The Market Keeps Going Higher

It seems that lately each time I turn on the business news I hear about how the markets are setting new records time and time again. It puts pressure on anyone sitting with a large cash balance to want to put their money to work in order to chase the incredible capital appreciation that just keeps rolling. Analysts routinely revise their price targets higher on stocks and the frenzy around the stock market rages.

Given the nature of this rising market, what are investors to do?
One thing that I always try to remember when hysteria abounds is that the same analysts who raise their price targets and who plead their case as to how high the market can go are the same analysts who will be arguing about the bottom when (yes, when) things turn around. No market rises in perpetuity without a slowdown at some point and certainly not a market that is being fuelled with liquidity from central bank policies.

The most money I ever invested in a single year was done in 2009 when the market was low and optimism among stock market “gurus” was hard to come by. I held faith that the companies behind the market would remain strong and build market share in a difficult environment. I looked to the continued dividend increases and solid earnings power of the strongest companies in the world such as Coca-Cola (NYSE: KO) and Wal-Mart (NYSE: WMT) as reassurance that my money was best invested than held on the sidelines.

Now, years later, I feel markets have pushed too high too fast and I do not trust the levels the market is at. I am hesitant to commit serious amounts of money in a market that is propped up by money printing. If the global economy was truly healthy, what would be the need for added stimulus?

Still, I am content knowing that I am participating in the rise of the market on the basis of money already invested at prices that offer me a margin of safety if things do turn back. My companies continue to churn off cash flow and have each become stronger than when I first bought them at lower prices. This allows me the patience to wait for better prices in the market today. Further, if my companies did see a tumble in their stock prices, I could simply add to them with new cash as their fundamentals continue improving.

If I had no position in the market at this point in time, I would likely consider building some small starter positions to get some skin in the game, but I am averse at this point to jumping into the water completely by buying heavily.

My stance on the market will develop over time as well. For instance, if the stock market were to stagnate, I may add some funds as valuations improve. I always remember that as long as my time horizon is for the long-term, the key is to own terrific businesses and continue building on that foundation.

Full Disclosure: Long KO.

Twitter IPO

As most everyone has heard by now, the social networking site Twitter (NYSE: TWTR) went public this past Thursday, November 7, 2013.

 What does this mean for investors?

If you like using Twitter, buying its stock allows the opportunity to have a share in the company and in its fortunes going forward. By the end of trading on Thursday, Twitter had been valued at roughly $31.7 billion by investors.

Twitter soared from an opening price of $26 into the $40s instantly and has been deemed a very successful IPO offering. That said, smaller retail investors were not able to get in on the IPO and were led to make their purchases on the open market. From its close on Thursday the company fell 7.24% in Friday trading as some investors took money off the table.

Given its massive worldwide usage, there is no doubt that Twitter has outstanding reach with consumers and has found its way into the households of everyday citizens. With over five hundred million tweets per day, there is a lot of content for the company to look at turning into dollar signs. The question over time will be how the company can continue to monetize itself and build on its ad-revenue to generate earnings.

I find it difficult to accept a $30 billion price tag on a company that is not generating profits. What an investor has to accept if they purchase Twitter is that they are buying the hope of future profits and gains while accepting the risk that Twitter may never realize this. There is substantial execution risk in that management may not be able to bring their vision of the company to fruition. Companies in such a situation are subject to extreme volatility in their share prices. For instance, should Twitter miss analyst estimates each time they announce their earnings reports, investors should be aware that they may be subject to serious downside on their stake in the company.

 Competition...

Twitter faces competition from many other social media companies which all vie for advertising dollars and for the eyeballs of users globally. Facebook (NASDAQ: FB), LinkedIn (NYSE: LNKD), and other big-hitters are all working to carve out their own space within the online arena. Over time, I find it likely that users will become overburdened (if they are not already) and social networking sites will get thinned out as people become more selective with their time and choosy as to where they decide to build their online presence.

The bottom line...

I will not be buying Twitter any time soon. While Twitter may offer upside in the form of capital gains, a company that is not kicking off profits does not pay a dividend (and certainly not a stable one), and as such it falls outside of my investment criteria.

The company poses an unnecessary level of risk for my portfolio and does not meet my minimum requirements for investment. While I do operate on Twitter as @DividendTitan, I will pass on owning its shares.

Full Disclosure: No position in any stock mentioned and no intention to initiate one within the next 72 hours.