Market Musings 140522: Stock Market Strategies for the Long-Term

15th May '22 by Edmund Shing

7 comments 1457 reads

Market Musings 140522:
Stock Market Strategies for the Long-Term

Just keep buying!

(Incidentally, this is the title of a newly-published book by Nick Maggiulli which is very well reviewed, you can listen to an interview on the book with the author below:)

Just Keep Buying With Nick Maggiulli

Summary:

Two fundamental stock market drivers: Earnings, and Valuations
Earnings trends continue to rise (for now),
Valuations (P/E ratios) have declined sharply in 2022,
But beware, analysts can be horribly wrong on occasion!
Valuations may not drive stock market performance in the short-term, but for patient investors truly taking a long-term multi-year perspective, today’s depressed stock market valuations should represent a good entry point,
Using a Minimum Volatility or Quality Factor ETF are good ways to improve your risk/return ratio on investing in a world stock market index fund/ETF.

This week’s Podcast:

INVESTMENT STRATEGY FOR MAY 2022 (link)

Growth slows on energy costs
Inflation has (likely) peaked
Bonds become attractive
Still neutral on equities
Copper and natural gas breakouts underline the commodity supercycle

Back to Basics: Drivers of stock/share prices

What really drives stock prices over the long term?

[PS note that I see stocks and shares as interchangeable terms; just that British English tends to use the word share, while in the US the term stock is more commonly used]

Boiling stock price drivers down to the bare minimum, there are two:

Earnings (some may prefer free cash flow, but let’s say post-tax earnings for now) which represent the profits that the company earns which are available to be distributed to shareholders via dividends or share buybacks, or which can be re-invested to drive future growth, and
Valuation (usually the Price/Earnings ratio), i.e. the amount that investors are currently willing to pay for this future stream of earnings

All other motors of stock prices feed into one or both of these fundamental stock price drivers.

Dividends are paid out of earnings, if they are to be sustainable and not one-off.

Share buybacks have an impact in theory both on earnings per share (roughly the same earnings in total, then divided by fewer shares) and also on valuation (as companies that hold regular share buybacks tend to be generating excess free cash flow, which points to higher-than-average profitability over time, which should be worth more to an investor).

Liquidity of a share (effectively the popularity or unpopularity of a…

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SCI20

15th May '22

Thank you Edmund for another excellent article. Your macro insights are invaluable and in my opinion give much needed balance to the focus on small cap investing.

KevinS1

Hi Edmund, a great article as usual with some sound advice.

Having been researching similar ETF's recently I took a quick look at £GGRG & £IWFQ on the really good JustETF website.

It appears that they are both similar with some small differences;

GGRG has 591 holdings vs IWFQ 298
GGRG has 29% in its Top 10 vs IWFQ 25%
TER ratio are similar 0.38% GGRG and 0.3% IWFQ
Performance is pretty similar with both holding No1 position at times across the last 4yrs but 3 yr Return overall being GGRG 43.5% and IWFQ 39%
The top 10 has similar names although weightings are slightly different. Common holdings include Apple (No1 in both), MSFT, FB, Johnson & Johnson, Roche etc. There are 1 or 2 variations as well with no site of the holding in the other one.

I had been using the JustETF site to try and find some decent global dividend payers to diversify my largely UK portfolio and I think both of these could fit the bill, although I think they both reinvest the dividends. Although it wouldn't be too difficult to cash in units to replicate the 3-4% I am looking for each year.

Thanks for all you efforts - always a worthwhile read.

GGRG has exposure to Basic Materials sector (RIO & BHP) which IMO is an important benefit over IWFQ.

donald pond

16th May '22

It seems to me central banks have swallowed the Volcker playbook that says the only way to deal with inflation is by stamping on economic growth, raising interest rates and doing whatever you can to stop wage increases. I can understand that if its the demand side driving inflation, but its fuel shortages, problems with the supply chain and increases in the cost of food production that are the drivers this time. Raising interest rates feels like fighting the last war. If anything, it would be better for the government to be finding ways to reduce the costs of fuel and food because otherwise there won't be any money left for anything else.

Cuddlesticks

Super, very insightful and helpful. Thank you.

Raman_D

Nice insightful article, it gave me a good perspective on the broader Global ETF's which I was not that familar too.

AnonymousUser1782684

Thanks very much Edmund, I always look forward to your articles.

Market Musings 140522: Stock Market Strategies for the Long-Term