A Winning Strategy
As I said earlier in discussing the Shiller ratio, we don’t know when the tide will turn on this long period of market stagnation. It could be within the next year, or even seven or eight years from now. Until the ship’s whistle sounds, though, there are plenty of things we can do to preserve our wealth, and grow it. Following are three specific steps I advise you to take in the meantime:
• Focus single-mindedly on bargain hunting. During a secular bear trend, it’s not enough to buy “reasonable values.” You’ve got to look for, and wait for, fire sales. To accomplish this goal, you’ll want, first of all, to carry around in your head definite prices at which you’re willing to buy individual stocks, or the market in general.
For instance, I know I would be very interested in buying Apple at $477, halfway between its 2011 low and 2012 high. At that point, the stock would trade at only 9X estimated FY13 earnings, and a reasonable 2.2% dividend yield. Should the market appear to be forming a major bottom without taking AAPL that low, I would consider buying at a somewhat higher price, perhaps in the $510 to $540 range.
Patience constitutes the other half of the bargain-hunting process. AAPL today is trading nowhere near any of my target prices. I’m in no hurry, though. I’m crouching in the grass, looking all around and listening, like a great cat of the Serengeti. When the prey ambles by, my muscles will be tensed, ready to pounce.
• Shift your stance as prices shift. In a stagnant or declining market, it also makes sense to adjust your exposure to stocks more frequently. Wall Street’s paid apologists deride this tactic as “market timing.” However, the critics often assume that the only alternative to being 100% invested in stocks is to be 100% out. That’s not true.
You might decide, for example, that in a challenging secular climate, you’re willing to allocate 50%–65% of your portfolio to stocks. (As it happens, I’ve adopted that range as the working benchmark for our Profitable Investing model portfolio until the long-term fundamentals for equities improve.)
When economic and market conditions seem good enough to lift share prices for the next year or two, you could push your stock weighting toward the top end of the range. As the advance matures, or when it falters, you could drop to the lower end. The remainder of your portfolio would consist of bonds, cash and other assets that don’t closely follow the stock market’s ups and downs. As we speak, I’m recommending a below-normal equity allocation for the model portfolio, reflecting my concern that the cyclical uptrend dating back to March 2009 may be in its final innings.
• Emphasize current income. With capital gains often fleeting and unreliable in today’s environment, it’s essential to capture as much of your return as possible in the form of “cash on the barrelhead.” Dividends and interest, in other words. The challenge, of course, is that yields on most dividend-paying stocks (and virtually all bonds) have declined substantially over the past couple of years.
Still, if you choose carefully, buying stocks and bonds on pullbacks as I suggested earlier, you’ll be able to assemble a portfolio with a current yield well above what is available on money market funds or bank CDs. In the equity arena, for example, we’ve recently locked in a yield of well over 3% with Emerson Electric (NYSE:EMR), a blue chip industrial firm that has raised its dividend 55 years in a row. A timely June 21 buy signal in my Richard’s Journal blog allowed us to grab Procter & Gamble (NYSE:PG) at a 3.8% yield, just before news broke that activist investor Bill Ackman had accumulated $2 billion worth of the stock.
Stay in touch with the regular monthly issues of Profitable Investing and my online updates between newsletters. That’s where I’ll be fleshing out this three-step strategy in practical detail. By maintaining a bargain hunter’s focus, shifting your portfolio gradually between stocks and fixed income, and emphasizing current yield, I’m confident you and I can stay alive—and thrive—until the Big Bull romps again.