Market Pulse: The ‘other’ casino
August 5, 2013
Over the past decade or more individual stock ownership has fallen as people soured on Wall Street, and some would say with good reason.
There have been several high-profile cases of insider trading, "flash crashes" that can devastate stock prices in a few seconds are becoming more common, and 100-point daily swings in the Dow are now routine.
People feel Wall Street is a casino and the odds are heavily stacked against them. Yes … and no.
If Wall Street is a casino, and many people believe it is, it's one in which the odds heavily favor the players. That's not a typo.
If the "players" are long-term investors in quality stocks, success is almost guaranteed. That is especially true for high-quality companies that pay dividends and raise them often, if not annually. Note: "Quality" doesn't mean there is zero risk.
After all, management can make mistakes, or competition can quickly change an industry. Many companies that were once members of the Dow Jones Industrial Average are no longer around. Nash Automobile was one.
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Johns Manville went the bankruptcy route due to asbestos liabilities. Union Carbide left after the chemical spill in India. Chrysler was in the Dow. There are some risks even when you buy high-quality companies. They may not always be high-quality.
That brings me to what people see as the biggest risk — a bear market. True, stocks can decline for years and investments in even high-quality stocks can be underwater for a long time.
But even if your timing is wrong and you buy high-quality stocks just before the start of a bear market, the next bull market will make it right.
Look at a chart of Johnson & Johnson or Becton Dickinson, two of the highest-quality companies. An investment in those — more than once — could have shown a loss for several years, but then both reached new highs and are setting more even now. Both companies raised their dividends year after year. There are many such companies.
In truth, a bear market offers tremendous opportunities to buy high-quality stocks when they are on sale. Long-term investors know that.
The biggest risk is with low-quality stocks. Unlike J&J and Becton Dickinson, those don't come back and many disappear entirely.
Buy low-quality stocks and investing will be very much like a casino, one where the odds overwhelmingly favor the house. Successful investors know that.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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