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Think for Yourself

By Roger Conrad on April 26, 2013

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In 1986, then-chief editor Richard E. Band assigned me my first Personal Finance article. In the 27 years since, I’ve recommended hundreds of stocks in as many articles.

The PF Income Portfolio, which I’ve run since 1990, has consistently fulfilled its mission of providing safety and high yield. And in the past year, I’ve been proud to serve at chief investment strategist of PF, as well as editor of the weekly companion Mind Over Markets.

Today, however, it’s with some regret that I announce I’m moving onto new ventures. Meanwhile Philip Springer, an industry veteran even when I first broke into the business, succeeds me at PF and MOM.

When I started at PF, I was fresh from the Thunderbird School of International Management, in Glendale Arizona. I can admit now there was a lot I didn’t know about the investment advisory business.

One thing Thunderbird does teach, however, is the practical—i.e., how to be flexible and adapt to changing conditions. Over the past 27 years, that’s been an invaluable part of my approach. And I’ve also been blessed to work with a lineup of highly qualified editors, from Richard Band to Stephen Leeb, Neil George and more recently Elliott Gue.

The world today for investors is in many ways far different than it was 27 years ago, or even a decade ago. The Internet has opened up to everyone the news and information sources that were previously privy to only a few.

Large institutions now dominate daily trading, and the driving motivation of money managers to produce superior quarterly returns has created a whole new range of seasonal pricing patterns. Momentum now routinely trumps value in decision-making. The “long-term” for many is measured in weeks or months, or at least no longer than the next earnings season.

That’s the reality we live in today as investors. Oddly, though, what’s really important to building wealth for individuals hasn’t changed much over the years, if at all.

My most profitable investments—both personal and in published advisories—are still those I’ve held the longest. Buying cheap stocks backed by quality companies can take a while to pay off, but it’s still the surest way to build wealth for investors who are patient enough and have the fortitude to wait out the market’s momentum swings.

Most important, thinking for yourself is as indispensable as ever. In fact, with so many messages thrown at us daily from both new and old media, it’s more critical than ever.

No one is infallible. No investment is risk free. And no strategy—no matter how many mathematical models are back tested against it—works every time forever.

What does work consistently is having a grip on where your returns are coming from and what they depend on. In my tenure at Personal Finance and Mind Over Markets, I’ve made plenty of mistakes. And I’m pretty sure some of you would be more than willing to point them out to me.

Unfortunately, if I can guarantee one thing about any future investment decisions I make, it’s that I’ll make more. But I can also promise that I will always endeavor to learn from those mistakes to become a better investor and advisor. That means asking hard questions of myself about what I’ve missed to create a loss, and being prepared to jettison any approach that’s kept me from being flexible.

To the extent I’ve been able to be successful in this business, it’s by being flexible enough to recognize that paramount goal. And it’s my foremost wish as an investor and advisor to become ever-more effective doing just that.

As I look at the Personal Finance model Growth and Income Portfolios now, I’m gratified so many recommendations have done well since the bottom in March 2009. In fact, we’ve had some nice gains this year from new picks as well, including Income denizens Alliance Resource Partners (NSDQ: ARLP) and W.P. Carey (NYSE: WPC).

On the other hand, higher stock prices mean lower yields and higher expectations, which if disappointed can send prices plummeting. Take results from another Growth Portfolio stock we’ve added during my tenure at PF, Apple Inc (NSDQ: AAPL).

The headline from the company’s first quarter results was a drop in profits for the first time in several quarters. Since the announcement, however, the stock is actually up. That’s mainly because it had already fallen from over $700 to barely $400 in just a few months. The reason: Growth posted the previous quarter failed to satisfy the buyers who had bid up the stock in a frenzy.

The dialogue about Apple now largely focuses on whether the company has peaked as an enterprise, to be passed and eventually devoured by up-and-comers in this notoriously competitive industry. But the reality is an emotional bubble has been burst in the stock price, which is back to early 2011 levels. The company is still gaining sales and launching products, as evidenced by a still robust 11 percent first quarter revenue gain.

Disappointing results after posting a big stock price run-up is likely to be the greatest risk for most current Personal Finance Portfolio members this earnings season. Companies will boost dividends and continue to build wealth as businesses. But the higher they’ve risen recently, the more vulnerable they’ll be to disappointment, and selloffs.

The way to deal with this kind of risk is of course to continue adhering to buy targets. We’ve set these by comparing business quality with price and prospective return. I raise my targets when companies boost dividends and/or report favorable developments that improve business quality.

Buy targets don’t represent a floor or a ceiling for prices. But they do represent points of value that should be exceeded in coming years. If you stick to them, you won’t be caught chasing expectations that can turn on a dime in this market.

The second risk is with companies that are facing business challenges. If they overcome them, we’ll receive big dividends as well as capital gains as prices adjust higher. If they don’t, we could see dividend cuts and falling prices.

Recommendations of this nature are and have always been in a distinct minority in Personal Finance Portfolios over the years. But they are represented now by the highest yielding fare, notably companies like Income pick Windstream Corp (NYSE: WIN).

The greatest risk of these is unexpectedly bad numbers that cause management to shift guidance enough to reduce dividends. We saw that happen to Income pick Exelon Corp (NYSE: EXC), when it reported fourth quarter 2012 results earlier this year, as weak wholesale electricity prices forced management to pull in their horns and trim payouts.

Exelon has since rallied more than 20 percent and is above our buy target of 35. But its situation exemplifies how stumbles are punished in this market. The same risk exists for other companies that currently face challenges.

Some investors may now want to clear out any higher risk/high yielding fare from their portfolios. Our approach, however, is still balance and diversify. While that means mostly focusing on the highest quality companies, Personal Finance will also likely continue to take shots at riskier fare where the potential rewards outweigh the dangers.

What we owe you as readers is the facts about each investment we recommend, so you can make your own judgment on whether you want to own it. That’s been my goal as editor of Mind Over Markets and Personal Finance these past years, and it’s my aim to get better at it in coming years.

Thanks for reading!

Roger S. Conrad

Publisher’s Note: Next week, look for the first Mind Over Markets column by Philip Springer, the incoming chief investment strategist of Personal Finance. A seasoned veteran of the investment world, Phil’s wealth-building philosophy and methodologies closely mirror those of Roger’s, ensuring continuity for readers—as well as years of profits in both bull and bear markets.

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  1. avatar
    Charles F Deffenbaugh Reply April 30, 2013 at 7:55 PM EDT

    Roger, Sorry to hear you are leaving PF. We’ve enjoyed your comments and advice. Will you be publishing or blogging elsewhere?