As this market gets increasingly volatile it’s important to revisit your long-term investing strategy to make sure that you don’t waver. As I wrote last week, and as we’ve all known, a market correction wouldn’t be a surprise. And in fact, it wouldn’t necessarily be a bad thing.
If you look back in time you’ll see that nearly every market correction in history represented a buying opportunity for long-term investors. That’s certainly been the case over the past four years.
Obviously your perspective is different if you’re not in the market for the long-term. But I’ll leave that subject alone since I’m in it for the long-haul, so that’s the platform I’m speaking from.
Let’s get back to strategy though, and leave speculation about corrections alone for now. As I’ve said many times before, the secret to making money in the stock market is not to simply invest in great companies. But to make great investments based on positive catalysts.
We tend to talk about catalyst investing in the context of individual stocks. But the same strategy can be applied equally well to ETF and mutual fund investing. Whatever the investment, the trick – broadly speaking – is to make sure there are very specific positive trends that you expect to drive shares of the investment higher.
This may sound basic, but implementation of the strategy over the long-term is anything but. There are thousands of great companies in the world vying for you investment dollars. Many have cutting-edge products, earnings growth, top-notch customer service and very talented managers. And it’s tempting to buy shares of these “great” companies. But they don’t necessarily deliver big returns to shareholders.
I like to use Exxon Mobil (NYSE:XOM) and Wal-Mart (NYSE:WMT) as two examples. Both are dominant in their industries. But over the past five years, these two stocks are up just 57% and 70%, respectively.
That’s not great performance, especially considering the S&P 500 is up 112% over the same time period.
So what gives? How do you generate wealth in volatile markets if “great” companies – like Exxon and Wal-Mart – don’t always deliver above-average returns?
The Key to Investing During a Volatile Market
The secret is to recognize the difference between great companies and great investments. Great investments go up in value. And almost all great investments share one thing in common: positive catalysts.
A stock catalyst is an event that has a very dramatic impact on the company’s future. A catalyst can completely change a company’s growth profile and drive the share price higher.
If you’re investing in individual stocks, than you want to be looking for potential catalysts specific to that company. Things like a new product launch, a resource discovery, a new customer or a new manufacturing plant. Industry growth trends are good to monitor too, but you want to make sure you understand exactly how your company’s revenue and EPS growth will benefit from the broad trends.
If you’re investing in ETFs and mutual funds, you’re looking for broad catalysts. In this case, catalysts such as industry growth and country growth are likely specific enough. Just be sure to understand the connection between the trend and the investment, how long you believe the trend will last for, and what you expect reasonable upside is.
The key to a catalyst-based investment strategy is to make sure the events are significant, positive and have a measurable impact on the company (or fund) in terms of important metrics – such as sales, earnings, product distribution and market share.
You’re also likely to have more success if you focus on a few types of catalysts to begin with. Over time, broaden your criteria to find success in this volatile market.
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