Next month, an array of laser devices mounted on top of high-rise apartment buildings in New Jersey begins operations. Their function is to zip market data 35 miles between the data centers of the New York Stock Exchange and the Nasdaq Stock Market data center in order to shave a few billionths of seconds in placing orders by high-frequency trading firms.
These market players seem in an arms race, after investing $1.5 billion last year in microwave systems that also carry transmissions at nearly the speed of light. Besides helping maintain the most liquid markets in the world, these speedy devices should remind investors that any attempts to convert to traders face formidable opposition.
Given perspective, there is little reason for most investors to attempt competing with professional investors. Professor Jeremy Siegel, author of Stocks in the Long Run, found that stocks returned an average of nearly ten percent before inflation over the last 200 years. In practice, this means that investors who take a longer-range perspective have higher probabilities of similar returns.
Given a perspective of over five years, preferably ten, stocks consistently beat bonds, gold and other investments, particularly those aimed at the short-term. Trading is always tempting, especially under a continuing barrage of financial news, and some investors may wish to allocate some of their assets into a trading portfolio, hopefully without losing sight of their longer range objectives.
Diversification is desirable provided it does not lead to complacency. One Wall Street veteran once said, “Put all your eggs in one basket-and then watch that basket!” Putting some assets in a short-term trading portfolio is a form of diversity in time. I also recommend holding some stocks in companies outside the U.S., particularly in Europe.
In today’s volatile markets, I continue to emphasize stocks in larger companies, with modest diversification into smaller companies like Generac (GNRC-$55) Jazz Pharm. (JAZZ-$171) and Vascular Solutions (VASC-$25).
Among the larger companies, I am reiterating my recommendation of DuPont (DD-$65). Wall Street seems to regard DuPont as still an old-line chemical company without giving credit to its increasing conversion to faster growing lines, particularly agriculture. This division accounted for one-third of 2013 sales and 40% of profit.
The world’s population is expected to grow from today’s seven billion to around 9.5 billion by 2050. Food production needs to increase 60% by then, exceeding the demand for energy. DuPont is trading at 14 times estimated 2014 earnings, less than the ratios around 20 for other agricultural chemical companies like Monsanto and Potash.
Attempting to improve on long-term averages requires taking positions in apparently mispriced stocks like DuPont. Blackstone (BX-$31) is similar. This large asset manager was privately held until its IPO in 2007, just in time to catch the financial crisis, and is still building investor recognition. It is a leader in alternative asset management, a loose term for asset classes other than conventional stocks and bonds. This strategy is popular in today’s low interest rate environment and is helping build the total of assets under management, currently $266 billion.
The manager of a private growth fund, of which Blackstone is its largest holding, said, “Blackstone is the largest alternative asset management firm; it’s also the fastest growing, the most diversified, the most global, and has the cheapest multiple with the highest dividend.” That dividend is variable but currently provides a 7% yield. Besides its investment merits, Blackstone is a leader in supporting post-9/11 servicemen, having committed to hire 50,000 veterans.
SeaDrill (SDRL-$36) also seems underpriced. This Norwegian-managed company has the most modern deep-water drilling fleet. This group is not in Wall Street’s spotlight at the moment but SeaDrill’s rising earnings and solid dividend are most promising.
The market is so far following its usual pattern for a mid-term year in the Presidential election cycle. These often begin with a weak January and a solid February preceding a seasonal peak by April with a strong finish to the year. We’ll see, however, continuing business growth and low interest rates still point the way toward new stock market highs at some point in 2014.
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/