Momentum trading is all the rage, at least on Reddit boards and on the Robinhood trading platform. But the principles of long-term investing haven’t changed. If you have a diversified strategy and stick with it, you are likely to have good compounded returns over the long haul.
There are always people who are new to investing. And to trading. For those who are only thinking about price momentum or volatility, the lessons of long-term investing might seem boring, but they can also make you a lot of money. Why not learn about a non-trading approach that has proven to be profitable over the decades?
Three professional investors gave examples of long-term investments during interviews. These selections are based on analysis of financial health, growth prospects and valuation of stocks against things that can be measured as well as estimates, such as earnings, sales and cash flow.
Trendy trades and momentum risk
The short-squeeze action that has recently come to a head, portrayed as individuals striking back at nefarious hedge funds, is an example of a momentum trading strategy that has worked well for traders during 2021. Some of the private investment funds that had heavily shorted stocks were hit hard. Melvin Capital took a 53% loss in January, according to reports.
But the word is out. If you bought shares of GameStop Corp. GME, -30.77% for $39.91 at the close on Jan. 14 (even after they had more than doubled from $18.84 at the close on Dec. 31), and held them through Jan. 29, when they closed at $325, you would have been sitting pretty. But less so, maybe, than if you had sold them at the Jan. 29 intraday high of $413.98.
But what if you were late jumping on the GameStop bandwagon and bought the shares at the all-time intraday high of $483 on Jan. 28? You might have been annoyed Monday morning (Feb. 1) when the shares opened at $316.56. At that point you would have been down 34% on your GameStop purchase. And that was before it dropped to as low as $212 before closing at $225.01. (They hit their all-time intraday low of $2.57 on April 30, 2020, FYI.)
Those hypothetical GameStop trades would have been based on nothing but buzz. There was fundamental change for GameStop’s business of trying to sell videogame console systems and media to customers who might be better off buying the systems online and are very likely never to purchase game media again, because nearly everything is downloaded these days.
A similar story could be told by traders playing the American Entertainment Holdings Inc. AMC, +0.30% short squeeze:
Get in early, and you can make a killing if you don’t get too piggy. It helps to have a crystal ball. Get in late and you might get skewered.
That’s a lot of risk — and possibly full-time work, monitoring the wild speculation. And maybe a loss of sleep and worse consequences if you really mess it up.
How ‘long’ money views the short-term action
Even if you have had success with short-term momentum trading strategies or plays on the movement of the CBOE Volatility Index VIX, -8.47%, it might be a good idea to invest a portion of your portfolio in stocks for long-term growth. Investing is not the same as trading. It means making a commitment (for years) to reduce risk and enhance rewards.
When asked for his thoughts about the short squeezes driven by traders communicating through Reddit’s WallStreetBets message board, Saumen Chattopadhyay, chief investment officer at Carson Group in Chicago said: “Timing the market is dangerous. Time in the market is more important.”
Carson Group provides support services to hundreds of investment advisory firms and also manages about $16 billion for its own clients, with Chattopadhyay running about $500 million in a large-cap growth strategy.
He went on to describe the recent short-squeeze action and the evolution of the “game-ification of the market” during the coronavirus pandemic, where some people who were unable to gamble in casinos or had their sports gambling curtailed moved into online trading.
“We have not seen that — people driving the calls with stocks with no fundamentals” through the use of social media, until recently, he said.
George Schultze, CEO of Schultze Asset Management in Rye Brook, N.Y., pointed to the revolution of information, saying it has become “ubiquitous” over the past 20 years and has led to the “empowerment of the individual investor.” While acknowledging that many individuals are “very smart,” he continues to believe investing is best left to professionals. While not addressing the short-squeeze action specifically, he said: “For people without any knowledge, I would advise caution.”
If your entire (and likely, new) trading strategy is based on momentum and message boards, you may well fall into the “without any knowledge” category.
John Buckingham, editor of The Prudent Speculator investing newsletter, said the democratization of investing through low-cost trading, the information flow and social media is not a bad thing, because “in the old days, the little guys were the suckers.”
“If a hedge fund blows up, I am not going to cry for them,” Buckingham added. “They took risk.”
The Prudent Speculator is published by published by Kovitz Investment Group of Chicago. Kovitz manages about $6 billion, mainly for private clients, but also through the Al Frank Fund VALUX, +1.15%, which is rated four stars (out of five) by Morningstar.
Buckingham said just about any diversified and “disciplined” approach to long-term investing in the stock market “should be successful.”
He pointed to Viacom Inc. VIAC, +7.90% — another stock that has been pushed up lately by traders pushing back against short-sellers. “Nobody wanted it at $10, and yesterday [Jan. 27] everybody wanted it at $55,” he said. “We did not buy Viacom because we thought it would be subject to a short squeeze — we bought it because it was trading for a single-digit P/E ratio with a big dividend yield.”
Buckingham said he sold some of his Viacom holdings on Jan. 27 “because it had gone up for no reason.”
Schultze pointed to General Motors Co. GM, +1.64% as a solid investment for the long term, even though the company’s shares have risen 22% during 2020, and 56% since the close on Sept. 8, before he made the case for them in this story about electric-vehicle-industry investments beyond Tesla Inc. TSLA, +5.83% on Sept. 9.
“ I would rather have GM at $51 with no dividend than at $15 with a 5% yield. ”
“GM has reported good results, and keeps [entering] new partnerships, with autonomous vehicle ventures,” he said, including this $2 billion deal with Cruise and Microsoft Corp. MSFT, +3.32%, announced Jan. 19.
In October 2018, Buckingham said he was surprised at the market’s disregard for GM. He was early, but he liked the stock for its very low valuation to earnings estimates and for its dividend yield of about 5% at that time.
GM suspended its dividend in April, but the market has obviously been more impressed with the company’s aggressive plans to deploy 30 fully electric models by 2025 than by the dividend cut.
While he loves dividends, Buckingham said: “We as investors don’t mind if capital is redeployed in creative ways. I would rather have GM at $51 with no dividend than at 15 with a 5% yield.” He continues to hold GM.
He said he expects to see revenue in Microsoft’s Intelligent Cloud segment grow at a compounded annual rate of 16% over the next five years. He said data security is a major area of risk for all large U.S. technology companies, but that he believes that because it has become an “enterprise staple,” Microsoft is better protected from data breaches and political fallout from them than Facebook Inc. FB, +1.42% and Alphabet Inc. GOOG, +3.57%.
For UnitedHealth, Chattopadhyay sees a “Goldilocks” political environment, with the Biden administration and Congress much more focused on the overall economy, financial regulation and “fixing immigration” than on a wholesale change to the U.S. health-care system that might hurt the nation’s largest health insurer. He thinks UnitedHealth’s revenue can grow “robustly” over the next five years because of the positioning of its Optum health-services segment and its Medicare Advantage business.
FMC makes insecticides and herbicides, as well as other agricultural products. Chattopadhyay said many of FMC’s products are cutting-edge, with EPA designation as “reduced-risk- pesticides,” and that the rollout of newer products should drive “single-digit growth for years.” What complicates the rollout is the variety of regulatory structures — and delays — around the world, he said.
Buckingham mentioned several other value stocks he argues are special bargains right now:
- Shares of Whirlpool Corp. WHR, +0.79% closed at $212.40 on Jan. 28, but then fell 12% over the next three trading sessions, even though the company soundly beat analysts’ estimates for sales and earnings. Buckingham called the company’s results “fantastic” and said the market’s negative reaction was typical of the “buy-the-rumor/sell-the-news mentality today.” WHR trades for 9.3 times consensus earnings estimates for the next 12 months, among analysts polled by FactSet. In comparison, the forward P/E ratio for the S&P 500 is 21.6.
- Goldman Sachs Group Inc. GS, +1.31% is another example of a company that blew out the fourth quarter, only to see its shares tumble afterward. The stock was down 9% from the close on Jan. 15 (before reporting earnings early on Jan. 19) through the close on Feb. 1. Goldman’s forward P/E is 9.3. If the U.S. begins a sustained post-pandemic economic recovery, Buckingham expects the financial sector to be “a leader this year.” He said “quality names with big dividends” in the sector also include J.P. Morgan Chase & Co. JPM, +0.74%, Bank of America Corp. BAC, +1.05%, Citigroup Inc. C, +0.76%, and Capital One Financial Corp. COF, -1.34%.
- Apple Inc. AAPL, +1.65% is a stock that might be a surprise to see on a value list — it rose 68% for one year through Jan. Feb. 1. Buckingham said that as part of the Prudent Speculator investing strategy of rebalancing to keep individual stock positions (in a portfolio of about 80 stocks) from getting too large, he had been trimming his position in Apple’s shares for years, having first bought it in 2000. But he still considers Apple a “buy,” and said “[i]f you were to open a managed account with us, you would get Apple. It would be your largest holding today.” Apple’s shares trade at a forward P/E of 30.2.