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Monday, November 19, 2012

Good Advice for Individual Investors from a Long Term "Value" Oriented Investment Fund Manager

The stock market has been shaky the past several weeks.

Since the election, it's been pointed downward. As a long term oriented investor and the exact opposite of a trader, I try hard not to get concerned about the daily, weekly, monthly and even annual ups and downs. I do prefer ups to downs, however, so I always like to see daily, weekly, monthly and annual increases and very much prefer big ones to tiny ones. But aren't we all human?

Although it's been a somewhat rocky ride lately, the market is still up nicely for the year as a whole. But then the year isn't over yet either.

My own always cloudy crystal ball suggests that the stock market will probably will show further increases between now and year end during the traditional Santa Claus rally, but then this year may be different with the fiscal cliff and tax hikes coming on capital gains next year. In other words, I have no clue about what will happen in the near term and my educated guess is that nobody else does either.

Hence, it's a good time to remember the importance of longer term investing timeframes and the continuing presence of short term market volatility. It's also good to remember that as humans we take less pleasure from market increases than the pain we experience from market declines. That's just the way we're wired, so let's get used to it.

In that regard, it's worth listening to the solid and timeless advice of fund manager Bill Nygren in Look past the 'news flow' and expand your time horizon:

"Bill Nygren, co-manager of the Oakmark Fund, says investors need to ignore the “news flow” and go where the values are high and the risks are lower than the general public might expect.... Nygren noted the importance of stretching a time horizon out past current events or even calendar years to find issues that have an attractive five-year stretch or more coming down the road.

Taking that approach, Nygren said, enables investors to look past current headline risks like the fiscal cliff or problems in Europe. For Nygren, it is why his fund is in the top 20% of its peer group ... over the last one-, three-, five-, 10- and 15-year periods.

“Most investors are still selling stocks to buy bonds and — when they do buy stocks — they are buying the stocks that look most like bonds,” he said. “So, we have seen big run-ups in electric utilities and in consumer staples — where business models don’t have much risk, don’t have much cyclical exposure — and relatively mature companies that are paying out most of their cash-flow as dividends. We think those sectors are pretty fully valued and we own almost nothing in those sectors.”

Instead, Nygren has been focusing on areas where the news flow has created bargains.

“Financials, technology stocks and industrial cyclicals have more of the near-term risk — How long is the government going to restrict cash-flow payments to shareholders from the financials? If we do go over a fiscal cliff, do we have a slow- or negative-growth economy for the next year? How much European focus do these companies have? — and that is where investor focus is today.”

“We think as you stretch the time horizon out to five years and economies on a worldwide basis normalize, the low multiples we are paying in those sectors will more than reward investors adequately for the risk that they are assuming.”

Summing Up

When individuals are investing MOM, adopting a long time horizon is the key to both individual peace of mind and long term success.

Nygren is a "value" oriented investor with a long term investing horizon. So am I.

Like all value investors, he doesn't get caught up in the daily trading frenzy but focuses on the longer term instead.

My point here isn't to recommend Nygren or anyone else. He just fits into an investing category that has always made sense to me -- long term value investing.

Of course, I'm a DIY investor myself and recommend that you consider using that approach as well. Your investments over time will perform better if you do.

Thanks. Bob.

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