high quality stocks
Profiting from the global stock market has never been easier for investors
Decades ago, it used to make some sense to try to profit by moving back and forth between bonds and stocks. That’s because bonds and stocks had something of a seesaw relationship.
When the economy was strong, business profits and stock prices would go up. However, interest rates and inflation would go up as well. The rise in interest rates meant that new bonds would come on the market with higher interest rates. That would push down prices of existing bonds that carried low interest rates.
As this process continued, some investors would sell some of their stocks, in part because stock prices had gone up. They would re-invest the money in bonds, because bond prices had fallen, and bond yields had gone up. This trading strategy gave investors a sense of safety and accomplishment, but it had drawbacks.
For one, you had to pay taxes in gains on your stocks if you held them in taxable accounts. You also had to pay brokerage commissions on the stock sales, and absorb the costs of buying bonds. (Bond trading costs were often built in to the price of bonds, rather than being charged separately as they are with stocks.) In addition, timing was crucial.
The appeal of selling stocks that had gone up, and buying bonds that had become cheaper, only goes so far. It shrinks quickly if your stocks keep going up after you sell, and your bonds keep going down after you buy.
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When the economy was strong, business profits and stock prices would go up. However, interest rates and inflation would go up as well. The rise in interest rates meant that new bonds would come on the market with higher interest rates. That would push down prices of existing bonds that carried low interest rates.
As this process continued, some investors would sell some of their stocks, in part because stock prices had gone up. They would re-invest the money in bonds, because bond prices had fallen, and bond yields had gone up. This trading strategy gave investors a sense of safety and accomplishment, but it had drawbacks.
For one, you had to pay taxes in gains on your stocks if you held them in taxable accounts. You also had to pay brokerage commissions on the stock sales, and absorb the costs of buying bonds. (Bond trading costs were often built in to the price of bonds, rather than being charged separately as they are with stocks.) In addition, timing was crucial.
The appeal of selling stocks that had gone up, and buying bonds that had become cheaper, only goes so far. It shrinks quickly if your stocks keep going up after you sell, and your bonds keep going down after you buy.
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If you own and operate your own small, successful business—or invest in one—you can earn much better returns than you get from investing in the stock market. That’s because risk is higher in small private companies, so they sell at a lower average P/E ratios than public companies. In addition, as the owner of such a company (or a favoured insider), you have a lot of tax deferral opportunities that are unavailable to a public investor. However, along with higher overall risk, private business has other negatives....
In last Friday’s Wall Street Stock Forecaster Hotline, we analyzed the great results that McDonald’s Corp., $111.55, symbol MCD on New York (Shares outstanding: 941.8 million; Market cap: $105.7 billion; www.mcdonalds.com), reported for the three months ended September 30. It was a standout quarter, particularly compared to the weak results that many companies have reported this year.
The first media comment we saw on these results took the view that the stock had gone up enough to offset the improvement in its results. The investment reporter quoted what he called “cynical observers” who said “there was almost no way but up” for the stock. These observers pointed out that McDonald’s had trailed the market by 62 percentage points during a recent three-year period, and that the company had only registered growth in global same-store sales in one quarter out of the past seven.
The statistics in the last sentence are true. But when you analyze a stock, you can come to a wide range of conclusions, depending on the breadth of data you choose, and the beginning and end dates of the periods you look at.
McDonald’s stock price rose from pennies per share (adjusted for stock splits along the way) in the 1970s to a peak of $45 in 1999. Like a lot of high-quality stocks, it suffered in the first few years of the new millennium, and fell to as low as $12 in early 2003. Then it began another monumental rise.
It sailed through the 2008-2009 market downturn with barely a scratch. It hit an all-time high of $67 in August 2008. The following month, the U.S. federal government took control of mortgage giants Fannie Mae and Freddie Mac, and Lehman Brothers filed the largest bankruptcy case in U.S. history. McDonald’s fell on this news like the rest of the market. In October 2008, it hit $46, an 18-month low. The stock then resumed its rise and hit $100 in October 2011.
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The first media comment we saw on these results took the view that the stock had gone up enough to offset the improvement in its results. The investment reporter quoted what he called “cynical observers” who said “there was almost no way but up” for the stock. These observers pointed out that McDonald’s had trailed the market by 62 percentage points during a recent three-year period, and that the company had only registered growth in global same-store sales in one quarter out of the past seven.
The statistics in the last sentence are true. But when you analyze a stock, you can come to a wide range of conclusions, depending on the breadth of data you choose, and the beginning and end dates of the periods you look at.
McDonald’s stock price rose from pennies per share (adjusted for stock splits along the way) in the 1970s to a peak of $45 in 1999. Like a lot of high-quality stocks, it suffered in the first few years of the new millennium, and fell to as low as $12 in early 2003. Then it began another monumental rise.
It sailed through the 2008-2009 market downturn with barely a scratch. It hit an all-time high of $67 in August 2008. The following month, the U.S. federal government took control of mortgage giants Fannie Mae and Freddie Mac, and Lehman Brothers filed the largest bankruptcy case in U.S. history. McDonald’s fell on this news like the rest of the market. In October 2008, it hit $46, an 18-month low. The stock then resumed its rise and hit $100 in October 2011.
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Many investors consider using stop-loss orders to protect their profits, particularly if the market begins to slide down after a period of gains.
Learn when to sell stocks at the right time. Here’s our advice.
Our view on two international ETFs—one for Emerging Markets, one for South Korea—as a way to diversify your portfolio in today’s markets
Investing in profitable blue chip stocks will become second-nature to you after learning these tips!
Investing in high quality stocks rewards you when you have the discipline to keep only the stocks in which you have the most confidence.
This recent market downturn doesn’t come as a complete surprise. But as I said in our July 28 edition of Advice for Inner Circle Members, my “best guess” called for a smaller drop. When you come right down to it, there are really only two kinds of market downturns. They differ mainly in how long they last. Some last three to six months or so, and others go on for a year or two, or even longer. I suspect this downturn is of the former, shorter variety. It may have already done most of the damage it is likely to do. I also suspect our Canadian market is less vulnerable to further decline than the U.S. market. For one thing, our market has gone up less than the U.S. market. The drop in our dollar’s foreign exchange value also makes our stock market cheaper and more attractive to foreign investors. To top it off, because of Canada’s economic dependence on the Resources sector, we are suffering more than the U.S. from the drop in resource prices....