Surviving Volatile Markets With "Easy Hold" Stocks
By Chuck Carlson, CFA
CEO, Horizon Publishing
Wall Street is the land of second chances.
I once worked for a man who compared Wall Street to horse racing, "with a new race running every day," he'd say. That's the beauty of investing. Second chances
do exist. Fresh opportunities come along every day. Despite the pounding your portfolio has probably taken this year, if you are like most investors, you probably have a good 10, 20, maybe 30 years or more of investing ahead of you. That's
more than enough time to make serious money in the market, more than enough time to make 2008 a dim memory.
In order to do that, however, you have to stop managing your portfolio using a
rearview mirror. I know that it's brutally difficult to stop looking backward and start looking forward. Looking forward may mean admitting mistakes, and nobody likes to do that. Looking forward may mean selling stocks today that could come back to haunt you tomorrow. Looking forward may mean locking up big losses.
But in order to move forward, to position your portfolio for the next 5, 10, or 20 years
- and to avoid making the same mistakes - you have got to let go of the past and chalk it up to an expensive learning experience that will pay dividends over the next decade and beyond.
The Power of "Easy Holds"
It is unlikely that the market volatility we have seen this year will fade anytime soon.
However, that doesn't give you an excuse for not owning stocks. Indeed, despite the lousy performance for most stocks in 2008, history shows that stocks remain the most attractive asset class for creating wealth. The trick, of course, is owning the right stocks.
One lesson I've learned in my more than 26 years in the stock market is that slow
and steady can make you rich. Owning stocks that provide reasonably consistent, albeit sometimes even boring returns can make you rich. And those stocks do exist. The problem is that they are often stocks lacking the type of sex-appeal that interests investors. That's too bad, because these are precisely the type of stocks that can help you weather markets like we are seeing today. What are these stocks? I call them "easy holds." These are stocks that don't demand too many decisions from you. They don't get mauled during down markets, nor do they skyrocket during up markets. Rather, they give you that fairly consistent 7%-10% per year over time - returns that don't seem exciting until you realize that you double your money every 7-10 years with such stocks. And over 20 or 30 years, that really adds up.
What are characteristics of these "easy hold" stocks?
- Strong finances. You want companies with strong finances so they can stay in the game. That means companies with plenty of cash and modest debt levels.
- Consistent sales and earnings growth. You don't necessarily need stocks showing 20% growth. Indeed, a company with sales growth of 6% to 8% and profit growth of 9% to 12% per year will do just fine.
- Moderate price volatility. Easy holds are easy holds for good reason - their price action generally does not force you to make too many decisions about selling.
Wal-Mart Offers Attractive Easy Hold
One "easy hold" stock is Wal-Mart Stores (NYSE: WMT). Wal-Mart is the world's
largest retailer, with more than $374 billion in sales in the most recent fiscal year. That's more than $1 billion in company sales per day. The firm employs more than two million workers worldwide. According to Nielsen estimates, more than 200 million people in the U.S. shop in Wal-Mart each year.
The company's discount focus has been especially popular with consumers in recent months in light of the sluggish economy and job markets. The firm has beaten earnings estimates in each of the last four quarters. Record profits of $3.49 per share are expected for the current fiscal year ending January 2009. Long term, I expect Wal-Mart to provide the sort of steady sales and profit growth that will keep its stock trending higher.
The stock has demonstrated its defensive qualities during the latest turmoil, with these shares holding up much better than the overall market. The stock currently yields 1.7%.
While I would not expect Wal-Mart to keep pace during the next big upward move in
the market, I think the consistency of returns the stock will show over the next several years should be rewarding for investors looking for acceptable returns at moderate risk levels.