In chemistry, a catalyst is a substance that causes or accelerates a process. Gasoline on a fire is a simple example.
It’s a term you might hear in investing sometimes too. It’s certainly one that I’ve heard again and again from readers, analysts and brokers. In an investment context, a company promoting a new product line might be seen as having a catalyst for growth. Some investors look strictly for those kinds of events.
But the truth is, you don’t need a catalyst to invest. Most of the major investment styles don’t give it much thought. If you’re a technical investor, you’re looking for opportunities in the chart patterns. If you’re a value investor, you’re looking for where the value is now.
If you’re a growth investor, you’re looking for growth now, not necessarily in the future.
If anything, a supposed catalyst only creates an opportunity in addition to other factors already at play. At least, in the best case scenario.
That’s because looking for a catalyst might even send you off in the wrong direction and into bad investment ideas. Just as no investment strategy works 100 percent of the time, not all new products pay off.
The Newton personal digital assistant by Apple (AAPL) back in the 1990’s is a great example. Its seemingly revolutionary technology that allowed handwriting to be translated into written text simply didn’t work and the product proved to be an expensive dud. Better products are out today, and when it comes to technology, getting it right is sometimes more important than being the first to the market.
Whether it’s unloved technology or out of fashion products, not all catalysts create value that takes Wall Street by surprise. If anything, a poorly executed catalyst might act as a destructive force on a stock, destroying value rather than creating it.
So if catalysts don’t matter at best and are destructive at worst, what does matter?
Consistency. If we’re going back to chemistry, it’s the idea that potassium and water will always do the same thing when they come into contact (they go boom). Or the idea that oil and water just won’t mix. You know going in what will happen in those situations.
Consistency matters with investing as well. It’s no good if you can double the market’s average return 3 out of 5 years if the other two years see 50 percent declines. The losses more than offset the gains, although most of the time you’re beating the market.
To get consistency, you need to find a strategy that delivers safe returns without undue risk. Preferably one that avoids large drops in capital along the way. It means avoiding potential investment catalysts—good or bad.
That’s why I’ve been pounding the table on preferred stock shares the past few weeks. In the increasingly volatile post-Labor Day markets, there’s consistency in buying steady income plays like the preferred shares. They’re bond-like in their returns, as they have a tangible par value and periodically get redeemed just like fixed income. If you have the patience to buy them when they’re trading below their par value, you’ll also see capital gains in the future as they get called.
There’s usually no catalyst in something as predictable as this sector, but during periods of financial fear, prices could go lower. That last happened at the start of the year when it looked like the Federal Reserve might have raised interest rates before the bank ultimately blinked. The catalyst, if there was one in this case, was a decrease in fear, not in any new value created.
On the other end of the spectrum, government bonds aren’t a value. They’re a bug in search of a windshield.
They’re trading at incredibly low yields, which means high prices. If investors start demanding higher yields from their government bonds, the prices on existing bonds have to go down. The longer a bond’s duration, the worse the drop will be. A 2-year bond might see modest declines on further interest rate hikes. But a 30-year bond could easily see double-digit declines if interest rates were to rise a few percentage points.
That’s why the Fed looks backed into a corner. Higher rates mean lower bond prices.
Lower prices mean higher yields. Higher yields, for the government, mean more money has to be spent on interest payments on our existing debt. If bond yields start to creep up, whether thanks to the private sector or the Fed, then we could see the financial equivalent of potassium meeting water. Boom.
Like chemistry, investing often involves the ideas of change. But investment changes follow human emotions, not immutable laws. They’re more flexible. What looks like an investment catalyst won’t always pan out. That’s why it’s important to have a simple strategy, stick to it, and keep an eye out for market developments so that you can stay flexible and on top of ever-changing opportunities.
One such opportunity today is with preferred shares. They may trade lower on fears of higher interest rates in the future, but many issuances today can be bought below their par value, offering solid income without taking on the higher risks of investing directly in stocks.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report. To read more of his work, GO HERE NOW.
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