The Investment Scientist

Buying Strong Stocks On Sale

Posted on: March 25, 2020

 

Now that the panic has abated a little, many financial advisors (FAs) are advising their clients to buy strong stocks on sale. None other than Jim Cramer made the same proclamation, he even mentioned ten stocks by name. (Just FYI, he did the same in 2008 – and I did a study afterward – 8 out of the 10 underperformed the S&P 500 index that year.)

So what are the strong stocks to own? Are they industrial titans like Boeing or GE? They were strong stocks but are they still? Are they Wall Street banks too big to fail like JP Morgan or Citibank? But how do we know they’re not just another Lehman Brothers? Is it a consumer tech giant like Apple? How can we be sure it won’t go the way of Sony, which was the previous consumer tech giant. How about Netflix? When we are stuck at home social distancing, you’ve got to watch Netflix right? But what if Amazon, Apple and the other big boys jumping in the streaming market eat its lunch?

The bottom line is that to do it right, you need to be clairvoyant (that is, the rare ability to predict the future.) If a TV celebrity like Jim Cramer doesn’t have that power, what chance do we have? (Tongue in Cheek.) Nobel Prize winner Daniel Kahneman observed that when we can’t answer a tough question, we tend to answer a slightly different, but much easier, question , unbeknownst even to ourselves. Most folks, including many FAs, will find a few familiar stocks that have performed well in the recent past and call them strong stocks. There is absolutely no guarantee that they will perform strongly in the future. In fact, Professor La Porta’s study “Analyst Expectation and Stock Returns” has shown that oftentimes,  the opposite is true.

For myself and my clients, we don’t do any of the busy but futile guess work.  We buy the one strongest “stock” money can buy. It doesn’t have a name. It is a synthetic stock made up of 6000 US stocks and 8000 international stocks and real estate trusts. I call it the World Stock. If you own shares of the World Stock, you own a share of the total productive assets of the world. As long as humanity grows in number, and as long as humanity demands a higher living standard, you can be sure the World Stock will grow in value. This is the safest and strongest stock of all since it’s a bet on the survival of humanity itself.

For those of you who are not my clients, and want to know how to buy the World Stock on sale, I encourage you to schedule a 2nd Opinion Review with me.

Schedule a 2nd opinion financial review, buy my wealth management books on Amazon, or download the pdf version here.

 

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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