Three Questions for Bill Richardson Part 11
Question 1: There is a Presidential election in a couple of weeks. How is this going to affect my investments?
This type of question fits into the predictions category and I will answer it as I usually answer predictions questions. Making predictions for the short-term is not much more than guessing. Who knew that last week, the Dolphins were going to blow out the 49ers or the Titans were going to destroy the Bills. Of all the NFL experts, 90% picked the Niners and 87% picked the Bills.
My prediction: There will be volatility.
The important factor in this discussion is earnings. One stock that is in the pools that I manage is Adobe. Over the past twelve months, they have earned $7.94 per share. Analysts predict that they will earn $13.13 over the next two years. That’s an increase of about 66%. Over the past 10 years, they have grown their earnings by 23.45% per year so analyst expectations are a bit higher than their track record (source: ycharts.com). Will analysts be correct? Maybe or maybe not. I predict maybe. Their price-earnings ratio has expanded past their 5-year average and it now sits at 12% above the five-year average. My prediction: The PE may slip back to average over the next two years. So, let’s say earnings grow by the 10-year average over the next five years and it trades at the average PE then, Adobe’s earnings should grow to 22.78 times and trade at a PE of 55.57, but let’s be conservative and call it 40. That would give us a target price of $991 vs. today’s price of $495 or an approximate double.
If we do a similar calculation on all the stocks in a diversified portfolio, some may work out and others won’t but it gives us a reasonable roadmap (vs. prediction) to determine if we should own the stocks we own.
Oh yeah, what’s going to happen with the election? Volatility and it may alter the earnings growth paths of great companies over the next five years but don’t let volatility affect your long-term strategy.
Question 2: I have a portfolio with another advisor and I am trying to determine if I should move it over to you. I’m not sure how to make that decision. What do you suggest?
Easy one. I’d ask your current advisor one simple question? “What’s our strategy?”
Your advisor should be able to articulate the strategy in a few simple words or statements.
For example, we do a 12-factor screen using such factors as earnings growth, return on equity, profit margins, etc. to build a sandbox of North America’s greatest companies and are biased to US companies because there is a much greater selection than Canada. We then screen to rank these companies to identify the companies with consistent and predictable earnings growth over the past five to ten years and then check that analysts believe that this growth will continue and then we try to buy these companies at reasonable prices. We diversify by sector and try to avoid sectors that do not exhibit consistent and predictable earnings growth, like energy and mining stocks. We monitor for changes and watch price charts as they sometimes give us a heads-up and make changes as necessary.
If your advisor cannot articulate his strategy, then you are playing a game of “buy and hope” and it will be uncomfortable for you and your current advisor and he will spend his time apologizing. “Buy, hope and apologize” is not a strategy.
Question 3: I have been following “3 Questions for Bill” for some time now and find it interesting. I appreciate you spending the time to educate me and I love the format. It must take a lot of time to write this every two weeks and I find it interesting how you come up with three new questions for each edition. What is your purpose of 3 Questions for Bill?
First and foremost, it is fun otherwise I wouldn’t be doing it. Secondly, I am asked things all the time and that is how I generate the questions. My theory is that if one person is asking, many are thinking the same thing.
My selfish response is that my ultimate goal is client satisfaction. It is not only my job to manage your investments, it is my job to understand you and your family, your goals and needs and try my best to help you achieve your goals.
If I do a good job of satisfying, I know that many of you know people who are in a bad relationship with their current advisor, who can’t answer the “what’s the strategy?” question. Introducing those people is uncomfortable for you, in many cases, so by writing 3 Questions, I am sending you something that you can forward to friends, family and associates to simplify the introduction process for you.
Until next time, have a great day!
Bill