It's a question we've been getting almost daily from our subscribers: "What does the fiscal cliff mean for stocks, and how we can adjust our portfolios accordingly?"
Our strategists have different opinions on the topic. I think, however, that the most interesting opinion on the topic came from Top 10 Stocks' Paul Tracy.
To be honest, you might not like Paul's answer... it's not something that most investors want to hear.
Yet what he suggests has helped investors get through every major economic event of the past decade. It worked in the market downturn of 2002... then again in 2007... and it even worked through the "subprime crisis" of 2008-2009.
In fact, through every major economic event the United States has ever faced -- including The Great Depression -- this investing strategy has helped investors earn staggering returns over the long term.
Yet despite all the success, investors are still reluctant to use it. They actually think that by not doing it, they're getting some sort of "edge" on the market.
So what's this big secret? Paul's advice is to do nothing.
As he often explains, every day financial talking heads get on CNBC and Bloomberg and try to convince you that some big economic factor is going to have a profound effect on the stock market.
It's important to be informed. But according to Paul, 99% of what they're telling you is just noise.
Last year, it was the European debt crisis... a month ago, it was the election... and today, it's the "fiscal cliff." Who knows what it will be next.
It's important to be informed. But according to Paul, 99% of what they're telling you is just noise.
There's no way to predict what's going to happen to stocks because of the "fiscal cliff." There are simply too many unknown factors.
Yet despite the hoopla, we still find that commentators and investors are constantly trying to "guess" the market's next big move. In the meantime, they often rack up huge commissions and miss out on moves that actually would have gone in their favor.
It doesn't make sense. Instead of trying to predict where the market might go, why not focus on a strategy that has proven to work over the long run?
I've asked Paul for more details, including what he focuses on instead of the headlines, and a 2013 stock pick that you won't want to miss...
Bob: What should investors be focused on going into the end of the year given the "fiscal" cliff question?
Paul: Think of all the shocks investors have experienced in the past 100 years -- The Great Depression, World Wars I and II, the '87 crash, stagflation, the tech bubble, and those are just some of the major items.
And yet, through all that, investing in great businesses -- dominant companies that pay rising dividends and buy back millions of shares -- has proven to be a winning strategy.
A $1,000 investment in Coca-Cola (NYSE: KO) on the day before the 1987 crash is worth more than $14,000 today. A $1,000 investment in Becton Dickinson (NYSE: BDX) on the same day is worth more than $10,000 now.
When you own stocks like these, you don't sell them because of what "could" happen or because the financial media makes you second guess what will happen with the market. People aren't going to stop drinking Coca-Cola because the S&P fell 5%... nor are they any more likely to stop buying Starbucks (Nasdaq: SBUX) because of an increase in taxes.
Don't get me wrong, that's not to say that these dominant companies aren't subject to selloffs. In the bear market of 2007-2009, the S&P 500 fell 55%... nothing short of a savings account was safe from the turmoil.
But as we know now, that selloff proved to be one of the greatest buying opportunities in history.
So the next time you find yourself worry about short-term issues, ask yourself: Are these events likely to have a direct long-term impact on my stock holdings? Or are they being driven by mass media?
Bob: And you think investors can make more money by tuning out this sort of "noise"?
Paul: Frankly, I think you have to tune out this noise to make money.
I've been thinking about Peter Lynch during the past few weeks as I see the headlines.
Lynch is one of the world's most-respected investors. From 1977 to 1990, he ran Fidelity's Magellan Fund. During that time, the fund returned 29% a year --meaning if you had invested just $37,000 when Lynch started, then you would have ended up with $1 million by the time he left 13 years later.
He's famous for his stance on the financial news hype (which has gotten even worse since he left his fund):
"I don't remember anybody predicting 1982 we're going to have 14 percent inflation, 12 percent unemployment, a 20 percent prime rate, you know, the worst recession since the Depression. I don't remember any of that being predicted. It just happened. It was there. It was ugly. And I don't remember anybody telling me about it. So I don't worry about any of that stuff. I've always said if you spend 13 minutes a year on economics, you've wasted 10 minutes.
"I mean I deal in facts, not forecasting the future. That's crystal ball stuff. That doesn't work. Futile."
- Peter Lynch
First it was problems in Europe... and then the election and its ramifications... now it's the "fiscal cliff." After that, I'm sure it will be something else. It always is. There's never a shortage of things the financial media wants you to worry about.
To invest based off that sort of constant stream of media frenzy is crazy.
Bob: On a different note, you just published a new piece of research, Top 10 Stocks for 2013. Can you share some ideas from this report?
Paul: Sure. My Top 10 Stocks for 2013 includes the 10 investments I like to beat the market for the coming year. This annual list has a strong track record. Since we began publishing in 2003, this list has beaten the market seven out of nine years.
[Note: This report is available to all Top 10 Stocks subscribers. If your account is in good standing, then you can read this new report here. You will need to be logged in.]
For 2013, one of my favorite ideas is actually a household name -- Starbucks. It's the most well-known of my picks, but I also think it's likely to have one of the best years.
Most people view Starbucks as a coffee shop. Yes, it's a coffee shop, but it is also transforming itself into a major consumer brand.
You've likely already seen the first evidence of this growth. Bottled Starbucks drinks (including Tazo-brand teas) are already available at many grocery stores in the United States, as are single-serve coffee packets and instant coffee.
So when you think about Starbucks, I don't want you to think of it as simply a coffee shop. In my mind, the company is a combination of two of the most powerful brands on Earth -- McDonald's (NYSE: MCD) and Coca-Cola. Not only does it have nearly 20,000 locations (like McDonald's), but it is also selling its products in thousands of grocery stores, gas stations and corner stores (like Coca-Cola).
That's going to lead to enormous growth for decades to come. It's also why it wasn't surprising when the company announced record quarterly revenues recently and a 24% year-over-year rise in earnings.
The company is also increasing dividends like crazy, including a dividend increase of 24% last quarter. For all of fiscal 2012, Starbucks returned $1.1 billion to its investors via share buybacks and dividend payments.
Going forward, the company is making a push with new stores in India, an entirely new juice business called "Evolution Fresh" and the new Verismo coffee system that allows customers to brew coffee in their homes. And in total the company plans to open 1,300 new stores around the world in the next year.
Action to Take --> In other words, Starbucks -- already the most dominant company in its niche -- is strengthening its position, and also venturing into new markets to further boost growth. In fact, the company is forecasting earnings per share growth of 15-20% in the coming year. That's setting up for a great year.
[Note: One stock has raised dividends 463% since 2004... another has $9.21 per share in cash (nearly 50% of its share price)... another has returned 137% in three years -- more than triple the S&P's gain. These are the type of investments that make up Paul's Top 10 Stocks for 2013 report. To learn more about these top picks for the coming year, visit this link.]
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