Saturday, October 26, 2013

Make Hay While the Sun Shines

Record earnings, low interest rates, and at least a modicum of economic certainty has once again led the stock market to near-record 2013 highs. As financial farmers hoping to Invest Like A Farmer, we love favorable economic climates to deploy seed capital. We have now been in fertile ground for approximately two solid years, and given the current conditions, I suspect this will continue for the foreseeable future.

Certain catalysts become apparent during a classic bull run, some of them include the following; significant strength in the IPO (initial public offering) market, increase in margin use by investors to leverage returns, "cheap" money, stability in the housing market, decent unemployment rates, and solid corporate earnings across a variety of sectors. We have all of these in place now, plus what I believe is the most important nutrient to any financial farmer's portfolio; stock momentum.

Day to day, month to month, and even year to year it is almost impossible to predict with any certainty a price target for the Dow Jones, S&P 500, NASDAQ, Gold, Oil, or specific stocks. What I have gleaned, however, is that momentum usually carries until it is broken. I'm a big believer in inertia.

On the radar we have a potential Fed tightening (unlikely due to the debt ceiling/government shutdown debacle), holiday spending (should be up moderately year over year), and February 2014 where we once again debate the finances of our country. I think there is low possible collateral damage to the stock market on any of these outcomes, and consequently, I believe inertia propels us higher with the Wall Street benchmarks tacking up from here. Nonetheless, I will continue to employ my simple rule set as previously posted to help guide my portfolio selection:

1) Boring is undervalued. Look for companies with established brands. If they are exclusive, finite, hart-to-get, vital, addictive, and/or monopolistic, so much the better.

2) I prefer companies that pay me to own them. Specifically, I want to buy companies that pay quarterly dividends that have historically risen over time.

3) Of the four possible outcomes; high margin, high volume is best.

4) A steadily moving higher and higher left to right stock chart is a good thing. The inverse is not.

5) Inevitably, and by definition, more time is spent holding a losing position than is necessary. Don't be afraid to cut your losses.

In summary, I look for boring, dividend paying companies that have a high margin, high volume business with steadily increasing left to right stock charts. I'm not afraid to cut my losses early.