Charles Payne is a Wall Street veteran with over 30 years of experience as a broker and analyst, and has a new show on Fox Business called Making Money with Charles Payne that airs every weekday at 6 p.m.
Charles takes a long view on investing and has some great insights about how to find opportunity in this market, how to plan for the long term and how to avoid common investing mistakes to protect your profits in this tough environment.
Here’s the full audio of the interview, along with a transcript of the Q&A:
Jeff: You’ve been around the block, what’s different about this market, do you think, than other markets? The indexes keep setting new highs, but some investors are just kind of doubtful about that. What’s your take on it? Will the rally last?
Charles: I think it’ll last. To your point, you’re question actually contained a lot of the answers. What’s different about it? It’s probably the most stealth rally in the history of the market and it’s probably the most hated stock market rally ever. Many investors have missed it — and while it’s heartbreaking on one hand, I think it’s one of the reasons it probably will continue. Listen, we know it’s been a long time since we pulled back and we’re overdue for a correction. That kind of stuff happens in the market from time to time. But I think overall where we’re going, I feel pretty good about the fundamental under pennies of this rally.
Jeff: So an important distinction is that a pull back is different than a crash? So even if we see a bit of cooling off, it’s not the end of the world, right?
Charles: Even a crash is not the end of the world, and I think that needs to be made clear. Think about how many people have missed a rally because they were afraid of the next leg down. Remember March 2009, Dow was 6,600. People said, “This is nothing, wait until the next leg down, wait until this happens, wait until commercial real estate- that’s going to crash. Wait until everything else collapses then you can look to buy the Dow at 3,000!” So you miss 10,000 points, who knows, maybe you’ll end up missing 11000, 12000 points and then you get a correction and we get back 4000 of it. It wasn’t worth it.
Jeff: It sounds like you’re pretty bullish on the equity side. What about rates? The Fed has been in the news and this week, Yellen said she’s not going to raise rates any time soon. But just because the Fed’s fund rate is low, doesn’t mean that rates can’t move 50 basis points higher. What’s your outlook for the end of the year? We’re about 2.5% now on the tenure, you think we’ll get towards 3% or stay pretty steady, where do you see us?
Charles: I think we’ll certainly be tickling 3% going into the end of the year. I think the realization will be if the economy does pick up a little steam, job creation remains over 200,000, housing starts to pick up a little bit, banks start to lend money, it’s going to be much, much tougher for Janet Yellen to convince people that rates are going to stay low for much longer. But predicting the interest rate game has been probably the craziest thing, the most difficult thing, and something that almost everyone has gotten wrong for a long time. But I would definitely say that they start going up, on their own to your point, and I would think that late next year, maybe the Fed starts to hike rates. Even after they hit all their targets, they’ll say they want to make sure it’s sustainable and they’ll buy themselves a few extra months.
Jeff: Let’s talk investable ideas here, it’s clear that if you want income you kind of have to look at stocks but some are overvalued, even if they pay a decent dividend. What sectors are you looking at right now that are safe even in this market that could see a pull back and maybe even give you an income, because there are not a lot of options in the bond front – where are you looking to put your money right now?
Charles: I am very excited about the energy sector. I think that is a 10-,20-,30- year story that continues. The fracking natural gas miracle has been phenomenal. I think we start to export it to other countries, our knowhow, our technology, our engineering and in the meantime France is talking about lessening their dependency on nuclear, Japan has sworn it off. Yes the world’s eating up all the coal, but they all sort of want what we have. So I love energy, I’ve already talked on my show, in less than 3 weeks I’ve brought up 2 or 3 energy companies – mostly natural gas related.
I love the rails, I haven’t been a huge fan of the rails.
I love aerospace, I think aerospace is phenomenal. Again, it’s an idea that’s based on a rich, global population that’s only going to wealthier, they’re going to travel, they’re going to want more. I think in the next 20 years, at least $5 trillion of commercial aircraft are going to be ordered.
So I like those areas, but there are select names I like in technology, there are select names I like in retail. I think you build a portfolio and some of it can be anchored by the kind of thing you described – rock solid companies that aren’t going to go anywhere. The market gets hit, they’ve been around a hundred years, they’ll be around for another hundred years. But then you also sprinkle it with the names that are coming on the scene now that can grow fast, have wide profit margins, take market share quickly, and be rewarding.
Jeff: I’ve kind of been looking at, for my own personal portfolio, emerging markets. It’s clear that there’s been some negativity there but it might be the time to slip a few jabs and see what happens. How do you feel about emerging markets? Do feel that the negativity is baked in already or is there still trouble ahead?
Charles: Here’s the problem when you try to play emerging markets: you also have to play disability factor and sometimes their markets are interesting because there are state-owned companies tossed in there. We know from our personal experience that when a government runs a business, they don’t run it to make profits, they run it as personal piggy banks. But I love what I see going on around the world.
I love the election in India. I got to tell you, we did ICICI Bank (IBN) last September and that thing has been a rocket. I love certain names in China, especially on the travel side.
Getting back to travel again, I think they just recently opened up more airspace in China, I think the government will open up even more airspace for commercial aircraft- I think that’s going to be a booming, gargantuan industry.
I love South America, and one of the ways I think people can invest there is via American companies. Caterpillar (CAT) does 70% of its business outside of this country, Whirlpool (WHR) sells a bunch of washing machines down in Latin America.
Jeff: That’s a great point. Maybe some people do overlook the fact that multinationals are definitely a good way to get a footprint in emerging markets. So it seems like even in China you have to kind of be selective and you can’t just throw your money around and you have to look at the balance sheet, you have to do your research.
Charles: And you have to believe it.
Jeff: Very true.
Well, I think a lot of people maybe made some mistakes because they’ve had faith in these broad trends and perhaps they thought the market would keep going up the way it did last year in the big 2013 and things have gotten more selective. I like to ask this of everybody because we’re all human… but what are some mistakes like that that you have made before and that you have learned from when it comes to investing and doing your research and being selective?
Charles: I guess the biggest mistake I’ve made is, you mentioned doing your research, but continuously doing it. Now I don’t expect people to go home every night and pull up the computer and play analyst every single night, but at the very least people should understand that if you own four or five stocks in your portfolio, check them out on a quarterly basis when the earnings come out.
I don’t necessarily want you to react to the earnings, but if you understand what’s going on under the hood, it’s going to help you avoid the crowd mentality.
And what you want to do is you want to make sure they’re growing the top line organically. In other words, that there’s real demand there and that they have pricing power and that their margins are expanding – things that are relatively easy to see. Check out the income statement, the balance sheet and the cash flow. I think that sometimes we get into this thing where we put it in automatic pilot and we believe or we buy into the broad strokes, but never forget that you have to still look deeper and keep a pulse on what you own.
Early on in my career, that’s sort of a mistake that I made, sort of like “okay this thing is hot, it’s going to go on forever,” obviously it’s a very cyclical thing.
But also having said that, it doesn’t mean that when you stumble it’s the end of the world. And I tell people all the time when we’re talking about the crash is that I’ve lost track of how many bear markets there have been in the last 100 years and how many crashes there have been. I do know the crash after ’29, the Dow went to like 66. So you ask yourself, in the last 100 years there have been at least a dozen crashes, are we closer to 66 or are we at an all-time high?
And it’s something that people need to keep in mind because what I’m trying to do with my show, Jeff, is to push it out a little longer. It’s not about necessarily a day trade, its about investing, you’re 35 years old, you’re 45 years old, you’re going to live to 85. Let’s put together a plan for you to have a great, great golden years, instead of becoming a victim to all the nuances and gyrations of the market.
Jeff: That’s great advice. And I will say that I’ve gotten emails from folks who, for the first time in a long time, maybe they have a little money, maybe they’re feeling better about things, they want to get involved in this rally but they don’t really know what to do. So Charles, what advice do you have for folks? It sounds like one piece of advice is to take the long view of things and not be so frantic, but for someone who is getting started right now and is a little intimidated, how do people get started in investing and what would you do?
Charles: This is what you’ve got to do: you better make a pledge that you’re going to be committed to this. Don’t put a toe in and walk away. The biggest mistake that people make is that they get in and buy one stock. One stock, they give it a shot. One stock.
Jeff: What could go wrong though?
Charles: Well you know, 40% of people in the market have one stock. So that’s the biggest mistake. Let me see how this one works. I’ll try one. It’s like going to McDonald’s and trying a new sandwich, it doesn’t work that way. If McDonald’s sold 10,000 sandwiches, you would try each sandwich once.
So that’s the first thing, how committed are you? Be honest with yourself about your personality.
I meet a lot of people, in fact it was a theme on my show last night, a lot of people come to me and say “Charles, I’m an investor”. In fact, they get offended if you say “Hey, do you trade?” “No, I’m not a day trader!” It has a bad negative stigma and connotation. Okay, so you’re an investor and you buy XYZ and you pay $20 for it and wow, look at this bad boy, it’s $24, $25, $26. Uh oh! The market gets hit, XYZ’s competitor has bad news, next thing you know it’s about $20, golly, a month later it’s at $18. What the heck is going on? $17 you sell. So when it was up 25%, you didn’t think about taking profits, but as soon as it was down double digits, you took a loss. That means you don’t have the temperament to own a stock when it’s down.
If that’s what you’re going to do and if that’s how you are, if you can’t sleep at night, then you’re going to have to make sure you control you’re greed level on the way up. This is the only way you’re going to be able to deal with the market. Conversely, if you look at it at $17 and you do your work and you say “Gosh, nothing’s changed”, maybe you buy more at $17 and a year later when it’s back at $26, you feel good about yourself.
But that all lies on temperament, so people need to be honest about their temperament, they have to make a commitment – near term to buy more than one stock and long term to stick with this thing and those are the two major factors that I think hurt people psychologically a lot.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via@JeffReevesIP.