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Monthly Letter to Our Clients & Friends
Although the rest of America may need a manufacturing revival, mutual fund manufacturing is not in need of help, as the business has been growing continuously for three decades. Because of the sheer number of funds and the amount of investment dollars they control, there is a very high probability that we are buying new positions and selling existing positions to one or more mutual fund companies.
Intrinsic Value from Ben Graham to Anderson Griggs With an example; Emerson Electric (EMR)
Ben Graham may not have been the first to use the term intrinsic value as a form of analysis for stocks and bonds. But, through his teachings and the successful application of this approach by his many students and practitioners (including Warren Buffett, John Templeton, Seth Klarman, Mason Hawkins, Howard Marks and yours truly) he is given the credit. Understanding the concept of intrinsic value is necessary for an intelligent investor. Without understanding intrinsic value, its offspring, margin of safety, has no meaning.
Restoring Trust
Conflicts always exist between clients and managers. Requiring full disclosure is a step in the right direction towards minimizing these conflicts. Rules alone will not be enough to restore trust between you and those of us who considered themselves professional advisers. My suggestion is that all advisers live their life, both professional and personal under an older rule than the current body of laws. That rule is Do unto others as you would have them do unto you.
Benjamin Graham's The Intelligent Investor: Chapter Eight
There are only five pages dedicated to bonds in Chapter Eight. But, these five pages had such major influence on my early years as an advisor. And once again, it is those pages that are sending me a reminder as to why I should not buy bonds today. Given the current interest rates, I would strongly suggest any and all bond investors read these pages. I can assure you that Mr. Buffett has.
Our Five Year S&P 1500 and Sector Forecast
Emotions are and will continue to be the drivers of short-term demand for stocks and bonds. At the individual stock level, we believe we can isolate certain human traits which drive this demand. However, at the broader market levels, we believe that the method to judge emotions is more intuitive than quantitative. In other words, it pays to be somewhat of a contrarian and to try not to become a member of the Buy High/Sell Low Club. History of markets can be a helpful guide to understanding the emotions that have driven previous investor buying decisions after major market declines.
A Tribute to Dr. Irwin Jacobs and Qualcomm
Any business cannot survive without more cash coming into the business than is being spent. For many new companies, especially technology companies, when the cash ran out they would just close the doors. Not for Dr. Jacobs and his fellow owners. When the cash ran out, they chose a different route to stay afloat, one that was contrary to accepted business practices and possibly the most important contribution any company has made in the development of the wireless industry. Their solution was to license all of their patents as a portfolio in return for a royalty payment.
2011 A Year of Low Volatility for the S&P 500
Generals have always formulated strategies and tactics. While these strategies may have been quite effective in the past, many have failed miserably in the present. Daily price swings may be higher than you like, but for an investor with a time frame greater than one day it shouldnt matter to you. You may be considering a risk reduction strategy in your portfolio based on the mistaken belief that markets are more volatile now than in the past. For a long-term investor this action will surely increase your cost and minimize the potential returns that the capital markets can provide you.
What IPOs and Buybacks are Telling Us Today About Tomorrow!
Supply and demand is the basis for technical analysis and for just about every other short-term trading method. The past years volatility of market prices is pretty good evidence on how quickly demand for shares can change. When the call of the day is risk on the market rises. When the call of the day is risk off, the market falls. The rapid change in price also tells us that in the short-term, the supply of shares is fixed. In the long term, the supply of shares will dominate market pricing. Unlike the demand for shares, which can change instantly, supply of shares changes slowly.
The French Influence of our Economy With A Little Common Sense to Boot!
My history lesson is in the form of letters from years past. The first is from Jean Baptiste Colbert, Frances controller-general of finance written in 1664 to King Louis XIV of France outlining his economic policies. King Louis assumed the throne in 1643 at the age of four but he did not assume personal control until 1661. At that time, feudalism still dominated the French economy. King Louis wanting greater wealth for himself and his country and to pacify the public, who were demanding change, embraced the actions of Colbert, making them the economic model for France.
Seeking income from AAA rated Corporations
Earning interest from bonds may seem to be the safe approach to seeking income. But consider this: If you took the same $1,280,683.03 invested in the 5 year Treasury note and instead invested $320,200 (plus or minus a few dollars in each of our AAA rated companies), your dividends would be $38,878. Is the possibility of a dividend cut in the next five years so great that the excess cash from the dividends will not equal the amount of interest earned on the Treasury? As an owner of all four of these companies I believe the potential reward is worth the risk.
Three Great Paragraphs from Peter Lynch
Since the stock market is in some way related to the general economy, one way that people try to outguess the market is to predict inflation and recessions, booms and busts, and the direction of interest rates. True, there is a wonderful correlation between interest rates and the stock market, but who can foretell interest rates with any bankable regularity? There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, theyd all be millionaires by now.
Consumer Confidence and Forward Returns of the S&P 500
The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell, as the most important, yet the most difficult to follow, as it is almost impossible to accurately judge the state of pessimism. However, measuring the current state of pessimism has been made much easier due to The Conference Board, a global independent business membership and research association. The Conference Board releases the Consumer Confidence Index each month, which is based on a probability-design random sample survey conducted by Nielsen.
SAP AG - A European Software Giant Worth Owning
If you want to achieve above average market returns then you cant just invest in an index fund. For those willing to venture out of those index funds there are three principles you should keep in mind: You will have to accept less diversification than the market; You must recognize that short-term speculative trading normally ends with your money in someone elses pocket; You must be willing to take a contrarian stance against the majority of investors. So what would be considered a contrarian play in todays market? Based on the flow of funds out of common stocks, it is common stocks!
Thinking Long-Term
We will never be able to remove all the news that influences our investment decisions, nor should we. What we can do is recognize that rapid trading and market timing may work in the short-term, but has reduced individual returns over the long-term. We can recognize that markets regress to the mean over long periods of time, but that may be much longer than you have or want. Our approach is an attempt to reconcile the two. We are fully aware that at times, stock and bond prices exceed value and at other times they are well below value.
S&P 500 to gain 10.48% by year end: Reuters Poll
According to the poll the S&P 500 index is expected to rise slightly from current levels to 1,250 by year-end, they further state that these expectations are a huge 150-point downgrade from the 1,400 consensus three months ago. We wont question the validity of their poll, results, nor the downgrade in consensus. What we want you to do is look at the results for what they are: a positive for intelligent investors. I hope after a period of thought, intelligent investors will choose as I haveto invest any savings for the long-term by purchasing common stocks of large quality companies.
Point & Counterpoint: Value vs. Growth
The debate over which investment philosophy is best will continue with winners promoting their own style and losers rationalizing their losses. Value vs. Growth. In 1996 the now defunct Mutual Funds Magazine invited me to contribute my thoughts in this ongoing debate in a featured article titled Speaking Out. The case for growth would be argued by John D. Gillespie. Since the debate between Value and Growth has continued to this day I am providing you, word for word, our Point and Counterpoint.
An Increased Cost to Mutual Fund Investors that is Worth Every Penny!
Today mutual funds, including ETFs, control over $13 Trillion for more than 40% of all U.S. households who own their shares. With that much money and so many investors I find it amazing that today, as it was when I first entered this business over thirty years ago, almost no mutual fund investor can tell me how much they are paying in commissions and fees, nor can they name any of the investments their fund has invested in on their behalf, let alone if the fund uses derivatives.
Target Fixation
When it comes to portfolio management, most professionals are forced to practice target fixation with your money. Their target is normally a predefined index of common stocks or bonds and they are rewarded based on their ability to exceed the returns of their target. This target fixation leads to all kinds of problems. Your manager will invariably take on increasing risk knowing that it is one of the few ways he or she can exceed their target. You or your financial advisor tend to use this outperformance as proof of superior management instead of what it really is, just higher risk.
The Common Stock Commandments of Claude N. Rosenberg, Jr.
Through the years of our parents and grandparents markets there were a few voices of reason to help guide them. One of these voices was Claude N. Rosenberg, Jr. whose legacy is kept fresh through RCM, formerly Rosenberg Capital Management, a global asset manager and a company of Allianz Global Investors. Over the years he shared his thoughts with his writings. I have chosen to highlight a few of these ideas that he called his Common Stock Commandments that I consider timeless and can guide you just as he did years ago to your parents and grandparents.
Do You Want Cheap Stocks? Then Take a Look at the S&P 100
For those of you who have been sitting in cash or wanting to add to your portfolio due to the recent market decline placing a few dollars into the S&P 100 at these levels can be accomplished by purchasing an ETF. For those of you who are enterprising investors, then surely you can find a few issues from the bargain list that would meet your needs. The 52 stocks with a P/E of less than 13.3 times earnings include representation in 9 of the 10 major economic sectors of the economy. All are available to build a complete portfolio or increase diversification.
Worried About the Future?
If you are worried about the current economic state of affairs you may be relieved by what research analysts are telling portfolio managers. First, they seem to be in agreement that businesses are doing fine, especially those that have a global market. Second, interest rates will be higher at some point in the future, and the majority of government debt is safe as far as the ability to pay interest on their borrowing. And most importantly, the earnings you should expect from your investments will be driven over time by the ability of companies to pay you with a little left over to reinvest.
A Common Sense approach to Biotech Novartis
A common sense approach to finding a winner in biotech is to own shares of a business that can afford the cost of R&D and have access to the brightest minds in the field. Novartis is one that can meet these requirements. In 2010 Novartis net sales exceeded $50 Billion more than all 37 of the profitable Biomed/Genetic companies combined. Their R&D spend last year exceeded $8 Billion, more than the total market value of all but 7 of the 293. Granted, this is not exclusively spent on biotech research, but what they do spend exceeds the budget of all but a few in the biomed/genetics industry.
Oh what fun the Behavioral Economist Will Have
Dr. Meir Statman, a Finance professor at Santa Clara University, delivered a presentation in may at the 64th CFA Institute Annual Conference held in Edinburgh, Scotland. His presentation was based on his book What Investors Really Want. I have been a fan of Dr. Statmen from the first time I heard him tell a story about investors making the same mistakes over and over again. Here is what Dr. Statman says are the four desires that investors to make major mistakes: to get high returns, to play and win the beat-the-market game, to banish fear, savor hope, and avoid regret and to pay no taxes.
So The Market Stinks ? Just Plug Your Nose and Buy Proctor & Gamble
The road to the creation of wealth in the U.S., the greatest economic power the world has ever seen, has been paved by owning and operating a business many years, not a few weeks. When the majority thinks the market stinks and the gamblers have taken a break from the gaming tables, shrewd business buyers jump at the opportunity to gain ownership interest at an attractive price. One such opportunity today is Proctor and Gamble.
What is conservative about Absolute Return, Market Neutral or Long/Short Mutual Funds?
The machine of Wall Street has convinced many individuals who believe they are prudent, conservative, investors that a mutual fund whose name or objective includes the terms Absolute Return, Market Neutral, Long/Short or hedged, will never lose your money. An individual whose fear of losing again from common stocks just can?t bear sitting on cash and earning a nickel of interest every three months 1k. The desire to increase returns is just too great. Before you fall for the hype there are a few things you should know. The most important item you should remember is that there is no guarantee.
The 5 Profit Seeking Methods
All professionals and individual investors are seeking higher returns. Each will follow one of these methods; Market Trading - your ability to anticipate changes in the market, Focused Trading - your ability to choose a derivative that will do better than the market, Buying Low and Selling High - buy only when the markets have fallen, sell when they are up, Buy and Hold - your belief that the company will prosper long into the future or Buying Bargains - buy when prices are below the "true value". Each method offers the potential to create wealth and each has its own group of believers.
Letters to the Internal Revenue Service
On April 8th our elected representatives reached a compromise to keep our federal government?s doors open. It was hailed a victory, yet we all know that this cutback (39 Billion) does nothing to alleviate the government?s need to borrow $6 Billion every working day. Every decision Congress has made concerning your money, since the beginning of this great country, has been a struggle. None of us enjoy paying taxes, yet we know it is necessary. We have deferred the decision on who will pay and who will receive, to Congress. We can only be thankful that the fight is taking place out in the open.
The Southern Classic IRC, A Reason for Ben Graham to Smile & Can Share Prices Diverge from Value?
The belief that share prices can at times diverge from underlying business value is the driving force behind security analysis as practiced by active investment managers. My example is not to lay out a case to buy or sell shares of IBM. Instead, it is to look at the value the market has placed on IBM over many years and let you decide if the price has diverged from the value of IBM as a business. To be fair, and to honor the many professional investors and students of investing who do not believe in active management, I at least need to give you their beliefs.
Our Five Year S&P 1500 and Sector Forecast
We believe that predicting short term swings in the market is an exercise in humility. Longer-term market predictions have value, but they should be based on a form of valuation methodology of the underlying securities that make up the market of choice. A consideration of the current mood of the market participants should also be included in that short term prices are driven by emotions.
James Tobin?s Advice; Look 'Anywhere insight may be found'
For 99% of all investors in the United States, risk control can be simplified by separating your funds into buckets of ?risk-free? and ?risky? assets. Just remember that ?risk-free? cannot be substituted with investments that are almost risk free. With FDIC Insurance coverage of $250,000.00 per person, and unlimited amounts available from the U.S. Treasury, the ability for most investors to incorporate risk free investments into their portfolios is easily accomplished.
'Good Enough' with Ken Fisher, Marty Whitman and Warren Buffett
It is quite easy for us all to forget that the concepts of ?good enough? and ?cheap enough? have produced such consistent long term returns, at least for those who have had the fortitude to apply this theme. True, it takes training to determine what is good enough and what is cheap enough. But for many of us, our greatest failure is not paying any attention to it at all. In today?s investment world the majority of investors are making their investment decisions based on their general market outlook and their desire to obtain immediate gratification.
Tales of the Bull and Bear Bond Market
The investment advisory business is competing to capture retirement dollars by offering new products that emphasize income. The greatest risk to any retiree is running out of money before they die. Most retirees understand this, so the idea of income for life sounds wonderful. What good is a guaranteed income payment, however, if the payment is not enough to cover the future cost of living? Current interest rates will not allow adequate income from bonds, or protect against the risk of inflation.
Are High-Quality Firms Also High-Quality Investments?
The Standard and Poor's Earnings and Dividend rankings (also known as 'quality rankings') score the financial quality of several thousand U.S. stocks from A+ through D, with data going back to 1956. The better the growth and stability of earnings and dividends, the higher the ranking. A recent study found that low quality dominated high quality in 2009. This has continued into the current year with low-quality continuing to dominate. If this study is accurate, however, then the 'quality cycle' will begin to favor high-quality holdings within a short period of time.
Ten Ways to Improve The Returns on Your Portfolios
On May 25, 2010, Dr. Paul Woolley, former head of the International Monetary Fund's investment and borrowing activities and founder of the UK arm of Grantham, Mayo, van Otterloo, laid out 10 policies that if adopted, could increase annual returns after inflation by 25 percent and long-term returns by at least 50 percent. He addressed his comments to the world's biggest public pension and charitable funds. His 10-point manifesto, however, will work just as well for individuals, offering the same, if not greater, potential return benefits to their portfolios.
The Battle for Investment Survival and Our Five-Year Forecast
The S&P 500 has gained 52 percent since the March 2009 lows. Although this seems extraordinary, the current recovery is still slightly less than average compared to historical bear markets. An average recovery would have the markets appreciate more than 25 percent from this level over the next two years. Meanwhile, the potential return on equities over the next five years is just slightly above the normal returns for U.S. stock markets. All of this, combined with low interest rates, suggests that it would seem logical to remain in common stocks.
Monthly Letter
On Friday the Dow Jones Industrial average lost 3.2 percent. The Standard & Poors 500 lost 3.4 percent, while the Nasdaq composite fell 3.6 percent. The reason for the drop was the monthly job report, as issued by the Labor Department, which indicated that only 41,000 out of 431,000 new jobs were created by the private sector. Of course this report brought with it images of an economy in trouble - that the recovery we've all been hoping for has stalled and the future is bleak. Kendall J. Anderson's response as an investor, and his suggestion to you, is to 'seize the day.'
A Four-Star Manager's Confession
If there is one confession that trumps all others for Anderson Griggs as a company, it is this: They only want to own very important, high quality firms. This may not seem to be a dramatic confession, but in the dog-eat-dog world of asset gathering you need to produce a product that fits nicely into one or more categories so that your relative performance can be measured. In addition, in order to produce relative returns in the short term you must include in the portfolio companies that are the current market darlings, independent of any other criteria.
Will Inflation Reemerge as a Dominant Force?
The current monetary policy of developed nations is to reinvigorate consumer demand through massive monetary stimulus. There is no doubt that this policy will have its intended effect and revitalize the private sector. Increasing demand from the private sector, along with the fiscal demands of new government obligations, however, could easily create a round of inflation where the aggregate demand of government and the private sector will exceed available supply. There is therefore a real possibility that inflation will be higher in the next 10 years relative to the past.
The Trifecta - Okun's Law and Unemployment - Is the Law of Supply & Demand Obsolete?
Okun's law explains the relationship between unemployment and real output, and calculates the gap between real GDP and potential GDP. Based on current GDP growth forecasts, the law predicts a one-half percentage point decline in unemployment this year and a full-point decline in 2011. Despite very positive returns, however, investors continue to allocate to bonds instead of stocks. The laws of supply and demand tell us that this is unwise.
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