Keep Your Head When All About Are Losing Theirs
Stocks tumbled into January with their weakest performance to begin a New Year in 15 years. The Dow Jones Industrial Average was below 3,000. It was on its way to over 13,000 in 2007 before the financial crisis, which took it below 8,000 in 2009, before it resumed its run to above 16,000 today. There have been plenty of rough landings over that span but thoughtful investors who never panicked and used dips to augment their investments have done rather well.
This illustrates the advantages of stocks as investments and points out the dangers of giving into herd emotions. By 2007, many were buying the sacred cows of mortgage lending like the big banks, whose earnings were shooting to the clouds on accelerating fantasies of loans based on imagination. (The new movie, The Big Short, brings back those days with dramatic flair.” Some of those jumping in were the same investors who had frantically sold on overly wrought scary news and were tardily trying to make up for lost time and opportunities.
The lesson is clear although the execution is difficult. After a disappointing year like 2015, it is even easier to give in and Mr. Warren Buffett’s advice is especially vital to investment success: Be fearful when others are greedy and greedy when others are fearful. He wrote that in an October 2008 New York Times op-ed piece, which continued, And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”
Today’s continuing plunge is certainly alarming. They all are and market history suggests this one may continue for a dozen or even more trading sessions before fears subside. In this case, the devil is the market collapse in China, whose markets were only open for fifteen minutes this morning before another dip triggered “circuit breakers” that shut down the market. Under such conditions, overseas investors whose stocks are frozen by these restrictions are being forced to sell stocks in more orderly markets like the U.S. and Europe to meet margin calls at home.
This phenomenon pops up on every major market dip as leveraged “investors” are forced to sell what they can, not what they should. This provides a dual message: (1) Don’t borrow too much and (2) Take advantage of those who do. Such is the nature of capitalism.
In stocks, anchoring and augmenting stock holdings with solidly capitalized companies that are growing and not living off reputation will more easily implement these tactics. Apple (AAPL-$97) is certainly going to slow its unique growth rate and Disney (DIS-$99) will not make as much off cable as it did but their present prices are ignoring their dominant strengths. Large growing industrial stocks at bargain prices include Boeing (BA-$133), General Electric (GE-$29), Honeywell (HON-$99) and Thermo Fisher (TMO-$134).
Domestic economic problems within China may revive Machiavelli’s tactic of diverting attention by emphasizing concerns with exterior issues, thus increasing spending for “defense.” This would probably enhance the fortunes of diversified defense contractors like Northrop Grumman (NOC-$187). Huntington Ingalls (HII-$124), a new recommendation, is the largest military shipbuilding company. Its earnings are growing at double-digit rates, its P/E is only 14 and it offers a 1.6% dividend with increases for the last three years.
Investors should keep their cool in the face of the Chicken Little fortunetellers who are whining about a supposed hydrogen bomb test in North Korea or a breakup of the European Union. It’s an election year and we will hear even more about an imminent Armageddon. Keep perspective, think of those who have real reasons for concern like refugees and hard working people trying to make ends meet. Testing times favor the thoughtful.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622
