In the United States, there were more than nine thousand mutual funds in 2014 and 3,700 publically traded companies, but not all of these choices provide the investor with opportunity. That is because opportunity and availability are not the same thing. To find opportunity in a world of availability, one needs to learn to look beyond the risk of the market and study the actions of the market. This is where
I start when others ask the following question.
What do you do to find opportunities in the market?
Let me first say for the record, I am not a financial planner nor do I have any licenses as such. Therefore, it is important that you understand that my response to this question is nothing more than opinion. With that said, it is important for you to do your own research and come to your own conclusions about what constitutes an opportunity. Always know your risk tolerance and never invest money you cannot afford to lose or that you might need to meet your obligations and necessities.
There are two strategies I deploy depending on the current market dynamics. The first is a buy and hold strategy and I usually deploy this strategy during times of steady growth in the market. The second one is a more aggressive (meaning of greater risk) strategy I use for volatile markets and it usually results in many small gains that add up quickly. So, one is a buy-and-hold strategy and the other is an in-and-out strategy.
Recently I have been moving more to a cash position as the time of the election draws closer. My strategy is to preserve some of the wealth I have built and then position myself to take advantage of opportunities for, what I term, quick hits. That means that I am looking for opportunities in my tax-favored accounts where I can go in and get out quickly and still make a small profit. This usually means a transaction that will last less than 90 days.
I find opportunity in mergers and acquisitions, stock splits, and the run-up to regular dividend payouts. A recent example would be the Johnson Controls / Tyco merger. This merger constituted several features that provide real value to the shareholder of either or both companies. There were three elements of the merger that provided a strong opportunity. First, shares of the new company (JCI), a cash payout for shares of the merging company (TYC), and a spin-off company. By purchasing these stocks in the $38 range, the share ran up to $45 before the close of the merger. The shares of the new company opened at $48, a cash payout was made for shares of TYC, and in the coming months shares of the spin-off company will be paid out.
Another example is two recent companies that are offering a 2:1 split. BMI and CHD both have or will execute a stock split in the coming month (September 2016). A 2:1 split reduces the share price and makes the stock more attractive to investors. This means a potential increase in the capital gains the stock will produce when the price begins to climb. This is not always the case though as the share prices sometimes fall after a split. However, the opportunity is there for companies with strong fundamentals.
A final example is when a company pays out a regular dividend. Vector (VGR) pays a handsome 8% annual dividend and adds a one-time 5% stock dividend on top. It is considered a 21:20 split. Here, the value is in both the regular dividend and the split. You have to do some research to find opportunities such as these. Most financial planners will not show their clients these types of opportunities and to be fair, many clients aren’t asking or looking for such opportunities.
None of these moves are complicated or hard to find, but you have to be positioned to take advantage of them when they come along. In volatile markets I keep a lot of cash on the sidelines. This positions me to have the resources necessary to take full advantage of opportunities such as these when they come along. In a less volatile market, I look for dividend stocks that have growth potential when held for a long time. So, I find opportunity on two fronts. A stable market provides opportunity for a buy-and-hold strategy, especially following a period of volatility when good company’s stock prices have taken a hit. Volatile markets provide opportunity for an in-and-out strategy when mergers and acquisitions, stock splits, and regular dividends pave the path for small returns in large quantities.
Stay away from programs you do not understand. I do not try to short the market, time the market or over-analyze the market. I have two strategies: buy-and-hold or in-and-out and I use them based on the market conditions. Geo-political events can swing the market and provide a good number of opportunities. Opportunity tends to hide behind risk. If you can train your mind to look beyond the risk to see the opportunity, you can train your will to take action and capitalize on those opportunities.
Disclosure: Author has held or is currently holding the securities mentioned. However, this information is not an endorsement of any securities mentioned. Always do your due diligence when investing in individual securities.
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