10 Investment Guidelines: Part 1

One of my go-to Wall Street market strategists is Richard Bernstein, whom I had the pleasure of working with at Merrill Lynch. I left Merrill in 2001, and Bernstein recently left as well, to strike out on his own.

Bernstein's final report at Merrill Lynch, published on April 14, was called 10 Guidelines Learned in 20 Years. The report, whose guidelines were listed without elaboration like the Ten Commandments, was so compelling and enlightening in its simplicity that I've decided to incorporate it into a lesson for my students at the Stillman School of Business at Seton Hall University. This and the following Finance Professor articles will serve as the outline for that lesson.

Here are the first five of Bernstein's guidelines, with my interpretation and analysis.

1. Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important that capital gains.

When it comes to investing what counts above all is performance. Performance is based on total return, which encompasses capital gains and income, the latter of which is generated through interest and dividends.

In the stock world, this boils down to the classic growth vs. income tradeoff. However, as biases are created toward growth (capital gains), income-oriented stocks become shunned and undervalued. As supply and demand imbalances are created, relative opportunities in income-oriented investments result.