Don’t Be Too Cute
- I try to keep investors on high ground by focusing on high-quality REITs.
- During times of turbulence, market participants often will gravitate to investments where they are least likely to experience a loss of principal.
- “Only when the tide goes out do you discover who has been swimming naked”. Warren Buffett.
Don’t get stuck when the tides goes out, you could get caught swimming naked.
The legendary investor Benjamin Graham was one of the first to recognize the quality problem among equities back in the 1930s. The well-respected value investor classified stocks as either Quality or Low Quality.
He also observed that the greatest losses result not from buying quality at an excessively high price, but from buying Low Quality at a price that seems good value. That line of thinking holds true for Graham’s star student, Warren Buffett, who said that one wants to buy companies run buy idiots, because some day they will be.
It’s ironic that high quality tends to do best when you need it, and owning high-quality stocks are more popular when times are tough. Who would have thought that after the Dot.com bubble investors would have got caught with shares in Enron and Worldcom, as many wished they had instead invested their capital in blue chip names like Coca Cola or Johnson & Johnson.
As my loyal readers know, I try to keep investors on high ground by focusing on high-quality REITs, and that means that I balance my research on the good, the bad, and the ugly. It’s important for investors to recognize the difference, that lasting differentiation is the key to sleeping well at night.
Certain stocks are better prepared to perform in the chaos than others, as “the flight to quality dynamic unfolds in the markets when investors are more concerned about protecting themselves from risk than they are with making money”.
During times of turbulence, market participants often will gravitate to investments where they are least likely to experience a loss of principal. This flight-to-quality phenomenon occurs when investors sell what they perceive to be higher risk investments and purchase safer investments.
Don’t worry, this article is not my harbinger that a recession is around the corner, but investors should consider the signals in the marketplace. We are now in late innings and investors should begin early to prepare for the flight to quality trade, as investors seek less risk in exchange for lower profits.
As Ben Graham wrote (in The Intelligent Investors) that “one of the most persuasive tests of high-quality is an uninterrupted record of dividend payments going back over many years”. I know you’ve heard me preach this sermon before (and it won’t be the last), please, please, please…
“Don’t Be Too Cute”