Does consistency matter when picking stocks?

In investing, many people place a high value on consistency. If you rely on your investments for daily spending, then a desire for regularity is perfectly understandable – which is why there will always be a demand for financial products that do just that, like fixed rate savings accounts or annuities.

Even if your investment portfolio isn’t a source of income, consistency matters. Unfortunately, market-traded securities come with fewer guarantees. By locking in a set return over several years, bonds and preference shares’ share some characteristics with annuities. But as the past couple of years have shown, they offer little in the way of price consistency when their returns get swallowed up by inflation.

Still, whenever something is highly valued, providers tend to respond. Absolute return funds, which seek to make a positive return regardless of whether markets are up or down, are one expression of this. So too are so-called buffer or ‘Defined Income’ exchange traded funds (ETFs): structured products that use options to provide protection from a predetermined percentage of losses.

As Charles Schwab’s director of ETF Research, Emily Doak, puts it, these all amount to potential solutions “to a well-known problem in behavioural finance, which is that many investors find losses to be much more distressing than missing out on potential gains”.

So what of individual shares? The complex structuring of buffer ETFs belies an inherent feature of equity markets: their price volatility. But this doesn’t mean daily, monthly, or yearly swings in the market need override any hope of consistency. Lots of companies, for example, manage to increase their earnings and dividends for many years at a time.

Aided by their structure – which allows them to set aside some income in good years – some investment trusts have even managed to increase their dividends for half a century.

When it comes to the share prices of UK or US blue chips, nothing has matched that level of consistency. Nevertheless, over the past 20 calendar years (including 2023 to date), several stocks in the S&P 500 and the FTSE 350 have come quite close to rising every year in simple price terms. Call them share price heroes.

Broadly speaking, this was a bullish period for equities, interspersed with a few big bear markets; unsurprisingly, the years that most frequently tripped up our heroes were 2008, 2020 and 2022. In total, six of the 240 US stocks that were listed throughout the two decades managed to climb in all but two years (UnitedHealth (US:UNH), TJX Companies (US:TJX), AutoZone (US:AZO), Ecolab (US:ECL), Church & Dwight (US:CHD) and Gartner (US:IT)), while five UK stocks Diploma (DPLM), Pantheon International (PIN), JD Sports Fashion (JD), Compass (CPG) and LSE (LSEG) managed to slip up in just three years. A sixth, the soon-to-be-acquired Dechra Pharmaceuticals (DPH), only declined in value in 2018 and 2022.

Does any of this matter? Should we care more about the stocks that rise most frequently? After all, share prices tell us nothing about fundamental value or a business’s competitive edge. Neither is it hugely surprising that some stocks go up most of the time: although volatility is a feature of equities, a year is a long enough period for the weighing scales of markets to assign higher values. Over time, stocks tend to rise.

I’m doubtful that such a qualification is the foundation of a real investment case. While long-term equity growth normally points to positive underlying qualities, price rises are yesterday’s story and tell us nothing about what’s to come.