The hunt for value in 2016

With 2015 in the books and 2016 underway, it’s important to remember that stock investing can be a risky endeavor.

US equity markets have delivered positive returns in every year since 2008–that is, until last year.

Still, losing 0.7% (S&P 500) and a little over 2% on the Dow isn’t a huge disaster if you own stock indexes.  


However, a broad market return is composed of a variety of different sectors and individual stocks. Like every year, there are dramatic variations in outcomes based on where most of the exposure is.  

As a result, a critical determination becomes where is your capital positioned?

Commodity Bust

In 2015, the places you did not want to be were anything commodity-related and material-based.

History shows that after a bust, v-shaped recoveries typically do not take place.  

Think about 2008, for example. Markets did not roar back but saw steady improvement.

After 10 to 15 years of expansion in China, the idea that global demand is going to rocket higher is misplaced.  

As such, like Charlie Munger says, the key to life is lowered expectations.

Baby Steps

Probably the most prudent approach is to keep your eye on commodities, but tiptoe around those sectors.

However, you have to make an exception for energy.  Energy must be monitored closely, always, because of the strategic importance, value, and investment potential.  

Nothing in energy worked the last three years, and, in some cases, for the last 10 years.  

Still, I don’t think you can give up on the sector. Make no mistake, the next six or nine months will probably be rough, but it may very well be priced into equation.  

Dollar-cost averaging seems the proper strategy. Of course, you could have made the same case ten years ago and you would have nothing but losses to show for it.


Financials Beckon

As far as places where the potential seems better, financials certainly qualify.

A gradual increase in interest rates during the year will help large money center and regional banks, especially with net interest margins.  

Money center banks have been on the floor for nearly ten years. What’s more, in most positive-return years for the overall market, financials lead the way.  

In my opinion, investment banks also seem poised for a decent run, especially if the merger and acquisition environment stays anywhere as close to as red hot as the past year.  

Media and Technology

Consistent with the merger theme, you probably have to consider content-related entities in media, along with enterprise technology, for potential benefits on some kind of deal.

I also do not think you should forget about finding highly profitable businesses with good long-term possibilities for growth.  

Not everything you own is going to deliver returns like Facebook (FB), but you should feel confident about each entity’s expansion prospects.

Investors shunned value in 2015, and growth remains the elusive ingredient investors are longing to find.  

Understanding this reality is crucial in thinking about where to invest.


Photo Credit: GotCredit via Flickr Creative Commons