By Christine Song of Small Investing Insights
In the US, Labor Day happens once a year and it marks the end of summer and the beginning of back to school. But for us lucky folks in the investing world, we get to experience labor day every month (the first Friday to be exact, when the US government releases unemployment numbers). With so much fear right now of a double dip recession, markets will rise or fall on these numbers and lately there’s been more falling than rising. Pick any newspaper and you’ll be sure to find gloomy economic data, so I was surprised (literally stopped me mid-coffee sip) when I read the headline “Executives Aren’t Flinching Just Yet”.The Washington Post had compiled comments in recent weeks by executives of more than three dozen large companies to see what they’ve been saying about the economy and the plans for their businesses. Though the CEOs aren’t talking about a massive hiring spree, they’re not closing up shop either. Even in my small cap universe, I’m hearing the same thing – choppy economy prompts caution not retreat. There seems to be a definite disconnect between Wall Street and Main Street.Now I’m not one to quote accounting books, but in accounting there’s a term called “going concern”, the idea being that the company is assumed to be around 1, 5, 10, etc. years from now. Depending on how much cash you need when, this “going concern” concept certainly applies to you when it comes to investing.
You see, owning stocks requires a CEO mindset – you don’t close up shop because of short term stock market setbacks. You need to see the bigger picture and have confidence that the stocks you own will be around for the long term. However, investors are often told to hang in there because of a vague and frankly outdated argument that stocks outperform in the long run. Don’t tell that to people who over the last 10 years find themselves in the same place where they started.
Not all stocks will outperform the market, but only the high quality ones. Knowing the specifics – what the companies are doing, creating, selling to make themselves stronger and more competitive during the short term setbacks – will save you from selling into a sea of red. There’ll be more labor days to come before the next official one rolls around, and there’ll be more down days as the economy recovers. Just remember – not all stocks are created equal and whether you’re a CEO or investor, conviction comes from knowing what’s going on under the hood.