As the end of the 2017 comes into sight, it is time once again to view Wall Street in a manner like the end game of a chess match. And yes, like chess, it takes special skills to master the Street’s annual end game.
What makes this time of the year unique is the inevitable tax-loss selling and profit-taking that occurs as portfolios are pruned and tuned ahead of the rapidly approaching new year both by individual investors and professional money managers.
And while this period can provide some of the best stock-buying opportunities of the year, no one would argue that recent stock market behavior has diverged considerably from the so-called normal, meaning that there are some lofty prices. At the same time, Wall Street’s herd mentality is also creating bargains due to a seemingly never-ending series of comments from those prognosticators of doom.
There is no question that in many respects Wall Street has become too scary for the uninformed. Nonetheless, this is no time to put money under the mattress or in a CD.
All too often the Street’s, “The sky is falling” mentality is paranoid to the point that even the slightest bit of disconcerting news can send shares prices tumbling. Now ask yourself, will the latest event du jour have a detrimental effect on the profits of the companies you invest in? The likely answer is probably not.
Therefore, it’s an excellent time to consider rebalancing and rejuvenating your portfolio to match the economic outlook for the coming year. Specifically, you want to remove those holdings that when viewed in the harsh light of reality are not going anywhere and replace them with companies with a brighter future. Moreover, you do not want to let extraneous “noise” negate your taking advantage of investment opportunities.
End-of-the-year bottom fishing is quite simple. You’re looking for companies whose shares have been beaten down because they are either being sold for a tax loss, or have succumbed to an understandable but over-done Wall Street selloff. And there have been periods of considerable selling of late.
What you are searching for are those unloved companies whose shares are seeking a munificent buyer. But don’t dwell on the negative. Instead, try to view the problem from the perspective that both the economy and corporate profits are steadily moving upward.
You cannot judge the efficacy of a company solely on the performance of its share price, high or low. Using methodologies such as discounted cash flow and intrinsic value, your investment objective should be to create a return that at a minimum exceeds the sum of the risk-free rate of return (the rate paid on a 10-year Treasury note), combined with up what you will lose through taxes and inflation.
Then add in a couple of points for the Gipper, as was so profoundly said by Knute Rockne in his “Win One for the Gipper” speech to the Notre Dame players at halftime of the 1928 Army game.
To simplify the equation, consider that the guideline for my students is a minimum compounded annual return over a 2- to 3-year period of 10 to 12 percent. It is foolhardy to believe that you can always pick winners. Swinging from the rafters is a game for monkeys, not investors.
To find those stocks you are going to need an edge. If you want to become a market-trouncing master strategist, your knowledge of a given company must be superior to that of others. And while it may not make you the life of the party this holiday season, when someone asks if you have invested in the latest “hot” stock, simply tell them that you prefer to be the tortoise and not the hare.
At the end of each year I offer up 12 investment ideas, the performance of which I then review 12 months later. That will in an upcoming column later this month. Start now with your own research and we will see how my picks did, while at the same time passing along some new investment ideas for you to analyze.
Lauren Rudd is a financial writer and columnist. You can write to him at Lauren.Rudd@RuddInternational.com. Phone calls accepted between 10 a.m. and 3 p.m. EST at (941) 706-3449. For back columns please go to www.RuddReport.com.
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