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You Achieve Big Gains When Wall Street Misses the Boat

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Your best move in 2020? Turns out it’s what we’ve been saying all along: invest for the long haul in rock-solid companies. According to Jason Zweig in his Intelligent Investor piece “How You Can Get Big Gains That Wall Street Can’t,” investing for the long haul actually works but is more difficult to do. Take mutual funds and ETFs with a set mandate to invest in smaller companies for example.

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“Small-company mutual funds that owned Amazon when it was tiny had to sell it once its market value grew into the billions,” explains Zweig. “Otherwise it would have dominated their portfolios. Investors in those funds missed out on nearly all of Amazon’s stratospheric growth.”

If you can’t find the time to pick stocks on your own and follow them through thick and thin, then find an advisor who will, and make sure it’s one that must act as your fiduciary by law.

Zweig writes at The Wall Street Journal (abridged):

Small stocks earn their highest returns not when they are small but rather as they migrate to large, according to research by finance professors Eugene Fama and Kenneth French.

That description fits Jack Henry to a T.

Founded in 1976, the company first sold shares to the public in November 1985. As of 1996, insiders still owned 41% of the stock; not until 2006 did any institutional investor show up owning 5% or more of the shares. Only in November 2018 did Jack Henry finally grow large enough to join the S&P 500 index, where it currently ranks 402nd by size.

The stock is no longer cheap—it trades at a steep 41 times the past 12 months’ earnings and eight times book value, according to FactSet—but Jack Henry doesn’t ride many market fads. “Most of our growth has been truly organic,” coming from business expansion rather than acquisitions, says finance chief Kevin Williams.

Unlike a lot of larger companies, Jack Henry hasn’t borrowed money to finance massive buybacks of its own stock; it has no long-term debt. On the back of the company’s business cards is the founders’ original motto: “Do the Right Thing, Do Whatever It Takes, Have Fun.”

Today, 94% of Jack Henry’s stock is held by institutions, but it’s unlikely any single fund manager has held the shares continuously for the whole wild ride.

Who could? For all the talk about how individual investors have faded as a market force, results like Jack Henry’s are a reminder that no other constituency is in a better position to buy and hold…and hold…and hold.

No one can fire you for hanging onto a stock that loses 75% or more; you are free to seek value in the most obscure companies or to find hope in the darkest hour.

In 1974, the financial analyst Benjamin Graham said: “I am convinced that an individual investor with sound principles, and soundly advised, can do distinctly better over the long pull than a large institution.”

He was right then, and his words may be even truer today.

Read more here.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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