Tuesday, November 1, 2011

Stock Market Thoughts

Stock market results the last two days show that the support for the market is a mile wide but only an inch deep.  Correlations among stocks are at historic highs, so it seems that on any given day, the Big Money either embraces risk or shuns it, driving stocks sharply up or sharply down.  It is so hard to invest in such a market environment that individual investors can be forgiven for shunning the stock market and just buying bonds, or even insurance annuities.

I haven't given up on stocks, at least where there is a real business underneath the stock.  I particularly seek businesses that produce useful products, are managed by individuals with high integrity and foresight, and which seek to ameliorate the adverse effects of their operations on the environment.  Such managers increasingly integrate environmental, social, and governance (ESG) principles in their business operations.  

I also favor companies that generate substantially more cash from their operations than is needed to continue the business.  Good things tend to happen when astute, shareholder-oriented managers have additional capital to allocate by raising dividends, repurchasing shares (at undervalued levels), reducing debt, or making acquisitions that enhance the business prospects.  Of course, as a contrarian, value- and income-oriented investor, I favor such stocks, especially when they have dividend yields of 4% or more and still generate surplus cash.  And such stocks are available.

So with bond yields unusually low and dividend yields on select stocks quite high (though not for the overall stock market), if this correction in stock prices continues, I'll be back in the market buying stocks.

Steve Lehman

S & P 500:  1218

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