If you follow Warren Buffett at all, you will know that one of his main investing philosophies is to buy companies with a wide moat, or a major defensive position in their industry which blocks competitors from grabbing market share. It seems second nature to want to invest in such stocks, however, research suggests they may not perform as well as one would think. The reason why is that wide-moat stocks are often very popular, which means they get overpriced as investors pile in. Because of this, companies that consumers love often have returns that lag lesser companies. “Great companies don’t always make great investments”, says the CIO of retirement for Morningstar Investment Management.
FINSUM: This is a really a matter of timing. At some point these popular companies see a big run up in their stock, so it is more a matter of buying them early than saying they underperform.
One of the old adages of the market is to “sell in May and go away”, or get out of stocks in the summer and come back in the fall when everyone gets back to work. That axiom holds water when you look over many decades, but its record in recent years has been spotty, with summer returns over the last five years being quite solid (though still less than November-April). Over the last five years, the average return from May-October has been 4.31% while in November-April is has been 5.53%.
FINSUM: Anyone’s guess what will happen this year, but the last few summers have been more positive. 5 years is a pretty short sample size though.
With the market still facing some volatility after last month’s beating, some investors might be inclined to seek out stocks that may stay relatively safe from big moves. One strategy for doing so could be to look for companies with low debt. Low debt brings greater financial flexibility to companies and generally makes investors much less worried about their ability to meet their obligations. According to Barron’s “Stocks of firms with low debt have outperformed those with higher debt by about one percentage point a year for the past 25 years … Low debt companies are also less volatile than the overall market, on average”.
FINSUM: This seems like a good parameter by which to carve out a safer portion of a portfolio, though as our readers will know, we generally don’t like using historical returns alone as a guide.
Here is an eye opener- by some measures this was the worst year for markets in at least a century. Through early November, 89% of assets had delivered losses for the year, the worst market wide performance in a 100 years, according to Deutsche Bank. However, with the new truce between China and the US, many assets are moving into the black for the year. Also, the jump in oil bodes well for the energy sector as well as high yield bonds.
FINSUM: A lot of the near-term gloom got cleared up this weekend, and it seems possible that markets could have a nice end-of-year bull run.
Jack Bogle, the founder of Vanguard, is a legendary name is investing. Not only did he found and grow one of the largest asset managers in the world, but he has a habit of being right when he predicts returns. Well, he has just made another prediction, and unfortunately it is not one investors will like. He thinks returns over the next decade are going to lag their historical levels badly. His forecast is that investors can expect a 1.75% net return with a 50%/50% stock-bond portfolio over the next decade.
FINSUM: If this call turns out to be right, it will have huge implications for retirees and pension funds, as “safe spending” rules and total returns for pensions will be devastated. That sad, we think forecasting that far out is all but useless.