Taking Stock

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Tony Crowell
Tony Crowell

From Trick Or Treat To Naughty Or Nice

Only a few weeks ago, kids were in Halloween costumes and the Dow Jones Industrials Average was nearing 17,500. Stock averages then began to reach all-time highs just before oil prices plunged and stocks joined the slide. Oil prices are now down 50% from their peak in June, presently pooling at a five-year low.

In volatile stock markets, which have become normal, stocks tend to overshoot in both directions. Fed Chairwoman Yellen commented that the decline in oil prices is a net positive for the economy. Stocks had overreacted to the unexpected oil price slide and Fed comments that it intended to do nothing for the moment were enough to reverse stock market momentum, sending the Dow up over 500 points in a couple of days back through 17,500, currently up 4% for the quarter and 6% for the year-to-date.

These are good returns, particularly in a low-interest rate economy where a ten-year U.S. Treasury bond only pays a little over 2%. Stocks have historically provided higher returns than almost anything else and investors can enhance their abilities to enjoy higher returns if they stop obsessing over day-to-day price fluctuations. It would also help if they decoupled themselves from tracking stock prices against whatever they paid. Price fluctuations come from trading desks run by institutions that could not care less what you paid.

Focusing on selecting and holding quality stocks rather than worrying about their short-term ups and downs works. It may seem unnatural as it goes against human tendencies to feel the pain of loss more acutely than we feel the pleasure of gain.

None of us like losing. Lance Armstrong was so committed to this that he may have sacrificed his cycling career to avoid the pain of losing. He said, “I like to win, but more than anything, I can’t stand the idea of losing. Because to me, losing means death.”

Psychologists have experimented with coin tosses. They ask how much the subject will pay to gain to offset the loss of an unsuccessful gamble. Most people want $20 or more to make a $10 loss acceptable. Researchers conclude that it takes around twice the exposure to upbeat financial news in order to offset the impact of unfavorable news. I feel that not only can investors improve their results by taking longer-range perspectives but they can also boost their emotional health.

Investors sometimes comment to me that they are waiting for some stock they bought years ago “to come back” when it has never gone anywhere but down. These often came from a “tip” by a supposed insider or some rich friend. This is a familiar example of loss aversion and it may be time to sell and get a tax loss.

With oil stocks still battered, I again suggest putting solid dividend payers into retirement accounts and leaving them there, reinvesting their dividends. I suggest Chevron (CVX-$107-4.1% yield); Conoco Phillips (COP-$66-4.6%); Exxon (XOM-$89-3.1%) and Suncor (SU-$30-3.5%).

Kinder Morgan (KMI-$40) is a new recommendation in the energy sector. It offers “midstream” infrastructure, primarily in natural gas through 80,000 miles of pipelines. KMI recently consolidated various limited partnerships into the parent company, creating the third largest energy company in North America. Yield is 4.4% with dividend increases for two straight years and more anticipated.

Outside the energy sector, quality stocks with promising dividend prospects include Apple (AAPL-$111), Amgen (AMGN-$167), BlackRock (BLK-$354), Blackstone (BX-$34), Disney (DIS-$91), Intel (INTC-$36), Johnson & Johnson (JNJ-$105), Novo-Nordisk (NVO-$44), Simon Property Group (SPG-$184), Union Pacific (UNP-$117) and Visa (V-$262). Investors who have been frantically trying to trade have been naughty; those who stuck with stocks like this have been nice and Santa will reward them.

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



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