Last time, I explained why I believe the current bout of financial turmoil is actually great news for equity investors and why the market will win this battle.
That might seem contrarian given the recent bloodshed in the markets and some of the more doom-laden commentary around at the moment. But I strongly believe there’s a great opportunity ahead to make money in stocks. I’ll show you why.
Let me start by explaining a bit about my own investment strategy. I have a diversified share portfolio, and I take a long-term view. I have some dividend paying stocks for income. But what I really like is to find what I think are great small businesses and buy in early. Fast-growing companies appeal to me because they can create so much value, both for their customers and for me as an investor.
Of course, things sometimes go wrong, that’s the nature of the game. But I’m looking for big rewards here – so we have to take on that extra risk. But what really bothers me is when these exciting little companies are prevented from succeeding and creating wealth by government bureaucracy and over-spending. More on that in a moment…
Why I’m getting worried about my cash
So I can afford to take a long-term view, as well as owning stocks I also hold enough cash to see me through in the short term. This is a simple strategy. But now something strange is happening…
To the extent that I have worried in the past, my worries have always been about my share portfolio. Even with plenty of monitoring, every now and then something comes out of left field to strike a blow at its value, which is disconcerting. But I have never worried about my cash – until now.
I do all the sensible things. I don’t chase the highest yields. I stick to National Savings Certificates and banks where deposits are guaranteed by the government. So really, I should not have anything to worry about at all. But I am uneasy.
If the government was actually called upon to meet all of its guarantees and ‘promises to pay the holder’ I’m not sure it could do so. In essence, I’m lending to a profligate outfit that can only meet its undertakings by sustaining the confidence of its creditors – and that confidence is wearing thin.
The heart of the matter is that the vast majority of government spending does not generate a financial return. Let me give you an example from Canada, a supposedly prudent country.
Three years ago my step-daughter, who lives in Vancouver, got a job with the German software giant SAP. Within a year she gave birth to her first child. SAP was required to hold her job for twelve months, while the Canadian government paid her half of her SAP salary to stay at home and raise the baby.
After a year she went back to work – and immediately became pregnant again. Now she is on her second stint of maternity leave, paid for by the Canadian tax-payer.
This is all very laudable and no doubt secures the feminine vote, but financially it’s crazy. Unless you believe that somebody looked after exclusively by his or her mother in the first year of life is going to become super-productive later on, this ‘investment’ by the Canadian Government will not yield a financial return.
How the state treats business with contempt
This is the problem. Government spending can create activity and it can achieve useful social ends. But – other than indirectly – it does not create wealth. Wealth creation comes from paying two and two for inputs of labour, materials and whatever else and creating a product that somebody thinks is worth more than four.
From this real wealth creation successful companies are able to repay shareholders. Governments on the other hand cannot repay their creditors out of created value. They can only do so by appropriating the money through taxation or borrowing it from somebody else. What we see today is a massive reliance upon the latter, which is simply unsustainable.
Now investors and businessmen have had enough. Recently I met two men who run small but successful UK businesses. Both told me that they simply won’t employ any more new staff. “It’s just too complicated,” they explained, “and too difficult to get rid of people if it becomes necessary.”
In the USA, too, business has had enough of over-regulation, over-taxation, government over-spending and a lack of political leadership. In an impassioned television appearance, Starbucks CEO Howard Shultz said that publicly listed US corporations are sitting on one trillion dollars of cash – but they will not commit the cash to job-creating investment until the US government squares up to its budgetary responsibilities and gets off their back.
For the last decade governments have treated wealth creating business with contempt. They buried it in regulation, taxed it to the bone and took its hard work for granted.
No wonder stock markets have performed badly. Now, though, like it or not, governments are being forced to acknowledge the importance of business. For some the transition will be an ideological challenge. But we are at a turning point. The pursuit of wealth can no longer be ridiculed.
That must be good for business, and for long-suffering stock market investors. Where am I looking to invest? I’m looking at innovative companies that are creating products and services that are in great demand.
My top sectors for the future
Long-time readers will know I’m bullish on natural resources like oil and gas, coal, copper and zinc. The things the world will always need. But I’m also very excited about opportunities in technology and especially biotech and pharmaceuticals. After all, no matter how hard things get, we’re always going to pay-up to look after our health. It’s a great business to be in.
I’ll keep on digging around for great stock ideas that are involved in these exciting areas. Stay tuned.
In the meantime, don’t forget the income side of your investing. I think it’s very important to have that as part of a balanced portfolio. And over the long term, investing in high-yielding stocks has proven to be an incredibly powerful wealth creation strategy.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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