For a flat stock market, 2015 sure packed plenty of pleasure and a whole lot of pain. In short, if you were a risk taker, you may have done very well. The most aggressive stocks like Netflix and Amazon returned 135% and 119% respectively. On the other hand, if you were investing in blue chips (Exxon/Mobil (-12.61%), Berkshire Hathaway (-12.48%), Walmart (-26.59%), American Express (-24.18%) Chesapeake Energy (- 76.77%) it was downright awful.
Income investors didn’t fare much better. MLP’s, traded REITs and high yield bonds all suffered negative returns last year, in some cases in excess of 50%!
So what do we make of it and what does this mean for 2016? Well we just don‘t know. We do know that it is often toughest to invest at the most opportune time. Think about it. How many of us really wanted to invest in March 2009. The world was coming to an end. If you don’t believe me, just watch TV at that time. Banks were going bankrupt, countries were next and the new normal meant it would be years until the economy started humming again.
While all of that was true, in hindsight, that was the best possible time to invest. All that pessimism and uncertainty bred discount share prices. Buying profitable quality companies, or mutual funds who buy those companies, proved the most prudent course. The S&P 500 hit a low of 666 and closed this year just a smidge above 2000. That’s a pretty good return for six years and a few months of investing. So after a bad year for some investments, and not a very good return for almost all, how should one invest?
Fundamental Analysis: Long term investors focus on this measure. Warren Buffet made this approach famous, but its roots are in Graham and Dodd’s investing classic, “Security Analysis.” The position they took is that stocks should be valued on the present value of the future income stream of dividends. This approach takes into account growth stocks (future potential dividends) and value stocks (current dividends). The analysis is focused on a rational approach to investing.
Technical Analysis: These individuals tend to be more tactical in their approach. If Fundamental analysis is the approach of investors, technical analysis is used by traders. Think of the urge to sell a losing stock if you could “just get back to even” or the desire to sell when you double your money. This emotional impact weighs on all individuals and can be used to try to predict short term stock movements.
So what does all this have to do with our investing environment today? The volatile movements of the stock market are being caused mostly by the buying and selling of technicians. Long term investors using fundamental analysis attempt to take advantage of the discounts that this emotional investing creates.