I'm a rock fan by nature, but over the years I've made room in my record collection for a smattering of classic country artists. I've also made the occasional foray to Nashville, including a trip a couple of years back that included an evening at the legendary Bluebird Cafe, the forum of choice for professional songwriters who come to show off their wares for the local bigwigs in hopes that they'll snap 'em up and turn 'em into blockbusters.
Sometimes these songwriters are performers themselves. During my visit, the audience was treated to a few tunes from Michael Peterson, including an achy-breaky ditty whose main refrain, which Peterson drawled over a Texas-sized chorus, could be the soundtrack of our investing lives these days: "You know you're in trouble when the bartender cries."
Achy breaky art
Now, to be fair, I haven't actually seen bartenders or their customers cry during this winter of investor discontent, but then again, as the father of a four-year old and a freshly minted newborn, I don't get out as much as I used to.
Still, it's not hard to imagine more than a few folks getting choked up over the performance of companies that, by rights, should have been stalwarts during the downturn. The widely held likes of PepsiCo (NYSE:PEP), Archer Daniels Midland (NYSE:ADM), and Schering-Plough (NYSE:SGP), for example, have each shed more than 30% of their value over the past 12 months. A glass-half-full type might point out that that loss, while painful in absolute terms, looks pretty strong on a relative basis: The S&P-tracking S&P 500 SPDRs (AMEX:SPY) has shed even more of its value over that stretch of time.
That's cold comfort, of course -- and no comfort at all for those investors who own Google (NASDAQ:GOOG), General Electric (NYSE:GE), and Schlumberger (NYSE:SLB). Each of those behemoths has declined by even more than the S&P. Ouch.
Stop your sobbing!
So, how to snap back if, like all too many of us, you're licking your wounds and wondering how to position your portfolio for future success? Good question, and here's one good answer: Buy quality on the cheap.
Whether or not December's 11% market rally means a real-deal recovery is under way, for savvy types with long-term perspectives, now is a great time to shop the market's sales rack in search of a few potential blockbusters of their own. The trouble, of course, is sifting through the thousands of investment possibilities to uncover that clutch of keepers that can help you beat the market without fretting obsessively over performance gyrations that, let's face it, come with the investing territory.
Start your shopping!
On that front, I favor zeroing in on firms that are financially rock-solid. Among other things, I want them to have little in the way of debt and lengthy track records of generating ample sums of free cash flow. Management teams that are committed to their shareholders are crucial as well, but the trick with this criterion is that most company honchos can at least talk a good game when they're on conference calls with analysts. Alas, that may even be a part of the reason they became honchos in the first place. A better bet: tune into a firm's return-on-equity (ROE) figure. A key profitability metric, ROE shows just what management has been able to deliver with the money its shareholders have at stake. It's going to vary from industry to industry, but generally speaking, you like to see an ROE over 10% and increasing.
That said, remember that when it comes to using any financial measurement intelligently, you'll want to compare and contrast your prospect's profile with other players in its field. If it beats up on the competition, that's a company worth considering for your portfolio. If not, you'll likely want to move on to greener (pun intended) pastures.
On the fund front
Meanwhile, when it comes to funds -- which I think intelligent investors will want to use as their portfolio's foundation -- I'm partial to those with cheap price tags: Every basis point of cost, after all, is a basis point of performance that isn't flowing to your bottom line. Indeed, that simple math helps to explain why cheaper funds are often far better long-haul performers.
Fund investing isn't all about price, however. I also look for managers whose track records indicate an ability to navigate the market's inevitable ups and downs, taking advantage of slumps to snap up shares of the kinds of companies they like for a song. These managers should eat plenty of their own cooking, too. You can find out if your managers invest their own money alongside you by checking out your fund's Statement of Additional Information (SAI). That's a key indicator of whether or not they'll run the fund with your best interests at heart. When they're shareholders as well, after all, they have ample incentive to invest in just their best ideas, keep expenses low, and to focus on tax efficiency.
The Foolish bottom line
As it happens, those are among the criteria I've used in assembling the compact, set-and-forget portfolio for the Fool's Ready-Made Millionaire service. I'm an investor in our real-money portfolio, too, and while we're currently closed to new members, we're set to reopen soon. If you'd like to learn more about the service, click here to grab (for free) our 11-Minute Millionaire special report, which serves up a power trio of tips to consider before investing another dime in this market. Give it a go, and we'll be sure to notify you just as soon as RMM reopens.
Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire service. At the time of publication, he didn't own any of the companies mentioned. Google is a Rule Breakers pick. PepsiCo is an Income Investor selection. You can check out the Fool's strict disclosure policy by clicking right here.
