Back in the 1970s and early 1980s, Wall Street brokerage firm E.F. Hutton ran a series of popular television commercials that stated "when E.F. Hutton" speaks, people listen" (click here for a video of an E.F. Hutton commercial). The commercials nicely promoted the idea that E.F. Hutton knew more than others. Unfortunately for E.F. Hutton, they did not know as much as they thought, as they were eventually taken over by Shearson Lehman after a number of scandals and bad bets had Hutton on the verge of collapse.
I use the above story as an example of what is common on Wall Street, firms and individuals who believe they know more than others. This behavior is most prevalent during this time of year when firms and individuals make forecasts for the next calendar year. I do not blame these individuals or firms for making forecasts, a common question this time of year is "what do you think will happen next year?" So it is natural that forecasts for the coming year would be common. What I do wish to communicate, is that the average investor should pay no attention to these forecasts because they are quite often wrong. I learned a long time ago not to pay attention to forecasts because there are too many outside events that can affect the markets' direction. One thing I know for sure is that no one can predict the market.
To prove my point, I thought I would look at some of the 2012 market forecasts that were made at the end of 2011. Let's start by looking at some of the S&P 500 forecasts that were made by the leading Wall Street firms. Morgan Stanley (MS) takes the worst prediction prize by forecasting an end-of-year S&P 500 closing price of 1167, off by almost 300 points. Goldman Sachs (GS) predicted a closing S&P 500 price of 1250 and Seabreeze Partners misfired on the high end by forecasting an S&P closing price of 1527. Click here to see all the major brokerage firms' predictions for 2012. Most of the firms under estimated the size of the stock market rise.
Individual forecasters were not any better; here are some quotes from relatively well-known investors.
Peter Schiff - ""I think you are going to have a lot of choppiness in the stock market, but in the end I don't expect a lot of movement in stocks. I don't expect a crash or a big run; instead I think prices will continue to move sideways. In terms of the stock markets relation to gold I think it will continue to fall as a ratio." That is definitely wrong as the S&P is up about 13% for the year. Think Peter's prediction on gold was better; think again "I don't think people will make money in stocks in 2012, especially in terms of gold. The price of gold should move quite a bit higher next year. We should decisively take out $2,000. It's hard to say how high gold will go, but it should trade above $2,500." Gold is in the $1,650 range so Peter was overly bullish on his gold call. Here
Doug Kass - "I think the S&P will eclipse the early 2000 high of around 1525 - in the beginning I think the market is range bound but by late spring and early summer I think we see (bullish) catalysts move the market." Doug was overly bullish as we have not broken to new highs, although his general bullish approach was correct. Here
To be fair, I found one forecaster who was remarkably correct, Byron Wien. Mr. Wien who has been forecasting for a long time had the following predictions. For 2012 Wien predicted oil prices to decline to $85 a barrel, the S&P would surpass 1,400, real GDP would exceed 3 percent, and unemployment would drop below 8 percent. All of which were relatively correct. Here
Media publications and websites also get into the year-end forecasting business; here are a couple I came across.
Kiplinger's - "Corporate earnings will continue to rise in 2012, albeit at a slower pace than they have been since cratering during the 2007-09 recession. Figure on profits for companies in the S&P 500 to improve by 6% to 7% in 2012, a bit less than perennially optimistic Wall Street analysts expect. If the market maintains its current price-earnings ratio of about 12, the S&P index, which closed at 1253 on November 4, should appreciate by the same amount. Throw in dividends of about 2% and you'd earn a total return of 8% to 9%. (This analysis suggests that the Dow Jones industrial average, which closed at 11,983 on November 4, should pass 12,700 a year from now.)" Not too far off but not right on the money either. Here
Marketwatch.Com - "We think things will get worse before they get better. The breakdown in gold for the first time since 2008 is likely signaling another liquidity crunch like we had in late 2008, and we think it could bode ill for the markets in the near- to intermediate-term." That was very wrong as the first part of 2012 was positive. Here
We see potential for another type of selloff or at least continued choppy consolidation for the first part of the year. As we approach summer, the market should begin to discount the coming 2012 election, which we believe could provide a rationale for a bottom to all of this correcting and consolidating and a new bull phase to begin.
I present these examples to show the futility of predicting markets; I am sure all of the above firms, individuals and publications put a lot of work into their calculation before making the predictions. However, as Donald Rumsfeld once said: "There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know." Mr. Rumsfeld may have been talking about the Iraq war, but the same thinking applies to investing, there is much we do not know, and those unknowns can affect the markets.
The first thing an investor needs to do is change his or her thinking. When you buy a stock, you are not investing in the stock market, you are buying a small part of a business. You should concern yourself with the company's business, not with the direction of the market. Warren Buffett is often quoted as saying "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." If the market shut down for 10 years and then re-opened, would the company you just bought stock in have grown its business and earnings during those 10 years? Would the company have expanded its markets and introduced more or better products? Do you believe the company you invested in will be worth more in 10 years than it is today? If you do believe the company will have greater value in 10 years' time, you have made a good choice, if you are not sure the company will be worth more, then you may want to reconsider your selection.
The second thing an investor needs to do is find the companies that he or she can be confident will still be growing and thriving 10 years from now. When looking for stocks, I always ask myself does the company I am thinking of investing in have a business or product that is sustainable. I want to know that the company's main business will still be needed 10 years from now. I am not confident Netflix's (NFLX) will be around in 10 years, so I don't invest in it. I am not confident SodaStream (SODA) will be around in 10 years, so I do not invest in it. I understand that an investor can make money in a stock like NFLX or SODA by trading it, but I am interested in investing in a company, so I avoid those types of stocks.
Similar to Warren Buffett, I prefer to hold my stocks forever, or until the business shows signs of trouble. Below I will share some stocks that I am fully confident will be around in 10 years, still thriving, still the leading company in its field.
Exxon Mobil (XOM) - The world population is currently just under 7 billion people; by 2025 another billion people are projected to be populating the earth. Many poor countries are starting to see rising economic growth; citizens who previously could afford little, now purchase cooking appliances or refrigerators. They also may look to purchase a motor scooter or perhaps even a small car. The need for energy is a basic human need and the demand for energy will continue to grow. It will take every type of energy resource to provide the energy that will be needed and no matter what energy forecast you look at, oil and gas will still be prominent energy sources. The publicly traded company with the most oil and natural gas resources is XOM.
Over the next 10 years, I expect XOM to increase its dividend every year like it has for the last 30 years, to buy back billions of dollars' worth of shares every year like it has been doing for years, and I expect it will increase its oil and natural gas production. Exxon management plans 10 to 20 years out, it uses its financial muscle to explore for and-or acquire the resources the world will need decades to come. In 2020, XOM will still be the king of energy.
Procter & Gamble (PG) - Procter & Gamble is the leading consumer goods company in the world. P&G's detergents, soaps, toiletries, beauty products and paper products are sold all over the world. P&G has recently aggressively expanded into emerging markets and has seen sales there grow. As the world population grows, as the world's poor starts to enter middle class, more people will look to purchase basic products like soap, toothpaste, and paper products to improve their personnel care and living conditions. In established markets, P&G will continue to innovate and develop new products like the Swifter that makes life a little simpler.
Over the next 10 years, I expect P&G will sell more products in the emerging markets, I expect P&G will develop new products that consumers want to have as they make life a little easier. I expect P&G will increase its dividend like it has every year for the last 56 years. Ten years from now P&G will sell more products to more people in more countries than they do today.
Coca-Cola (KO) - Coca-Cola has been around for 126 years selling liquid refreshment to consumers. Today, Coca-Cola sells over 3,500 products in over 200 countries and growing. In recent years, KO has been innovating by adding new beverage lines and new packaging while continually gaining market share. Coca-Cola has been aggressively expanding in emerging markets like China, India and the continent of Africa. Over 1.7 billion times a day a consumer somewhere enjoys a KO product.
In 10 years' time, I expect KO will be selling more products to more people in more countries. In fact, Coca-Cola has a plan called "2020 Vision" which calls for KO to double sales by 2020. I also expect KO to continue to increase its dividend every year, just like it has for the last 50 years. In addition, I expect KO to make strategic acquisitions and have occasional share buybacks.
McDonald's (MCD) - McDonald's is the world's leading restaurant chain; every day McDonald's serves fast food to 68 million people in over 119 countries and in over 33,000 locations. The basic menu of burgers, fries, and beverages are available in all restaurants, but many local menu items are also available in various countries. MCD has been aggressively expanding in China and other emerging markets. In China alone, McDonald's opens a restaurant every other day and in a few years will open a new restaurant everyday (here).
In 10 years' time, I expect MCD to be selling more food in more restaurants in more countries around the world. MCD has raised its dividend for 36 straight years and I expect it will continue to increase the dividend. Over the last 5 years, MCD has raised its dividend by an average of 20%. I don't think that pace will continue, but I do expect dividend increases on average of 10%. I also expect the world to continue to become more urbanized and fast foods sales in that environment should grow.
Walgreen (WAG) - Walgreen is the leading drug store in the United States with approximately 8,000 stores in the United States and Puerto Rico. Walgreen is also the owner of Take Care Health Systems, a Walgreen subsidiary that is the largest manager of worksite health and wellness centers, with more than 700 locations throughout the country. In addition, Walgreen owns the websites Drugstore.com, Beauty.com and VisionDirect.com. In 2012 WAG acquired a 45% interest in Alliance Boot. The deal includes the option to purchase the remaining 55% of Alliance Boot in three years. In announcing the deal, the companies referred to the combined business as "The First Global Pharmacy-Led Health and Wellbeing Leader."
Alliance Boot has 3,400 health and beauty stores, operates 370 pharmaceutical wholesale distribution centers and develops its own beauty products like No7 and Soltan, the leading European sun protection product. Under the Boots name, it has pharmacy stores in the United Kingdom, Norway, Republic of Ireland, the Netherlands and Lithuania.
In 10 years' time, I expect WAG will have completed its acquisition of Alliance Boot and will be the world's largest pharmacy health and beauty store. The scale of operation will allow WAG to receive better pricing from its vendors and sell its store brand products in more locations. I also expect WAG will provide more healthcare services to the world's aging population and increase its dividend every year as it has for the last 36 years.
During the next couple weeks, you will see and hear many predictions for next year, all of which should be ignored. Predictions on the market direction are almost always wrong and for a dividend growth investor should have no bearing on their investment game plan. A dividend growth investor should attempt to buy dividend growing companies with solid balance sheets when they are appropriately priced. Even the best run company can be overpriced, so investors should not chase these companies. Wait for Mr. Market to give you a good entry point and then buy some shares with the intention to hold them for as long as the business continues to perform well.
I know some readers may think the companies listed above are old and boring, perhaps they are. However, ask yourself, how did they get to be old companies? They got that way by having a product or service people wanted or needed. They got that way by being well managed with conservative accounting practices. They got that way by taking care of their shareholders with dividends, share price appreciation and, in some cases, share buybacks.
I believe all of the companies above will continue to reward shareholders for years to come and I am happy to enjoy the rewards these companies offer year in and year out.