In tumultuous times conventional wisdom suggests buying then holding high quality, blue chip, dividend paying stocks for stability. The big idea is to avoid "timing the market" by extending the time frame beyond the current day, month, year or even decade. The value/yield camp tends to view volatile markets, such as that of 2011, as a chance to add to a portfolio while flighty "traders" panic in and out of stocks.
The mathematical fact is those who have bought and held stocks over the last 3, 5 or even 10 years have lost money, either on an absolute basis or relative to inflation. Missing the 50% drop of 2008 didn't require intuition, charting or sophisticated financial analysis. Selling the news when Bear Stearns got sold for $2 got you out of the S&P500 well over 1,250. Selling the news of the Lehman collapse got you out of stocks well over 1,200 on the S&P. Once out, investors had two years to get back into the market below where they made their exit.
I don't particularly regard stepping aside as trading; it's common sense. If investing in this manner is a mug's game, buying and holding forever, putting Blue Chips in a drawer forever, or dollar-cost averaging have been tantamount to financial self-abuse.
These are my personal beliefs. You can time the market, either on the news or using rudimentary tools like purple crayons and rulers. You won't get out at the tops or the bottoms but you can catch the meat of a move. Trading markets is what I do for a living.
All of which simply serves as background information to help readers/viewers understand that I came into my interview with Bob Pavlik of Banyan Partners with an obvious bias against his notion that investors with a three-year or longer time horizon are best served by ignoring the bad news from Europe, Washington, D.C. Pavlik and I avoided a fist fight over the issue, largely because he's a stock-picker rather than a market buyer or seller.
We'll get to his stock picks later. For this segment Pavlik and I stuck to the macro:
The Demise of the EU
Pavlik isn't too concerned about the growing possibility that one of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) fails. "If one of these countries defaults on the debt, it's probably priced in," he claims. While acknowledging a default would likely create some disconnects in prices of debt and financial stocks, he believes the impact would be muted and fleeting.
Pavlik's view on housing is simple: "If you're looking at housing as the savior for this economy, it just isn't going to happen." He offered Lennar (LEN) as a possible stock idea, but did so with the same enthusiasm I have for salsa dancing (read: he tried to be a good sport about it but was clearly out of his comfort zone).
The Prospect of Strong Corporate Balance Sheets Leading to Hiring
This is a classic glass half-full or half-empty debate. Pavlik sees insanely strong balance sheets as a coiled spring of investment possibility if and when there's more economic certainty. I see the cash on hand as an indication of the bizarre, un-American, and destructive hostility between this country's corporations and Washington, D.C.
Just as all roads once led to Rome, all current market debates lead back to volatility. Pavlik points to the information age's insatiable desire to flood the world with news as the chief cause of investors' fascination with market fluctuations. The counter-argument is that bi-annual 20% market fluctuations have driven investors' desire to understand how it is their former Blue Chips got folded in half.
Complain about the cliche' all you want but it is, in fact, a "stock pickers market." For every Apple (AAPL) you missed out on buying during the crisis, there's a General Motors (GM) that went to zero. The trick to Pavlik isn't really ignoring the volatility entirely, but rather, not letting it cloud your decision-making to the point that you miss the opportunity to make good stock picks. Prudence and trading aren't mutually exclusive; just different approaches towards the same goal.
Pavlik freely admits "if you bought the Spyders (SPY), the Diamonds (DIA), or the QQQ's (QQQ) you probably haven't made any money." That fact is actually what keeps him, as a stock picker, in business.