By: Paul Sutherland, CFP ®
I’m still numb from the election. As I heard candidates fighting it out, I kept telling myself, “I am proud to be an American,” where we are free to pursue and express our ideals and opinions. I was raised in a home where if we even thought about swearing we got red-faced. If we lied or showed disrespect we were given “a talking to.” I think my parents would have turned off the TV rather than expose us to the disrespectful and untrue prattle of political ads. We watch these so-called “leaders” and assume they must know something. Turns out that isn’t always the case.
As a thoughtful, global investor I understand that government (both U.S. and abroad) regulations and fiscal/monetary policies will have implications for investors. Great companies, maneuver wisely and can make money regardless of government mandates. Trying to forecast government tax policies or dwelling on similar matters is simply not a good use of an investor’s time. Like the weather, government is influential in our lives. Unlike the weather, which we can’t change, we feel like we have the ability to influence politics, and around the edges, collectively, we can. But as an individual and an investor I must go with the unalterable “flow” and realize my job is to make money for clients, regardless of the politics of the season.
Irrelevant to Investing
I remember the day President Kennedy was assassinated. Regardless of history, no matter what happens in life, however tragic, we somehow manage to put one foot in front of the other and move on. If you’re a “half-empty” investor, however, you’ll always have a reason to fret, calling it “common sense.” For example, “The president got shot, so that must mean it’s time to sell.” (The market dropped 3% the day of the assasination - recovering fully the next week.) If you’re a history buff (like me) and an optimistic, truth-seeking, “half full” investor (also like me), then the president’s death as a very sad, tragic event; not an investment event. Politics really are not a productive place to spend a great deal of time as part of the investment process. Sure, it seems influential, but really it’s mostly a waste of time and energy.
During a recent FIM Group investment committee meeting, I quoted Peter Lynch, former Magellan Funds manager: “If you spend 13 minutes on economics, you wasted 10.” He said that in an interview citing the fact that no one predicted 1982’s 12% unemployment, 14% inflation and 20% prime rate. I infer that he believes, as I do, that the key in finding great investments is not wasting too much time squinting at politics or the economy. I discuss politics and the economy with business owners and managers all the time, and I’ve learned that the successful ones don’t get frightened. Why? Because losers let fear guide them, and winners let facts, opportunities and truth guide them. We have deficits, debts, a fiscal cliff, wars, regulations and such. When have we not? We also have the poor, rich, religious, not-so religious and taxes too. When have we not?
Relativity and Complexity
Building and/or running a business is no simple task. All ideas are relative – every platform, decision and path of thinking has both its strong points and weak points. Nothing should ever be set in stone. This is the nature of our world. Like politics, business is complex, messy, and rough and tumble. A tough, competitive fight is usually the reality of executing on a business plan. It’s no place for the weak or the fearful. Thankfully my dad instilled in me ethics and honesty, and always taught me to be diligent when assessing the character of the managers of the companies we invested in. This alone has helped me be aware of the “fast money” guys.
"Like no other time in history, political divisiveness and geopolitical strife is causing investment paralysis and/or unhealthy investment practices. “Whether Obama or Romney wins the White House, investors need to get off the sidelines if they are going to hit their long-term financial obligations." – Dick Weil, CEO of Janus Capital
Making Good Choices
"What’s important in business (and investing) is to progress forward while constantly adapting to new situations. I watched my four children learn to walk. I remember my son Keeston enthusiastically trying to make it from the couch to the end table without falling. When I brought him to the pediatrician for a gash over his eye, the doctor said that end tables should come with a child-warning label. But he was just learning; the act of walking requires a moment in which he would lose balance and then regain it as he would throw one foot in front of the other.
"And so, my fellow Americans: ask not what your country can do for you — ask what you can do for your country." – John F. Kennedy
What Matters Most
Businesses progress in much the same way. We observe their growing and history unfolding amid a consistent rough-and-tumble forward motion, stumbling and regaining balance. History teaches us that nothing is ever finished or fixed. Everything changes. Success, then, depends on choices, successful choices in which we must concentrate on what is important and not waste time on the unimportant. While the economy and politics are inputs to our investment process, like the weather they are something to be prepared for but not to obsess over. Choices are not well made if they are fear-driven and give too much relevance to forecasting the economy or politics. Successful investors like Peter Lynch, John Templeton and Warren Buffett have all discussed making good choices. Part of making good choices is to concentrate on what matters most – which has been the subject of many past newsletters … and will continue to be the fodder for future newsletters.
When asked what investors should be thinking about, Peter Lynch responds with practical advice:
"Well, they should think about what’s happening. I’m talking about economics as forecasting the future. If you own auto stocks you ought to be very interested in used car prices. If you own aluminum companies you ought to be interested in what’s happened to inventories of aluminum. If your stocks are hotels, you ought to be interested in how many people are building hotels. These are facts... I mean I deal in facts.” – Peter Lynch
By: Jeff Lokken, CFP®, ChFC
It’s almost 2013 and time for some planning. The New Year often has an interesting effect on us. Suddenly we realize that we need to make some form of resolution or commitment – usually to lose weight, balance our checkbook, call Aunt Matilda or some other item we seemed to have either forgotten or simply practiced perfect procrastination. Despite our well-intended newfound commitments, time has a way of turning them into vapor. And despite the poor human record of successfully following through with resolutions, I thought it might be a good idea to create a checklist in case “financial planning” is on your 2013 list. Feel free to tear this page out of the newsletter, hang it on the refrigerator and check each item as it is completed. I kept the list short on purpose. Good luck!
Review beneficiary designations: Life insurance policies, annuities and retirement plans all require a primary and contingent beneficiary. Obtain copies of the existing designations and review them to make sure they are up-to-date and consistent with your estate planning objectives.
Make a budget: A painful as it is, knowing what monies are coming in and going out is an essential fundamental for good financial planning. Most of our financial life evolves around cash flow, so don’t put this goal in vapor-land. Many software packages such as QuickBooks provide a method of tracking cash flow by category and are relatively inexpensive. I recommend that you review your checkbook ledger for the past three to six months to get a feel for all expenses. Then, going forward, work on expense-reduction strategies so you practice the old adage of “spending less than you earn.”
Save some money and pay off debt: I have included a chart at the right that is a guideline for how much, at a given age, you should save (19%) and have in debt (zero by age 65). In most situations, the best way to save is through employer-sponsored retirement plans such as a 401(k) plan. These plans often have an employer matching provision that gives you some free money, and contributions are pretax so there is an “instant” rate of return from a reduced income bill. Most plans provide various risk levels of investment options, so you can sculpture the risk of the plan to your specific situation. The best time to pay off debt is when interest rates are low. If you haven’t done so, refinance your mortgage and amortize it so it is paid off by the time you reach age 65.
Review all insurance: Take some time to sit down with your property and casualty, life insurance and business insurance agents to make sure your insurance coverage is suitable to your situation. Take a good look at deductibles – your out-of-pocket risk – to make sure they are in line with your financial condition. For example, if you have adequate savings (six months of expenses) and a good driving record, a higher deductible of $1,000 for auto collision or comprehensive coverage might save some premium dollars. Make sure you have “umbrella” liability coverage. This coverage accompanies your auto or homeowner’s policies to protect against a large litigation claim or other expensive claim. Umbrella coverage is typically low-cost and is sold in $1 million increments. It is a good idea to maintain umbrella liability coverage equivalent to your net worth.
Keep a tax file: To save time keep an income file in a handy location so as the year progresses you can put all income documentation in the file to be ready for income tax preparation.
Calculate net worth: Make a list of all your assets (what you own) and liabilities (what you owe) as of December 31. The difference is your net worth. Keep this for historical reference. If you are doing a good job saving, paying off debt and getting a good investment returns, you will be amazed at how fast your net worth can increase year over year.
Don’t allow fate to manage your financial planning. Successful financial planning is an ongoing process that requires some diligence and patience, but the benefits include less stress, a better living standard and being able to weather poor financial times.
By: Berry Hyman, MBA
Taxes aretgoing up. The deficit is still rising. Debt is out of control. The government is deadlocked barreling headlong for the “fiscal cliff” of rising taxes and spending cuts. Europe is a mess. And God knows what Ahmadinejad and Netanyahu are going to do. Is it possible, even likely, that one or more of these or other factors could be the catalyst for a “correction” in the prices of global stock markets? You bet. Should we assume the fetal position, go to 100% cash, and wait for these storm clouds to pass? While that’s certainly an option some investors will choose, we remain convinced there is a better way. In fact, we are more convinced than ever that for clients with funds appropriate for long-term time horizons (at least three years), there remain considerable opportunities for superior total return amid the hand-wringing and doom and gloom
Rest assured, we do not have our heads buried in the sand. In fact, our Investment Committee spends time each week discussing how such treacherous “macro” conditions might impact the portfolios we manage. While opinions vary amongst our team members about how certain scenarios may play out, we are united in the belief that owning carefully selected stocks as a core part of our investment portfolios remains highly rational.
Granted the investment industry is full of salespeople with talking points and Letterman-like “Top-Ten” lists of why you should own stocks (usually omitting the reason that doing so keeps their bonuses fat). Just turn on media platforms like CNBC to hear it. Most of these talking points are terrible reasons to blindly own stocks, just to own stocks. This month, I’ll note a few of these before honing in on the single reason we choose to put the stocks we own in client portfolios, even amid such economic uncertainty.
#5 – “Stocks are as cheap relative to bonds as they’ve been in decades!”
Let’s face it, just about anything looks more attractive than a 1.6%-yielding 10-year U.S. Treasury bond which, for buy-and-hold investors, is virtually guaranteed to be a permanent loss of wealth (assuming even modest inflation). That is a reason to avoid many bonds, but not a reason to blindly buy stocks.
#4 – “The stock market trades at only 12x expected earnings!”
Current price-to-earnings is the current price of stocks divided by their current earnings. A relatively low P/E doesn’t tell you about the future earnings of companies. If earnings are unsustainably high, P/E will rise as earnings fall. Current corporate profit margins are at historic highs after years of cutting costs and refinancing debt at record low rates. Additional room for margin improvement from cost-cutting (in aggregate for the market) is limited, so for earnings to continue to rise, revenues must also rise. And if input costs rise, it will put downward pressure on earnings.
Another measure of P/E is called PE10 or Shiller PE. That is the current price divided by the past 10 years’ average earnings. Looking at P/Es this way averages out good and bad years and gives a more “normalized” measure. By this measure, the average of all stocks in the overall US stock market is currently above historic norms. So it is quite possible that if growth remains sluggish and margins contract, passive investors who own “the market” could be in for disappointing returns.
#3 – “Don’t Fight the Fed.”
Our central bank has certainly been transparent in its desire to generate a wealth effect by goosing financial markets higher. It has forced interest rates so low that investors feel they have no alternative than to invest their savings in the “stock market” to generate any semblance of total return. Artificial support for stocks, though, only goes so far. Ultimately fundamentals prevail. To blindly buy stocks on the notion that the Fed has the tools to put a floor on the stock market is putting a lot of faith in a small group of individuals who are becoming increasingly experimental in their policy-making.
#2 – “There is tons of money waiting on the sidelines.”
True, there is plenty of money holed up in CDs and bank accounts eroding in value. This is part fear and distrust of investment markets after the ’07-’08 financial crisis, part demographic changes as retirees need to set aside savings to fund living expenses, and part a reflection of families across the country coping with reduced wages and dimmed job prospects. Some of this cash might find its way into stocks, but the assumption that a significant portion of it will could be nothing more than wishful thinking.
The #1 and only reason FIM Group invests in the stocks we own has nothing to do with their relative cheapness to bonds or how the market is valued versus high current year earnings.
It also has nothing to do with our faith in the Federal Reserve or the idea that we need to “get in” before money sitting on the sidelines will jump in and chase after stocks. We do not blindly invest in the stock market. We do not blindly stick to a fixed allocation of stocks, bonds, cash, gold, real estate, etc.
We invest in the stocks we own because we have conviction in specific companies and believe that investments in these companies will generate significant risk-adjusted returns. We do thorough work determining the intrinsic value of each investment we own, and we buy when we feel the market price is well below this intrinsic value. That said, it is necessary to accept that investors with less conviction and emotional market participants can drive the prices of those investments lower, especially during periods of negative sentiment. But over time, armed with the knowledge of the fundamental value of the businesses we own, we have absolute conviction that when rationality returns, their prices will reward patient investors.
Yes there are headwinds and crosswinds blowing. But uncertainty and emotion create opportunity. It is absolutely essential that investors have their eyes open and their emotions in check. As opposed to investing in “the market” just because it seems there is no alternative, the “Intelligent Investor” as Benjamin Graham said, owns only hand-selected favorable risk-adjusted investments and only when their prices are compelling. It is also critical that the money investors have invested is money they are committed to leave invested for a complete market cycle. Money that cannot be committed for such a period should not be invested despite it being exposed to the erosion of inflation and devaluation.
There is no Spotlight for this issue.