As investors cluster around a handful of core names, you might have valuation risk
Not all large cap stocks are high quality, hence defensive investments. But a lot of index trackers and passive investors are crowding this segment, when the market gets worried. However, this does not mean that you cannot find value within the large cap stocks. You should not focus too much on your Benchmark and market cap weightings. Search for "quality" stocks within the whole market universe from small-, mid- to big cap stocks and globally with emerging market exposure. Concerning valuation risk, just stick to your own "quality" standards, when looking for a good company to invest for the long-term. You could look for the following characteristics:
1. High ROIC without accounting gimmicks or a lot of leverage.
2. Generating cash profits. (High profit margins)
3. Has predictable earnings and growing.
4. Not a natural target of regulation.
5. Owner-oriented management.
6. Understandable business model with a strong balance sheet.
7. Owns strong franchises, thus having the freedom to raise prices.
8. Low asset intensity with a lean expense structure.
9. High return on tangible assets.
10. Dominant and growing market shares in their principal products and/or service lines, long product cycles and excellent global market positioning. (strong product demand in a growing market)
Look for management with a record of doing what it says it's going to do and has a vision. Further management should spend on R&D and innovation.
Buy and stick to companies with the best global growth prospects.
Do your own diligent research before making any buy or sell decision.
Over time stocks are going to move with earnings growth.
You must calculate your "fair"-price you are prepared to pay for a good company and sometimes you have to wait for the price to come down first, before investing in a "quality" company. Never overpay, but do your fishing, when the weather is grey and terrible, when investors panic. This is called "bottom-fishing", when valuation risk is low and prices are attractive. www.sautterinvest.ch
Price is what you pay. Value is what you get.