Picking Winners & Identifying Losers

It has been said many times before that attempting to time the market is a fool’s errand. One approach common with Dividend Growth Investors the one taken by DivHut which is to  “…invest in a consistent and systematic manner. Over the long haul, being invested and staying invested in the stock market gives you the best long term odds of success.”  The benefits are consistency, removing emotions and dollar cost averaging while the disadvantages – particularly if fully invested – is the reduced ability to take advantage of “one day sale events” which are becoming more common.

Another favored approach is a screening mechanism to identify securities with characteristics matching ones personal investing preferences.  Many brokers offer this capability and community favorites Dividend Diplomats and Dividends Diversify have published theirs.  While these approaches removes emotion from the equation, subjectivity remains particularly in the exceptions to various ‘rules’.  Case in point, Simply Investing‘s, “The best method for determining when a stock is low is to compare the stock’s current dividend to its average (10yrs) dividend yield. When its current dividend yield is higher than its average dividend yield the stock is undervalued (priced low) and worth consideration. It shocks me to see investors and fund managers not apply this simple principle and continue to buy stocks when they are priced high, and then they blame the stock market for their portfolio’s poor performance.

To add to the complexity, one then has to ponder the role of mentors, advisors or life coaches.  The likes of Tony Robbins who states, “The mechanics of creating a Money Machine, a way for you to get financially free, are actually not that difficult. But first you have to make the psychological changes that can not only get you there, but help you enjoy that place of freedom as well.”  The real issue may not be in an individual’s ability to locate the path, but the fortitude to execute the steps required.  Perhaps this psychological layer gave rise to the growth of ETFs and funds which absorbs this for a nominal fee.

My personal take is to apply the ‘old standards’ to roughly 2/3rds of my portfolio with the remaining third made up of a mix of growth, M&A candidates, speculative and foreign.  Some of this mix is ripped from headlines.  Such as my concern last year with Unilever’s headquarters.  Now a scramble is afoot with UL investors determining the impact the move to a full Dutch HQ location.  But twice last week, the venerable Jim Cramer stated,

“Welcome to the post-highs market where there are simply too many headwinds swirling, from rising raw costs … to the West Wing revolving door to failed takeovers and suddenly unhelpful government intervention,” he continued.

But even with all of the negatives, Cramer knew one thing for certain: the earnings are strong and full of upside surprises, and that’s what’s keeping the market from tanking.

But don’t forget that the thicket of national news, mostly emanating from the White House, has not been good for stocks lately,” Cramer said. “We can no longer rely on Washington to give us a positive backdrop, which is precisely what makes this market so challenging compared to last year.”

This sentiment I agree with.  Where we diverge is that some news is indeed worthy of including in purchase/sale decisions.  Take the EU’s decision for possible tariff retaliation.  Burying ones’ head in the sand while turbulence is swirling serves no purpose and may result in missed opportunities.

Hope you all experience a good and profitable week!

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10 thoughts on “Picking Winners & Identifying Losers

  1. Thanks for the link SR. Always nice to be mentioned. A lot of good thoughts here. Having a process, whatever it is, and sticking with it consistently are important ingredients. Even on the speculative 1/3 of your portfolio it seems you have a process. Tom

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  2. Can’t agree more. Turns out I failed to include the final paragraph cautioning on the government rewriting the rules in real time (T, QCOM, et.al.) which may tilt the scales a bit making my spec portion more perilous than normal. But as you basically said in your piece, a solid foundation is the key to be able to play.

    Thanks for the read!

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  3. I find it’s much easier to buy index funds and ETFs for the majority of my investing money especially the money that flows in automatically.

    It takes me a ton of time and research to get comfortable with an individual stock so I don’t make individual buys too often unless it’s a screaming deal. In this market, there aren’t many screaming deals.

    For my own analysis, I focus heavily on free cash flow and growth potential of a stock. If the growth isn’t there then I’m not too interested unless the company is a free cash flow machine and is for some reason on sale big time.

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    • I believe you’re correct in your value assessment. You must be a Buffett adherent as well. 🙂 It is a great metric but (in my opinion) has one issue – being the ignoring of geopolitics. Take Ford – if Nafta fails its FCF may be in jeopardy. Tariffs on other FCF generators as well. Which makes it a trailing indicator. Which drives home your point of ETFs! I guess any approach that is not comprehensive will have flaws or biases built in requiring time and effort to flesh out.

      Thanks for the read!

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  4. Trying to time the market isn’t a fools errand. It is possible to consistently beat it over the long run. The only people who say it can’t be done just haven’t dedicated enough time to trying to do so. This saying is just an excuse for their failure – “it’s all luck”

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  5. Perhaps we define “market timing” differently. I concur it’s possible to beat the market consistently over the long haul. I’m living proof of that beating the S&P for 34 of the 37 years I’ve used it as a yardstick. But did I foresee February’s correction? A resounding no. I took advantage of part of the pullback but failed to identify the absolute bottom. Perhaps one who studies charts and averages performs better but my preference is in the trends and imbalances (tariff impacts being a current example).

    Thanks for the read!

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  6. The psychological changes needed are so difficult to master – which is the biggest reason most people do worse than the market. I don’t think ‘picking’ stocks is the hard part, but making consistent good decisions for a long period of time – including on the sell side. Also makes it a great challenge though!

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    • I’m not sure anyone can master the psychology of it all. As you say, stock selection for buying and holding is fairly straight forward as long as you identify a strategy fitting your comfort level. Besides, averaging down can be a good equalizer. Selling … I did an analysis a couple of years ago (https://drog98.wordpress.com/2016/01/14/crisis-management/) which attempted to answer this question with no clear answer. Even when ‘rules’ are in effect, emotions tend to override!

      Appreciate the visit!

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  7. I stick to index funds. I have had success as a stock picker. But, I could never sustain it. Index funds help me sleep better. That being said I also invest in dividend ETFs like VIG and VYM

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  8. I see both pros and cons to each approach and one could argue that a portfolio as broad as mine is a no-fee index fund in disguise. Your method (less the tax loss IRS grey area) provides instant diversity with good vehicles and less oversight. Mine provides the ability to select weightings – and avoid some of – the underlying securities, albeit with additional initial research time required. Both can be set on auto-pilot though mine will require more managerial tweaks (yours auto-tweak). Overall, similar strategies moving towards the same goal.

    Appreciate the visit!

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