Note: By cyclical I’m referring to resource stocks rather than the technical definition which is stocks that rise and fall with the economy, say car stocks for example.
I’ve had this discussion with various buy and hold bloggers and the issue is that investors tend not to distinguish between cynical and non cynical stocks.
Cynical stocks are driven nearly 100% by commodity prices and herd mentality. You get in, take your profits and leave. There is very little a company can do to increase earnings when commodity prices are depressed.
Non cynical stocks, and this is the part that really matters are more suited to buy and hold investors. Short term you see price volatility due to herd mentality. Sectors fall in and out of favour giving you opportunities to pick up a stock at a better price. Take banks as an example. Prices are (were) quite depressed so bargain hunters started shopping driving prices up but at some point the housing bubble is going scare off investors off leading to a major sell off. Prices will drop but unlike the resource sector dividends and yields will continue to rise and the whole cycle will repeat itself giving the astute investor an opportunity to profit.
But what about Manulife you say?
In this case it has less to do with cynical vs non cynical but rather a poorly run business. The company ran into problems had to cut the dividend and the stock price simply tanked. While they did restructure and eventually return to profitability the stock price has never recovered. I wrote about Manulife here.