Thursday, January 12, 2012

Investment Outlook for 2012--The More Things Change...

I believe that 2012 will be the fourth straight rewarding year for investors who can sleep at night and deal with the very real headline risks that will whip the markets around on a daily basis. I further believe it is an excellent time to be invested in outstanding American companies that are earning record profits, some of which selling at levels we have not seen since I first got into the business more than three decades ago.

More about where we are headed and why in a minute. First, let’s look back on the year just ended and see what we have learned.

On one level, 2011 was an extremely volatile period for the investment markets. It seemed that every day the focus would shift from one economic “crisis” to the next with the headlines of the moment combining with the steroids of high-frequency computer trading to whip the market up, down and around on an hourly basis.

We went from periods of angst about the budget deficits to concerns about the U.S. unemployment rate to fears of the effect of tax increases to the catastrophic implications of a downgrade to the U.S. credit rating to worries about a double-dip recession to the Congressionally-created threats of a U.S. default to the grim speculation over the impact of a Chinese slowdown to the current doomsday scenarios regarding the future of European Union and the economic and financial disruptions that are still being touted as a likely outcome of a full-blown crisis in that part of the world.

Each of these looming disasters was labeled a crisis by the disaster-addicted media—at least until they completely dropped the story the next day—and the ebb and flow of hourly headlines had the ability to create “risk-on” euphoria or “risk-off” despair—sometimes with several of each taking place during the same trading day. And, for the most part, the accompanying frenzies disappeared as quickly as they had appeared and the media spotlight and obsession moved on to the next disaster du jour.

And yet if someone went to sleep on January 1, 2011 and woke up on New Year’s Eve, he would think that things had been pretty calm since all the stock market averages ended the year about where they started. So who were the real experts—those who told us we needed to make daily adjustments to our holdings or face calamity or the guy who slept through it all and didn’t change a thing?

This obvious attempt at sarcasm should not suggest that there aren’t serious issues that hang like a cloud over the future of our economy and that there aren’t real problems out there. Far from it.

Our media’s addiction to crises has distracted investors from the real underlying story. After a real cataclysmic, system-threatening financial meltdown in 2008 followed by three years of rehab, high unemployment and slow economic activity, there seems to be evidence that things are getting better across a whole variety of data points and the slow steady economic recovery of the last two years is finally gaining some real traction. More jobs are being created every month, fewer people are submitting new claims for unemployment, and consumer confidence is rising.

At a time when stock prices across a broad swath of companies ranging from Apple to McDonald’s to IBM to Union Pacific to Nike to Philip Morris trading at or near all-time highs in revenues, earnings, and stock prices and most market averages up almost 100 percent over the last three years, many investors still fear the market and have been steering their purchases to so-called safe havens such as gold and U.S. treasuries.

My plan for 2012 is similar to my approach in 2011. Investors should be positioned in quality companies which are showing outstanding growth in revenues and profits, solid management, a history of raising dividends and distributions in industry sectors that seem likely to benefit from an improving economy and rising confidence. In summary, I believe 2012 should be very much like 2011 in a number of respects—only better.

Those sectors that were favored in 2011 (energy, agriculture, oil and gas pipelines, and life-changing technology) should continue to do well. If the economy and sentiment continue to improve, sectors such as industrials, banks, and home builders could end their multi-year bear markets and finally make a turn to the upside. Even though the headlines remained bad during the fourth quarter, some of the largest gains were registered by housing related investments. Many of the bank stocks have spiked sharply in recent weeks as well. It is an area we will continue to watch.

The headlines will be far different in 2012 as the presidential campaign kicks into full swing. The Republicans will certainly continue to convince Americans that we have been suffering mightily from the policies of President Obama while Democrats will try to focus on all of the many hopeful signs I have mentioned above. As usual, the pundits will do their best to stir the pot and create controversy and confusion.

Meanwhile, I will continue to keep my eye on the data which, at least recently, have shown signs of significant and hopefully sustainable improvement.

Buy good stocks and live a long time. That has been my mantra for more than 30 years. For the first 20 years, it worked like a charm. Not much has worked for anyone during the last 10 years. Now the whole idea of long-term investing has been thoroughly rejected by luminaries such as Jim Cramer and a broad range of high-speed hedge fund traders (many of whom lost quite a bit of their clients’ money last year).

Hopefully, this will be the year that we are all fully rewarded for our belief and confidence in some of our country’s premier companies. Obviously, there are event risks, but I believe there are greater risks to losing both money and/or buying power to those who load up on cash, bonds and gold in the name of safety than to those who buy quality companies at reasonable prices.

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