Someone once asked me why I am always so cheerful whenever I am interviewed on air. In fact, I am cheerful – whether I am speaking on radio, grilled by a presenter down the lens of a TV camera or talking openly in an event about global markets. Nothing that happens in the stock market ever seems to get me worried.
The reason for my cheerfulness is really quite simple. I see opportunities whether stock markets are rising or falling. I also see opportunities regardless of whether economies are expanding or contracting.
For some people, an economy that is contracting could be viewed as something to be worried about. That is perfectly understandable. After all, weakened businesses – especially those that are heavily indebted – are likely to go to the wall. It is the market’s way of saying that these businesses are unsuitable to be going concerns.
But there is a flip side to this. It could also mean that businesses that can remain standing are likely to capitalise on the woes of others. They might even be able to grow their market share, even if an economy happens to be on the back foot.
Overcoming hurdles
So, not even a debt ceiling in the US, or interest-rate hikes and quantitative tightening in the eurozone, or geopolitical tensions between the US and China can possibly knock me off my perch. I have been around the block so many times that these and other events are merely hurdles that long-term investors have to both accept and tolerate.
And whenever people say that this time it is different, I know it is just not true. Things are only different if our time horizons are not long enough. The problem is, many investors have a tendency to look at the world through a kaleidoscope. It can be utterly confusing, given the plethora of noise from various channels. It is materially different if we look at markets through a telescope. So, it is important to be able to zoom out.
Consequently, I am focused on the very long term. Over that very long time frame, businesses will inevitably experience numerous economic cycles. It is vital, therefore, to hold a diversified portfolio of shares, which can help to spread the risk from investing. That is because not all companies are affected by what goes on in an economy in exactly the same way.
Cash is always king
We should invest only in solid companies that have dependable cash flow and are able to pay reliable dividends. Cash is always king. As a result, I can count on dividends being deposited into my bank account regardless of whether the market is up or down.
In fact, and perhaps a little selfishly, I prefer it when share prices fall. As an investor with an eye on the very long term, I would much rather buy shares when they are cheap and not when they are expensive.
When we are building our portfolios, we should always try to look for companies with real prospects for profit and cash flow growth. After all, if we are dedicated income investors, we do not want to continually chop and change the shares we hold for the sake of a quick profit. It can be costly to do so. Instead, we are looking for shares that can be consistently good performers over the long haul.
If we can identify truly good companies, they could also reward us with rising dividends. Sometimes, the yields may not be spectacular at first. But a modest yield can turn into a mouthwatering one if the payout can grow at a healthy lick, even if the share price remains constant. In most cases, though, the share prices of companies showing rapid dividend growth often move higher too.
Having your cake and eating it too
For me, income investing is not about buying shares in boring, humdrum companies that simply pay dividends because management does not know what else to do with the cash. It is about identifying businesses that can grow their dividends and provide some capital growth too. We can find those types of shares in almost every market around the globe.
So, income investing, if we get it right, can be about having our cake and eating it too – which is why I am always cheerful. There is not a lot that goes on in markets than can faze me. The point is, a good company does not turn into a bad one just because economic conditions are terrible.
So spend time looking for good companies, especially if they are selling at wonderful prices. If you get it right, you too could be smiling when the market is crying.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: David Kuo does not own shares in any of the companies mentioned.
