Failing to plan is indeed planning to fail. This is a quote we’ve all heard before and of course its implications are widely applicable. In attempting to remove the cliché aspect from this post, I was faced with compromising a belief that I have that most success does come from proper planning. The methodology [of planning] extends to virtually all aspects of life and can literally pay dividends for investors that survey the landscape for opportunities that will prove fruitful with a properly executed strategy.
What ideas will be best for 2016 and beyond?
Fallen Angels – Oil has fallen more than 50% over the last twelve months. Companies that spent millions of dollars in infrastructure building (CAPEX) to dig wells, find oil and bring it to market are now hemorrhaging financially. 2015 was a year that saw relatively few bankruptcies and restructurings, however 2016-17 should be ripe with more of the same. These fallen angels will present opportunities to investors that have a longer horizon to withstand the “bottom” in oil prices and ride it back to a point of stability. Of particular note, have been oil refiners and pipeline companies that have performed although oil prices have declined.
Emerging Markets – Developing economies which are dependent on heavy commodity exporting were happy to see 2015 go. My thoughts are that the underlying assets in this category may experience more pain in the interim, but are poised for big gains for longer holding periods. Investors must remember that most markets are cyclical. China’s growth over the last decade plus must be brought into equilibrium with other developed economies. As growth slows in China, its trading partners will also experience slower growth until equilibrium of supply and demand are reached. As this unfolds, emerging markets with strong political leadership and weak currencies stimulating domestic output will look to take advantage of the carnage from this most recent commodity decline and position themselves for future growth.
US Stocks – Bellwether mega cap companies with diversified operations are not currently cheap, but with continued volatility will look quite attractive. As an example, technology companies like Apple have experienced selling pressure due to the slowdown in China specifically, but for a company with a 1/2 trillion dollar market cap and $41 billion of cash & cash equivalents on its balance sheet it has the luxury of waiting out this storm. US corporations flush with cash have the option of using stock price pressures to increase their dividends or announce share buybacks. Investors should remember that cash is king, and companies that produce a lot of it can represent good long term holds in any portfolio.
Municipal Bonds – If you have read any of my previous posts, you may have noticed my “soft spot” for municipal bonds. This asset class is dear to me because of the relatively ease it presents for patient investors to accumulate safe total returns. First, if you end up paying more than 25% in taxes in any given year, you should consider municipal bonds. Most are exempt from federal income tax so you earn tax free income which on a tax equivalent basis gives you a boost. Next, they usually offer better yields than US treasury bonds and similarly rated corporate bonds. So for the diligent investor that dedicates a portion of their portfolio to this asset class, tax free investment returns can be used to accelerate net cash flow in the portfolio over a longer time horizon.
These are just a few ideas investors should be considering as investments for their portfolios. However, remember that the planning process–not just the ideas—is a crucial step in any investment strategy.