October is historically a shaky month for the market. It is now trading at an all-time-high; should you sell or buy more?   It depends on your point of view. Strategists will tell you, if your cash out time horizon is 20 years, let it ride. However, once you move inside that time horizon you need to adjust your risk exposure to achieve a "fair return." That begs the questions:  What is a "fair return" and why can it take the stock market 20 years to achieve it? The answer offers a stock tip.

An experienced business person or MBA will tell you that over a broad spectrum of businesses 10% is a "fair return". By that they mean a going concern that has average long-term prospects, competition, and risk. At that rate the business should pay them back in about 7 years. They know that since most businesses fail within five years, one that passes its seventh anniversary can likely be sold. Businesses of any substance find their way to the stock market either through public offerings or acquisition by a company that is already publicly traded. Depending on a variety of factors the acquirer at that stage is more likely to pay too much rather than too little because, sadly, many highly paid CFO's, board members, and stock investors are lazy in their research or rely too heavily on "disinterested" third parties. The result is that the average payback time goes from 7 years to between 10 to 20. Unless one is uniquely qualified at identifying and purchasing good companies at rock bottom prices, that is what must be accepted.

Most don't have the patience, experience, or fortitude to correctly price individual stocks or buy at market lows.  Most need a reliable investment technique and someone to help them improve their odds. The reliable technique is called dollar cost averaging, and that someone is an experienced and conservative market pro such as myself. I know that over the history of the modern stock market in any given 10-year period the "average return" has been roughly 7%, but over any 20-year period that improves to 10%. For example, looking back at ten year segments over the last fifty years the market's compounded annual return had a low of 3.7% between 1967-1977 and a high of 18% between 1977-1987. Statistically speaking, the way to get a business man's fair return upon entering the market at any given point in time has been to average in and out through the highs and lows and be very, very patient. If you don't like the bumps and your patience is thin use bonds and cash to help ride out the rough spots. Unless you are very lucky your portfolio will not get a businessman's expected returns in 7 years, but on a risk adjusted basis the stock portion of your portfolio should in just over ten. That is, as long as your pro helps you keep your investment discipline, uses dollar cost averaging, and doesn't charge too much.

I mention all of this because it is not only the naïve investing public which can have difficulty pricing securities, but also market pros. As a case study take the results of a singularly well known company like General Electric (ticker: GE). Twenty years ago, this September, you could buy the common stock  in the neighborhood of $22.25/share. Since that time the shares have seen a high near $60/share in August of 2000 and a low of under $6/share in March of 2009. Today you can buy a share for roughly the same amount it traded for in 1997. Collecting dividends for 20 years would have earned you practically nothing on an inflation adjusted basis. This came about, in large part because in 2009 the CEO, Jeff Immelt, ("to save the companies AAA ratting?") cut the dividend, went to market with a dilutive secondary offering, and sold away most of the next 9 years of shareholders upside in part by issuing common stock warrants and 10% preferred to Warren Buffet's company Berkshire Hathaway (ticker:BRK.B).  Buffet has cashed in, redeemed his preferred, exchanged a load of his GE common for shares in one of GE's financial jewels Symphony (ticker: SYF) in a spin off, and sold the rest in August. Mr. Immelt just retired with what appears to be $100's of millions in compensation, a great example of why the board should exercise claw backs. Mr. Immelt and Mr. Buffett doubtless are satisfied with the results of their business relationship, but the investors who bought at the secondary price of $22.25/share in 2008, not so much. Their shares will need to reach the min $40's by 2023 just to see an average 7% annual compounded return. Analysts, have continuously valued the shares in the high $20's since the secondary. Show how even the pros can get snowed.

With stocks like GE mucking up the returns of the top 20 largest positions in the S&P 500 is it any wonder it can take 20 years to earn a "fair return?" Fortunately, there are companies like Apple (ticker: APPL), Google (ticker: GOOGL) and Facebook (ticker: FB) towing the line for the broad market and returning double digit growth to bring up the average. If there is such a thing as revision to the mean it does give one pause to consider whether GE might finally be investable. The new CEO, John Finnery is due to announce his vison for the company mid-November. I and others suspect he is considering announcing a dividend cut this Friday, October 20, at the earnings call. That explains why the stock is down so much. High dividend yield fund managers are purging the stock from their portfolios on speculation this will happen. Also, like it or not there are a lot of Buffet copy cats that follow his lead.  Selling pressure has been intense. Mr. Finnery from all appearance, is changing GE for the better. It looks like he is cleaning house (a much-needed purge), and turning the culture around to one in favor of long term shareholders value. I for one will want to look into his eyes and see what he has to say in mid-November at the analyst meeting. Judging a CEO's character correctly is often all one needs to make a good stock selection. At this point it appears Mr. Finnery is holding a good hand, but if he's not, there will likely be a "tell" as there was with Mr. Immelt back in 2008.  Currently the broad averages are offering only "average returns", but in the next few weeks the market may be offering an opportunity to pick up GE shares at prices that offer a businessman's "fair return".  At roughly $22.50 or better I think the stock is attractive. If there is a dividend cut, and Mr. Finnery says the right things the stock will likely rise a couple bucks over the next year. That seems fair....

Note: Vanguard is holding a proxy vote November 15th. I urge you to vote your proxy. I will be voting to withhold the board seats for those on the  technology committee. Please withhold votes for 1-Buckley, 5-Loughrey, 6-Loughridge, 11-Raskin, 12-Volanakis. I will also withhold my vote for item #4, but will be voting for all the other board recommendations.