Why Buffett is Bullish on Stocks: A Q1 letter to clients

Tuesday, April 2nd, 2013

Why Buf­fett is bull­ish on stocks: A Q1 let­ter to clients

by Dan Richards, Cli​entIn​sights​.ca

Mon­day, April 01, 2013

Since 2008, I have posted tem­plates to serve as a start­ing point for advi­sors look­ing to send clients an overview of the year that just ended and the out­look for the period ahead.Advi­sors have told me they’ve received a great response to these let­ters and the tem­plates rank among my most pop­u­lar arti­cles – that’s espe­cially the case given today’s uncertainty.

This let­ter has three components:

1. An update on per­for­mance
2. Per­spec­tives on today’s macro chal­lenges from War­ren Buffett’s most recent let­ter to investors
3. Your rec­om­men­da­tions for the period aheadUse as much or as lit­tle of the con­tent as is appro­pri­ate for your approach. And a reminder that if you’re going to use this let­ter, cus­tomize it to reflect your own lan­guage and approach.

The first quar­ter in review: Why War­ren Buf­fett is bull­ish on stocks

As we enter the sec­ond quar­ter of 2013, I’m writ­ing to sum­ma­rize mar­kets devel­op­ments since the start of the year and to share my thoughts on posi­tion­ing port­fo­lios for the period ahead. First though, a quick recap of the first quar­ter of 2013.

At the end of March, U.S. stock mar­kets crossed the all-time high reached in Octo­ber of 2007. This was due to an excep­tion­ally strong per­for­mance to start the year fol­low­ing the agree­ment by U.S. Con­gress in early Jan­u­ary to avoid the “fis­cal cliff” that would have required dra­matic reduc­tions in spend­ing and risked throw­ing the U.S. back into recession.

Three things worth not­ing about first quar­ter performance:

1. Dri­ven by a strong start in Jan­u­ary, global mar­kets were up by almost 9% in the first quar­ter, led by gains in the United States of over 10%. One word of cau­tion: Last year global mar­kets were up by 12% in the first three months before giv­ing back almost all of those gains in the sec­ond quar­ter, in large mea­sure due to con­cerns about Europe.

2. On the topic of Europe, in spite of recent head­lines about the bank cri­sis in Cyprus and con­tin­u­ing issues in Greece, the Euro­pean mar­ket was up by 7% (in local cur­rency) in the first three months of 2013. While Cyprus and Greece got the head­lines, the large bulk of Europe’s eco­nomic per­for­mance will con­tinue to be dri­ven by the larger countries.

3. Canada con­tin­ued to under­per­form the United States and global mar­kets. Since the begin­ning of 2010, the Cana­dian mar­ket is up by about 15%; in that same time the United States is up by roughly 50%.Here’s how first quar­ter per­for­mance looked:

Returns to month end, all in local cur­rency, includ­ing dividends

War­ren Buffett’s view: Stocks still offer value

War­ren Buf­fett is gen­er­ally con­sid­ered the great­est investor of all time. From 1966 when he began run­ning Berk­shire Hath­away to the end of 2012, the over­all U.S. stock mar­ket (includ­ing div­i­dends) has returned an aver­age of 9.4% annu­ally. That means that $1000 invested in the US mar­ket in 1966 was worth just over $74,000 at the end of 2012. Dur­ing that same time, the book value of Berk­shire Hath­away increased by almost 20% per year, twice the U.S. mar­ket return. The result: That same $1000 invested in Berk­shire Hathaway’s book value would have grown to over $5 mil­lion. That’s why War­ren Buffett’s views are worth heed­ing. And that’s also why his annual let­ter to investors is awaited each year with such antic­i­pa­tion. Three key mes­sages in this year’s letter:

1. Invest in “won­der­ful” businesses

Buf­fett is known for say­ing that he’d rather buy “a won­der­ful busi­ness at a fair price than a fair busi­ness at a won­der­ful price.”

He’s writ­ten in depth about the com­pet­i­tive insu­la­tion that makes for a great busi­ness. (In another well-known turn of phrase, he’s said that he wants to buy busi­nesses “so won­der­ful that an idiot could run them, because some day an idiot will.”In this year’s let­ter, Buf­fett touched on Berk­shire Hathaway’s invest­ment in Amer­i­can Express (of which he owns just under 14%) as well as Coca-Cola, IBM and Wells Fargo, his other three big hold­ings in which he owns between 6% and 9%. In all four cases, he increased his stake in 2012; he quotes the Mae West line that “too much of a good thing is wonderful.”

2. Look past today’s uncertainty

Buf­fett addressed the uncer­tainty that pre­oc­cu­pies many mem­bers of the media and which has damp­ened the will­ing­ness of Amer­i­can busi­ness to invest. He points out that uncer­tainty has been a con­stant in the United States since 1776; the only vari­able is whether peo­ple ignore the uncer­tainty (which typ­i­cally hap­pens in boom times) or fix­ate on it.Buffett con­tin­ues to express con­fi­dence in the resiliency of Amer­i­can busi­ness, just as he did in his famous New York Times arti­cle in the fall of 2008 titled “Buy Amer­i­can I Am” that appeared close to stock mar­ket bot­toms dur­ing the uncer­tainty in the after­math of the global finan­cial crisis.

3. Stay in the game

In this year’s let­ter, Buf­fett addressed the temp­ta­tion to, in his words “try to dance in and out (of the stock mar­ket) based upon the turn of tarot cards, the pre­dic­tion of so-called experts or the ebb and flow of busi­ness activity.”

He went on to say that since the long-term out­come of invest­ing in stocks is so over­whelm­ingly favourable “the risks of being out of the game are huge com­pared to the risks of being in it.”In an inter­view that fol­lowed the release of his let­ter, Buf­fett reit­er­ated his view that given that at some point inter­est rates will inevitably rise, stocks of qual­ity busi­nesses con­tinue to offer good value rel­a­tive to bonds, even in the face of the run-up in equity prices since last sum­mer. He also repeated his skep­ti­cism about own­ing bonds say­ing that today “the dumb­est invest­ment is a gov­ern­ment bond.”Click here to read War­ren Buffett’s let­ter to investors.And click here to watch a nine-minute excerpt of the tele­vi­sion inter­view that fol­lowed the release of his letter:

What this means for your portfolio

In my email at the end of last year, I out­lined some guid­ing prin­ci­ples in my approach to build­ing client port­fo­lios, three of which I repeat here.

I’d be pleased to dis­cuss these guide­lines at our next meeting.

1. Time to rebalance:

Adher­ing to your planIn light of stock val­u­a­tions and the risk in bonds, early last year we rec­om­mended that clients increase equity weights to the upper end of their range. Given strong stock per­for­mance since the mid-point of last year, that has worked out well and we con­tinue to advise that clients hold their max­i­mum equity weight.

But strong per­for­mance by stocks means that today some clients are above the top of their equity allo­ca­tion. In those cases, we have been rec­om­mend­ing reduc­ing equity weight­ing to bring port­fo­lios back within their guide­lines. Regard­less of what hap­pens to mar­kets in the short term, bar­ring a sig­nif­i­cant change in your cir­cum­stances, you should stick to your invest­ment parameters.

2. Diver­si­fy­ing portfolios

When build­ing equity port­fo­lios, I’ve always advo­cated strong diver­si­fi­ca­tion out­side Canada. This helped my clients through most of the 1990s, then hurt them in the decade after 2000, then helped them again in the past three years.Going for­ward, I have no idea whether the Cana­dian mar­ket will do bet­ter or worse than global mar­kets, but I do know that we rep­re­sent fewer than 5% of invest­ing oppor­tu­ni­ties around the world. In addi­tion, because of our resource focus Canada’s mar­ket will tend to be more volatile over time than those of the U.S. and yes, even Europe. For those rea­sons, I con­tinue to rec­om­mend geo­graphic diver­si­fi­ca­tion of stock portfolios.

3. Focus on div­i­dends and cash flow

The final prin­ci­ple relates to the role of cash flow from invest­ments. Amid the uncer­tainty sur­round­ing eco­nomic growth and equity returns, I con­tinue to place pri­or­ity on the cash yield from invest­ments. While the head­lines talked about US mar­kets hit­ting new highs in March, investors who rein­vested their div­i­dends saw their account val­ues exceed the 2007 peak sig­nif­i­cantly earlier.

Div­i­dends on stocks in selec­tive sec­tors con­tinue to make these stocks attrac­tive. When it comes to equi­ties, we do have to be increas­ingly dis­cern­ing, how­ever; in some tra­di­tional high-dividend sec­tors stocks that pay steady income are expen­sive by his­tor­i­cal stan­dards and show signs of stretched valuations.I hope you found this overview help­ful. Should you have ques­tions about any­thing in this note or about any other issue, please feel free to give me or one of the mem­bers of my team a call.And as always, thank you for the oppor­tu­nity to serve as your finan­cial advisor.

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Tags: All Time High, Caution, Challenges, Congress, Dramatic Reductions, First Quarter, First Three Months, Global Markets, Investors, Performance 2, Perspectives, Portfolios, Quarter Performance, Recession, Reminder, Second Quarter, Stock Markets, Stocks, Uncertainty, Warren Buffett
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Mid-year Client Letter: Wisdom from Three Veterans of 50 Years on Wall Street

Tuesday, July 3rd, 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 an overview of the past 90 days and the out­look for the period ahead. Advi­sors have told me that they’ve received a great response to these quar­terly let­ters and the tem­plates rank among my most pop­u­lar arti­cles – that’s espe­cially the case in uncer­tain times such as we see today.

This quarter’s let­ter has four parts:

1. An update on performance

2. An assess­ment of where we are today

3. Per­spec­tives from leg­endary investors Dan Fuss and Bob Far­rell, each with 50 years of expe­ri­ence on Wall Street, as well as asset allo­ca­tion advice from Ben­jamin Graham

4. Impli­ca­tions for investors and an out­line of your rec­om­men­da­tions for the period ahead

Use as much or as lit­tle of the con­tent as is appro­pri­ate for your approach. I’ve iden­ti­fied two por­tions of the let­ter that could be omit­ted to shorten it. Just a reminder that if you’re going to use this let­ter, be sure to take the time to cus­tomize it and put it into your own words, so that it truly does rep­re­sent your point of view. On a final note, my spe­cial thanks to Tacita Capital’s Michael Nairne for his help in craft­ing this letter.

The first half in review: Wis­dom from three vet­er­ans of 50 years on Wall Street

As we enter July, I’m writ­ing to pro­vide per­spec­tive on what hap­pened in the first half of 2012 and to share my thoughts on how to posi­tion port­fo­lios for the period ahead. To help do that, I have tapped into three long­stand­ing vet­er­ans of Wall Street, one who made his career in stocks, the other in bonds, the third War­ren Buffett’s teacher at Colum­bia who I’ve referred to in past emails.

Before we get into their views, here’s an overview of what’s hap­pened so far this year:

The first half of 2012 was a tale of two quar­ters; the first quar­ter 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 Europe, as well as stronger eco­nomic data in the U.S.

The sec­ond quar­ter gave many of those gains back:

• Mar­kets were dri­ven by esca­lat­ing con­cerns about the future of the Euro­pean cur­rency union and slow­ing global growth, accom­pa­nied by dis­cour­ag­ing data on employ­ment and renewed focus on the cap­i­tal­iza­tion of Europe and some Amer­i­can banks.
• We’ve also seen a slow­down in China and India, putting down­ward pres­sure on the prices of oil and other com­modi­ties and stocks in general.
• There were signs of the Euro­pean sit­u­a­tion sta­bi­liz­ing; after being off 7% in May, mar­kets around the world did recover with a 4% gain in June.

Here’s a sum­mary of mar­ket per­for­mance in the first half of 2012, all in local cur­rency. This under­states returns from invest­ing in the US, as the strong Amer­i­can dol­lar has boosted returns. With its resource expo­sure, Canada has con­tin­ued last year’s pat­tern of being a global laggard.

The dilemma for investors: Dan­ger­ous stocks, unat­trac­tive bond yields

On the sur­face, investors today face a range of unat­trac­tive choices. While stocks appear fairly val­ued by most mea­sures, the sec­ond quar­ter saw volatil­ity well above his­tor­i­cal norms. Hold­ing stocks has always been risky if your time­frame is short but geopo­lit­i­cal uncer­tainty and mar­ket swings make own­ing stocks feel espe­cially dan­ger­ous today.

Note: To shorten this let­ter, you could omit the next two para­graphs in italics.

There is con­sid­er­able debate about whether stocks are expen­sive, cheap or fairly val­ued. Some observers express doubts about the sus­tain­abil­ity of today’s record cor­po­rate profit mar­gins and the endur­ing impact of debt prob­lems and slow growth around the world. US stocks also show up on the pricey side using mod­els such as the val­u­a­tion approach advo­cated by Yale’s Robert Shiller, com­par­ing stock prices to aver­age earn­ings over the past 10 years, adjusted for inflation.

On the other side, a fair num­ber of rep­utable ana­lysts view stocks as his­tor­i­cally cheap, point­ing to attrac­tive ratios of stock prices to book val­ues and mea­sures like mul­ti­ples of earn­ings and cash flows. Indeed, using Robert Shiller’s mul­ti­ple of aver­age ten year earn­ings, Europe is inex­pen­sive by his­tor­i­cal stan­dards. My view: for long term investors, stocks glob­ally today pro­vide fair value.

Bonds pose dif­fer­ent risks; we’re see­ing his­tor­i­cally low inter­est rates, as cen­tral banks around the world keep inter­est rates down to stoke eco­nomic growth. Given cur­rent infla­tion, in nor­mal times we would expect to see inter­est rates about two per­cent higher than today, but of course these aren’t nor­mal times, and of course hold­ing cash to elim­i­nate risk from stocks and bonds vir­tu­ally guar­an­tees depre­ci­a­tion of pur­chas­ing power. For many investors, cash gives them no chance of achiev­ing the returns they need to achieve their long-term goals.

Clearly, every client is dif­fer­ent and every port­fo­lio is dif­fer­ent. That said, even given short-term uncer­tainty in stocks, I am rec­om­mend­ing that clients move to the upper end of the equity allo­ca­tion in their invest­ment pol­icy. That deci­sion is sup­ported by per­spec­tives from two respected invest­ment vet­er­ans with long expe­ri­ence on Wall Street, Dan Fuss and Bob Farrell.

Dan Fuss: Replace mar­ket risk with com­pany risk

Dan Fuss is Vice Chair­man of Boston-based Loomis, Sayles & Co, with over fifty years of fixed income expe­ri­ence, he is one of the most highly regarded bond man­agers of all time. Still actively run­ning money in his mid-seventies, the bond fund he man­ages has over $20 bil­lion in assets and over the past 20 years is a top per­former in its category.

In an April inter­view with Invest­ment News, Fuss made an unusual rec­om­men­da­tion for a bond man­ager – to sell bonds and buy stocks. The rea­son relates to the risk of ris­ing inter­est rates . “We’re in the foothills of a grad­ual rise in inter­est rates,” he said “Once they start to rise, you’re prob­a­bly look­ing at a 20– or 30-year sec­u­lar trend of ris­ing inter­est rates.” He went on to say that when the unem­ploy­ment rate falls to between 6% and 7%, it’s likely that Ben Bernanke and the Fed­eral Reserve Board will alter the pol­icy that has been keep­ing the inter­est rate on the 10-year Trea­sury bill arti­fi­cially low. “Once that hap­pens, you need to get out of the mar­ket risk that’s in fixed-income and into the company-specific risk you can find in stocks,” Fuss said.

Bob Far­rell: 10 Mar­ket Rules to Remember

In the 1950s, Bob Far­rell attended the same Mas­ters pro­gram at Colum­bia as War­ren Buf­fett, study­ing under Ben­jamin Gra­ham, con­sid­ered the father of value invest­ing. In 1957 Far­rell joined Mer­rill Lynch as an ana­lyst and stepped down as Merrill’s Chief Invest­ment Strate­gist in 1992, although he con­tin­ued to pro­vide his per­spec­tives through arti­cles and media interviews.

In 1992, Far­rell penned 10 rules on invest­ing. Two of those ten are par­tic­u­larly per­ti­nent today and give me encour­age­ment about stock returns in the mid and long term period ahead.

If you are look­ing to shorten the let­ter, you could omit Rule 1 below in ital­ics on rever­sion to the mean in and just refer to the sec­ond rule. If you do that, in the last sen­tence above change “Two of those ten are par­tic­u­larly per­ti­nent today and give me encour­age­ment … ” to “One of those ten is par­tic­u­larly per­ti­nent today and gives me encouragement….”

Rule 1: Mar­kets return to the mean over time

“Return­ing to the mean” is another way of say­ing that over time, per­for­mance on stocks will revert to his­tor­i­cal aver­ages. The long-term annual return in the US stock mar­ket going back to 1926 is 9.8% before infla­tion and 6.6% after infla­tion, what’s called the real return. When­ever you have an extended period in which returns exceed the long term aver­age, chances are a period of under­per­for­mance will fol­low, and the oppo­site applies as well; a long period of under­per­for­mance will be fol­lowed by a period of above aver­age returns.

The 1990s saw aver­age real returns of 14.9% annu­ally, the best decade on record. Then rever­sion to the mean kicked in and the fol­low­ing ten years saw an aver­age annual loss after infla­tion of 3.4%. Add the two decades together and you get a real return that’s 1% below the long-term aver­age. In essence, it’s taken the last decade to rec­tify the val­u­a­tion excesses of the pre­vi­ous 10 years – but with that behind us, his­tory (and Bob Farrell’s rule on rever­sion) sug­gest that long-term real returns going for­ward should be closer to the 6.5% average.

Rule 5: The pub­lic buys the most at the top and least at the bottom

Since the finan­cial cri­sis, total assets in U.S. fixed-income funds have more than dou­bled to over $2 tril­lion, up from $1 tril­lion at the start of 2008. At the same time, we’ve seen record out­flows from US equity funds. To me, this is fur­ther indi­ca­tion that pro­vided you have a time­frame of five plus years and can tol­er­ate the kind of volatil­ity we’ve seen of late, invest­ing in a broadly diver­si­fied stock port­fo­lio is likely to serve you well.

Here’s a com­plete list of Bob Farrell’s 10 Mar­ket Rules to Remember.

TEN RULES TO REMEMBER

What this means for your portfolio

In my email at the end of the first quar­ter, I out­lined some guid­ing prin­ci­ples in my approach to build­ing client port­fo­lios which I repeat here:

1. For retired clients, I believe in main­tain­ing secure, liq­uid funds to cover three years of expenses. Hav­ing that buffer means that we reduce the risk of hav­ing to sell hold­ings at depressed lev­els; this also lessens the stress and anx­i­ety for us both.

2. The sec­ond prin­ci­ple relates to the allo­ca­tion between stocks and bonds and comes from my third Wall Street vet­eran, Ben­jamin Gra­ham, the Colum­bia pro­fes­sor I men­tioned ear­lier under whom Bob Far­rell and War­ren Buf­fett stud­ied. In a recently dis­cov­ered 1963 talk, Gra­ham gave this advice:

“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.”

3. Third, regard­less of what hap­pens to mar­kets in the short term, we should adhere to the agreed to invest­ment para­me­ters, bar­ring a sig­nif­i­cant change in circumstances

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. Given strong stock per­for­mance in the first quar­ter. I got ques­tions from some clients about increas­ing equity weight above the max­i­mum bound­ary in port­fo­lios, and in light of con­cerns about Europe, recently I’ve had ques­tions about sell­ing stocks.

While I am always happy to dis­cuss this on a case by case basis, I advise against devi­at­ing from the range that we estab­lished going into 2012. Note that given stock val­u­a­tions and the risk in bonds, for some clients we have recently increased equity weights to the upper end of their range. Of course mar­ket rever­sals from cur­rent lev­els are always pos­si­ble; how­ever, tak­ing a long term view, at cur­rent lev­els there is a strong case for stocks over bonds.

4. When build­ing equity port­fo­lios, I’ve always advo­cated strong diver­si­fi­ca­tion out­side Canada. This helped my clients when Canada under­per­formed in the 1990s and hurt them in the 2000s, when it out­per­formed. Going for­ward, I have no idea whether Canada will do bet­ter or worse than global mar­kets, but do know that we rep­re­sent less than 5% of invest­ing oppor­tu­ni­ties around the world and need to stay geo­graph­i­cally diver­si­fied as a result. For any­one con­cerned about volatil­ity, our con­cen­tra­tion in resources means that invest­ing glob­ally should also lessen extreme swings in port­fo­lio values.

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

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

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Tags: Asset Allocation Advice, Benjamin Graham, Bob Farrell, Bonds, Dan Fuss, First Quarter, Legendary Investors, Perspectives, Point Of View, Portfolios, Quarterly Letters, Quarters, Reminder, Special Thanks, Stocks, U S Stock Market, Uncertain Times, Wall Street, Warren Buffett, Wisdom
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Reduce Your Vulnerability to a Market Downturn

Wednesday, April 4th, 2012

by Stephen Wer­sh­ing, The Client Dri­ven Practice

Is the next mar­ket down­turn your biggest vul­ner­a­bil­ity? It shouldn’t be. Many advi­sors lose clients when the mar­ket declines.  The most suc­cess­ful add clients.  Is the next bear a threat to your prac­tice? If it is, how will you elim­i­nate it?

Jack Stack is rec­og­nized as an out­stand­ing busi­ness strate­gist.  I have great respect for his work, and, not to take any­thing away from his accom­plish­ments or The Great Game of Busi­ness, his secret is not as sim­ple as hav­ing a great vision.  It may be that he does not even excel at the “vision thing.” He man­aged to steer his com­pany through a very chal­leng­ing period, and sub­se­quently spin off 63 other suc­cess­ful com­pa­nies, by focus­ing on its biggest vul­ner­a­bil­ity. As the firm grad­u­ally reduced the threat, he turned his atten­tion to the next biggest.  Sys­tem­at­i­cally mit­i­gat­ing or elim­i­nat­ing the biggest threat to the busi­ness made him one of the most suc­cess­ful lead­ers in business.

Suc­cess­ful advi­sors pro­vide clients valu­able guid­ance and ser­vices beyond invest­ment returns. If the advice you offer does not go much beyond port­fo­lio per­for­mance, it needs to now. You can­not con­trol the direc­tion of the mar­ket, and it would be fool­ish to leave the future of your prac­tice to the fickle direc­tion of stocks. Besides, if your pri­mary value is invest­ment returns, how will you dis­tin­guish your­self from the thou­sands of advi­sors who do exactly the same thing?

When we ask clients “What is the most valu­able thing your advi­sor brings to the rela­tion­ship?” we prac­ti­cally never hear “earns a good return on invest­ment.” Like good cus­tomer ser­vice and trust, it is assumed you will man­age their port­fo­lio com­pe­tently. What they value, remem­ber you for, and ulti­mately refer you for, is some­thing more. Find out what that is, and build your strate­gic plan around it.

Refine your value propo­si­tion and build on what keeps your best clients with you. Learn new skills that enhance what dif­fer­en­ti­ates you from other advi­sors and strength­ens your real value to clients. And do it before another mar­ket down­turn jeop­ar­dizes your relationships!

Copy­right © Stephen Wer­sh­ing, The Client Dri­ven Practice

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Tags: Business Strategist, Direction, Driven Practice, Good Customer Service, Great Game, Great Vision, Guidance, Investment Returns, Jack Stack, Market Downturn, Portfolio Performance, Relationship, Return On Investment, Stocks, Strategic Plan, Successful Companies, Value Proposition, Vision Thing, Vulnerability
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Expert Evidence to Address Fears About Stocks

Wednesday, February 3rd, 2010

Even with the recov­ery in the last nine months of 2009, many clients are still anx­ious about own­ing stocks.

If you’re run­ning into ner­vous clients, you might want to refer to a recent inter­view with Jeremy Siegel, the Whar­ton aca­d­e­mic who’s the lead­ing author­ity on long term asset class returns.

A link to the full inter­view is below.  Among the key points Siegel makes:

• Stocks today are fairly val­ued based on cur­rent earn­ings – and over the next year will likely offer bet­ter returns than bonds and cash
• Why stocks are likely to be sig­nif­i­cantly higher by 2012
• Infla­tion is not going to be a con­cern in the near to mid term
• The rea­son US deficit spend­ing isn’t the biggest cause for con­cern going forward
• Why the last ten years have been so mis­er­able for stocks – and the rea­son that investors can expect after infla­tion returns of 6 to 7% on stocks going forward

Here’s the full arti­cle: http://​knowl​edge​.whar​ton​.upenn​.edu/​a​r​t​i​c​l​e​.​c​f​m​?​a​r​t​i​c​l​e​i​d​=​2​411

And for clients who’d like to watch Jeremy Siegel talk about his views, below are five short video inter­views he did last Sep­tem­ber that you can email to clients.

Stocks for the long run and long term returns http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​s​t​o​c​k​s​-​f​o​r​-​t​h​e​-​l​o​n​g​-​r​u​n​-​a​n​d​-​l​o​n​g​-​t​e​r​m​-​r​e​t​u​r​n​s​/​t​y​p​e​:​i​n​v​e​s​tor

The growth trap and the role of div­i­dends       http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​t​h​e​-​g​r​o​w​t​h​-​t​r​a​p​-​a​n​d​-​t​h​e​-​r​o​l​e​-​o​f​-​d​i​v​i​d​e​n​d​s​/​t​y​p​e​:​i​n​v​e​s​tor

Look­ing back on the past ten years in mar­kets – what went wrong http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​l​o​o​k​i​n​g​-​b​a​c​k​-​o​n​-​t​h​e​-​p​a​s​t​-​t​e​n​-​y​e​a​r​s​-​i​n​-​m​a​r​k​e​t​s​-​w​h​a​t​-​w​e​n​t​-​w​r​o​n​g​/​t​y​p​e​:​i​n​v​e​s​tor

Today’s val­u­a­tion lev­els and mar­ket out­look   http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​t​o​d​a​y​-​s​-​v​a​l​u​a​t​i​o​n​-​l​e​v​e​l​s​-​a​n​d​-​m​a​r​k​e​t​-​o​u​t​l​o​o​k​/​t​y​p​e​:​i​n​v​e​s​tor

The case for inter­na­tional invest­ing       http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​t​h​e​-​c​a​s​e​-​f​o​r​-​i​n​t​e​r​n​a​t​i​o​n​a​l​-​i​n​v​e​s​t​i​n​g​/​t​y​p​e​:​i​n​v​e​s​tor

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Tags: Asset Class, Bonds, Deficit Spending, Dividends, Earnings, Expert Evidence, Fears, Inflation, Jeremy Siegel, Last September, Last Ten Years, Leading Authority, Market Outlook, Nine Months, Stocks, Term Asset, Upenn, Valuation Levels, Video Interviews, Wharton
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A quarter end letter to send clients

Wednesday, October 28th, 2009

Last fall I began post­ing quar­ter end let­ters that advi­sors could adapt for their own use.  Many advi­sors have told me that they have received an out­stand­ing response to the let­ters they sent as a result.

There are five qual­i­ties to an effec­tive client letter.

A good client let­ter needs to be:

1. Sub­stan­tive
2. Candid
3. Backed up by facts
4. Clear and easy to read
5. Tai­lored to each advisor’s per­son­al­ity and views

Below is a tem­plate that you can use as a start­ing point for your own third quar­ter client let­ter – sum­ma­riz­ing where we’ve been, where we are today and the out­look for the period ahead.  Remem­ber, this let­ter is only designed as a start­ing point – be sure to take the time to inject it with your own point of view and personality.

Sep­tem­ber 18, 2009

To my clients

As I write this let­ter, it’s two weeks from the end of the third quar­ter in what con­tin­ues to be a most event­ful year for stock mar­kets and the economy.

It’s also one year since the week­end that shook the foun­da­tions of Wall Street and of the global finan­cial sys­tem – when Lehman Broth­ers col­lapsed, Mer­rill Lynch van­ished as an inde­pen­dent entity and AIG was taken over by the U.S. government.

In light of that, I thought it might be worth­while to briefly sum­ma­rize where we’ve been this year, where we are today and the prospects for the period ahead – and also to high­light some lessons from last year’s finan­cial collapse.

Where we’ve been

Six months ago, in early March, it truly did feel like the world might be com­ing to an end – talk of a return to a Great Depres­sion like econ­omy dom­i­nated radio, tele­vi­sion and news­pa­per. Under­stand­ably, fear was ram­pant – and stocks responded to these night­mar­ish sce­nar­ios by hit­ting the low­est lev­els in years, with finan­cials espe­cially hard hit.

Although no one knew it at the time, that turned out to be the bot­tom. Since then, we’ve seen the econ­omy move back from the precipice – there is a grow­ing con­sen­sus that we’ll return to eco­nomic growth in the sec­ond half of this year. The Econ­o­mist recently ran a cover story dis­cussing the extent to which the eco­nomic recov­ery was led by Asia.

As a result, we’ve had a strong recov­ery in mar­kets – from their bot­tom in the begin­ning of March, stock mar­kets are up 50%, retrac­ing a good por­tion of the losses since last fall.

The sec­ond quar­ter of this year, from March to June, was espe­cially strong – since 1956 the Cana­dian mar­ket has only had three quar­ters that rose more than this one.

In the mean­time, here are six lessons from the last twelve months:

1. We were reminded of just how volatile stocks can be.
2. And of the impor­tance of true diversification.
3. Many investors dis­cov­ered that they’re less com­fort­able with risk and volatil­ity in their port­fo­lio than they had believed.
4. Investors were also reminded of the need to focus on what they can con­trol – under­stand­ing cash needs and think­ing through how much risk they can live with to fund those needs.
5. In some cases, investors began rethink­ing retire­ment plans as a result.
6. Finally, we were reminded that in today’s world, we need to expect the unexpected.

Where we are today

A year ago, the mar­ket was char­ac­ter­ized by ram­pant opti­mism. The Cana­dian mar­ket had hit a new high in June of 2008 and any con­cerns were set aside as minor annoyances.

By con­trast, six months ago the mar­ket was over­whelmed by absolute pes­simism – there was no sign of hope anywhere.

Today, the mar­ket is some­where between those two extremes and many investors can be char­ac­ter­ized as extremely ner­vous.

As a gen­eral rule, I think a cer­tain level of healthy anx­i­ety is pos­i­tive – what gets investors in trou­ble is an excess of either opti­mism or pes­simism. While today’s mood may be erring on the side of being a bit too pes­simistic, I think being cau­tious in the cur­rent mar­ket makes sense … pro­vided that pru­dent cau­tion doesn’t cross the line into pan­icked inertia.

The good news is that there are still excel­lent oppor­tu­ni­ties for investors who are pre­pared for short term volatil­ity. I spend a lot of time lis­ten­ing to the best mar­ket minds and to man­agers who have lived through mul­ti­ple cycles. I am reas­sured that most say that they are still find­ing very good value – not to the extent that they did ear­lier this year, but still well ahead of what they would have seen a year ago.

The out­look going forward

In August, Busi­ness Week ran a cover story called “The case for optimism.”

The premise was sim­ple: Beyond the issues fac­ing the global econ­omy, there are many under­ly­ing pos­i­tives that give cause for opti­mism if we look out two and three years and beyond.

There are things hap­pen­ing under the sur­face that will drive eco­nomic growth … and with that eco­nomic growth will come growth in stock prices. Exam­ples include the pos­i­tive impact of tech­nol­ogy, the recov­er­ing US hous­ing mar­ket, the revi­tal­iza­tion of economies and the incred­i­ble energy from the devel­op­ing world’s edu­cated youth and emerg­ing mid­dle class

Click here to access all the Busi­ness Week sto­ries on The Case for OPTIMISM :

http://​www​.busi​ness​week​.com/​m​a​g​a​z​i​n​e​/​t​o​c​/​0​9​_​3​4​/​B​4​1​4​4​o​p​t​i​m​i​s​m​.​h​t​m​?​c​h​a​n​=​m​a​g​a​z​i​n​e​+​c​h​a​n​n​e​l​_​t​o​p​+​s​t​o​r​ies

And here to view a three minute video with inter­views with CEOs of Dow Corn­ing, East­man Kodak and Intuit.

http://​fee​d​room​.busi​ness​week​.com/​?​f​r​_​s​t​o​r​y​=​3​4​b​1​f​5​a​b​2​1​3​d​4​8​a​1​6​0​a​7​6​7​c​9​c​6​c​5​0​d​0​9​1​f​6​c​c​7a3

Volatil­ity

Let me close by talk­ing about mar­ket volatility.

In 1907, U.S. financier J. Pier­point Mor­gan sin­gle­hand­edly averted a bank­ing panic among U.S. investors.

Later in life, some­one asked him his best guess on the direc­tion of mar­kets. His answer: “They will go up and they will go down.”

One hun­dred years later, that’s still the best answer to some­one look­ing for a short term mar­ket fore­cast. No one can pre­dict mar­ket move­ments in the imme­di­ate period ahead – all we can do is under­stand clearly how much short term volatil­ity we can live with, adjust our port­fo­lios accord­ingly and stay focused on the hori­zon as we deal with the rough waters. No one likes volatil­ity … but for most of us it’s the nec­es­sary price to arrive at our ulti­mate destination.

Direc­tion of portfolios

This needs to be cus­tomized to each advisor

In the mean­time, my team and I are con­stantly look­ing for oppor­tu­ni­ties to realign port­fo­lios to give our clients the best trade­off between risk and return.  Given the cur­rent uncer­tainty and volatil­ity, we are con­tin­u­ing to focus on higher qual­ity com­pa­nies in both stock and bond port­fo­lios and are main­tain­ing a healthy fixed income weight­ing, with par­tic­u­lar empha­sis on qual­ity cor­po­rate issues.

Over the past while, I’ve talked to most clients about their port­fo­lios. If I missed you for some rea­son or you would like to dis­cuss your invest­ments in more detail, I am always delighted to have that conversation.

Thank you for the con­tin­ued oppor­tu­nity to work together – remem­ber, my team and I are always here should you have any ques­tions or wish to talk about any­thing related to your port­fo­lio or your finances.

Name of advisor

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Tags: Aig, Consensus, Financial Collapse, Foundations, Global Financial System, Great Depression, Independent Entity, Lehman Brothers, Merrill Lynch, Personality, Point Of View, Precipice, Prospects, Radio Television, Scenarios, September 18, Six Months, Stock Markets, Stocks, Substantive, Wall Street
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