Is the Stock Market Passing You By?

This article was written with Steve Cordasco, of Cordasco financial network. It's part of a series of articles developed under an agreement with to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

Steve Cordasco and David Evanson, Winter, 2013

Is the Stock Market Passing You By? Donzzt be fooled. Slow down. There are significant risks in rapidly rising equity markets and I donzzt want you to be a casualty. Recent short sale squeezes and the central bank induced euphoria are only contributing to the problem facing disciplined, conservative investors.

Right now, I liken the situation to your typical, congested interstate. As the stock market races to new highs, many investors begin to feel the need for speed and switch from slow moving conservative investments to the faster moving equity investments. Driving in the right lane at the speed limit can be a frustrating experience as you watch faster traffic zip by at high speeds.

Equity rallies, particularly mature ones, have the same dangerous, emotional pull on individuals as they tend to change lanes near the end of the highway to capture the time lost by playing it safe along the way.

For instance, buyers of Apple (AAPL) in the last year, who perhaps felt they were plodding along with dividends and interest from bonds, are now full of regret as that companyzzs stock price resembles a pile-up in the left lane.

It can be hard to remain disciplined, especially when there seems to be evidence to the contrary. Take the recent meteoric rise of Herbalife (HLF), from $26 to $46. The jump in price gives the impression something positive is occurring at the company when in reality itzzs just a short sale squeeze.

These occur when many investors have sold a stock short, betting it will go down. If the stock in fact rises, these investors are forced to cover their bets by buying the stock, driving it further upward. In fact, the recent fall and rise in HLF is just a fight between hedge fund titans. Investors who saw the momentum and got in, were betting on an illusion.

At the macro level, investors are subject to the same illusory progress. Central banks around the world are pumping cash into the banking system. This creates the appearance of prosperity, but systemically and fundamentally, I do not see it. What I do see are short-term measures from governments designed to make people feel better in the short run and hoping that translates into something real in the long run.

So how can you benefit from the current environment while avoiding the tailgaters in the left lane? My advice is to find profitable companies generating predictable or growing cash flow. These same companies can take advantage of central bank policy and borrow at historically low rates with the purpose of investing in their businesses for growth or returning cash to shareholders.

Companies like this can provide attractive returns over time, and the growing dividends and cash flow from the business create a buffer if the overall market turns down.

The chart below contains stocks that have a track record of increasing their dividend to shareholders. I am not recommending investors buy these stocks. I am, however, suggesting the list represents a point of departure for further research on an investment strategy that focuses on growing income rather than simply focusing on stock values.

For instance, if in November 2002, you purchased $10,000 of Mattel (MAT) that were trading at about $20.50, your 488 shares, then yielding about 28 cents a share would have netted you about $137. Today, those same shares would generate generate about $605, for a cash-on-cash return ($605/$10,000) of more than 6% or three times the yield on 10-year treasury bonds.

In the longer term, investing is not about feeling good or feeling bad. Itzzs about what is doing the right thing for yourself financially. That means ignoring what is happening to indexes and specific stocks and choosing what fits your risk profile and needs. You should not look to others to define what you need, rather look inside yourself and set your own destination and develop a reasonable way of getting there.

We recommend staying at a comfortable safe speed, and over time you will probably pass those who make the mistake of lead footing it with a lot less anxiety. Unfortunately, they might just be piled up on the left shoulder waiting for tow trucks and EMS vehicles as you slip by to your destination still in one piece.

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