Seven positive articles to email clients

Wednesday, June 15th, 2011

Amidst all of the mar­ket uncertainty, some advi­sors find it help­ful to email arti­cles that pro­vide a gen­er­ally upbeat view of mid term prospects.For exam­ple, a recent cover story on Macleans fea­tured “The case for opti­mism.” Other arti­cles come from the Globe and Mail, National Post and Toronto Star.

Macleans

To view “The case for opti­mism”, March 24 — go to www​.macleans​.ca

Globe and Mail Report on Business

“Bear rally or not, there will be a recov­ery” — March 24, Rob Car­rick When the mar­ket does come back, it’s going to look a lot like it has in the past cou­ple of weeks
<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​3​2​3​.​w​c​a​r​r​i​c​k​0​3​2​4​/​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/>

Tak­ing (Buffett’s) mea­sure of the mar­ket” — March 12, Derek DeCloet
Where is the bot­tom? Even War­ren Buf­fett doesn’t want to guess
<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​3​1​1​.​w​d​e​c​l​o​e​t​0​3​1​2​/​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/>

The art of ignor­ing the pendulum’s swing — March 13, Dan Richards

http://​www​.the​globe​and​mail​.com/​p​a​r​t​n​e​r​s​/​f​r​e​e​/​g​l​o​b​e​i​n​v​e​s​t​o​r​/​i​n​v​e​s​t​m​e​n​t​/​f​e​b​0​9​/​o​n​l​i​n​e​/​p​e​n​d​u​l​u​m​.​h​tml

The pre­ferred approach” — March 27, Rob Car­rick
Banks have lately issued hun­dreds of mil­lions of dol­lars in pre­ferred shares, and investors have been ready buy­ers
<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​3​2​7​.​w​s​t​m​a​i​n​0​3​2​8​/​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/>

“New faith in energy stocks” — March 23, Rob Car­rick
Suncor’s bid for Petro­can might be a sig­nal it is time to dip back into the oil patch
<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​3​2​3​.​w​p​e​t​r​o​c​a​n​C​a​r​r​i​c​k​0​3​2​3​/​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/>

National Post

Mar­ket has changed stripes

Levi Folk, March 26

We now have a mar­ket that wants to rally, and that is a very dif­fer­ent beast from prior months. U. S. stock mar­kets clawed their way back to gains late in the day yes­ter­day, extend­ing the best monthly result for the S&P 500 in nearly two decades. The cat­a­lyst is a string of data sug­gest­ing that a mas­sive inven­tory rebound will take the U. S. econ­omy back from the brink, aided by a flood of cheap financing.

Toronto Star

Fair­fax Con­trar­ian Cashes in Might­ily — March 28, James Dawe http://​www​.thes​tar​.com/​a​r​t​i​c​l​e​/​6​0​9​732

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

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Tags: Decloet, Energy Stocks, Globe And Mail, Late In The Day, Mail Report, Market Uncertainty, New Faith, Oil Patch, Pendulum, Preferred Approach, Preferred Shares, Report On Business, Rob Carrick, Suncor, Swing March, Term Prospects, Theglobeandmail, Toronto Star, Upbeat View, Warren Buffett
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A Q1 Letter to Clients – Two Critical Lessons from Japan

Wednesday, May 11th, 2011

An end of quar­ter let­ter to clients — Invest­ment advice from Mark Twain

Given recent events in Japan and North Africa, 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 note of cau­tion — to be effec­tive, it has to reflect your approach, per­son­al­ity and point of view. Be sure to take the time to cus­tomize the let­ter to your own situation.

April 4, 2011

Two crit­i­cal lessons from Japan

“The only cer­tainty is that noth­ing is certain”

Pliny the Elder

First cen­tury Roman author and naval commander

“It ain’t what you don’t know that gets you into trouble.

It’s what you know for sure that just ain’t so.”

Mark Twain, 1835–1910

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

For this quarter’s let­ter, I have selected quotes writ­ten 1900 years apart to high­light two impor­tant lessons  for investors, made trag­i­cally appar­ent from the recent events in Japan. One is the need to con­struct port­fo­lios that expect the unex­pected and antic­i­pate the unan­tic­i­pated.  And the other relates to avoid­ing one of the costli­est traps that ensnares investors.

Before get­ting into detail on those lessons, here’s a quick recap on the first quarter.

Mar­ket per­for­mance in the first quarter

Mar­kets in Jan­u­ary and Feb­ru­ary reflected a con­tin­u­a­tion of last year’s pos­i­tive sen­ti­ment. This was spurred by solid cor­po­rate prof­its and a broad con­sen­sus that while the global econ­omy might not expe­ri­ence a strong recov­ery going for­ward, it would see growth.

March did begin with an ini­tial set­back . The earth­quake and tsunami in Japan on March 11, which took a dread­ful toll in human lives, clearly reduced short-term prospects for the global econ­omy. The tur­moil in North Africa, while pos­i­tive for oil prices, also had a neg­a­tive impact on mar­kets due to con­cerns about the effect on con­sumer demand. By the end of March, how­ever, pos­i­tive eco­nomic growth reports in the US and Europe allowed most mar­kets to recover their ini­tial losses.

As a result, devel­oped mar­kets gen­er­ally saw gains at the end of the first quar­ter that put them on track for solid per­for­mance in 2011. Below are first quar­ter results for key mar­kets — note that these are in local cur­ren­cies, so that the effect of swings in the Cana­dian dol­lar are not reflected here.

% change (all in local currencies)

Learn­ing to live with uncertainty

If they oper­ate effi­ciently, stock and bond mar­kets incor­po­rate all the avail­able infor­ma­tion at a given point in time. That’s why when sov­er­eign debt prob­lems emerged in Greece early last year, other Euro­pean coun­tries seen as hav­ing poten­tial prob­lems along the same lines saw an imme­di­ate spike in the cost of insur­ing their debt. Even though they hadn’t run into prob­lems yet, the mar­ket fac­tored this pos­si­bil­ity in.

Mar­ket ana­lysts spend many thou­sands of hours each year on these kinds of issues — with enough time and research, slow form­ing prob­lems like gov­ern­ment debt prob­lems can be iden­ti­fied before a cri­sis unfolds.

What can’t be antic­i­pated are devel­op­ments that are by their nature unpre­dictable. We’ve had at least four such events in the past year:

• Last April’s vol­canic erup­tion in Ice­land that spewed ash in the air, shut down 100,000 transat­lantic flights and cost the air­line indus­try $2 billion;
• Also last April, the explo­sion of the Deep­wa­ter Hori­zon oil rig in the Gulf of Mexico;
• Com­menc­ing last Decem­ber, street protests result­ing in changes of lead­er­ship in a num­ber of coun­tries in North Africa, lead­ing directly to the cur­rent war in Libya;
• And of course the earth­quake, tsunami and nuclear-reactor crises in Japan.

In light of episodes like these, investors need to take away two key lessons.

Les­son One: Expect the unexpected

The only way to deal with uncer­tainty and man­age the impact of unfore­seen events is to build strict risk con­trols into port­fo­lios, sim­i­lar to those used by the most sophis­ti­cated pen­sion funds.  While the risk of one time inci­dents can’t be elim­i­nated,  through diver­si­fi­ca­tion and risk man­age­ment we can  limit the dam­age when neg­a­tive events occur — whether they be mas­sive frauds such as Enron, sud­den bank­rupt­cies like Lehman Broth­ers,  vol­canic erup­tions, oil rig explo­sions or earthquakes.

I thought it might be use­ful to pro­vide an overview of my approach to risk man­age­ment in port­fo­lio con­struc­tion. There are three steps in this process.

Step one: Iden­tify tar­get mix

First, we iden­tify the tar­get mix of stocks, bonds and cash that, based on his­tor­i­cal prece­dent and cur­rent val­u­a­tion lev­els, will over time have a high like­li­hood of pro­vid­ing the returns you need to achieve your long term goals with a level of volatil­ity you can live with along the way.

Step two: Diversify

Next we and the money man­agers we work with care­fully diver­sify your port­fo­lio, by plac­ing lim­its on the expo­sure to any one com­pany, indus­try sec­tor or region. For indi­vid­ual hold­ings, it’s typ­i­cally an absolute per­cent­age of your port­fo­lio — so for exam­ple no one stock should make up more than 5% of your equity hold­ings  and no one bond should  rep­re­sent more than 3% of your fixed income exposure.

As well, no mat­ter how opti­mistic we are about an indus­try sec­tor or region, its weight should never be more than 50% above its under­ly­ing impor­tance in the mar­ket as a whole.

Step three: Stay balanced

In the final step, at least once a year we con­duct an in depth analy­sis of each port­fo­lio. Over time, asset classes, indus­try sec­tors and indi­vid­ual stocks that do well will increase their pres­ence in your port­fo­lio and bump up against the risk con­trol limits.

At that point, your port­fo­lios need to be rebal­anced back to the tar­get asset allo­ca­tion and some of the posi­tions that have out­per­formed might be trimmed  to stay within risk con­trol lim­its. Some investors find this very dif­fi­cult — after all you’re sell­ing exactly those invest­ments that have done the best.

But it’s the only way to stay truly diver­si­fied and con­trol the risk that accom­pa­nies over­ex­po­sure to any one stock, indus­try sec­tor or geo­graphic region.  And it’s also the only way to get some pro­tec­tion from things that sim­ply can’t be anticipated.

Les­son Two: Avoid overconfidence

Aside from the time entailed, there is one big neg­a­tive to the risk con­trolled approach to port­fo­lio con­struc­tion — in the short and mid-term, there will always be some­one who’s made a big bet that’s paid off and who is doing bet­ter than you as a result.  Because it elim­i­nates big bets, a risk con­trolled approach to invest­ing will sel­dom give you brag­ging rights on the golf course.

Investors who take the big bet approach typ­i­cally have a high degree of con­fi­dence in their invest­ments; after all, if you’re absolutely cer­tain about a com­pany or indus­try, why bother to diver­sify?  On the other hand, research  by the Uni­ver­sity of Chicago’s Richard Thaler has demon­strated that over­con­fi­dence is among the most costly traits an investor can have.

Think no fur­ther than the Cana­di­ans who stuffed their port­fo­lios with Nor­tel dur­ing the tech boom. At its peak, Nor­tel rep­re­sented 35% of our mar­ket  — and 50% plus of many port­fo­lios. While not nearly as  extreme, a case can be made that as a result of their strong per­for­mance over the past ten years, today many investors have too much of their sav­ings in Canada’s banks, gold, oil and min­ing stocks and Cana­dian stocks as a whole. In fact, many global ana­lysts today iden­tify Canada as one of the most expen­sive stock mar­kets among all the devel­oped countries.

The quote from Mark Twain at the start of this let­ter says it all — what gets us in trou­ble aren’t the things we’ve iden­ti­fied as ques­tion marks and causes for con­cern. Rather, port­fo­lios crater because of the things that we’re absolutely pos­i­tive about — right until unan­tic­i­pated occur­rences catch us by surprise.

We’ve always had unex­pected events and always will — and despite these economies have grown, com­pa­nies have pros­pered and stock mar­kets have gen­er­ated pos­i­tive returns.  The key to ben­e­fit­ing from this long term growth has been to diver­sify so that no sin­gle event can cre­ate per­ma­nent dam­age to  port­fo­lios.  When it comes to long term invest­ing, it’s not only that a slow and steady approach wins the race, but more impor­tantly slow and steady sur­vives to cross the fin­ish line.

I believe that we will work through the recent events also — and that investors with a bal­anced approach and a long term view will be well rewarded.  The approach to risk man­age­ment I’ve described may not be fun or sexy in the short term, but all the evi­dence at hand sug­gests that over time it will serve you well, get­ting you to your goals with the least amount of stress and dis­tress along the way.

At our next meet­ing, I’d be happy to dis­cuss the impact of rebal­anc­ing on long term returns. Should you have any ques­tions  in the mean­time on your port­fo­lio, the con­tents of this note or any other issue, please give me a call — I’d be happy to deal with your ques­tions on the phone or at our next meeting.

As always, thank you for the oppor­tu­nity to work together.

Best regards,

Name of advisor

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Tags: Continuation, Corporate Profits, Critical Lessons, First Quarter, Global Economy, Initial Setback, Investment Advice, March 11, Mark Twain, Market Performance, Naval Commander, North Africa, Pliny The Elder, Portfolios, Quarter Letter, Relevant Quotation, Sentiment, Term Prospects, Tsunami In Japan, Turmoil
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Articles you can send to clients (July 22, 2009)

Wednesday, September 9th, 2009

These days, so much press and much of the con­sen­sus are neg­a­tive tilted and its hard to find some good arti­cles that you could use to pro­vide your clients with food for pos­i­tive thought. Some­times, its not strictly a mat­ter of con­vic­tion, its a mat­ter of keep­ing your clients talk­ing. We found sev­eral arti­cles that were pos­i­tively bal­anced or moti­vated that might rein­force some of your dis­cus­sions about earn­ings, Canada and its com­mod­ity com­plex, and where to go next (?).

First, on the sub­ject of cor­po­rate earn­ings. Three bell­wether stocks from the Cap­i­tal Goods, Pharma, and Chem­i­cals sec­tors may be a clue to an eco­nomic revival.

Sur­pris­ing Prof­its on Cuts Show Steady­ing Econ­omy, Bloomberg, July 21, 2009

July 21 (Bloomberg) — Cater­pil­lar Inc., Merck & Co. and DuPont Co. were among com­pa­nies report­ing earn­ings that beat ana­lysts’ esti­mates by cut­ting jobs while pro­ject­ing ris­ing demand. The sur­prises may sig­nal the reces­sion is near its end.

Sec­ond, an arti­cle about the global impor­tance of Canada’s com­mod­ity com­plex, in par­tic­u­lar, the oil patch to the world’s new con­sumers, like China, whose gov­ern­ment and com­pa­nies have the means to fund acqui­si­tions, pro­vide cap­i­tal for explo­ration and devel­op­ment, and the impe­tus to secure future reserve require­ments. These are excit­ing long term prospects for the Cana­dian resources sector.

Why China has its eye on Canada’s oil patch, Globe and Mail, July 21, 2009

July 21, 2009 — Today there are really three cities that really drive the oil and gas busi­ness. The most impor­tant city is actu­ally Hous­ton: it’s the real No. 1, it’s the cap­i­tal of the U.S. indus­try, and the U.S. indus­try remains today the most impor­tant indus­try in terms of depth of mar­ket, num­ber of com­pa­nies, and num­ber of trans­ac­tions. It is fol­lowed by Lon­don; not by num­ber of com­pa­nies or trans­ac­tions, but just sheer mar­ket size in terms of com­pa­nies doing busi­ness there. The third most impor­tant city would be Cal­gary, but I quickly would say that Cal­gary is … I don’t want to say it’s third of three in a pejo­ra­tive sense because Cal­gary remains a very impor­tant cen­tre in the global picture.

Third, here is an arti­cle which pro­vides a log­i­cal dis­cus­sion for invest­ment selec­tion based on his­tor­i­cal evi­dence of which seg­ments of the mar­ket tend to out­per­form fol­low­ing peri­ods of high or low favour. For exam­ple the author points out that dur­ing the pre­ced­ing period of 2003–2007, emerg­ing mar­kets out­per­formed strongly, and if his­tory is any guide, odds are against the like­li­hood of a con­tin­u­ance of this trend. On the other hand, tech­nol­ogy stocks and large blue-chip and good qual­ity growth stocks with strong bal­ance sheets under­per­formed in the same period and odds are cur­rently favour­ing their out­per­for­mance in the period ahead.

Pick­ing Win­ners in the Next Bull Mar­ket, New York Times

July 18, 2009 — WHICH invest­ments are most likely to per­form best in a bull market?

…James B. Stack, edi­tor of the InvesTech Mar­ket Ana­lyst newslet­ter, notes that the stocks that tend to lose the most in a bear mar­ket are the best per­form­ers in the pre­vi­ous bull mar­ket. “But then, com­ing out of those down­turns, very often you’ll see those same sec­tors regain their lead­er­ship sta­tus,” sim­ply because they fell the most, Mr. Stack said. “The ques­tion is, will that con­tinue? In many cases, it will not.”

Fourth, maybe because of the way that money can mess around with our heads, DIY invest­ing is not such a good idea for the major­ity of investors, and just in case your clients are think­ing of bypass­ing the won­der­ful world of invest­ing advice, this would be a good arti­cle for rein­forc­ing that now is a time when they need you more than ever. I’m assum­ing, of course, that you pro­vide a val­ued ser­vice to them. They do need you, and though this arti­cle does not dis­cuss the impor­tance of hav­ing a good advi­sor, it does dis­cuss the psy­cho­log­i­cal and social impact that money can have on us all. At the very least it will be good, as a reveal­ing piece on some­thing that we all sus­pect, but can’t nec­es­sar­ily admit.

Appar­ently, just count­ing lots of money can reduce sen­si­tiv­ity to social rejec­tion. See, money can be a replace­ment for lousy friends.

How Money Messes With Your Mind, The New York Times, July 20, 2009

July 20, 2009 — Money may have a big­ger psy­cho­log­i­cal impact on us than we real­ize. A new study in the jour­nal Psy­cho­log­i­cal Sci­ence finds that merely think­ing about money can affect how we per­ceive phys­i­cal pain and feel­ings of social rejection.

… Peo­ple who counted the real money also reported feel­ing less pain when their fin­gers were immersed in hot water for 30 sec­onds than those who counted the paper.

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