A Q1 letter to clients: Bernanke, Buffett and Siegel on the Prospects Ahead

Wednesday, April 4th, 2012

Each quar­ter since 2008, I have posted a tem­plate for a let­ter to serve as a start­ing point for advi­sors look­ing to send clients a sum­mary of what’s hap­pened in the past 90 days; and the out­look for the period ahead.

Advi­sors have told me that they’ve got a great response to these quar­terly let­ters and the tem­plates rank among my most pop­u­lar arti­cles. This let­ter goes into more depth on global growth fore­casts than past tem­plates. If this is more detail than you think your clients will be inter­ested in you can eas­ily delete this section.

Just a reminder that if you’re going to use this let­ter, take the time to cus­tomize it and put it into your own words, so that it truly does rep­re­sent your point of view.

An overview of Q1 2012 mar­kets: Bernanke, Buf­fett and Siegel on the prospects ahead:

The first quar­ter of 2012 rep­re­sented the strongest start for the U.S. stock mar­ket since 1998; with Japan turn­ing in its best first quar­ter gains in 24 years. This was largely dri­ven by a reduc­tion of fears about an extremely neg­a­tive out­come in Europe, as well as stronger eco­nomic data in the U.S.

Of course, there are some for­mi­da­ble issues still to be addressed. This let­ter pro­vides per­spec­tive on some of these issues, and out­lines some thoughts on what we can expect for the bal­ance of 2012 and beyond. As part of that, I have tapped into recent com­ments from Ben Bernanke and War­ren Buf­fett, as well as Chris­tine Lagarde; man­ag­ing direc­tor of the Inter­na­tional Mon­e­tary Fund and the Whar­ton School’s Jeremy Siegel, today’s lead­ing mar­ket historian.

Before get­ting into their views, here’s a sum­mary of mar­ket per­for­mance in the first quar­ter, all in local cur­rency so as to exclude cur­rency fluc­tu­a­tions. Even with strong first quar­ter returns, most mar­kets with the excep­tion of the United States are under­wa­ter over the past 12 months. Its resource expo­sure has meant that Canada has been a par­tic­u­lar lag­gard over the past year.

The IMF’s view: A reduced fore­cast for global growth:

The sin­gle fac­tor that more than any other will drive stock mar­kets over the mid-term is the path of global eco­nomic growth; Europe in par­tic­u­lar remains a ques­tion mark. In early Jan­u­ary, the Inter­na­tional Mon­e­tary Fund reduced its fore­cast for global growth, and pre­dicted that con­ti­nen­tal Europe would see a mild reces­sion in 2012. Here are excerpts from the IMF’s Jan­u­ary fore­cast for eco­nomic growth:

Eco­nomic Growth:

Bernanke & Lagarde: Sign of improve­ment … but efforts must continue:

Since this fore­cast was released in Jan­u­ary, actions by global gov­ern­ments have changed the Euro­pean out­look for the bet­ter. Indeed, it was greater opti­mism about a res­o­lu­tion to Europe’s issues that fueled the first quarter’s strong mar­ket performance.

There is still much work to do, how­ever. March 20^th fea­tured a press con­fer­ence by Chris­tine Lagarde, Man­ag­ing Direc­tor of the Inter­na­tional Mon­e­tary Fund and, for­merly Finance Min­is­ter in France. She painted a more pos­i­tive but still cau­tious pic­ture. Here’s how her remarks began:

“In terms of global eco­nomic out­look, we are cer­tainly not, and I do say not in as bad a sit­u­a­tion as we were only three months ago; and there have clearly been some sig­nif­i­cant improvements.”

“Cou­pled with an uptick com­ing out of the United States of Amer­ica, it gives an over­all pic­ture (for Europe) that is slightly more pos­i­tive than it was three months ago; not to say that all the dif­fi­cul­ties have been cleared. If I have one mes­sage, it’s that the reforms and the efforts under­way in advanced economies have to con­tinue and that the same vig­or­ous rigor has to be applied by Gov­ern­ments in the pro­grams and the efforts that they have undertaken.”

The very next day, Ben Bernanke spoke to the House Com­mit­tee on Over­sight and Gov­ern­ment Reform about the Fed­eral Reserve Board’s views on Europe. He pointed to improve­ment in Europe and focused on three pos­i­tive steps on the con­ti­nent to increase sta­bil­ity. He also dis­cussed favourable results of stress tests of banks in the event of a severe pull­back in the U.S. economy.

But his clos­ing com­ments echoed Chris­tine Lagarde’s note of cau­tion about the need for fur­ther action to address Europe’s struc­tural issues:

“The recent reduc­tion in finan­cial stress in Europe is wel­come given our impor­tant trade link­ages. The sit­u­a­tion how­ever remains dif­fi­cult and it’s crit­i­cal that Euro­pean pol­icy lead­ers fol­low through on their com­mit­ment to achieve a last­ing sta­bi­liza­tion. I believe our Euro­pean coun­ter­parts under­stand the chal­lenges they face and they’re com­mit­ted to take the nec­es­sary steps to address those issues.”

Should you be inter­ested in watch­ing them, here are links to the com­ments from Ben Bernanke (CLICK HERE) and Chris­tine Lagarde (CLICK HERE).

Also, you can CLICK HERE to go to the IMF’s most recent global growth forecast.

From my own point of view, it’s worth not­ing that given Euro­pean issues and a slow­down in China, there is broad con­sen­sus that the next five years will see “2, 6 and 4” growth; an aver­age of 2% in devel­oped coun­tries, and 6% in emerg­ing economies, lead­ing to 4% global growth over­all. It’s this diver­gence in growth between devel­oped and emerg­ing coun­tries that is dri­ving increased focus by multi nation­als on faster grow­ing emerg­ing economies.

War­ren Buf­fett: “America’s best days lie ahead:”

In the face of chal­lenges for devel­oped economies, there is a per­sis­tent view of Amer­ica as an “empire in decline.” This was rein­forced by last year’s down­grade of US debt and by the stale­mate in Con­gress over deal­ing with America’s deficit and debt challenges.

As I look at for­mu­lat­ing rec­om­men­da­tions for my clients, I don’t sub­scribe to the view of a declin­ing Amer­ica. With­out dis­miss­ing its issues, the biggest com­pet­i­tive advan­tage for United States is its vital­ity and capac­ity for change and inno­va­tion. It con­tin­ues to dom­i­nate in high tech, and remains a mag­net for the best and bright­est tal­ent from around the world.

I’m not alone in this view. Here’s an excerpt from War­ren Buffett’s annual let­ter to investors released in Feb­ru­ary:

“In 2011, we will set a new record for cap­i­tal spend­ing, $8 bil­lion and spend all of the $2 bil­lion increase in the United States. Money will always flow toward oppor­tu­nity, and there is an abun­dance of that in Amer­ica. Com­men­ta­tors today often talk of “great uncer­tainty.” But think back, for exam­ple, to Decem­ber 6, 1941, Octo­ber 18, 1987 and Sep­tem­ber 10, 2001. No mat­ter how serene today may be, tomor­row is always uncertain.”

“The prophets of doom have over­looked the all-important fac­tor that is cer­tain: Human poten­tial is far from exhausted, and the Amer­i­can sys­tem for unleash­ing that poten­tial, a sys­tem that has worked won­ders for over two cen­turies; despite fre­quent inter­rup­tions for reces­sions and even Civil War remains alive and effec­tive. We are not natively smarter than we were when our coun­try was founded, nor do we work harder. But look around you and see a world beyond the dreams of any colo­nial cit­i­zen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

You can read War­ren Buffett’s full let­ter to investors HERE.

A long term per­spec­tive on valuations:

While eco­nomic growth enables long term increases in cor­po­rate prof­its as a whole, in the short and mid-term we have to pay a fair value for the com­pa­nies we buy. Any­one who invested at the peak of the U.S. mar­ket val­u­a­tions in 2000 learned a hard les­son about the per­ils of los­ing focus on what we pay for a dol­lar of earnings.

There are few more hotly debated issues on Wall Street than whether today’s mar­ket is over­val­ued, under­val­ued or priced just right. In look­ing at all the avail­able data, my own con­clu­sion is that the mar­ket is roughly fairly valued.

That’s not to say it doesn’t face some speed bumps in the period ahead. But I was inter­ested to see a March 29 inter­view with Jeremy Siegel of the Whar­ton School. Author of Stocks for the Long Run, which exam­ined almost 200 years of mar­ket data, in this inter­view Siegel looks at his­tor­i­cal prece­dent; and sees sig­nif­i­cant upside poten­tial at today’s stock val­u­a­tions. To see his inter­view, CLICK HERE.

What this means for your portfolio:

While all port­fo­lios are cus­tomized to clients’ spe­cific needs, there are three guid­ing prin­ci­ples to the advice that I offer.

1. The first relates to the allo­ca­tion between stocks and bonds, and comes from Ben­jamin Gra­ham; the Colum­bia pro­fes­sor who was War­ren Buffett’s teacher, and who is con­sid­ered the father of value invest­ing. In a recently dis­cov­ered 1963 talk, Gra­ham had this to say on asset allocation:

“In my nearly fifty years of expe­ri­ence on Wall Street, I’ve found that I know less and less about what the stock mar­ket is going to do but I know more and more about what investors ought to do. My sug­ges­tion is that the min­i­mum amount (of the investor’s) port­fo­lio held in com­mon stocks should be 25% and the max­i­mum should be 75%. Con­se­quently the max­i­mum amount held in bonds would be 75% and the min­i­mum 25%; any vari­a­tions should be clearly based on value considerations.”

2. The sec­ond prin­ci­ple relates to, bar­ring a sig­nif­i­cant change in cir­cum­stances, stick­ing within the invest­ment frame­work that we’re decided upon.

Some of you may recall my advice in early 2009, as we faced what appeared to be an end of the world sce­nario and some stocks hit lows they hadn’t seen in 20 years. At that time, I urged clients to main­tain a core level of equity expo­sure. Recently, I have had ques­tions from clients about increas­ing equity weight in port­fo­lios, given low inter­est rate and strong stock per­for­mance in the first quarter.

While I am always happy to dis­cuss this on a case by case basis, given the level of uncer­tainty that still exists, I gen­er­ally advise against increas­ing equity allo­ca­tion from the level that we had going into 2012.

3. The final prin­ci­ple relates to the role of cash flow from invest­ments. In an uncer­tain envi­ron­ment for eco­nomic growth and equity returns, we con­tinue to place pri­or­ity on the cash yield from invest­ments. In my view, the returns on some REITs, cor­po­rate bonds and div­i­dend stocks in selec­tive sec­tors con­tinue to make these attrac­tive rel­a­tive to the avail­able alternatives.

Should you have any ques­tions on any­thing I’ve cov­ered in this note or on any other issue, please feel free to con­tact myself or one of the mem­bers of my team directly. And as always, thank you for the oppor­tu­nity to serve as your finan­cial advisor.

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Tags: 24 Years, Ben Bernanke, Christine Lagarde, Currency Fluctuations, Economic Data, First Quarter, Global Growth, Growth Forecasts, Historian, International Monetary Fund, Jeremy Siegel, Leading Market, Managing Director, Market Performance, Negative Outcome, Outlines, Quarterly Letters, U S Stock Market, Warren Buffett, Wharton School
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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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Tags: Academics, Balanced Perspective, Canadian Investors, Canadians, Conversations, Credible Experts, Global Economies, Happy Camp, Jeremy Siegel, Market Valuations, Meltdown, Party Sources, Perma, Place Strategies, Rrsp Contributions, Stock Markets, Video Interviews, Wall Street Journal, Warren Buffett, Wsj
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Avoiding Credibility Traps

Wednesday, November 9th, 2011

Many advi­sors are actively engaged in dia­logue with clients about the mar­ket ups and downs of the past month.

Part of your con­ver­sa­tion will typ­i­cally focus on putting the decline we’ve seen in his­tor­i­cal con­text — an impor­tant pri­or­ity, since good advi­sors pro­vide per­spec­tive as part of their role. And there’s lots of sta­tis­ti­cal data on the mag­ni­tude, dura­tion and time to recover from past down­turns to help reas­sure investors. Espe­cially for more ana­lyt­i­cal, num­bers dri­ven clients, I’d encour­age you to use the charts and graphs which your firm pro­vides or which are avail­able from sources such as Jeremy Siegel’s Stocks for the Long Run or Ibbotson’s Stocks, Bonds, Bills and Infla­tion year­book.

At the same time, I would cau­tion you against using par­al­lels which clients view as lack­ing bal­ance and which risk under­min­ing your cred­i­bil­ity — any­thing smack­ing even slightly of a “sales pitch” risks posi­tion­ing you as a “sales­per­son” rather than an objec­tive professional.

Here are a cou­ple of exam­ples of poten­tially trou­ble­some tactics.

Every advi­sor (and many clients) have heard the “stocks on sale“analogy — when GAP or Future Shop have a sale, peo­ple stand in line and flock to buy, but when stocks are down 15%, many investors avoid them like the plague.

Here’s the dif­fi­culty with this anal­ogy: A com­mon response from investors is that when Future Shop has a sale, they know what the reg­u­lar price of the item is and that prices will be back to nor­mal the day after the sale ends. They don’t have any such assur­ance when it comes to stocks — and many still bear the scars from Nor­tel and other tech boom dar­lings as proof of that.

Another fre­quently used argu­ment is the dev­as­tat­ing impact of “miss­ing the best days” — whether it be the best 10, 20 or 60 days — as a warn­ing about being out of the market.

When walked through this argu­ment, the typ­i­cal response by investors is “that’s all fine and good, but what’s the impact of miss­ing the WORST sixty days?”.

This is not to say that mes­sages about buy­ing when val­u­a­tions are depressed or stay­ing invested aren’t the right ones — but advi­sors have to be extremely cau­tious about using evi­dence for these mes­sages which con­tra­dicts your image as a source of objec­tive advice. Being seen as even a lit­tle bit self serv­ing or unbal­anced in the coun­sel you pro­vide can plant a seed of doubt in your clients’ minds and under­mine your posi­tion­ing as a trusted pro­fes­sional who puts clients’ needs first.

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Tags: Analogy, Charts And Graphs, Credibility, Darlings, Flock, Future Shop, Historical Context, Jeremy Siegel, Market Ups, Parallels, Plague, Sales Pitch, Salesperson, Scars, Statistical Data, Stocks Bonds, Stocks On Sale, Typical Response, Ups, Ups And Downs
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Guidance from Buffett, Gross and Siegel — An End of Quarter Letter to Clients

Wednesday, July 6th, 2011

Given recent unrest in Europe and uncer­tainty about eco­nomic growth, many clients are look­ing to their advi­sors for direc­tion on what they should do.

This tem­plate for an end of quar­ter let­ter is intended to be a start­ing point for your own let­ter to clients, one that can be a cat­a­lyst for a con­ver­sa­tion about how to posi­tion portfolios.

In the past, I have used quotes from Mark Twain, Win­ston Churchill, Ben­jamin Gra­ham and War­ren Buf­fett to set the tone for these tem­plates. This quarter’s let­ter once again uses a quote from Buf­fett, along with Bill Gross and Jeremy Siegel.

One note of cau­tion — to be effec­tive, this let­ter has to reflect your approach, per­son­al­ity and point of view. Be sure to take the time to cus­tomize the let­ter to incor­po­rate your own views.

July 4, 2011

Buf­fett, Gross and Siegel — Find­ing oppor­tu­ni­ties in today’s mar­ket

“Money will always flow toward oppor­tu­nity and there is an abun­dance of that in Amer­ica .… Human poten­tial is far from exhausted and the Amer­i­can sys­tem for unleash­ing that poten­tial … remains alive and effective.

War­ren Buffett

Berk­shire Hath­away Let­ter to Share­hold­ers, Feb­ru­ary 2011

“In terms of the stock mar­ket, there are amaz­ing oppor­tu­ni­ties … (com­pared to US gov­ern­ment bonds) there’s a huge gap and a huge differential.”

Bill Gross, Morn­ingstar Fixed Income Man­ager of the Decade

CNBC — June 7, 2011

“We’ve almost never seen val­u­a­tions (on the US stock mar­ket) this low when inter­est rates are as low as they are today .… rel­a­tive to bonds today, I’ve almost never seen such com­pelling values.”

Pro­fes­sor Jeremy Siegel, Whar­ton School

Author: Stocks for the long run

Busi­ness News Net­work — June 28, 2011

At the end of each quar­ter, I send clients a let­ter sum­ma­riz­ing events of the past three months … and usu­ally try to find rel­e­vant quo­ta­tions to estab­lish the tone for my note.

Given the recent con­cerns about Euro­pean debt and uncer­tainty about eco­nomic growth, in this quarter’s let­ter I am shar­ing recent per­spec­tives from three of today’s most respected stock mar­ket observers: War­ren Buf­fett; Morn­ingstar fixed income man­ager of the decade Bill Gross; and Whar­ton researcher Jeremy Siegel, con­sid­ered today’s lead­ing stock mar­ket historian.

Before get­ting into their views, here’s a quick recap on the first quarter.

Mar­ket per­for­mance in the first half

Devel­oped mar­kets reg­is­tered solid gains in the first quar­ter, despite the set­back from March’s earth­quake and tsunami in Japan.

The sec­ond quar­ter was a dif­fer­ent story, with con­cerns aris­ing from grow­ing infla­tion threats in emerg­ing mar­kets, sov­er­eign debt wor­ries in Europe and a down­grad­ing of growth fore­casts for the global econ­omy. Below are first half results for key mar­kets — note that these are in local cur­ren­cies, so that the effect of swings in the dol­lar are not reflected here.

War­ren Buf­fett — “Bet­ting on America”

In Novem­ber of 2009, Berk­shire Hath­away spent $26 bil­lion to buy the 77% of rail giant Burling­ton North­ern that it didn’t already own. In inter­views, War­ren Buf­fett referred to this as “bet­ting on Amer­ica.” Buf­fett has been con­sis­tent in his pos­i­tive out­look for the U.S. econ­omy, look­ing past short term events to focus on Amer­i­can inge­nu­ity and resolve and its abil­ity to attract the best and the bright­est from around the world.

Buf­fett is con­sis­tently voted the great­est investor of all time. In the 46 years he’s run Berk­shire Hath­away, annual growth in book value has exceeded 20%, more than twice the gains for the U.S. stock mar­ket index. Even more remark­able, Buffett’s num­bers are after tax, while the index’s gains are pre­tax. And while he lagged in indi­vid­ual years, in his last let­ter to share­hold­ers Buf­fett pointed out that there has never been a five year period where Berk­shire Hath­away under­per­formed the S & P.

To put his record into dol­lar terms, $1000 invested in the Stan­dard & Poors index of US stocks at the start of 1965 would have risen by the end of 2010 to $62,620. By con­trast, that same $1000 under Buffett’s stew­ard­ship would have grown to over $4 million.

Here’s an excerpt from this year’s let­ter to investors, pub­lished in February.

“Last year — in the face of wide­spread pes­simism about our econ­omy — we demon­strated our enthu­si­asm for cap­i­tal invest­ment at Berk­shire by spend­ing $6 bil­lion on prop­erty and equip­ment. Of this amount, $5.4 bil­lion — or 90% of the total — was spent in the United States. Cer­tainly our busi­nesses will expand abroad in the future, but an over­whelm­ing part of their future invest­ments will be at home. In 2011, we will set a new record for cap­i­tal spend­ing — $8 bil­lion — and spend all of the $2 bil­lion increase in the United States.

Money will always flow toward oppor­tu­nity and there is an abun­dance of that in Amer­ica. Com­men­ta­tors often talk of “great uncer­tainty. Through­out my life­time, politi­cians and pun­dits have con­stantly moaned about ter­ri­fy­ing prob­lems fac­ing America.

Yet our cit­i­zens now live an aston­ish­ing six times bet­ter than when I was born. The prophets of doom have over­looked the all-important fac­tor that is cer­tain: Human poten­tial is far from exhausted, and the Amer­i­can sys­tem for unleash­ing that poten­tial — a sys­tem that has worked won­ders for over two cen­turies despite fre­quent inter­rup­tions for reces­sions and even a Civil War — remains alive and effective.”

Here’s a link to War­ren Buffett’s Feb­ru­ary let­ter to share­hold­ers: http://​www​.berk​shire​hath​away​.com/​l​e​t​t​e​r​s​/​2​0​1​0​l​t​r​.​pdf

Bill Gross — “The case for stocks that pay dividends”

My sec­ond expert is some­one who’s not nearly as well known to the invest­ing pub­lic — but is a house­hold name among pro­fes­sional investors.

As man­ager of PIMCO Total Return Fund, the world’s largest bond fund, Bill Gross turned in a track record matched by few oth­ers and was named Morn­ingstar Fixed Income Man­ager of the Decade. In part, this stems from his will­ing­ness to take con­trar­ian views; in 2010, he went on record talk­ing about the “new nor­mal” of lower growth, higher infla­tion and increased risk in hold­ing debt of gov­ern­ments around the world.

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Tags: Benjamin Graham, Berkshire Hathaway, Berkshire Hathaway Letter, Berkshire Hathaway Letter To Shareholders, Bill Gross, Cnbc, Government Bonds, Human Potential, Jeremy Siegel, Letter To Shareholders, Market Money, Morningstar, Professor Jeremy, Quarter Letter, Relevant Quotations, S Market, Us Stock Market, Warren Buffett, Wharton School, Winston Churchill
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Three Articles to Combat Celebrity Bears

Wednesday, June 29th, 2011

Last week’s “Night of the bears” in Toronto drew lots of media coverage.Here are three arti­cles you can send clients that pro­vide per­spec­tive on the celebrity bears — two come for the Globe and Mail, the other fea­tures Pro­fes­sor Jeremy Siegel from Whar­ton in an arti­cle and audio interview.“Celebrity bears all the rage; but we’ve seen fads before”
Bear­ish mantras need to be heard; but with a grain of salt
<http://​www​.the​globe​and​mail​.com/​s​e​r​v​l​e​t​/​s​t​o​r​y​/​R​T​G​A​M​.​2​0​0​9​0​4​1​0​.​w​t​a​k​i​n​g​s​t​o​c​k​0​4​1​1​/​E​m​a​i​l​B​N​S​t​o​r​y​/​r​o​b​C​o​l​u​m​n​s​B​l​o​gs/>

”Bears, bulls and the haz­ards of guru­dom”
Con­sider the pos­si­bil­ity that the bears might miss it when the econ­omy turns
<http://​www​.the​globe​and​mail​.com/​s​e​r​v​l​e​t​/​s​t​o​r​y​/​R​T​G​A​M​.​2​0​0​9​0​4​0​8​.​w​d​e​c​l​o​e​t​0​4​0​9​/​E​m​a​i​l​B​N​S​t​o​r​y​/​S​p​e​c​i​a​l​E​v​e​n​t​s2/>

Jeremy Siegel: ‘Once the Mar­ket Has Fallen 50%, Your Future Returns Are Even Bet­ter’
http://​knowl​edge​.whar​ton​.upenn​.edu/​i​n​d​e​x​.​c​f​m​?​f​a​=​v​i​e​w​f​e​a​t​u​r​e​&​a​m​p​;​i​d​=​2​188
U.S. stocks raised eye­brows this week and last, clos­ing higher in six of seven trad­ing days, includ­ing four in a row from March 10 to 13. But how does the mar­ket look for the longer term? In an inter­view with Knowledge@Wharton, Whar­ton finance pro­fes­sor Jeremy J. Siegel says he was pleased to see con­sec­u­tive gains after so many declines. He adds that his­tory pro­vides lots of evi­dence that stocks remain good long-term invest­ments, espe­cially when they are down 50% from their peak.

Visit http://​knowl​edge​.whar​ton​.upenn​.edu/​i​n​d​e​x​.​c​f​m​?​f​a​=​v​i​e​w​f​e​a​t​u​r​e​&​a​m​p​;​i​d​=​2​188 for the com­plete story.

For more infor­ma­tion, please visit http://​www​.get​keep​clients​.com.

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Tags: All The Rage, Audio Interview, Declines, Eyebrows, Fads, Finance Professor, Future Returns, Globe And Mail, Grain Of Salt, Jeremy J Siegel, Jeremy Siegel, Mantras, Media Coverage, Peak Visit, Professor Jeremy, Servlet, Term Investments, Theglobeandmail, Upenn, Wharton
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Do You Need a Code of Conduct?

Tuesday, October 19th, 2010

Recently, I got an email from an advi­sor ask­ing for sug­ges­tions on how to deal with clients who sold some or all of their port­fo­lio near the 2008-lows.

More specif­i­cally, he wanted to know if it’s worth­while edu­cat­ing these clients of where they would be had they not sold out? Or does he risk fur­ther dam­ag­ing their ego and what remains of the rela­tion­ship?

He also asked for my thoughts on deal­ing with three types of per­son­al­i­ties he has seen emerge among his clients:

1) Almost a per­ma­nent “pes­simism” about the world and mar­kets will crash again (not sure he wants to keep these ones)

2) Acknowl­edge­ment that it was not a good time to sell and con­sid­er­ing re-entry in the mar­kets    (these make him slightly ner­vous since there will be drops in the future)

3) Those who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates.

Clients who sold at the bottom

For clients who bailed out in late 2008 or early 2009, I do think it’s worth approach­ing them about sit­ting down and revis­it­ing where they stand.

The key is to make this con­ver­sa­tion forward-looking, focus­ing on the oppor­tu­ni­ties today – there’s noth­ing to be gained by going back over missed oppor­tu­ni­ties.

So it comes down to mak­ing an assess­ment of today’s val­u­a­tions, clients’ time frames and abil­ity to with­stand mar­ket down­turns – and also the rate of return they need to achieve their goals.

As for clients who are still appre­hen­sive, many investors are spooked by all the neg­a­tive head­lines in the media.

Here you need third party sup­port. On my web­site I have posted arti­cles refer­ring to pos­i­tive com­ments about prospects for the period ahead by War­ren Buf­fett, Steve Ballmer and Jeff Immelt at a con­fer­ence in mid Sep­tem­ber.

And I also have an inter­view with Jeremy Siegel of Whar­ton, con­sid­ered today’s lead­ing stock mar­ket his­to­rian, that I recorded in July - “The case for under­val­ued mar­kets” – that is still rel­e­vant today.

When talk­ing to clients about reen­ter­ing the mar­ket, assum­ing you are mod­estly pos­i­tive in the mid term as I am, you could rec­om­mend phas­ing their shift from cash to equity in over a twelve month period, invest­ing the funds in two or three stages .

This feels less risky and is more com­fort­able for many clients and also sends the pos­i­tive sig­nal that you’re not in a rush to get their money invested and gen­er­at­ing rev­enue for you.

Three trou­ble­some client profiles

For clients who are “almost per­ma­nently pes­simistic” about the world and mar­kets will crash again, I agree that it’s gen­er­ally not pro­duc­tive keep­ing “per­ma­nently  pes­simistic” clients – they’re unlikely to change and will likely sap your own energy with lim­ited return.

For clients who acknowl­edge that it was not a good time to sell and are con­sid­er­ing re-entry in the mar­kets , but make this advi­sor slightly ner­vous since there will be drops in the future, these cases I wouldn’t be as hard on.

Lots of peo­ple (includ­ing advi­sors) got spooked in 2008 and early 2009, it truly did feel like we might be look­ing into the abyss. In these cases, you need to have a can­did con­ver­sa­tion about the cer­tainty of con­tin­ued volatil­ity – and have a dis­cus­sion about their abil­ity to with­stand this.

Finally, for clients who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates, low rates are obvi­ously a huge issue, espe­cially for seniors.

In some of these cases, advi­sors are going to have to broaden their hori­zons, look­ing at mov­ing out on the volatil­ity curve, putting part of client port­fo­lios in solu­tions like invest­ment grade cor­po­rate bond funds, emerg­ing mar­ket bond funds (cur­rently yield­ing 6%), REITs and bank alter­na­tive lend­ing firms.

You obvi­ously need to talk to clients about the greater risk of these alter­na­tives com­pared to Gov­ern­ment bonds – but even if it takes more time to have these con­ver­sa­tions, they’re still going to be essen­tial in many cases.

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Tags: Acknowledgement, Code Of Conduct, Ego, Good Time, Historian, Jeff Immelt, Jeremy Siegel, Low Interest Rates, Lows, Negative Headlines, Pessimism, Prospects, Rate Of Return, Steve Ballmer, Stock Market, Time Frames, Types Of Personalities, Valuations, Warren Buffett, Wharton
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Navigating Post-Financial-Meltdown Reviews

Tuesday, October 19th, 2010

Recently, I got an email from an advi­sor ask­ing for sug­ges­tions on how to deal with clients who sold some or all of their port­fo­lio near the 2008-lows.

More specif­i­cally, he wanted to know if it’s worth­while edu­cat­ing these clients of where they would be had they not sold out? Or does he risk fur­ther dam­ag­ing their ego and what remains of the rela­tion­ship?

He also asked for my thoughts on deal­ing with three types of per­son­al­i­ties he has seen emerge among his clients:

1) Almost a per­ma­nent “pes­simism” about the world and mar­kets will crash again (not sure he wants to keep these ones)

2) Acknowl­edge­ment that it was not a good time to sell and con­sid­er­ing re-entry in the mar­kets    (these make him slightly ner­vous since there will be drops in the future)

3) Those who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates.

Clients who sold at the bottom

For clients who bailed out in late 2008 or early 2009, I do think it’s worth approach­ing them about sit­ting down and revis­it­ing where they stand.

The key is to make this con­ver­sa­tion forward-looking, focus­ing on the oppor­tu­ni­ties today – there’s noth­ing to be gained by going back over missed oppor­tu­ni­ties.

So it comes down to mak­ing an assess­ment of today’s val­u­a­tions, clients’ time frames and abil­ity to with­stand mar­ket down­turns – and also the rate of return they need to achieve their goals.

As for clients who are still appre­hen­sive, many investors are spooked by all the neg­a­tive head­lines in the media.

Here you need third party sup­port. On my web­site I have posted arti­cles refer­ring to pos­i­tive com­ments about prospects for the period ahead by War­ren Buf­fett, Steve Ballmer and Jeff Immelt at a con­fer­ence in mid Sep­tem­ber.

And I also have an inter­view with Jeremy Siegel of Whar­ton, con­sid­ered today’s lead­ing stock mar­ket his­to­rian, that I recorded in July - “The case for under­val­ued mar­kets” – that is still rel­e­vant today.

When talk­ing to clients about reen­ter­ing the mar­ket, assum­ing you are mod­estly pos­i­tive in the mid term as I am, you could rec­om­mend phas­ing their shift from cash to equity in over a twelve month period, invest­ing the funds in two or three stages .

This feels less risky and is more com­fort­able for many clients and also sends the pos­i­tive sig­nal that you’re not in a rush to get their money invested and gen­er­at­ing rev­enue for you.

Three trou­ble­some client profiles

For clients who are “almost per­ma­nently pes­simistic” about the world and mar­kets will crash again, I agree that it’s gen­er­ally not pro­duc­tive keep­ing “per­ma­nently  pes­simistic” clients – they’re unlikely to change and will likely sap your own energy with lim­ited return.

For clients who acknowl­edge that it was not a good time to sell and are con­sid­er­ing re-entry in the mar­kets , but make this advi­sor slightly ner­vous since there will be drops in the future, these cases I wouldn’t be as hard on.

Lots of peo­ple (includ­ing advi­sors) got spooked in 2008 and early 2009, it truly did feel like we might be look­ing into the abyss. In these cases, you need to have a can­did con­ver­sa­tion about the cer­tainty of con­tin­ued volatil­ity – and have a dis­cus­sion about their abil­ity to with­stand this.

Finally, for clients who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates, low rates are obvi­ously a huge issue, espe­cially for seniors.

In some of these cases, advi­sors are going to have to broaden their hori­zons, look­ing at mov­ing out on the volatil­ity curve, putting part of client port­fo­lios in solu­tions like invest­ment grade cor­po­rate bond funds, emerg­ing mar­ket bond funds (cur­rently yield­ing 6%), REITs and bank alter­na­tive lend­ing firms.

You obvi­ously need to talk to clients about the greater risk of these alter­na­tives com­pared to Gov­ern­ment bonds – but even if it takes more time to have these con­ver­sa­tions, they’re still going to be essen­tial in many cases.

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Tags: Acknowledgement, Ego, Financial Meltdown, Good Time, Historian, Jeff Immelt, Jeremy Siegel, Low Interest Rates, Lows, Negative Headlines, Pessimism, Prospects, Rate Of Return, Steve Ballmer, Stock Market, Time Frames, Types Of Personalities, Valuations, Warren Buffett, Wharton
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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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Rebuilding client confidence in stocks

Wednesday, July 21st, 2010

These days, there’s a cloud of uncer­tainty over mar­kets, with ques­tions about eco­nomic growth, gov­ern­ment deficits, the tim­ing and impact of inter­est rates increases, unem­ploy­ment lev­els and the US hous­ing market.

Com­bined with recent mar­ket volatil­ity and dis­ap­point­ing stock returns over the past ten years, it’s no sur­prise that many investors have lost con­fi­dence that stocks will be a good place to be over the mid and long term … espe­cially when they hear respected money man­agers like Bill Gross talk about a “new nor­mal” of slower eco­nomic growth and lower returns on stocks.

The result is that many investors have money earn­ing next to noth­ing in cash. That’s fine if some­one only needs a 1% or 2% return to hit their long term goals — but for many investors, their cur­rent allo­ca­tions mean it will be impos­si­ble to achieve their long term goals.

And it’s in this kind of an envi­ron­ment that advi­sors can bring value, by pro­vid­ing per­spec­tive on both sides of the debate about the value that stocks pro­vide at today’s levels.

Expert views on stock valuations

Today, the the lead­ing pro­po­nents that stocks are cheap and that they’re expen­sive are Wharton’s Jeremy Siegel, author of Stocks for the Long Run and Yale’s Robert Shiller, who wrote Irra­tional Exuberance.

Notably, both went on record in early 2000 to the effect that tech stocks were over­val­ued and at unsus­tain­able lev­els — but since then have diverged on their assess­ments of stock mar­ket valuations.

Ten days ago, I trav­elled to Philadel­phia and New Haven and spent an hour with each of Pro­fes­sors Siegel and Shiller, who coin­ci­den­tally are long-time friends who reg­u­larly vaca­tion together on the Jer­sey Shore.

Our con­ver­sa­tions on mar­ket val­u­a­tions are sum­ma­rized in my col­umn in today’s Globe and Mail, which is at the bot­tom of this email and which can be sent to clients.

The case for stocks as expensive

Robert Shiller looks at cor­po­rate earn­ings adjusted for infla­tion over the past ten years — look­ing back ten years elim­i­nates short term dis­tor­tions in any given year.

Over the past hun­dred and fifty year, stocks have traded at an aver­age mul­ti­ple of six­teen times an aver­age of the past ten year earnings.

Today, stocks trade at around twenty times their aver­age earn­ings. I make the point in my Globe col­umn that while not close to the peak level of forty times his­tor­i­cal earn­ings they hit in 2000, this is still his­tor­i­cally expen­sive — and sug­gests returns in the period ahead below the long term lev­els of 9% before infla­tion and 6% after inflation.

As an aside, In Jan­u­ary I spent 90 min­utes with Shiller over lunch, hav­ing for­tu­itously bumped into him at the Atlanta air­port. At that time, he made the com­ment that even when stocks are at 20 times aver­age ten year earn­ings, investors can still do respectably in the fol­low­ing period.

Today, he is more pes­simistic, as he’s con­cerned that erod­ing con­fi­dence by Amer­i­can con­sumers and busi­ness could lead to a down­ward spi­ral of reduced spend­ing, which in and of itself could trig­ger a dou­ble dip recession.

And he con­cluded our con­ver­sa­tion by say­ing that he’s uncer­tain whether investors will be bet­ter off in stocks or in bonds in the period ahead.

The argu­ment for stocks as cheap

Jeremy Siegel has a very dif­fer­ent take on the value in stocks.

In my Globe col­umn, I note that he uses a dif­fer­ent method to value stocks and reaches a dif­fer­ent con­clu­sion — his analy­sis sug­gests that com­pared to long term aver­ages stocks are under­val­ued by 25% to 30%.

The biggest dif­fer­ence between his approach and Robert Shiller’s is that his is for­ward look­ing, focus­ing on con­sen­sus earn­ings fore­casts for this year and next. Among his crit­i­cisms of Robert Shiller’s method­ol­ogy is that mega-writeoffs such as the $80 bil­lion write­down by AIG will dis­tort the earn­ings base from which back­ward look­ing cal­cu­la­tions are con­ducted for years to come.

Siegel has looked at U.S. stock mar­ket val­u­a­tions over a 200 year period. Dur­ing that time, the aver­age stock mul­ti­ple of earn­ings has been 15 times — that com­pares with a mul­ti­ple of con­sen­sus earn­ings fore­casts of 13 times for this year and 11 times for next year.

The impact of low inter­est rates

Siegel’s aver­age of 15 times earn­ings includes peri­ods of dou­ble digit infla­tion, when mul­ti­ples are typ­i­cally depressed — exclud­ing peri­ods of dou­ble digit infla­tion, the aver­age mul­ti­ple that the mar­ket paid for earn­ings was 17 times.

If earn­ings fore­casts for next year are accu­rate, then return­ing to that long term aver­age of 15 times earn­ings would see stocks increase by 30%, ris­ing to the his­tor­i­cal low infla­tion val­u­a­tion norm would see stocks rise by 50%.

Address­ing the new nor­mal of lower growth

We also dis­cussed some of the argu­ments by Bill Gross at PIMCO and oth­ers about a new nor­mal of slower eco­nomic growth, due to delever­ag­ing, re reg­u­la­tion and a reduc­tion in the pace of globalization.

His response was that these are legit­i­mate con­cerns but that they ignore the impact of inno­va­tion and espe­cially the effect of the internet.

Siegel points to the inter­net as a trans­for­ma­tive tool in accel­er­at­ing the pace of inno­va­tion, as sci­en­tists and researchers around the world are able to work together in real time.

And he went on to say that this will inevitably lead to faster eco­nomic growth.

Com­mu­ni­cat­ing your views to clients

In an indus­try where opin­ion often drowns out rea­son, Robert Shiller and Jeremy Siegel stand out for their care­ful, fact-based approaches.

Which view you and your clients favour will largely depend on your going-in biases — those who are cur­rently neg­a­tive will look to Robert Shiller’s approach, those who are more opti­mistic will side with Jeremy Siegel.

The good news is that these two views lay out clear para­me­ters for the upside and down­side case for stocks — and pro­vide the foun­da­tion for a rea­soned dis­cus­sion about the direc­tion of stocks in the period ahead.

And by shar­ing the argu­ments on both sides of the debate with clients, you posi­tion your­self as some­one who con­sid­ers all the facts before reach­ing con­clu­sions and mak­ing recommendations.

Two routes back into the market

A final com­ment on help­ing clients get back into the mar­ket, if after dis­cussing this you agree that it makes sense to increase their stock allocations.

At that point, you can go in one of two directions.

One is to imme­di­ately move to the tar­get allocation.

The advan­tage of mak­ing the full move now is that clients will ben­e­fit from any run-up in stocks and you won’t have to con­tend with hes­i­ta­tion to com­plete the com­mit­ment in six and twelve months.

The down­side to this approach is that if mar­kets see a short-term set­back, you risk height­ened anx­i­ety from your client and poten­tially los­ing that client entirely.

The alter­na­tive is to phase in that move in stages, with per­haps a third now, a third in six months and the final por­tion in a year.

For many clients this is a more com­fort­able approach than invest­ing the total amount right now.

Fur­ther, by sug­gest­ing that you phase in the com­mit­ment you reduce the risk of clients won­der­ing about whether your advice is influ­enced by the desire to earn higher com­pen­sa­tion from funds that are invested in the mar­ket rather than sit­ting in cash.

To watch two of the inter­views with Jeremy Siegel, click below — note that addi­tional videos are avail­able at www​.cli​entin​sights​.ca

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 to 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

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