The best stocks are often right under your nose

published 3 June 2010

"Never invest in future trends," hollered the gruff Brooklyner.

I think I must have inadvertently ruffled his feathers. In fact, I was only trying to agree with him.

There we were, a group of investors and investment writers, gathered in a fine chateau in France last week batting around ideas.

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I asked Michael if he was investing in real estate. "Yep, I'm getting some great deals in Florida at the moment," he said.

"So you're going to make the most of the future trend of retirees heading to the sunshine state?" I asked.

"No way!" he replied. "I only buy properties when I know I can rent them out for a decent return right now. Never invest in future trends."

And he's right. Michael wants a good yield on his investments immediately. Any uptick in value from future demographic trends will be an added bonus. He's certainly not predicting this eventuality.

This is a valuable investment lesson we shouldn't forget.

Future trends are too hard to predict

Just think back to the dotcom boom. At the time, there were loads of stocks vying for your money. Many investors predicted the future trend. Some even saw that a search engine would be central to 'web navigation' and would provide a tremendous business model.

Maybe they put their money down on Yahoo, and did okay. But more likely they put their money into something that fell by the wayside. Even with tremendous foresight, they couldn't cash in.

Why? Because what nobody knew was that the company set to become the industry leader, Google, wasn't even on the stockmarket in those days. Google didn't offer its shares to the public until August 2004.

Anyone that tried to anticipate the future trend got their fingers burnt.

Invest in current trends

It's much safer to invest in current trends and by that I mean stocks that are profitable now. Of course, they should have some growth potential too, but that's the icing on the cake. The cake itself is the day-to-day profitable business.

Okay, it's a bit boring, but for investment success, we should be happy with boring.

I'm not saying that I don't hold a couple of speculative stocks that have a great story. But I'd say 90% of a portfolio should be in boring 'current trend' stocks.

Mobile phone operator Vodafone is very much a current trend stock. The chart shows how Vodafone has grown its earnings per share to about 16p today. Brokers are pencilling in the same over the next couple of years.

Vodafone historic and forecast earnings per share

To many, this looks like a stock that's had its day. And that's exactly how the market's treating it. It's trading on less than 9 times earnings and pays a 6% dividend yield.

Vodafone earns 16p per share, but pays out only 8p of that in dividends. That means half of their earnings are retained within the business. So what are they using them for?

They're investing in research and development, and who knows, maybe they'll come up with innovations that'll set the world alight. They'll also be using spare cash to make acquisitions, maybe in emerging markets, effectively 'buying in' future growth.

Truth is, we just don't know how profitably they'll invest this spare cash. We have to assign the task to the management team and hope they come up with the goods. If they create earnings growth, then analysts will upgrade the stock.

We'll make even more moneylike the bonus Florida real estate buyers will get if the baby-boomers descend on the Sunshine state.

But we're not banking on it. We're living for today; we're getting a 6% pay out. We're hoping they find the icing on the cake, but we're not banking the cheque just yet.

This article was written for the free investment email The Right Side. Sign up to The Right Side here .

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.