that much after all. Maybe we’ve just been dropkicked back to reality.
[Ed. Note: Steve McDonald has dedicated years of study to the bond market. His expertise is in showing investors how to generate stock market gains without taking stock market risk. And for a select group of investors, Steve has agreed to share his secrets of success... and his top bond recommendations. Click here to learn more... ]