(WealthTrust) "The market will fluctuate." J.P. Morgan’s words are as true today as they were when he uttered them nearly a century ago. The market will indeed fluctuate – and this creates risk.
At any given time, certain sectors of the market may perform better than others, and certain companies (even in the same market sector) may do better than others.
What does this mean for the investor? It means that they have to find a way to manage the risk of investing in companies or even entire market sectors so that they have broad exposure to stable or rising sectors and limited exposure to unstable or declining ones.
Risk is best managed by maintaining a diversified investment portfolio.
Diversification can be achieved on many levels:
• Industry (for example, health care vs. retail)
• Size of company, otherwise known as market capitalization (for example, small cap. vs. large cap.)
• Geography (Domestic vs. foreign based)
• Growth rate (For example, fast-growing companies vs. mature companies)
• Cyclical or non-cyclical (for example, steel vs. food).
“Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” Bernard Baruch was famous for getting out of the market before the 1929 crash.
He later said that he became concerned when shoeshine boys started giving him stock tips. He also made and lost several fortunes in the market.
Studies have shown that successful market timing (even by professional investors) is very difficult to achieve — maybe even impossible over the long-term. In our opinion, the most successful investors are usually fully invested in the market through both up and down cycles.
While WEALTHTRUST Asset Management primarily advocates being fully invested in the market, we also believe that investors should remain flexible in order to take advantage of opportunities when they arise while attempting to mitigate some of the risk associated with the markets
“The return of my money is more important than the return on my money.” — Mark Twain
So, how should an investor allocate his portfolio? What sectors of the market are peaking, falling or rising? How does the investor determine which companies in these sectors to invest in? Who has the time or the expertise to plow through the mountains of information now available? Which analysts or market pundits should they believe in?
Before an investor can answer these questions, they need to determine what their tolerance for risk is. Risk means that you may lose some or all of your investment, or that the investment may not gain in value at the desired rate.
Diversification can help us reach our goals but of course it doesn’t eliminate the risk of fluctuating prices and uncertain returns. In pursuing financial objectives, investors can choose from a wide range of investment alternatives that vary greatly in their degree and type of risk and potential return.
“Don’t fall in love with your investment: it won’t fall in love with you.” - Dr. Steve Sjuggerud
At WEALTHTRUST Asset Management, we believe that the long-term market price of a stock is ultimately determined by its ability to generate earnings.
Wall Street brokerage firms and independent research firms employ professional equity analysts to estimate the earnings growth of the companies they follow to develop their estimate of a company’s “fair value” in relation to its current market price.
The analysts then determine their Buy, Sell and Hold recommendations for the companies that they follow. For any given stock there may be numerous brokerage analysts following the company and making earnings-per share estimates.
These numbers are collected and compared by various services to develop a “consensus” number for Earnings per Share (EPS) for every followed company. In most circumstances, the most recent analyst estimates are the most accurate.
When a company announces a quarterly EPS amount that is higher than the consensus number, it is said to have “beat the street number” and may often experience an upward movement in stock price.
“The best way to double your money is to fold it in half and put it back into your pocket.” - Kin Hubbard
At WEALTHTRUST Asset Management, we believe that the real value of brokerage analyst estimates is not in the current consensus but in the trend of positive or negative changes in the individual brokerage analyst estimates from the former consensus.
WEALTHTRUST Asset Management uses these EPS estimate changes as a buy/sell signal for each company.
“The stock market is a world of its own. Fashion and style are big factors in the price of a stock.” - Seth Glickenhaus
Using an extensive analytical database our proprietary in-depth screening process, WEALTHTRUST Asset Management’s method uses the collective analysis of thousands of analysts following thousands of companies across all market segments to rank prospective companies for its portfolios.
The difficult task at hand is to effectively analyze equities, using reported company data as well as analysts’ forecasts for a company’s future earnings.
We use our own methods and experiences to further analyze and decide if a particular company is a potential portfolio selection or if it meets the criteria to remain in a portfolio, taking into account our in-depth analysis and tactical economic outlook.
We perform this additional screening process systematically across all stocks analyzed by our quantitative database.
We believe that this provides a strong, yet dispassionate, buy/sell discipline which assists us in avoiding market fads and helps us find or realize real value in companies across market segments that may be currently out of favor or to lighten up on companies or market segments that may be peaking.
