My life on the run
May 14, 2012What Every Investor Should Know Series
October 6, 2010A relatively calm first quarter
April 5, 2010“I have no idea what the stock market will do next month or six months from now. I do know that, over a period of time, the American economy will do very well and investors who own a piece of it will do well.” Warren Buffet in an interview on CNBC on Friday, October 10, 2008
After the market roller coaster of 2008 and 2009, the first quarter of 2010 has been blessedly uneventful by comparison. The US markets gained about 5% in the first quarter, the best start to the year since 1998 – the US market ended up about 60% from its lows of a year ago. Singapore is more muted, up about 1.5% in the first quarter. That said, there is still a cloud of uncertainty that is making many investors nervous. Causes for concern … and for optimism Even with the stabilization of the global economy, there’s no shortage of short term causes of concern: … continued questions on the direction and timing of the economic recovery in the United States and Europe and the timing of higher interest rates … US housing prices that are staying stubbornly low and unemployment levels in North America and Europe that are stubbornly high. … and in late March the deputy director of the International Monetary Fund made headlines as he talked about the need for advanced economies to cut spending in order to reduce deficits. Here’s a New York Times article about the IMF’s views:
http://www.nytimes.com/2010/03/22/business/global/22imf.html?scp=1&sq=lipsky%20imf&st=cse
The good news is that there are offsetting positives, even if the media headlines that feature them aren’t quite as prominent: … on Monday March 22, the Wall Street Journal ran a story about dividend hikes as a result of rising profits by US companies. The article also mentioned that cash on hand on US corporate balance sheets was at the highest level since 2007. … on the same day the Financial Times ran a similar story about dividend increases in Europe … and there’s growing attention to the impact that Germany’s emphasis on manufacturing productivity had in sheltering it from the worst of the economic downturn – and questions about whether this might be a model for other countries. In March the Economist ran a 14 page feature on how Germany positioned itself for success. Today’s Business times contain the headline ‘Pretty clear’ US recession has ended” BT 5 April 2010.
Forecasting the future Whether you choose to focus on the positives or the negatives, there’s broad agreement that the steps taken by governments stabilized the financial crisis that we were facing a year ago – and there is almost no talk today of a global depression. So the issue is not whether the economy will recover, but when and at what rate -and whether there might be another stumble along the way. If you look for investing advice in the newspaper or on television, the discussion tends to revolve around what stocks will do well in the immediate period ahead … this week, this month, this quarter. We refuse to participate in that speculation – when it comes to short-term predictions, whether about the economy or the stock market, there’s one thing we can say with virtual certainty: Most of them will be wrong. Quite simply, no one has a consistent track record of successfully forecasting short term movements in the economy and markets. Which is why in uncertain times such as today, one of the people I look to for guidance is Warren Buffett.
Advice from Warren Buffett
In an investment industry poll a couple of years ago, Warren Buffett was voted the greatest investor of all time; among the runners up were Peter Lynch, John Templeton and George Soros. Buffett’s returns are a testimony to the power of compounding. From 1965 to the end of 2009, the growth in book value of his investments averaged 20% annually. As a result, $10,000 invested in 1965 would currently be worth a remarkable $40 million. By contrast, that same $10,000 invested in the US stock market as a whole, returning just over 9% during this period, would be worth $540,000.
In one of his annual letters to shareholders, Warren Buffett wrote that it only takes two things to invest successfully – having a sound plan and sticking to it. He went on to say that of these two, it’s the “sticking to it” part that investors struggle with the most. The quote at the top of the letter, made at the height of the financial crisis, speaks to Buffett’s discipline on this issue. I try to apply that approach as well – putting a plan in place for each client that will meet their long term needs and modifying it as circumstances warrant, without walking away from the plan itself. Boom times such as we saw in the late 90′s and scary conditions such as we’ve seen in the past two years can make that difficult – but those conditions can also represent opportunity. Indeed, in his most recent letter to shareholders Buffett wrote that “a climate of fear is an investor’s best friend.”
Five core principles that shape our approach
On balance, I share Warren Buffett’s mid term positive outlook, not least because many of the positives that drove market optimism two years ago are still in place, among these the continued emergence of a global middle class in developing countries like Brazil, China, India and Turkey. This educated middle class will fuel global growth that will make us all better off. In the meantime, here are five fundamental principles that we look for in money managers and that drive the portfolios that we believe will serve clients well in the period ahead.
1. Concentrate on quality
The record bounce in stock prices over the past year was led by companies with the weakest credit ratings. Some have referred to last year as a “junk rally”, with the lowest quality companies doing the best. That’s unlikely to continue- that’s why I’m focusing my portfolios on only the highest quality companies, those best able to withstand the inevitable ups and downs in the economy.
2. Look to dividends
Historically, dividends made up 40% of the total returns of investing in stocks and have also helped provide stability through market turbulence. Two years ago, quality companies paying good dividends were hard to find – one piece of good news is that today it’s possible to build a portfolio of good quality companies paying dividends of 3% and above.
3. Focus on valuations
Having a strong price discipline on buying and selling stocks is paramount to success – history shows that the key to a successful investment is ensuring that the purchase price is a fair one. Investors who bought market leaders Cisco Systems, Intel and Microsoft ten years ago are still down down 40% to 70%, not because these aren’t great companies but because the price paid was too high.
4. Build in a buffer
Given that we have to expect continued volatility, we identify cash flow needs for the next three years for every client and ensure these are set aside in safe investments. That buffer protects clients from short term volatility and reduces stress along the way.
5. Stick to your plan
In the face of economic and market uncertainty, another key to success is having a diversified plan appropriate to your risk tolerance – and then sticking to it. It can be hard to ignore the short-term distractions, but ultimately that’s the only way to achieve your long term goals with a manageable amount of stress along the way.
In closing, let me express my thanks for the continued opportunity to work together. Should you ever have any questions or if there’s anything you’d like to talk about, my team and I are always pleased to take your call.
If you’re interested, here’s a link to Warren Buffett’s 2010 letter to investors:
What Money Can’t Buy?
March 25, 2010In a book, Money and the Meaning of life: Spiritual Search in a Material World (Bantam Doubleday Dell, 1991), Jacob Needleman affirms what you’ve always felt and yet still manages to surprise you. He asks the question, “What’s the one thing money can’t buy?”
Happiness? Good health? Love?
While these answer are true sometimes, they are not universal. Money can buy the experiences that let happiness and even love rise in us. Often, good health is relativeto money. For example, if two people ha the exact same illness, who do you think is more likely getting the better care? The patient with money.
So what is the one thing money can’t buy?
Opportunities in a climate of fear
March 2, 2010In Saturday’s annual letter to investors, Warren Buffett wrote that “a climate of fear is investors’ best friend”.
Buffett’s returns are a great example of the power of compounding. For the 45 years from 1965 to 2009, his letter shows that Buffett’s growth in book value averaged 20.3% vs the S & P 500 return of 9.3%. As a result, $1000 invested in the US market at the beginning of 1965 would be worth $54,000; $1000 in Berkshire Hathaway’s book value would have grown to over $4 million. Of note, buried in the letter is the fact that the S & P returns are pre-tax, while Buffett’s returns are after-tax, which makes his performance all the more remarkable.
Stocks for the long run
January 10, 2010Today’s post features a short video with Jeremy Siegel of the Wharton School in Philadelphia,
talking about the reasons that stocks are still the number one performing asset class in the long run.
This is particularly relevant given the number of investors questioning the risk of owning stocks and whether stocks make sense going forward.
Siegel is the leading authority on long term returns in different asset classes and author of “Stocks for the Long Run”, consistently ranked among the top ten all time most influential books on investing.
In this video, Siegel summarizes his research on long term returns in stocks – you can view that interview here:
Looking Back..and Looking Forward
January 8, 20102009 was one of those years that reminded us what a roller coaster the stock market can be – and also of the dangers of conventional thinking.
After the collapse in global financial markets last fall and the resulting pummelling taken by stock markets around the world, the consensus in January was that the worst was behind us. That was a sharp reminder of the danger of conventional thinking – by early March, markets in Asia had declined by a further 15% and the U.S. was down by 25%. At that point, the consensus shifted and there was growing sentiment that we might be entering a long period of economic stagnation; that’s when we heard respected economic forecasters talk about a one in five chance of another depression. It was precisely at this point that the coordinated stimulus spending by governments around the world finally had an impact and we began seeing signs of an economic recovery. From the market’s bottom on March 9 to the end of November, global markets were up by 50% to 65%.
Thus, 2009 was a sharp reminder that it’s impossible to predict short term market movements.
Instead we need to focus on two key questions:
1. First, what do the prospects for economic and profit growth look like in the mid term – 12 to 18 months and beyond?
2. Second, to what extent are these prospects for growth accurately reflected in today’s prices of stocks and bonds?
Mid term prospects for growth
In building portfolios, we have to start with some core assumptions about the environment we’ll be in going forward. Noted British historian Paul Johnson has written that at every given point in time, you can always point to good news and bad news – the only difference is the balance between the two and what the media pays attention to.
In early 2000 (at the height of the tech bubble) and the beginning of 2008 (at the top of the real estate and finance bubble), all we read about was good news – almost no attention was paid to any offsetting concerns. By contrast, during market bottoms at the end of 2003 and early 2009, all we saw was the bad news – it’s as if there were no positives on the horizon. Despite the recovery in the global economy and markets since the early part of this year, the general sentiment and confidence level among many people today is quite negative. Much of that is driven by concerns about the U.S. economy – still the engine of global growth.
And certainly there are lots of things to worry about in the U.S. – stubbornly high unemployment, a housing market that is still depressed (although no longer in decline) and Government deficits.
Without dismissing the short term challenges facing the US, it’s important not to lose sight of some important underlying positives.
In an August cover story on “ The case for optimism” Business Week Magazine highlighted a number of reasons to be positive, among them the impact of technology and free markets in emerging economies.
Click here to read more about what Business Week had to say:
And recently two respected columnists at the New York Times, Thomas Friedman and David Brooks, weighed in on both the positives in the U.S. and some of the challenges that America faces.
http://www.nytimes.com/2009/11/22/opinion/22friedman.html
http://www.nytimes.com/2009/11/17/opinion/17brooks.html
The bottom line is: In the mid term I believe the positives outweigh the negatives and that the dire predictions about America’s decline are overstated. It may not see the rapid growth we’ve seen in the past but it will see solid growth.
Today’s valuation levels
Being right on our midterm outlook for the economy only helps us if we buy stocks and bonds at attractive prices.
With regard to bonds, at current interest rates of about 3% it is hard to make a case for Government bonds as anything except a safe harbour against more market disruption.
The returns on corporate bonds are more interesting – especially toward the bottom of the investment grade category, which currently yield about 6%. Note that we do have to be very selective here, since companies with low investment grade ratings are susceptible to shocks and downgrades should the economy run into difficulty.
On the issue of valuation levels of stocks, there are lots of academics who have made a career of studying markets. Of these, I follow two in particular – Jeremy Siegel at the Wharton School at the University of Pennsylvania and Robert Shiller at Yale. Between them, they forecast both the technology and the U.S. real estate bubbles.
Robert Shiller believes stocks should be valued based on their average earnings over the past ten years, using what he calls the Cyclically Adujsted Price Earnings ratio (CAPE for short). Employing that measure, at the end of November Shiller calculates the U.S. market’s multiple is 19.5 x times average earnings for the past ten years, within the normal historical range (although at the high end of that range.)
Prior to 2008, you have to go back to 1992 to find the last time we saw this multiple consistently below twenty times average ten year earnings. Throughout the period from 1997 to 2001, this multiple was in the thirties and forties – when the multiple was in its forties, you were paying twice as much for a dollar of earnings as you are today.
Jeremy Siegel is the best known researcher on long term returns in the stock market and author of Stocks for the Long Run, often cited as one of the all-time ten most influential books on investing. Among his claims to fame is an article in the Wall Street Journal at the peak of the tech mania in early 2000, predicting that sector’s collapse.
In September, Siegel did two interviews on long term returns and current valuations, in which he talked about his research and his opinion that stocks offered good value at the time. You can see those interviews below:
Professor Jeremy Siegel on today’s market outlook:
Professor Jeremy Siegel on long term stock returns:
The bottom line from these two experts: While stocks are not as cheap as they were in March, by historical standards they do offer reasonable value.
While we can expect continued volatility in 2010, we do believe that returns on stocks in the period ahead will be in line with historical levels.
The right approach for your portfolio
While my team and I spend a great deal of time focusing on the big picture, the most important issue is how we adapt that view to each client’s individual portfolio.
For older clients, we have always been believers in maintaining conservative, balanced portfolios – that stance protected our retired clients from the worst of the decline in 2008 and early this year. Today, we are focusing on higher quality stocks, as we believe that these will provide the best risk return tradeoff going forward.
In summary, we are cautiously optimistic about the American and the global economy’s ability to work through some of the current issues they face – and believe that valuations on stocks will make quality stocks an attractive investment in the mid term.
We look forward to continuing to work with you in 2010 to ensure you have the portfolio that is right for you – and thank you again for the opportunity to work with you over the past while.
As always, my team and I area always available to talk about any questions that you might have.
In the meantime, best wishes for a relaxing holiday season – I look forward to talking in 2010.
Retirements are always paid for – one way or the other
October 21, 2009I would like to start today’s post with an incident that happen in my office back in 2003.
I remember this extremely cold December morning when I came into the office at 7am to clear my paperwork. The office was extremely cold due to the default air-conditioning provided by the building management. I thought I was the only one in the office at this hour but I was wrong.
Just like the CSI movie that you watch on TV but minus the orchestra music, I saw a body lying on the corridor. Fortunately, it wasn’t a dead body, it was my office cleaning lady and she wasn’t dead yet. I went over and help her up and offered her a sip of water. She mentioned that she fainted a while ago. I offered to call the ambulance but she insisted that there was no need. We chatted a little for the next 15 minutes; she thanked me profusely. I watched as this almost 70 year-old lady recomposed herself and went about her routine of clearing the waste paper baskets in the office. I learnt through the conversation that her husband had died some years back, but he never accumulated anything. Her only child gaves her a monthly allowance that was hardly enough to pay rent. She told me that she had taken the cleaning job rather than received charity or government assistant. I saw the pride in her when she said that.
This incident left a deep impression on me over the years. It set me thinking about what my life would be like when I am a 70 year-old. Will I still be working? Will my children be funding my retirement? How long can my money last?
Why tell you this terrible story? Because I want you to truly understand that you will either pay for your retirement now with little sacrifices of money while you are young, healthy and energetic or you will pay a very painful price later on. You do not want to be that little old lady in 20 or 30 years time.
How do you start?(My next post)
