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Winnipeg Free Press - PRINT EDITION

The case for shares continues to stand

I'm not sold on argument about volume

By: Fabrice Taylor / Inside Track

Posted: 02/4/2012 1:00 AM | Comments: 0 (including replies)

A pretty sharp reader wrote me a while back to argue against my recommendation to buy stocks. He said a lack of volume didn't bode well for shares (volume being a gauge of interest in the stock market).

With all due respect, however, I will disagree and reiterate my case for shares.

Exhibit A comes courtesy of Ben Bernanke, chairman of the Federal Reserve, the U.S. central bank, who said recently the interest rates he controls, which in turn set the standard for other interest rates, would not be going up for at least three years.

Those rates are currently near zero.

In the investment game, a common expression is "follow the money." But that's only useful if you want to explain what already happened. If you want to profit, go where the money is going (or as Wayne Gretzky said, skate to where the puck will be, not where it is). In the 2008 financial crisis, burned investors fled for the safety of GICs and money-market funds. Some came back to the stock market, but many did not. Instead, they preferred to earn a little interest. When interest rates started their drastic drop, they held on. Today, they're still holding, waiting for rates to come back and provide them with a return.

They're earning maybe two per cent on their money, maximum. That is not enough to provide for retirement or for income if they're already in retirement.

Meanwhile, there are stocks yielding five per cent, seven per cent, even 10 per cent. These are companies with good assets and stable revenues, and although their profits may not be growing, they are steady enough to pay the dividends.

So here's what's going to happen, in my view. Eventually, money-market refugees will capitulate and be forced by necessity or frustration back into the stock market. Companies that provide yield will benefit. And the numbers can be surprisingly good.

Let's say, for example, you invest in a smallish company (call it a $500-million firm) that pays a seven per cent dividend. The business is stable, management is conservative and the balance sheet is solid (i.e. not too much debt).

Because of the weak economy the company's sales aren't growing, but are constant.

If, in a year, the money-market refugees start to migrate toward stocks, and enough of them do so to take the yield on your company's stock from seven per cent to six per cent (that is, they buy the stock and drive the price up), you will have made almost 25 per cent on your investment (seven per cent from the dividend plus 17 per cent from the stock price going up).

Is it hard to imagine investors would accept six per cent from that stock instead of seven per cent? Not in a world of non-interest rates, or rates that don't even beat inflation.

Yet that single point of yield makes for a big return for you.

It's true, higher volume is a comforting sign it's not necessarily vital. The volume might well be building up on the sidelines.

If you go where it'll go when unleashed, you'll do well.

Republished from the Winnipeg Free Press print edition February 4, 2012 B5

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