By Herb Greenberg, Empire Financial Research
Let’s not kid ourselves…
Most investors want moonshots.
That’s not investing, of course… The folks on Wall Street call it “speculating.” But it’s really just another form of gambling – buying companies with no profits but big promises in hopes of a really big payday.
We all do it – or have done it – in part because… it’s fun.
Everybody loves to tout their winners and pretend they never heard of their losers, which of course is a mistake.
I’m with Warren Buffett’s longtime business partner Charlie Munger, who once said…
I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.
Even when I was a journalist, I would put my mistakes – even typos at times – up in neon lights. There is no better teacher than being publicly humiliated by your own stupidity… It’s the stuff that comes with being human.
My investing journey into individual stocks, rather than mutual funds or indexes, started later in life thanks to being a stocks journalist…
To avoid even the appearance of conflict, I avoided owning any individual stocks – a self-imposed rule long before it eventually was mandated by my employers.
When the handcuffs were taken off after I left journalism, I dove in headfirst – wanting to see just what kind of an investor I really was.
That included buying a few lottery tickets before and during the bubble.
One was a fantastic winner… while the other two were spectacular losers. One of those losers went out of business. The other had been a compelling public tout of an investor I had known and respected for decades, whose passion sucked in some of the best-known investors on the planet. I now view it as little more than an undated call option on the miracle drug it supposedly has been “developing” for years… I’m pretty sure that option will expire more worthless than it already is.
I haven’t bought another lottery ticket since and (famous last words!) never will…
I really don’t care how well the horse ran in the morning training or what the trainer supposedly told a friend who told another friend who told me. It’s the real race that matters.
At my stage of life, I’m more interested in making sure I get a good night’s sleep.
After the ‘speculating,’ what I discovered about myself was a theme I’ve hammered away at frequently here at Empire Financial Daily…
When it comes to investing, boring can be beautiful.
I like real companies that make real things or provide real services for real people and make real money and generate real free cash flow (“FCF”) doing it. If they pay a dividend they can afford, all the better.
Why bring this up now?
My friends at Kailash Concepts recently published a report titled, “Specious vs. Spurious Correlation,” which is a considerably more tantalizing, clever way to describe what it’s really about – a defense of defensive stocks.
This report is about as out of step with the current mentality of investors as possible, yet it holds a powerful message – the kind investors will kick themselves for ignoring after the fact. You know – just as they always seem to want to short stocks after they fall… Human nature, once again, at its finest.
As Kailash explains…
U.S. markets are currently dealing with the earliest phases of the fall-out from the most grotesque speculative orgy in American history. Over the last three years, we have explained the myriad headwinds faced by loss-making speculative shares trading at unforgiving valuations ad nauseam.
Financial history suggests this misallocation of capital will be forced to end. Speculative novelty stocks that once gorged on cheap capital will go begging. In contrast, makers of critical goods that were starved of funds will generate abnormal returns, in our view.
Like everything in finance, there is nothing new in that concept. Bull markets and their consequences have been documented back to 14th century Venice.
Which gets to where we are now. As the Kailash report explains, despite everything that has happened…
Investors today are trying to predict the Fed’s every next move and studying the “macro-maps.” Often little more than specious “lines that look similar with no proven predictive value” – we wish users of these tea leaves well. Some will be lucky and lauded as the next great investors, and others will be quietly washed out. In our view, betting on these short-term moves is simply speculation.
Yet – and this is the good part…
Despite the howling headwinds to loss-making, high growth, and other high-priced mega-cap stocks today, we have had precisely zero queries for defensive products. Valuations have fallen to levels just slightly below the peak of the dot-com bubble, and everyone is trying to time the next entry to speculative shares. We are not market-timers here, but we are natural contrarians.
For other like-minded individuals, maybe it is time to revisit defensive stocks just in case the crowd of pivot-prophet Fed chasers is wrong.
Which is exactly why I’ve spent the past year here are Empire Financial Research creating two long-biased newsletters whose model portfolios were intentionally built with the kind of companies Kailash is talking about.
One is small/mid-cap, the other large cap. I rarely speak about them publicly – outside of the promotional videos I’m sometimes in.
But I was beyond thrilled to see one stock at the very top of Kailash’s small/mid-cap model portfolio…
I’m talking about Allison Transmission (ALSN), the largest manufacturer of truck automatic transmissions.
Back in June, I recommended for readers of my QUANT-X System newsletter to buy shares of Allison, and the stock remains a core holding in the model portfolio.
Allison took a massive hit along with the market last fall, but the two wound up going their separate ways. Allison is now up 12% – in line with the rest of the portfolio and considerably better than the broad market… Over the same time frame, the S&P SmallCap 600 Index is roughly flat.
Meanwhile, the QUANT-X System portfolio’s best-performing idea – a back-from-the-dead turnaround – has more than doubled.
I don’t expect such returns from Allison, which gives new meaning to boring.
What I do expect from the company is somewhat steady performance, which Allison has managed to deliver… even with the cyclical nature of this economy. And with a 7.1% FCF yield and a solid balance sheet, Allison splits its cash between reinvesting in the business, dividends, and buying back shares. In fact, the company has bought back half its shares outstanding over the past 10 years, in effect taking itself private… yet it’s off everybody’s radar.
Which, as I like to say, is why it’s on mine.
Going against the herd with these kinds of ideas – most of which rarely if ever make the headlines – can be so lonely and frustrating, but also so rewarding…
It just takes patience, which surprisingly – despite everything that has happened in the markets in the past two years – there appears to be little of.
Most of my stocks may not be moonshots – or the average investor’s idea of fun – but they can result in realistic returns with less risk… which last time I checked was what investing was supposed to be all about.
In this market, I feel strongly that these are the kind of stocks you want to own…
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