Max Wasserman is a co-founder and senior portfolio manager at Miramar Capital. Wasserman previously served as a senior portfolio manager at UBS and boasts nearly three decades of experience as a portfolio manager and research analyst.
Russ Alan Prince: Valuations are high and markets are volatile amid economic uncertainty. How should investors identify opportunities in today’s market?
Max Wasserman: Step one is for them to look at their time horizon. We’re focused on long-term-dividend growth at Miramar, so we’re looking two to three years out, not one, six, or even 12 months out. We typically hold an investment for at least two to five years.
When we look for investments, we’re asking ourselves “How can we make money on a stock in the long term?” We’re not looking for momentum to shift, catalysts, or even short-term trades based on interest rate moves; we look for companies that we feel have top-line revenue growth, strong return on equity, good dominant market positions, and a philosophy of providing shareholder returns by way of dividends. That’s why time frame is crucial: in the longer term, stocks, especially dividend stocks, give you a chance to outpace inflation.
If inflation’s running 4% or 5% and you bought a fixed-income vehicle, you’re looking at a negative real rate of return. Whereas for stocks with dividends, you’re looking at companies that are increasing their dividends and cash flows. We tend to look for companies that are increasing their dividends by roughly 5% to 10% annually to outpace inflation and give shareholders cash to reinvest at higher rates.
We also tell clients to take a real, and honest assessment of their risk tolerance. Given the market volatility, you have to have the stomach for your investment. It’s a matter of temperament—are you truly an investor or are you a trader? Yes, the market can be overvalued and volatile in the short term, but if you take a long-term view, you’re looking for companies with dominant market positions and well-paying dividends that can reward shareholders.
Prince: What are the core factors investors should consider when picking stocks?
Wasserman: I always emphasize areas of competency: when examining a stock, don’t look solely at the mechanics behind it, look at the company holistically. Do you understand the company that you’re investing in, how they make money, their expenses, and the market environment they’re operating in? Stock valuations are based on a fleeting moment in time, so you should be looking for a good company that you fully understand and have confidence in before entering an investment.
Once you’ve identified a company you’re interested in, you should assess its price. From there, investors should evaluate the price-earnings ratio over an extended period of time and compare it relative to its peers. You want to look at the return on capital, the sales growth of the company, its stability, and management practices, including risks to their type of business—pricing power, margins, etc. Those are all key factors—valuation is only a good 30% to 40% of the situation. Remember, you can have a cheap stock but a bad company; you can have a great company but an expensive stock.
Miramar operates as large to mid-cap dividend growth investors. When we look for investments, we’re looking for companies that usually have a market capitalization greater than $10 to $20 billion. We seek out dominant market cap companies; companies that have a history of paying dividends; companies that can ride out economic cycles both good and bad; and companies with reasonable payout ratios. We do our best to avoid “value traps” and companies whose dividends are too high to be maintained in an economic downturn.
Prince: Many investors found success with passive strategies throughout the bull market, questioning the necessity for an active manager. As a traditional stock picker, what do you say to that?
Wasserman: There’s the old cliché that a rising tide lifts all boats. The problem with that analysis in an investment context is that it’s only true when people are riding the wave of cheap interest rates in a strong bull market where capital costs nothing. Those are the market conditions we’re just coming out of, where it didn’t matter what you owned because people didn’t want to buy bonds. Investors were piling into index funds and being rewarded for it because interest rates were so low. For a period of time, people were all rewarded for buying the same thing and the bull market fed on itself.
The problem arises when rational thought comes back to the market. What occurred last year was a prime example. All of a sudden, somebody let the air out of the tire. And when interest rates started going up, valuations made a difference, as did how companies conducted themselves, the actual returns they were generating, and whether or not they had the financial wherewithal to survive long term. In essence, people started using fundamental analysis again. We saw what happened when the market shifted last year: everybody using passive strategies took a beating.
On the other hand, quality stock pickers are always looking at valuations. They’re not just buying multiple concentrated—largest cap stocks because their weightings are so dominant in the indexes—stocks as many passive strategies were doing. The benefits of this approach could be seen last year: when the Nasdaq was down 30% and the S&P was down 20%, quality active managers were probably down under 10%. Another fact to consider is value stocks have historically outperformed growth.
In short, passive strategies can prove lucrative in a raging bull market with no cost of capital because you don’t have to do much. But when that changes, and it has, you can’t abandon passive strategies soon enough. Conversely, active strategies are conducted with disciplined thought and actual valuation methodologies behind them, and the difference is borne out through the results.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.
