Nov 19 2008
If you had missed the best 90 days of the S&P 500 over a 15 year period (1993-2007) your average annual return would have been a negative 7%. If instead you bought the market and held onto it, that same return would have been greater than 10%.
Nov 13 2008
In light of those who foresee the current bear market bringing about the death of stocks, here are 10 Market Rules to Remember from long time strategist Bob Farrell:
(Photo: azrainman)
1) Markets tend to return to the mean over time.
2) Excesses in one direction will lead to an opposite excess in the other direction.
3) There are no new eras - excesses are never permanent.
4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
5) The public buys the most at the top and the least at the bottom.
6) Fear and greed are stronger than long-term resolve.
7) Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.
8) Bear markets have three stages - sharp down - reflexive rebound - a drawn-out fundamental downtrend.
9) When all the experts and forecasts agree - something else is going to happen.
10) Bull markets are more fun than bear markets.
Hat Tip: Carpe Diem blog
Nov 06 2008
The election is done. Time to focus on the upcoming recovery in the stock market and economy.
Here is what I see happening.
Let’s first look at monetary policy. As seen in the below chart, the Fed is pumping massive amounts of liquidity into the financial system:
After a period of time banks will be saturated with lendable dollars and bankers will start looking for deals. Instead of being incredibly defensive, they will be on the lookout for borrowers. There are a lot of good ideas out there but the owners of these ideas need capital to bring them to market. Growth has been held down by a sharp decline in velocity (the rate at which money changes hands) and fear.
I expect this activity to slowly increase just from the fact that more money is being made available. The problem during the credit meltdown was there were a lot of people with ample collateral but could not get approved for a loan.
So are we close to the market bottom?
Hindsight is the only way to be certain but one indicator that tells me we are nearing a recovery is business inventories. They’re way down because everyone has been holding back thanks partly to the media spreading recession/depression fears for the past year and a half.
This tells me companies will eventually need to start producing more goods. When they do start producing, activity rises as does GDP. I could be wrong but my best guess is that by the spring of next year we will begin to see the visible traces of growth.
Now on to fiscal policy - the taxation and spending that goes on in Washington.
We have an idea of what our President-Elect wants to do but the real issue is what will he do. Fortunately the high level advisors to Obama carry a lot brain power - especially former Fed Chairman Paul Volcker. So I don’t expect anything disastrous to happen, just slower growth (than what a free market would produce) once policies are put in place.
As for the stock market recovery, I think it will be closer to a V shape. Actually, there will be two recoveries - one in the stock market and the other in the economy but we will see the market recovery first.
Here’s why:
Unemployment is a lagging indicator meaning the peak of joblessness is seen after a market bottom has passed. A ramp up in business activity and production will not be seen in current jobless claim reports.
Historically a stock market recovery takes off at least 6 months prior to a recovery in the economy. Expect the economic recovery to be more U shaped as the economy continues to muddle along over the next few months.
I will close this post with the following: My advice to investors over the past several months remains unchanged. The rate at which the Fed is creating money will eventually have some incredibly powerful effects on asset prices. When will this be? Impossible to say but what I am most certain of is that you will either be a net receiver or a net payer. Buyers of tangible assets at today’s prices will find themselves on the receiving end once the market recovery arrives.
Oct 28 2008
Key Quote: ” … over the last quarter century when the Republicans controlled both houses of Congress, the stock market rose by an average of about 20 percent per year. When the Democrats controlled both houses of Congress, the stock market only rose an average annual rate of 6.9 percent for the Dow Jones and a tepid 5.1 percent for the Standard & Poor['s] 500.”
For those of you not familiar with the Cato Institute, they are a leading advocate on promoting the principals of liberty, free markets, and limited government. Cato is the best organization I know of at getting this message out to mainstream America. Here is their website, blog, and Twitter feed.
Oct 20 2008
Billionaire investor Warren Buffett used a guest commentary article in the New York Times on Friday to announce that he’s sticking with stocks.
Buffett, the so-called Oracle of Omaha for his ability to buy up the right companies at the right time for his holding company Berkshire Hathaway (BRK.A), said the worst may not be over for the faltering economy.
“In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary,” Buffett wrote.
But for that reason, the Berkshire CEO said, he has converted his personal portfolio almost entirely to U.S. stocks. Previously, he said he owned nothing but Treasury bonds.
Buffett said the fear surrounding the disastrous credit crisis, which has dropped stocks about 36% from their all-time highs set around this time last year, has left equities with attractive purchasing prices.
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” said Buffett. “And most certainly, fear is now widespread, gripping even seasoned investors.”
Stock prices have been volatile, to say the least. Consider what happened this week alone: The Dow Jones gained 976 points on Monday; fell 76 points on Tuesday; dropped 733 points on Wednesday and then gained 401 points Thursday. But Buffett says the future is much brighter for stocks.
“Fears regarding the long-term prosperity of the nation’s many sound companies make no sense,” wrote Buffett. “Most major companies will be setting new profit records 5, 10 and 20 years from now.”
~ From David Goldman’s recent article at CNNMoney.com.
(Hat tip to Dave Blair)
Oct 16 2008
With the Dow swinging up and down hundreds of points nearly every session, despondency is the feeling of the day. Here is some great insight I think will help investors stay the course.
Oct 08 2008
We are currently in the grip of a temporary deflationary panic but based on the evidence I see from the Federal Reserve and its growth of the money supply, the long term trend is still inflationary and owners of tangible (non dollar-denominated) assets will be the winners at the end of this shakeout. It’s disconcerting to see our portfolio values drop but being a diversified owner is still the best place to be if real world safety is your goal.
Bottom line: I’m a buyer and not a seller. And now is the time to be making financial decisions with your head, not your heart.
Update: A transcript is linked below.
Sep 30 2008
There’s nothing like a deep bear market to get folks talking about a lot of financial nonsense. The rhetoric I’m hearing these days takes me back to October of 1998 and the Long Term Capital fiasco - a hedge fund collapse that came darn close to bringing down the house of cards.
More recently (and more importantly), a group of researchers from Dimensional Fund Advisors reviewed the performance of the S&P 500 from January 1970 to December 2006. The annualized return for that period was 11.1%.
But here is where things get interesting.
When the researchers removed the 25 best performing days of the market over that 36 year period (less than one day per year), that 11.1% return dropped to 7.6%. A HUGE difference!
So what does one learn from all this?
First, tell your friends and family to quit making short-term changes to their investment strategy based on their emotions. They are foolish if they do. Woe onto anyone that thinks otherwise.
And second, ignore the headlines in the financial media and all predictions telling you about the best stocks to own. Here is a great example why:
AIG and Merrill Lynch? Seriously, what were these editors thinking?
It sort of reminds me of that lyric from the Beatles’ “Nowhere Man”:
He’s as blind as he can be/Just sees what he wants to see.
In any case, what you’ve witnessed in the market over the past couple of days is another classic stampede that occurs every so often. Bottom line: Don’t do anything with your finances you will one day regret. Although easier said than done, I know.
But the fact remains that throughout human history, there have been numerous financial disasters far worse than anything we are experiencing today. Millions of people prospered shortly after those times simply by remaining diversified in the market and not following the crowd. I cannot find a reason why you and I should not do the same.
Stay tuned, I will do my best to help you come out on the profit end of this unique and opportunistic environment.
Sep 19 2008
Be sure to tune in to our radio show each week for more discussion.
Have thoughts or questions? Leave them in the comment field below.
Related Articles:
###
Aron Huddleston talks with WOWT in Omaha about what investors should be focusing on in today’s market environment:
Video used with permission of WOWT
Update: The transcript to Roland’s video can be viewed by clicking the link below.
Sep 15 2008
The below article was written by my colleague Dave Blair and published in our client newsletter this past summer. In light of public perception, it deserves a second look:
As the markets continue to stumble along driven by fear and emotion, some people have asked if they should be getting out of the market to “protect their investment.” Note that these are not clients asking the question, our clients already know the answer.
Short term volatility is the price we pay for long term success in building wealth.
You can see this chart in Roland’s new book, Manarin On Money.
Over time equity ownership positions have moved up and down but have always trended up. Like a yo-yo climbing a flight of stairs.
Market timing requires two perfect decisions, whereas, staying invested in quality, professionally managed stock mutual funds requires only one decision. Nobody makes two perfect decisions all of the time.
