We frequently hear the phrase "buy low, sell high" as the secret to stock market success. Yet what I have found is that the vast majority of investors never want to buy low, asserts Rida Morwa, editor of High Dividend Opportunities.
They will have all sorts of reasons for not buying when something is cheap. Well, yes — by definition, for a valuation to be "low" it has to be down. If the valuation just kept getting higher, it wouldn't be low.
The market is cyclical. This means that investments with certain features will become relatively popular and others relatively unpopular. Fast-forward a few years, and the features that were popular fade, while the unpopular often come back into style.
One example is small-cap vs large-cap stocks. 25 years ago, everyone "knew" that owning large caps was the way to make money in the market. Then the dot-com bubble burst and large-caps were sold off. Suddenly, investors "knew" that the best way to make money was to find small-cap opportunities. At that point, large caps were relatively cheap, and small caps were relatively expensive.
Today, the cycle is back to where it was 25 years ago. Large-caps are expensive, while small and mid-cap stocks are trading at valuations they usually see in recessions. While the market has been selling off small-caps, I'm a buyer.
Royce Value Trust (RVT) is a closed-end fund (CEF) that focuses on small-cap value opportunities. It is one of the oldest CEFs in the market and has proven to perform well over the long run. It has outperformed the Russell 2000 index since its inception in 1986.
RVT has reached this impressive achievement with a value-centric approach. Founder Chuck Royce, who is still with the fund, described the approach like this: We are happy to ride along with Royce, collecting our dividends while we wait for the cycle to turn and small-cap stocks to come back into favor.
The fund pays a variable distribution based on an annual rate of 7% of NAV (1.75% per quarter). For the distribution, NAV is calculated as the average for the prior four quarters. As a result, its distribution is variable but adjusts slowly. RVT currently yields 7.8%.
This distribution policy allows for the fund to be sustainable long term, as any prolonged downturn will result in a lower distribution and avoid having to sell too much when prices are low.
It also ensures that investors gain exposure to the upside when prices are high. At the same time, the distribution will be less volatile than CEFs that just use a single quarter to calculate the distribution. Just like us, Royce loves to buy low and sell high!
