Top Drawer Investments

Canny View: Top Drawer Investments

By Glen Trillo

One old adage about investment is that you buy a bunch of reliable stocks, stick them in your bottom drawer and forget about them. That ignores one pesky fact: nothing stays the same.

Small stocks don’t always stay that way. Some grow up to become large stocks. Stocks that have low prices relative to fundamental factors like profits, cash flow, dividends or book value can turn into high relative-price stocks.

Likewise, companies with large market valuations, can turn into small companies over time. And forms characterised as high relative-priced “growth” stocks can transform into relative-priced “value” stocks.

Price is a measure of how stocks change in character. And we know that prices change from day to day, from hour to hour, from minute to minute and even from second to second. And what moves prices is news.

For instance, one major Australian stock Qantas staged its biggest one-day rise in nearly seven years after the company posted an annual profit that exceeded collective market expectations. The 14% price rise was achieved on volumes almost three times the stock’s three-month average.

The point is that prices don’t tend to change on anticipated information. Price change on news. And the definition of news is something that is out of the ordinary, unexpected, noteworthy or that makes people sit up and take notice.

Of course, prices don’t always change as dramatically or suddenly as in this example. Individual stocks can move gradually and incrementally over months or years in a way that takes them from one dimension of expected returns to another.

Some people reckon you can time market premiums so that you get just in time for them to kick in and out just as they have run their course. Trouble is there’s little evidence that anyone can do that consistently, reliably or without running up huge costs that wipe out any premium they might earn.

Prices of stocks in competitive financial markets represent the collective judgment of millions of investors based on current information. So, instead of second guessing the market, work with it. Let the market work for you.

Another approach is to rebalance the portfolio continuously so that the same stocks are not asked to do all the work in delivering the investment strategy.

Rebalancing means you sell securities that have gone up in price to the point where they are no longer part of the dimension of returns you are seeking to capture. These are stocks that now offer low expected returns.

The proceeds from selling can be used to buy back into new opportunities – in other words, into the stocks that are now in the higher expected returns areas of the market.

In doing this, you have to be mindful of the cost of the transactions, the tax impact and other frictions in capital markets. Always keep you costs low. Day to day moves in the market are temporary, but costs are permanent. Over time, they can put a real dent in your wealth plans. That's why it makes sense to be mindful of fees and expenses.

Focus on what you can control. You have no control over the markets, but in consultation with a financial adviser acting in your best interests you can create a low-cost, diversified portfolio that matches your needs and risk tolerance.

Essentially the strategy is about buying securities when their prices are low (and their expected returns are high) and selling them when their prices are high (and their expected returns are low).

However, this approach isn’t primarily about individual stocks. It’s about targeting those part of the market where the expected returns are highest and being mindful the stocks can move in and out of these dimensions of returns all the time.

This is a process based on rigorous research. And it’s a process that take heed of real-world concerns, like costs, news and price movements.

  • Glen Trillo is the Head of Wealth Management at Stewart Group, a family-owned independent financial planning and wealth management firm based in Hastings. Stewart Group works with individuals, families, and businesses in New Zealand who are committed to pursuing financial planning and wellbeing. Our clients understand the value of independent, goal oriented and objective financial advice that is free of conflicts. If that sounds like you, we would love to hear from you.

  • The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visiting www.stewartgroup.co.nz