Tim Cook, chief executive officer of Apple Inc. © 2018 Bloomberg Finance LP
If you missed the big gains in Apple and Nvidia during the bull market, you can buy them now for 30% and 50% less than just four months ago. Buying the right stocks after Wall Street sells them off is one of the more consistently profitable strategies employed by my managers. If you don’t already own, Apple and Nvidia, this is a good time to initiate a position.
How Big Is A Position?
When you are just starting out, you don’t know enough about your investment skill to make big bets. For this reason, I recommend you make smaller bets by allocating 5% of your portfolio to each position. After you have a track record it will give you a sense of when to have confidence in your investment skill. At that point, you can consider making bigger bets where each is perhaps 10% of your portfolio.
If you want a 5% position in Apple, don’t buy it all at once. After many discussions with clients who manage a portion of their portfolio themselves, I find it makes it easier for them to pull the trigger if they make trades 1% at a time. You may have to make 5 such trades to build up your 5% position. But this takes the pressure off trying to pick the absolute lowest price before doing anything.
Often I find that smart people can talk themselves out of taking any action when it comes to making a big decision. It is easier, and probably better, to make a bunch of small decisions that take you in the right direction than to wait for the perfect time to make a big change.
The Outlook For The Market
There are not that many factors that move the whole market up or down. Two of the most important are monetary and fiscal policy.
For 8 of the last 10 years, the Federal Reserve has had a zero interest rate monetary policy. When interest rates are falling, even poorly managed companies can see their stocks rise. One of the underlying factors for the longest bull market since World War II is the Fed’s drive to push interest rates to zero.
However, monetary policy has changed. The Fed has already raised interest rates by one-quarter percent nine times and two more hikes are expected this year. We will not soon see the market being driven up by falling interest rates.
One reason the market seemed to be immune to the first seven interest rate hikes was the Trump Administration’s fiscal policy of regulatory relief and reduced corporate taxes. However, with the Democrats in control of the House, Trump’s fiscal policy will come to a standstill.
Without a supportive fiscal policy, rising interest rates will bias the market to the downside.
Until the time comes when monetary and fiscal policy can once again lift the whole market, investors need to focus on companies that can overcome the market’s headwinds. Rest assured that even if the market is down, some stocks will do quite well.
Facebook, Apple and Nvidia
What a company has to do to overcome the market’s downside bias is, in a word, grow. Companies that cannot grow both their top and bottom lines will likely see their stocks move in the same direction as the market.
While the S&P 500 lost 13.5% last quarter, Apple lost 30%, Facebook dropped 20%, and Nvidia fell 52%. But, investors who held onto these stocks for three years are still up. Nvidia, for example, went from $33 at year-end 2015 to $134 at 2018’s close.
As 2018 ended, I explained why Facebook at $131 was my first pick for a 10 stock portfolio that could do well even in a bear market. With Facebook now at $148, this strategy is off to a good start.
Today, I’m adding Apple to the portfolio after John Archer, one of my managers, told us why he would buy Apple at its current price if he did not already own the stock.
Jen-Hsun Huang, president and chief executive officer of Nvidia Corp. © 2018 Bloomberg Finance LP
I have a number of managers for whom Nvidia is a top 10 idea. For me, that is almost enough to put Nvidia in the portfolio. What puts it over the top is that it’s trailing price-to-earnings ratio is 19.88 which is slightly less than the S&P 500’s at 20.12 even though Nvidia has much better growth prospects.
If you need to sell something before you can initiate a new position consider my reasons for recommending the sale of Starbucks or AT&T.
This article is part of a series I write for those who want to get their portfolios back on track. To be notified when the next installment is published, click here.