I truly hope that last week’s passing of Charlie Munger, Vice Chairman of Berkshire Hathaway, did not signal the slow death of the value stock investing model. Yes, I know, his partner Warren Buffett is still alive and more dedicated to value investing than ever before. But Warren is getting up there in age, too. And while he has a strong management team for his succession, I just don’t think there will ever be another Buffett-Munger value team in the near future.
And that’s scary.
I do believe that there are many different ways to make money in the stock market, and here at Cabot, we address the lion’s share of those methods, including value, growth, options, international, small caps, and income. And each is a proven strategy, with years of expertise behind them accompanied by sterling track records for each service.
Yet, more and more, “easy money” strategies and scams are popping up in newsreels today, along with lots of “free” investing advice, guaranteed to make you “millions.” Over my 40+ years in the investing world, I’ve seen these stabs at fleecing investors many times, often hyped during worrisome economic environments, such as the high-interest-rate/high-inflation scenario we face today.
But the worst one—which continues to proliferate—despite being proven wrong for decades—is market timing, which is simply investing according to your forecasts of where the market is going—up or down. The intent is admirable—buy low and sell high. But, in reality, it just isn’t that easy. It requires perfect timing—in both buying and selling. One small miscalculation can lead to disastrous results! And so far, humans have just not been capable of perfect market timing.
A study by Retirement Researcher reported that “missing out on the best single month in the market between 1926 and 2016 would have left a market-timing investor with 30% less money than an investor who simply used a buy-and-hold strategy during that time.”
Honestly, if it worked, all of us so-called investment pros would be lounging on a tropical beach with an umbrella drink instead of spending most of the day researching legitimate investment strategies.
Case in point, Charles Schwab has just come out with a report that—once again—proves the lie of market timing.
The company used S&P 500 data and looked at five investing strategies, analyzing their hypothetical 20-year returns. Here are the investing strategies:
Perfect market timing: One investor invested $2,000 each year at the S&P 500’s lowest trading point.
Immediate investing: One investor put $2,000 into the S&P 500 on the first trading day of each year.
Dollar-cost averaging: Another investor split the $2,000 into 12 equal allotments and invested one portion on the first of every month.
Poorly timed investing: One investor invested the entire $2,000 at the S&P 500’s highest point of the year, every year.
Treasuries: The final investor avoided stocks altogether and instead put their $2,000 into U.S. Treasury securities each year as a cash proxy and left it there.
The study called for each hypothetical investor to put $2,000 into the market every year.
No one was shocked when the results showed that perfect timing was the winner (but we already know this is impossible!) The good news is that immediate investing came in second and trailed the perfect timing results by just 8% over the 20-year period.
Schwab put it this way: “Not trying to time the market at all earned 92% as much as timing the market perfectly. In dollar terms, the difference was $10,537, with perfect timing returning $138,044 and no timing producing $127,506.”
In case you are still a doubter, there are plenty more market timing studies that show similar results, including:
· A Putnam Investments study found that “market timers who miss just 10 days in the market could lose up to half the value of their portfolio. Their model found that getting it wrong by no more than a month was the difference between $6,873 in returns and $30,711.”
· Results from a Merrill Lynch study proved that model portfolios over a 30-year period could underperform by nearly half of their value through attempting market timing.
In contrast, there are two basic styles of investing which have proven very successful over time:
Fundamental analysis focuses on the company, as well as sector, market, and economic events. It attempts to analyze the company’s future prospects and estimate the value of its shares, based on a wide variety of factors, including historical and forecast financial ratios, competition, company management, prospects for its industry and the current as well as future economic developments.
On the other hand, technical analysis doesn’t give two cents about the value of a company, its financial characteristics or who runs it. Instead, technical analysts simply focus on supply and demand in the market to determine what direction, or trend, prices will continue in the future.
I’m still mostly a fundamental analyst, but in recent years, I have begun incorporating some technical analysis into my stock research in order to narrow down my buying and selling ranges.
And while I’m still a value-oriented investor, I’m heavily influenced by growth.
In the table below, you can see that value investing has taken a back seat to growth investing for the past year.
U.S. Equities - Morningstar Indexes
But I see no reason why you can’t combine both—buying fundamentally strong companies that have definite growth prospects—like these three that are currently on the top of my Christmas wish list:
3 Stocking Stuffer Stocks (That Don’t Rely on Market Timing)
Ferroglobe PLC (GSM) operates in the silicon and specialty metals industry in the United States, Europe, and internationally. It provides silicone chemicals that are used in a range of applications, including personal care items, construction-related products, health care products, and electronics, as well as silicon metal for primary and secondary aluminum producers. Trading at a P/E of 12.22, analyst price targets are predicting a price rise to $11.25, an 84% upside from its current trading price.
Arcos Dorados Holdings Inc. (ARCO) operates as a franchisee of McDonald’s restaurants. It has the exclusive right to own, operate, and grant franchises of McDonald’s restaurants in 20 countries and territories in Latin America and the Caribbean, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curacao, Ecuador, French Guiana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, Trinidad and Tobago, Uruguay, the U.S. Virgin Islands of St. Croix and St. Thomas, and Venezuela. In its recent 3Q earnings report, the company posted adjusted earnings per share (EPS) of 30 cents, walloping the consensus estimate of 20 cents, and last year’s 3Q earnings of 23 cents. Its revenues came in at $1,11.5 million, beating analysts’ prediction of $1,076 million, and up 21.7% on a year-over-year basis.
Genesis Energy, L.P. (GEL) operates in the midstream segment of the crude oil and natural gas industry. The company’s Offshore Pipeline Transportation segment engages in offshore crude oil and natural gas pipeline transportation and handling operations; and in the deepwater pipeline servicing in the southern Keathley Canyon area of the Gulf of Mexico. In its Q3, the company saw its net income soar to $58.1 million, up from just $3.4 million in the same period in 2022. The company has a 4.74% dividend yield, and its shares have recently risen above all of its major moving averages.
I hope I’ve convinced you that the old-fashioned way of making money by investing in strong stocks in growing sectors is the proven method to see portfolio success. If so, why not consider one or more of the above stocks to add to your Christmas list?