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Sound Advice: December 7, 2022

Strategy of the Day, Week, Month, Year, etc.

Knowledgeable investors can only gag at the plethora of schemes that bombard the public every day.  Whether it’s 10 stocks to buy now, funds you can hold forever or strategies to make money in up or down markets, there seems to be no end to these preposterous enticements.

Unlike Las Vegas, Atlantic City or Monte Carlo, the odds of success when investing in stocks and bonds are on your side.  However long a period you choose, assuming it’s 20 years or more, there has always been a positive return on stocks.  Indeed, over the past half century, the Dow Jones Industrial Average has risen more than 50-fold.

Yes, the increase over the five-decade period has not been consistent. During some decades, such as 2000-2010, the stock market went nowhere, yet in the 10 years that followed, the annual gains from stocks were nearly double the historic average. 

It’s a cyclical thing that depends largely on valuations.  Back in the mid-1970s, amid an extended period of stagflation, the typical valuation on stocks had shriveled to the mid-single digits.  What followed during the 1980s was an enormous rise in valuations, which peaked during the era.

High valuations are followed by weak markets and vice-versa.  We’re somewhere in between at the moment, though there’s a distinct possibility of slower economic growth over the next few quarters as the Fed continues its program of rising interest rates and tighter credit. 

The prospective aftermath will be more interesting as it is likely to bring with it an acceleration of economic progress and an easing of credit.  These are the ingredients of a strengthening stock market and higher bond prices.  That’s predictable.

Proper analysis of earnings prospects and financial health will assist in the selection of worthwhile holdings, whether they be stocks or funds, but suggestions offered in the media about esoteric approaches, hot lists, and the like are today’s equivalents of snake oil.  Avoid them like the plague.

If there really were methods that produced consistent improvements over time, you can bet those who developed them would take advantage of what they had to offer.  No doubt, there are professionals who have found small tweaks in their techniques that may result in small improvements, but as others have come aboard and done similarly, the impact has always diminished.

Consistent long-term growth of profits combined with strong finances is always reflected in good stock performance.  Anything else is essentially a crapshoot.   

N. Russell Wayne, CFPÒ

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