Template for a mid-year letter

Wednesday, April 18th, 2012

Below is a tem­plate for a mid-year let­ter to go to clients. Please make sure you read the accom­pa­ny­ing post, Guide­lines for An Effec­tive Mid-Year Let­ter.

Please remem­ber that this let­ter is intended as a tem­plate only, be sure to take the time to mod­ify this to reflect your per­sonal views.

June  22, 2009

A mid year note to clients

For many of us, the July 1 Canada Day hol­i­day is the offi­cial begin­ning of summer.

It also marks the half-way point of the year.  Look­ing for­ward, I am cau­tiously opti­mistic -  and want to share some thoughts on why that is, where mar­kets stand today and what we can look for in the period ahead.

Where we are today

If you’d asked fore­cast­ers in early March about prospects for the econ­omy, you’d have heard some very dire pre­dic­tions — this was when the con­ver­sa­tion about the pos­si­bil­ity of a depres­sion or Japan-like lost decade was at its loudest.

While we still face sig­nif­i­cant chal­lenges and there’s no short­age of neg­a­tive fore­casts, it does appear that the worst is behind us:

• Although we are still see­ing some tough news on job losses and cor­po­rate earn­ings, it appears that global economies have gen­er­ally sta­bi­lized and early March was the point of max­i­mum fear and pes­simism. Since the mar­ket bot­tom on March 9, we have seen global mar­kets rise by about 40%
• Con­sumer and busi­ness sen­ti­ment has shown mod­est improve­ment and some impor­tant eco­nomic indi­ca­tors have gone from neg­a­tive to neu­tral and in some cases pos­i­tive.  Much has been made of the so-called “green shoots” point­ing to early signs of recovery.
• While busi­nesses are still cau­tious, access to lend­ing has improved and we are see­ing some pos­i­tive prospects for a resump­tion of eco­nomic growth. The cur­rent fore­cast is for the U.S. to exit its reces­sion in the sec­ond half of this year and for mod­est growth in 2010, fol­lowed by a return to stronger growth in 2011.

Select one of the two arti­cles below to insert here

As an exam­ple of the improv­ing out­look, here’s a June 16 arti­cle from the Wall Street Jour­nal on an upgraded fore­cast for the U.S. econ­omy by the inter­na­tional Mon­e­tary Fund :

WSJ​.com — IMF Upgrades Its View of U.S. Econ­omy*

or

The arti­cle below from the June 19 Globe and Mail, titled “IMF sees eco­nomic slump mod­er­at­ing”, is an exam­ple of the more upbeat think­ing on tim­ing of a U.S. recovery.

http://​www​.the​globe​and​mail​.com/​r​e​p​o​r​t​-​o​n​-​b​u​s​i​n​e​s​s​/​c​r​a​s​h​-​a​n​d​-​r​e​c​o​v​e​r​y​/​i​m​f​-​s​e​e​s​-​e​c​o​n​o​m​i​c​-​s​l​u​m​p​-​m​o​d​e​r​a​t​i​n​g​/​a​r​t​i​c​l​e​1​1​8​8​6​05/

Rea­sons for cau­tion in the near term

In my con­ver­sa­tions with clients over the past while, the num­ber one ques­tion relates to the out­look for the period ahead and what we should be doing in our port­fo­lios as a result.

Hav­ing said that the worst appears to be behind us doesn’t mean we won’t see con­tin­u­ing chal­lenges in the econ­omy and stock mar­kets in the period ahead.

As I said at the out­set, I am in the cat­e­gory of “cau­tiously opti­mistic.”  Here are some of the things that make me cau­tious — note that some of these will be pos­i­tive in the mid and long-term, but are prob­lem­atic in the short-term.

• Amer­i­cans have responded to declines in stock mar­kets and house prices by reduc­ing spend­ing and increas­ing sav­ing. Lower con­sumer debt is pos­i­tive long term but given that the con­sumer accounts for 70% of the U.S. econ­omy this lim­its growth prospects in the near term.
• The U.S. hous­ing mar­ket is still a mess, with 20% of Amer­i­can mort­gages “upside-down” cat­e­gory, where the mort­gage exceeds the value of the house.  House prices do show signs of bot­tom­ing but it will take some time for the hous­ing mar­ket and U.S. gov­ern­ment poli­cies to work through this.
• Many of you have read about “delever­ag­ing” by busi­nesses and finan­cial insti­tu­tions. This is a fancy word for reduc­ing debt — and while decreas­ing debt lev­els will increase sta­bil­ity and reduce pain in a down­turn (a good thing), it will also lead to lower earn­ings than we saw in the past few years.
• Reduced debt will par­tic­u­larly hit the prof­its of many U.S. and Euro­pean banks, which are also elim­i­nat­ing high risk oper­a­tions. While this will result in fewer acci­dents and lower volatil­ity in earn­ings, it also means that some of the sources of wind­fall prof­its from trad­ing and cap­i­tal mar­ket activ­i­ties over the past decade will dis­ap­pear going forward.
• With the global econ­omy still oper­at­ing well below capac­ity, in the near term many com­pa­nies will strug­gle for rev­enue growth and will also be fac­ing pres­sure on mar­gins; this will inevitably hurt profitability.
• Gov­ern­ments are fund­ing their stim­u­lus spend­ing with record issuance of new debt and bud­get deficits. At some point, this will have to be repaid — and also runs the risks of fuelling infla­tion down the road.

Why I’m opti­mistic in the mid-term

While these chal­lenges are real, I believe they are fun­da­men­tally man­age­able and that they are out­weighed by the mid and long-term pos­i­tives. I don’t believe any­one can pre­dict mar­ket move­ments in the short term and so avoid doing so myself — instead I try to focus on prospects for the econ­omy and mar­kets look­ing out eigh­teen months to three years.

When I do that, there are numer­ous rea­sons for optimism:

• The coor­di­nated action by cen­tral banks and gov­ern­ments around the world appears to have sta­bi­lized the econ­omy and pre­vented the pre­cip­i­tous decline that many had feared. We’ve never seen the level of inter­na­tional coop­er­a­tion on the eco­nomic front that exists today.
• Some of the most extreme fears about the global bank­ing sys­tem now appear exag­ger­ated. The stress tests of bank bal­ance sheets in the U.S. gave most banks a clean bill of health and some have started repay­ing the funds they received ear­lier this year (although these stress tests also high­lighted con­tin­ued prob­lems with a few large finan­cial institutions.)
• We’re going to come out of this with a more solid, bet­ter reg­u­lated global finan­cial system.
• The focus on energy self-sufficiency and clean fuels has unleashed a frenzy of entre­pre­neur­ial activ­ity around the world, with break-through tech­nol­ogy being devel­oped by many small and mid-size com­pa­nies. In the past year, For­tune Mag­a­zine has devoted con­sid­er­able space to pro­fil­ing some of these com­pa­nies, here’s a link to an arti­cle on green firms of the future.

6 green tech firms of the future — Green Wom­bat*

• Many of the build­ing blocks that led to opti­mistic fore­casts a year ago are still in place — the impact of tech­nol­ogy on pro­duc­tiv­ity and prof­its, record lev­els of research and devel­op­ment around the world, the emerg­ing mid­dle class in China, India and other devel­op­ing coun­tries, con­tin­ued growth of trade and the global move to open markets.
• Canada’s econ­omy is well posi­tioned for the future, despite the cur­rent issues with the man­u­fac­tur­ing sec­tor and com­mod­ity prices. Our banks and real estate mar­ket never par­tic­i­pated in the excesses seen else­where, our man­u­fac­tur­ing sys­tem is going through the nec­es­sary adjust­ments to com­pete going for­ward (albeit some of these are very painful) and as we see a return to global growth we’re likely to see com­mod­ity prices rise in response.
• Most impor­tant for investors, the bulk of the bad news appears to be fully priced into cur­rent stock val­u­a­tions. Many vet­eran money man­agers with strong track records are iden­ti­fy­ing excel­lent val­ues and a num­ber have said recently that they are able to buy good qual­ity assets at prices well below their real value.

What I’m rec­om­mend­ing today

While the eas­i­est prof­its may be behind us, I still see good oppor­tu­ni­ties in qual­ity stocks with attrac­tive div­i­dends, with strong cov­er­age should prof­its decline. Even after the recent runup, for exam­ple, the div­i­dends on all the Cana­dian bank stocks are well over 4% and the div­i­dend on BCE is over 6%.  The div­i­dends on these stocks not only gen­er­ate good income but also pro­vide a buffer should mar­kets move down.

As well, I like the value in invest­ment grade cor­po­rate bonds and high yield bonds. While the greater volatil­ity in these requires a stronger stom­ach than gov­ern­ment bonds, the gap between the inter­est rates on these and gov­ern­ment  bonds is at his­tor­i­cally high lev­els, even after nar­row­ing over the last while.

Going for­ward, expect con­tin­ued volatil­ity and head­lines that will cause alarm. As a result, I am focus­ing on well known com­pa­nies with strong bal­ance sheets and on build­ing bal­anced, diver­si­fied port­fo­lios — one of the impor­tant lessons from 2008 was the crit­i­cal impor­tance of true diver­si­fi­ca­tion across dif­fer­ent asset classes. I am also mon­i­tor­ing any signs of sig­nif­i­cantly higher infla­tion or a pat­tern of cor­po­rate earn­ings com­ing in below fore­cast, either of which would cause a rethink­ing of our port­fo­lio strategy.

In light of what’s hap­pened in the last year, all investors need to take a hard look at their risk tol­er­ance and finan­cial sit­u­a­tion. I would be happy to sit down to update your finan­cial plan and dis­cuss any changes aris­ing from this process.

In con­clu­sion, I want to express my thanks for your patience and under­stand­ing through what has been an excep­tion­ally dif­fi­cult period. All of us have found our­selves chal­lenged over the past nine months — and I look for­ward to being able to look back on this last while as a once in a life­time test of our dis­ci­pline and resolve.

Best wishes for a relax­ing and rest­ful sum­mer — and remem­ber, should you have any ques­tions what­so­ever, my team and I are here to take your calls.

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Using credible experts to help clients stick to their plans

Wednesday, January 25th, 2012

War­ren Buf­fett has said it only takes two things for investors to suc­ceed — hav­ing a sound plan and stick­ing to it…and it’s the stick­ing to it part where most peo­ple struggle.

Along sim­i­lar lines, the key for advi­sors in help­ing clients suc­ceed is not devel­op­ing the right plan, it’s putting in place strate­gies to help clients stick to the plan once it’s developed.

That’s typ­i­cally not a big prob­lem when peo­ple are mak­ing money and investors feel rewarded for being in markets.

But it’s a huge issue in times like these, when it’s easy for Cana­di­ans to become anx­ious and discouraged…to go to cash with their exist­ing invest­ments and stop mak­ing RRSP contributions.

In light of that, here’s a strat­egy that can help clients main­tain con­fi­dence and stick to their plans.

Pro­vid­ing perspective

In my con­ver­sa­tions with Cana­dian investors, almost all want to deal with advi­sors who are gen­er­ally pos­i­tive but at the same time pro­vide a bal­anced per­spec­tive; so don’t fall into the perma-bull “don’t worry be happy” camp.

That’s why you can’t dis­miss the issues that global economies and stock mar­kets are facing.

And with many clients, you can’t rely on just your own opin­ion or your firm’s research — in times like these, it’s help­ful to pro­vide sup­port from trusted, third party sources.

The lead­ing voices in the val­u­a­tion debate

That’s the rea­son that in early July I con­ducted video inter­views with both Jeremy Siegel and Robert Shiller, the two lead­ing voices on the mar­ket val­u­a­tions, with a view to pre­sent­ing both sides of the argu­ment on mar­ket valuations.

Both Siegel and Shiller are highly cred­i­ble — they each called the tech melt­down and take a fact-based approach to their analysis.

Here’s the link to a March Wall Street Jour­nal front page story that high­lighted these two aca­d­e­mics as the lead­ing voices in the under­val­ued vs. over­val­ued debate: http://​online​.wsj​.com/​a​r​t​i​c​l​e​/​S​B​1​0​0​0​1​4​2​4​0​5​2​7​4​8​7​0​4​7​0​6​3​0​4​5​7​5​1​0​7​4​9​2​6​3​2​5​6​7​8​0​2​.​h​tml

Using the videos with clients

Last week, videos of the inter­views with Siegel and Shiller were posted to the Cli​entin​sights​.ca website.

There are a cou­ple of ways to use these interviews.

One is to email clients the one that sup­ports your point of view.

Alter­na­tively, you might want to send clients not just the one you agree with but both videos — and then talk about the con­trary case that has been presented.

By demon­strat­ing that you’ve looked at the full gamut of views rather than telling just one side of story, your ulti­mate rec­om­men­da­tion has more power.

So if you’re rec­om­mend­ing clients stay fully invested, it’s impor­tant to show clients you’ve exam­ined the neg­a­tive case.

And if you’re cau­tious and rec­om­mend­ing cash, it’s help­ful to demon­strate that you’re not ignor­ing the opti­mistic voices.

Doing this entails a longer, more detailed con­ver­sa­tion — but it’s this kind of con­ver­sa­tion that helps clients stick to their plan at the inevitable time when the mar­ket goes against the stance you’ve taken.

To watch videos of two of the inter­views with Jeremy Siegel, click here:

Why stocks are undervalued

http://​cli​entin​sights​.ca/​v​i​d​e​o​/​j​e​r​e​m​y​-​s​i​e​g​e​l​-​w​h​y​-​s​t​o​c​k​s​-​a​r​e​-​u​n​d​e​r​v​a​l​u​e​d​/​t​y​p​e​:​i​n​v​e​s​tor

Respond­ing on mar­ket concerns:

http://​cli​entin​sights​.ca/​v​i​d​e​o​/​j​e​r​e​m​y​-​s​i​e​g​e​l​-​r​e​s​p​o​n​d​i​n​g​-​t​o​-​m​a​r​k​e​t​-​c​o​n​c​e​r​n​s​/​t​y​p​e​:​i​n​v​e​s​tor

And these inter­views sum­ma­rize Robert Shiller’s views on the market:

A cau­tious out­look for stocks:

http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​r​o​b​e​r​t​-​s​h​i​l​l​e​r​-​a​-​c​a​u​t​i​o​u​s​-​o​u​t​l​o​o​k​-​f​o​r​-​s​t​o​c​k​s​/​t​y​p​e​:​i​n​v​e​s​tor

The impact of con­sumer confidence:

http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​r​o​b​e​r​t​-​s​h​i​l​l​e​r​-​t​h​e​-​i​m​p​a​c​t​-​o​f​-​c​o​n​s​u​m​e​r​-​c​o​n​f​i​d​e​n​c​e​/​t​y​p​e​:​i​n​v​e​s​tor

To watch a dozen dif­fer­ent inter­views with Jeremy Siegel and Robert Shiller, go to www​.cli​entin​sights​.ca.

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Two Compelling Articles to Send Clients

Sunday, September 19th, 2010

“I’m a huge bull on this coun­try … we won’t have a dou­ble dip reces­sion. I see our busi­nesses com­ing back almost across the board.”  .…War­ren Buf­fett, Berk­shire Hathaway

“GE is now find­ing it prof­itable to build man­u­fac­tur­ing and ser­vice cen­ters in the United States rather than over­seas, because it is more com­pet­i­tive to do so.”   … Jeff Immelt, CEO, GE

“I am very enthu­si­as­tic about what the future holds” .… Steve Ballmer, CEO, Microsoft

One of the most impor­tant roles for advi­sors is to be an emo­tional anchor for clients … pre­vent­ing the highs from being too high and the lows from being too low.

Today, many Cana­di­ans are pes­simistic about the U.S. and global economies … dri­ven in large mea­sure by daunt­ing head­lines about slow growth, weak hous­ing prices, high unem­ploy­ment and deficit prob­lems in much of the devel­oped world, as well as polit­i­cal dis­cord in Washington.

This pes­simism is ampli­fied by the media cov­er­age given to voices of gloom such as Nouriel Roubini and David Rosenberg.

Pre­sent­ing an upbeat outlook

That’s why a con­fer­ence that took place just last Mon­day gives advi­sors the chance to pro­vide clients with some off­set­ting per­spec­tive on the mid and long term pos­i­tives for the United States.

Speak­ing on Mon­day Sep­tem­ber 13 to 2000 busi­ness and polit­i­cal lead­ers in Mon­tana, War­ren Buf­fett, Steve Ballmer of Microsoft and GE’s Jeff Immelt talked about good news at their com­pa­nies and a pos­i­tive out­look for the future.

Here are two arti­cles on this con­fer­ence that you can send clients, one from Bloomberg and other from Yahoo News:

http://www.bloomberg.com/news/2010–09-13/buffett-rules-out-double-dip-u-s-recession-says-berkshire-units-growing.html

http://​news​.yahoo​.com/​s​/​a​p​/​2​0​1​0​0​9​1​3​/​a​p​_​o​n​_​b​i​_​g​e​/​u​s​_​e​c​o​n​o​m​y​_​l​e​a​d​ers

And here are some of their comments:

War­ren Buf­fett, Berk­shire Hathaway:

“I’m a huge bull on this coun­try … we won’t have a dou­ble dip reces­sion. I see our busi­nesses com­ing back almost across the board … … it’s night and day from a year ago.”

“I’ve seen sen­ti­ment turn sour in the last three months or so, gen­er­ally in the media. I don’t see that in our busi­nesses … we’re employ­ing more peo­ple than a month ago, two months ago.”

“The things that worked for the coun­try through a cen­tury of two world wars, a depres­sion and more — all while increas­ing the stan­dard of liv­ing — will work again.”

“Banks are lend­ing money again, busi­nesses are hir­ing employ­ees and I expect the econ­omy to come back stronger than ever.”

Steve Ballmer, Microsoft:

“There soon will be more tech­no­log­i­cal advance­ment and inven­tion than there was dur­ing the Inter­net era and that will help drive busi­ness growth.”

“I am very enthu­si­as­tic about what the future holds for our indus­try and what our indus­try will mean for growth in other industries.”

“We will see new tech­nolo­gies that move beyond the Inter­net to tie together com­put­ers, phones, tele­vi­sions and data cen­ters to cre­ate amaz­ing new prod­ucts. And the pace of inno­va­tion will increase as tech­nol­ogy makes work­ers more productive.”

“All areas of sci­ence today are mov­ing for­ward more quickly. The speed of sci­en­tific break­through is accelerating.”

Jeff Immelt, GE:

“Angry polit­i­cal rhetoric is not help­ful and head­lines are too focused on find­ing neg­a­tive indicators.”

“Busi­ness at GE is improv­ing. Signs across the world show growth improv­ing as evi­denced by a rise in GE’s orders.”

“GE is now find­ing it prof­itable to build man­u­fac­tur­ing and ser­vice cen­ters in the United States rather than over­seas, because it is more com­pet­i­tive to do so.”

“The U.S.‘s cen­tral chal­lenge will be to speed growth. We need an increase in exports of man­u­fac­tured goods to help com­pete glob­ally. Expan­sion will be fur­ther bol­stered when smaller busi­nesses and con­sumers regain con­fi­dence in banks and are able to bor­row more.”

“We need peo­ple to be able to feel like they’re going to get loans, the process is going to work and that they under­stand the rules.”

“The U.S. is going to need to adjust, though. The econ­omy since the 1970s has been dri­ven by con­sumer credit and a mis­guided notion in build­ing a “lazy” ser­vice econ­omy. Man­u­fac­tur­ing, with an aim to reduce the trade deficit, is the key.”

“The push for an exclu­sively  service-based econ­omy was just wrong. It was stu­pid. It was insane .The future of the econ­omy has to be as an exporter.”

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Helping Clients Stick to Their Plans

Wednesday, July 28th, 2010

War­ren Buf­fett has said it only takes two things for investors to suc­ceed — hav­ing a sound plan and stick­ing to it … and it’s the stick­ing to it part where most peo­ple struggle.

Along sim­i­lar lines, the key for advi­sors in help­ing clients suc­ceed is not devel­op­ing the right plan, it’s putting in place strate­gies to help clients stick to the plan once it’s developed.

That’s less of an issue when  peo­ple are mak­ing money and investors feel rewarded for being in markets.

But it’s a huge issue in times like these, when it’s easy for Cana­di­ans to become anx­ious and dis­cour­aged … to go to cash with their exist­ing invest­ments and stop mak­ing RRSP contributions.

Here are two tac­tics that might help clients main­tain con­fi­dence and stick to their plans:

Pro­vid­ing perspective

In my con­ver­sa­tions with Cana­dian investors, almost all want to deal with advi­sors who are at the same time gen­er­ally pos­i­tive but also pro­vide a bal­anced per­spec­tive, so don’t fall into the perma-bull  “don’t worry be happy” camp.

That’s why you can’t dis­miss the issues that global economies and stock mar­kets are facing.

And with many clients, you can’t rely on just your own opin­ion or your firm’s research — in times like these, it’s help­ful to pro­vide sup­port from trusted, third party sources.

You also have to be care­ful about only telling one side of the story — in fact by demon­strat­ing that you’ve looked at the full gamut of views, your ulti­mate rec­om­men­da­tion has more power.

So if you’re rec­om­mend­ing clients stay fully invested, it’s impor­tant to show clients you’ve exam­ined the neg­a­tive case.

And if you’re cau­tious and rec­om­mend­ing cash, it’s help­ful to demon­strate that you’re not ignor­ing the opti­mistic voices.

That’s the rea­son that in early July I spoke to both Jeremy Siegel and Robert Shiller, the two lead­ing voices on the mar­ket val­u­a­tions, so that I could present both sides of the argu­ment on mar­ket val­u­a­tions — and so that advi­sors could present both sides to clients.

Both  Siegel and Shiller are highly cred­i­ble — they both called the tech melt­down and take a fact-based approach to their analysis.

And if you’re going to use one of these inter­views with clients to sup­port your case, you might want to send clients not just the one you agree with but both videos — and then talk about the con­trary case that has been presented.

Doing this entails a longer, more detailed con­ver­sa­tion — but it’s this kind of con­ver­sa­tion that helps clients stick to their plan when the mar­ket goes against whichever stance you’ve taken.

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Tags: Balanced Perspective, Canadian Investors, Canadians, Compendium, Confidence, Conversations, Gamut, Global Economies, Happy Camp, Investments, Jeremy Siegel, Market Valuations, Negative Case, Optimistic Voices, Party Sources, Perma, Place Strategies, Rrsp Contributions, Stock Markets, Target, Third Party, Warren Buffett
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