Now that my NCAA bracket is pretty much busted and baseball season doesn't start for two more weeks, I might as well as focus on the stock market. I want to continue my previous discussion of trading and investing approaches and time frames because choosing an approach that fits your personality and goals is critical. So is selecting the right securities. Defining these up front can help increase your odds of success in the markets.
As we move out in our time frame into the six- to 12-month segment of the markets, we need to change our approach somewhat. In this time frame, momentum is still very important, but valuation becomes more of a factor. The problem with super-high momentum stocks is that when the mo-mo stops, it gets ugly fast for stocks with high valuation multiples. If I am looking at a longer holding period, I want to consider adding value to my momentum approach. I am still surfing, but I'm surfing using stocks with solid fundamentals and lower valuations that are less likely to collapse if the market stumbles along the way. I want to look for value stocks that have started to improve and the market is noticing, or growth stocks with lower price-to-earnings-to-growth ratios that have not risen to unstable heights.
When I started in this business, back in the age of Quotrons, ticker tapes and paper stock guides, the one- to two-year neighborhood was where just about everyone lived. Investors bought stocks and started thinking about selling after the one-year capital gains period was reached. Right or wrong, this was the most common holding period for the investors I met and worked with in the good old days. Even mutual funds were sensitive about turnover and taxes back then. Very few people live in this area anymore, as most of the focus has become short term in nature.
The absence of heavy competition makes this a pretty fertile area. I would be looking for fallen angels, turnarounds and undiscovered growth stocks exclusively. The approach of buying first- or second-ranked Value Line stocks priced below $10 works very well. These are stocks that have fallen out of favor with Wall Street and the rankings indicate signs of a turnaround. Right now, stocks like JetBlue (JBLU) and Micron Technology (MU) make the list as turnaround stories that could easily rise by 50% or more over a 12- to 24-month time frame. I also think undiscovered growth stocks with low institutional ownership like Eastern (EML) and Orchids Paper Products (TIS) work very well in this time frame.
Crash buying of blue chips fall into this time frame as well. When everything goes to hell and no one is buying stocks, the one- to two-year investor should be buying with both hands. Wall Street is the only place where the 100-year statistical storm hits every three or four years. When it looks as though the world is going to end and the commentators on the financial networks look hung over in the morning, buy big names like Disney (DIS), Johnson & Johnson (JNJ) and Microsoft (MSFT) with the idea of selling them when the sun comes out on Wall Street again.
When you move out over two years, you are in my neighborhood, the neighborhood of owners. It does matter if we own 100 shares or a million, we think or ourselves as owners of the underlying business. I look to buy attractive assets at fire sale prices and own them until the full value is realized. I kick over rocks looking to buy companies in a good business at desperate prices. I also look to be the buyer of last resort in distressed situations where panic and fear is in the air. I have no stop loss or exit strategy when I buy a stock. In most cases, I will own it until something changes for the worse and any hope of the company being fixed is gone, or the company fails, is taken over or discovered by Wall Street and valuations soar to what I consider to be overvalued prices.
I focus on safe and cheap, and with an occasional venture into long shots with risks and rewards highly skewed in my favor. I do not care how long I own a stock. I am very comfortable owning a company for five years, but I'm not upset when one gets taken over at a premium a year or two later. I want to buy extremely cheap and sell extremely dear, and time is not that much of a factor.
There is no sense arguing value versus momentum; they both work. The discussion needs to be about time frame, desired outcomes and personality.