A historic 10-year bear market has left investors less wealthy, with many wondering if they can ever actually win at investing. We believe conventional ideas about investing need to be discarded if there is any hope of turning the tide.
Passive buy and hold allocation strategies can hand investors severe losses as market prices move sharply lower. As investor survival instincts kick in, these losses can cause them to “buy and fold” as they move to protect dwindling capital. This may cause them to sit on the sidelines for several years until markets have been steadily rallying. Investing late in the game often makes investors channel assets into the hottest growth stocks or sectors in an effort to play catch up. Instead of buying low, they buy high and set themselves up for additional losses as overvalued markets correct.
One of the basic tenets to successful investing is to buy low and sell high, yet investors seem to do just the opposite. An easy way to improve performance is to only buy stocks when they are cheap. If you can’t find stocks to “buy low,” then keep your money in cash until you can.
We suggest focusing on cash flow from operations to signal healthy profits and a company’s ability to cover debt, while continuing to pay dividends. Liquid assets plus excess cash flow need to allow the company to pay any short-term debt coming due. Growth trends in earnings and revenue should be positive for the most recent quarter and for the last 12 months. Dividend payout ratios should show the board’s commitment to supporting and increasing dividends without compromising its ability to reinvest a portion of earnings to drive growth. Try to buy stocks when they are trading in the bottom half of their normal price trading range, and never buy a stock when its price is declining.