Don't Trade On This News
Joe is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While we were celebrating by drinking champagne and watching the ball drop, the president and Congress sacrificed their New Year's Eve by saving our country from disaster. At least that is the feeling shared by all the talking heads and news agencies in the final weeks of 2012. You couldn't keep a station on for more than 2 minutes without hearing the words "fiscal cliff" in the offing. And the market bought it. The Santa Claus rally was stalled this year obviously cause his reindeer could not propel his sled over this enormous and rapidly rising cliff. We needed to be saved from this impending doom. And sure enough the President and Congress came in right on cue to do just that. The deal reached was far from comprehensive, but hey they did a masterful job as always creating the theatrics and resolving it just in time. And the Dow soared out of the gate and didn't look back until it closed the first day of trading for the year up 300 points.
The fiscal cliff only existed because the government placed a random expiration date on tax cuts and linked it to a set of spending cuts. The market began selling off in the final weeks of the year on fears their would be no deal. During this time fear and emotion trump logic and the long term view of things. Did people stop eating hamburgers during this period? Stop drinking soda or put off home improvements? No, and it is during such periods when buying good businesses makes the most sense. Business and human activity always trump politics. It's foolish to let such antics stop you from investing in great businesses. There's never a time when buying a sound stable business at a good price isn't a good idea regardless of what the government is doing.
Businesses that trounce the competition, have a track record of growth are secure investments that will not go away. Products like food (McDonald's (NYSE: MCD)), consumer staples (Coke (NYSE: KO)) and pharmaceutical care (Johnson & Johnson(NYSE: JNJ)) are a few examples that also happen to pay inflation beating dividends. Sticking with good companies and reinvesting your dividends is the surest way to long term wealth regardless of the hot air coming from Washington. Of course this type of investing can be B-O-R-I-N-G, but if you are looking for a get rich quick scheme the Market is not for you. CDs, treasury bonds, savings accounts and cash haven't payed out enough to keep up with inflation and won't for the foreseeable future. These companies have a huge amount of what Buffet calls "economic goodwill." That's an asset that doesn't show up on the balance sheet, or can't be purchased with any capital investment. It's simply a well deserved reputation for quality and customer service. Over the last 30 years Coca-Cola and McDonalds have yielded a 15% return annualized factoring in dividends.
Of course even great businesses go through a rough patch from time to time. When a big name disappoints Market players tend to sell first and ask questions later rather than consider the long term. Let's take for example the aforementioned McDonald's. Ranked as the seventh most popular brand name in the world by Forbes, it nonetheless had a rough 2012. After making a big run up in 2011 a disappointing earnings report sent the shares down from a high of around 102 to a low of 83 in November. It has since held that level and shown strength in recent weeks.
The stock has stabilized since the November bottom and now there are opportunities for a new buy here or adding to existing positions. In my case I like to generate income buy selling puts on great businesses so right now I'm looking at selling the Feb 90 put for around $1.50. The main concept here is I am putting in for buying at an even lower price than offered today and if the stock does not fall below that I keep the premium, which would be about a 2% return for the 2 month period. If I were to do this all year, it would amount to a 10-12% return. If get put the stock at 90 I can then get dividends in addition and continue use other income generating stategies such as covered calls.
And despite all the trashing of McDonalds being nutritionally devoid, they've been successful overeas and I have no doubt 20 years from now people will still be devouring fries and McRibs (or some other newly created McMonster). Of course it is possible that the aformentioned companies in this article will someday stop growing. But the point here is to never let the headlines dictate your investing decisions. The road to safe wealth accrual is a long and slow one.
Fool blogger sabatuj has a postion in MCD. You can gain more insight at http://www.joesabatucci.com/syndicated-blogs