Institutional investors will still be buyers of equities as the market pulls back. There’s just no other way to earn a decent return on investment that beats the rate of inflation. Any consolidation or correction in stock prices would certainly be a positive development for the long-run health of the equity market. The stock market needs a rest from its excellent performance over the last two years.
Ever since the market low set during the financial crisis, just owning the index has been a very profitable strategy. Once again, this illustrates how successful you can be as an investor using the buy-low-and-sell-high investment philosophy. It takes time and patience, but if you wait for markets to go crazy, the likelihood of making money by stepping in at extremes is greatly enhanced.
A lot of individual stocks also have done extremely well over the last two years and many of these have been large-caps. In fact, a lot of old, brand-name companies have been performing like fast-growing micro-cap stocks. Consider the outstanding stock market performance of ConocoPhillips (NYSE/COP). This used to be a favored holding of Warren Buffett, but he cashed out too soon. This integrated oil and gas company has been a top moneymaker over the last 18 months and, in addition to its amazing capital appreciation (for a large-cap), it’s also paid a big, fat divided to shareholders. It’s the best of both worlds for an investor.
The price performance of a company like ConocoPhillips serves to illustrate that an equity investor doesn’t have to just speculate in penny stocks to make money from the market. I have always advocated a mixed strategy for equity speculators. Just like you might own some gold stocks or a high-tech micro-cap, it often pays to own a few large-cap names in a speculative portfolio. Big companies have big economies of scale and that’s how they make money. As always, the key to wealth creation in the stock market is owning the right stocks at the right time in the right kind of market environment. This is why the equity speculation business isn’t so easy.
The stock market is taking a break now, but my outlook remains positive. We’re in an age of austerity and, frankly, I think that’s a good thing. Going forward this decade, some of the best stocks to own will be those companies that produce “real” things. By real, I’m talking about tangible resources that the world needs to consume. The commodity price cycle isn’t over. It’s only at the end of its beginning.
Any equity portfolio, conservative or speculative, needs to have some exposure to oil and gold. If we aren’t at a peak oil environment yet, we’re very close. And with all the sovereign debt in the majority of mature economies, gold will increasingly become the store of value that investors like China and India are looking for. Oil and gold—don’t be afraid to own them.