Howard Marks, co-chairman of Oaktree Capital, says “the most important thing that an investor has to do . . . is to set the balance in his portfolio between offense and defense.” He continues: “For the last four years, we’ve had a position that can be summed up as ‘move forward, but with caution. . . . I think you have to favor caution.”
Regarding high yield bonds, Marks said the inference from recent activity may be that they seem riskier, “but the math is that they are a better buy now” than previously. He does not buy such bonds to trade however, and evaluates them in terms of whether it makes sense to hold them to maturity.
The deep thinking investor, Marks, quotes Henry Kaufman, an economist, who once said there are “two types of people who lose money, the ones that know nothing and the ones who think they know everything”.
Roger Mortimer, senior vice-president of CI Investments in Toronto, predicts that market sentiment will begin to favor value stocks once the Fed raises rates. He notes historical data suggesting that following a period in which growth investing outperforms value investing, “value comes back strongly.”
From 1975 to present, value outperformed growth by a 2.9% compound annual growth rate (CAGR), according to Mortimer. In five of the eight five-year periods since 1975, value has outperformed. Mortimer says that growth has outperformed when there is excess liquidity, as in the 1995-99 internet bubble and the 2008-present post-QE period, during which growth produced a 16% CAGR to value’s 10.2%.
“In an environment where liquidity is abundant and money is cheap,” Mortimer explains in this Morningstar.ca piece, “it may be allocated with somewhat less discipline than when money is expensive. In an environment where liquidity is contracting and money is more expensive, investors are more discriminating about allocating it. They care more about valuations.” He points to his fund’s recent purchases of Apple and GE stock as examples of how a value approach can benefit from market volatility.
Josh Brown, CEO of Ritholtz Wealth Management, outlines a series of best practices, or survival tips, he believes
investors can follow during difficult market environments. Brown’s process starts by asking a series of questions, which hones on each individual’s risk tolerance and portfolio positioning. For example, asking if one is overexposed to stocks, how much interest rate risk one is exposed to, whether or not hedge-like strategies are appropriate and asking what the chances are that stocks and bonds could fall at the same time. These are all important questions that should be thought about in the context of long term investing and one’s allocation.
Brown also makes a very important point, which is that when stocks fall their expected future return is increasing. According to Brown, when volatility picks up “you are earning the premium long-term returns that not all investors have the stomach for. That makes you the winner of a game that many others consistently lose”.
See Brown’s 4 Survival Tips from Fortune Magazine on the right.
Last week, the Nasdaq Composite produced a “death cross” chart pattern, which occurs when the 50-day moving average crosses below the 200-day moving average. It may signal moving from a short-term correction into a longer-term decline. The Nasdaq is the fourth major index to create a death cross since the Dow Jones Industrial Average did so on August 11, followed by the S&P 500 and the Russell 2000 Index. Several other broader-market indexes have also displayed death crosses recently.
This is the first time all four indexes have displayed the pattern since August 24, 2011 and the thirteenth time since 1979. Joseph Goepfert, president of Sundial Capital Research, says that historical data “don’t support the assumption” that “this is a sell signal for stocks.” He points out that “[a]fter a month, returns [in the S&P 500] improved significantly.” Goepfert says there is little statistically significant correlation between performance in the stock market and the death cross grand slam. “It’s as useful to know what to ignore as what not to,” he noted, concluding: “this is one to ignore.”
This week, we bring you the Stock Screen of the week from Validea. On Validea, you can screen for stocks using the site’s Guru Stock Screener, which scores stocks based on the fundamental stock selection criteria of great investors. The firm’s models are based on investing legends such as Warren Buffett, Peter Lynch, Benjamin Graham, Kenneth Fisher, Martin Zweig, David Dreman, Joel Greenblatt and others. The Advanced Guru Stock Screener allows users to create their own fundamental screens using a combination of the strategies of these investing greats and their own criteria.
This week’s screen looks for dividend payers that pass 3 of our guru models and have shown strong relative price strength and insider ownership. The criteria used and resulting companies are below.
- Pass at least 3 guru models with an 80% score or higher;
- Share price above $10 and market cap greater than $300M;
- Relative Strength Score of 70 or higher;
- At least 5% of shares owned by Insiders;
- Dividend Yield of 2% or higher.
Here are the six stocks that currently make the cut. Interested in the Guru Stock Screener – try it out with a 7 day trial to Validea.
Emerging markets (EM) are undergoing long-term shifts that are not favorable to EM equities, according to managers of EM funds. “Things have changed,” says the executive chairman of Franklin Templeton’s emerging-markets group, Mark Mobius. The more than 20% decline in such stocks does not make them a value, based on marcoeconomic indicators. Average expansion in EMs has fallen to below 5% (down from 8% in 2007), placing them just 2.5 percentage points above developed countries (the smallest difference since 2002).
Improvement in equities is not on the horizon. “We’re looking for a long, drawn-out period of subdued economic growth,” says Rashique Rahman, head of EM fixed income at Invesco. EM exports have also stopped growing, due to reduced demand resulting from the Chinese slowdown and subpar recovery in the U.S. and Europe. A report by the Bank of International Settlements identified a half-dozen big EMs with credit-to-GDP ratios associated with “serious banking strains.” EM governments and companies did not, by and large, prepare for slowdown. Chuck Knudsen, EM equity strategist with T. Rowe Price, says that average return on equity and capital has declined for each of the past four years.
There may be niches of value in EM equities. Knudsen points to insurance and food retail; Todd McClone, co-manager of the William Blair Emerging Markets Small Cap Growth fund, identifies pollution-control and alternative energy in China and mortgage lenders and private hospitals in India.
Fixed-income investment in EMs may fare better. Most EM governments appear to have learned fiscal discipline since the last major crisis nearly 20 years ago. Rahman of Invesco notes, “[o]ur base-case scenario is no sovereign defaults among mainstream countries.”
Jim O’Shaughnessy, O’Shaughnessy Asset Management, says a long-term investor should be buying now, and compares “low-conviction buybacks” (defined as 5% or less) and “high-conviction buybacks” (over 5%) in identifying attractive stocks. From 1987 to 2014, he says, the return on low-conviction buybacks was 12.1% annually (about 1% over return on all large stocks), but the return on high-conviction buybacks was 15.9% annually. Further, he says that the buyers of these high-conviction buyback stocks “were buying their stocks when they were dirt cheap.” Of all buybacks, 70% are low-conviction, according to O’Shaughnessy.
Going forward, O’Shaughnessy says investors should be taking a value investing approach. “Over long periods of time, value trumps growth, and significantly trumps growth.” He described expensive stocks as “lottery stocks,” noting that some do very well but the average return is negative. To evaluate the value of stocks, he uses a composite of various factors (such as price to earnings) that he found “beats any given factor 82% of all rolling 10-year periods.”
O’Shaughnessy does not think a bear market is on the horizon. Sounding a note of caution, he notes, “human psychology plays such a part in investment psychology,” explaining “fear, greed, and hope have wiped out more investment value than any bear market ever can.”