These are dark days for investors. Interest rates squat at historic all-time lows in order that the Bank of England can continue to bail out our errant banks and government. Western economies toil under a monumental burden of public and private-sector debt, to which austerity is merely the latest desperate political response. Securities and currency markets are all being manipulated by extraordinary and highly inflationary monetary stimulus. Safe havens, anyone?
The situation is doubly challenging for anyone in or approaching retirement. By artificially suppressing the yields available on UK government bonds or gilts, and therefore annuities, through its absurd policy of quantitative easing (a.k.a. money printing), the Bank of England has done an excellent job of further enriching the banking lobby whilst impoverishing those least able to add to their investment pot.
But the kneejerk response to the challenges of our time should not simply be to plunge without reservation into the stock market and hope for the best. Stocks play a role within a balanced portfolio for any investor — as do high quality bonds and real assets — but the prudent course is surely to concentrate on the most defensive stocks available. Happily, there are a number of time-honoured strategies that can help us identify some of the most appropriate candidates.
The imposing-sounding Altman Z-score is a particular favourite of mine. I will spare you the maths, but the Altman score for any quoted company indicates the probability of that business going bankrupt within the next two years. It is calculated by using a weighted mixture of a company’s working capital, retained earnings, market value, liabilities and tangible assets. A bulletproof business with strong earnings and little or no debt will score highly; a debt-laden basket case with puny revenues and a dodgy business model will earn a score of little or nothing.
Comments
Join the debate for just £1 a month
Be part of the conversation with other Spectator readers by getting your first three months for £3.
UNLOCK ACCESS Just £1 a monthAlready a subscriber? Log in