This life advice might be too late for many of you but the best tip I have ever heard for bringing up kids is to “give them a handful of rules and repeat them often.” And while I can see this being really effective for employers to use with employees as well, I think the approach is just as useful when advising investors.
My handful of rules is simple:
- Buy quality companies, preferably those that pay good dividends.
- Buy these companies when the price looks attractive and it can often be when others are scared.
- Have at least 20 companies so a bad CEO, a crazy government decision or a bad choice by you doesn’t ruin your returns. (You can have less but I am pretty cautious for an alleged perma-bull!)
- Build up a cash buffer to preserve your capital in case you get two or three bad years in a row.
- Time in the market is better than timing the market but if you have made great money over a good number of years of an extended cycle, taking profit and waiting for the market to crash, is not altogether a bad idea, though it’s hard to pull off!
This chart always convinces me about the benefits of time in the market:
So, what about now and how do you play it?
I don’t think this is a sell-out and wait for the crash moment. Sure, we could see a US correction as they are near all-time high territory and there’s only been one decent near correction for the Yanks in recent times.
A correction — down 10% — could be created by one or a number of factors, which I am happy to list:
- Currency shocks of the kind we saw the Swiss mastermind this week and a rising greenback temporarily could rattle some big US companies in the current earnings season, which have lots of overseas exports.
- The fear index or VIX in the US shows volatility is more elevated in 2015 and that can lead to some sell offs that could turn into a correction.
- The Fed getting it wrong and raising interest rates too early but I don’t expect that. It could come from the ECB not coming up with an impressive QE strategy this week — January 22.
- A left-field geopolitical event like we saw with Vladimir Putin and Ukraine.
- The bond market developments, which have seen US bond yields go lower, could mean that the deflation or disinflation we are starting to see is because the global demand ahead is weaker than expected, rather than mainly due to lower oil costs. That could create something greater than a correction!
This is the big bet I am making. I think demand recovers this year to KO the doomsday merchants, who think the current stock market sell-offs are because the collapsing oil price says world demand is collapsing. The same can be argued for lower iron ore prices.
But this rules out the oversupply effects from BHP, Rio and Vale, which have added to the falling iron ore price. For oil, the increase in supply is nowhere near the 50% in oil price falls, so it could be demand problems but OPEC says it is speculation issues and I agree with OPEC on the subject.
China and Japan definitely have their hands up for stimulus, the Yanks are not rushing to raise rates and lower oil costs, in fact, allow them to delay it for longer and I hope the Europeans and the ECB don’t let me down on Thursday, their time.
The right phrase
All of this says to me that we are still in the mature phase of the bull market, just out of the sceptical phase — though there is still a bit of wariness around, as recent months have shown. And we are definitely not in the euphoria phase.
I’ve argued before that this is a long, grinding economic recovery and stock market comeback. The pointy-headed experts at Macquarie hold the same view and so does most of Wall Street judging the levels of the Dow, the S&P 500 and the Nasdaq. That’s why dip-buying, moneymaking corrections are more likely than a crash.
My best reason for being comfortable with stocks is the strength of the US recovery. I showed on Saturday that consumer confidence went from 93.6 to 98.2 in January and that has to be good. These were an 11-year high reading driven by better job numbers and, wait for it, lower gasoline prices!
Helping the Dow shoot up 190 points or 1.1% was the oil price actually rising to $US48.60 a barrel and I am hoping the past, silly, very low oil prices get replaced with say a $US60-like price and we get the best of both worlds — a low price for consumers and a less ruinous price for energy companies.
Many energy companies are working off a $US75 a barrel price once this hotbed of speculation unwinds. That could be a little too bullish but it does show that people in the industry believe we are seeing a Smart Alec game being played out by oil market speculators.
And when things like this happen, it creates, yep, I’m going to say it again — “a buying opportunity.”
You only have to worry when I stop using this favourite line of advice!
Here’s one final positive argument for stocks in 2015 to remember. The US is recovering strongly as a huge run of jobs is being created, with interest rates near zero and consumer confidence is at levels not seen for over a decade. Meanwhile the P/E for the US stock market is not historically too high and this is the third year of a second-term president, where history says there’s a very high likelihood of this being a great year for stocks.
So just imagine if the Europeans deliver on Thursday when a trillion euro QE package has been tipped to be unveiled! This will be a big news day for stocks and explains why the Swiss took away their exchange rate controls last week, which saw their franc appreciate some 14%, but at one stage it was up 40% against the euro!
Thursday in Europe is going to be HUGE. I hope it’s a day to remember.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.