John Buckingham was explaining why he is bullish on stocks these days before interrupting himself to confess that he’s “always bullish.”
That faith in the market has not paid off during the last year and a half for Buckingham, the chief investment officer of Al Frank Asset Management in Laguna Beach, Calif., or for his investors, but it has worked extremely well over the long haul.
His Al Frank Fund ranks in the top 1 percent over the last 10 years out of nearly 3,000 diversified domestic equity funds tracked by the research firm Morningstar. The fund, which has a strong tilt toward value stocks, has returned more than 9 percent a year during that period, compared with a slight loss for the average fund in the category.
Buckingham’s portfolio achieved those results even after losing half of its value in the last two years. That seems surprising at first because the stocks that he prefers often trade at steep discounts to their peers and have healthy balance sheets, which should make them comparatively safe.
But they are often in industries whose earnings are especially sensitive to the economic cycle. That means they tend to suffer worse than the broad market during the worst downturns.
Downturns always end, however, even the worst ones, and studies have found that value stocks tend to outperform in the long run. That should encourage investors to take advantage of the steep recession and buy cheap, cyclical stocks to be positioned for recovery.
Instead they tend to panic amid such conditions and either sell or stand pat. Not only do they fail to think ahead, they fail to do much thinking, period.
“All things being equal, you want to be a value investor, but all things are not equal because value has underperformed,” Buckingham told MoneyWatch. “If you’re a student of market history, you know that the best time to invest in a value-oriented strategy is after it has just gone through a horrendous period when economic data is awful.” (Here’s Buckingham during a recent discussion on the rally and the likelihood that it will continue.)
There are no guarantees that the market will rise from here or that value will lead the way. There are “many other shoes to drop” for the economy, he conceded, and the major averages have already risen 30 percent off the lows reached in early March.
But while it may seem as though the market has gone too far, too fast, “you could argue that 50 percent down in five to six months was too far, too fast,” Buckingham said, recalling the plunge last fall. “When you have a decline of that magnitude, you need Great Depression 2 to justify it.”
What could keep the fresh bull run going, in his view, is the lukewarm reception that it has received so far.
“I would expect some kind of pullback, but then everybody and his brother is expecting one,” he said. “Nobody is ready to believe in this rally.”
He directed an outpouring of scorn at Charles Schwab for its series of commercials touting ultra-safe but utterly unrewarding money-market funds.
“Wow, I can get a 1.5 percent yield,” he said, paraphrasing the message in the commercials. “You’ve been in equities all your life. Now is the time to get out and go to cash.”
A message that would serve the public better, he said, is: “If you have a long-term investment outlook, you should use this period to increase your equity exposure.”
Next week, John Buckingham goes over some of his favorite stocks, including several big names and some never-heard-of-’em names. Meanwhile, he is available to respond to your questions and comments. Just fill in the comment form below, but please note that you must register with the site first.
