conventional wisdom

Classical Language, Mostly Classic Ideas

© Can Stock Photo / franckito

A surprising number of Latin phrases are woven into modern society, considering the language has not been widely used for centuries. From simple truisms like tempus fugit (time flies) to mottos like e pluribus unum (from many, one), the wisdom and ideas of a civilization lost to antiquity survive.

The Roman historian Tacitus wrote “experientia docet,” experience teaches. We must take issue with this one. Investors make a critical mistake in learning from experience, in our view. They often learn the wrong lesson.

People sometimes adopt tactics and strategies that would have worked great in the last cycle. Unfortunately, times change and the outdated strategies usually fail to perform like they did before.

In the year 2000, following the stock market bust stocks fell—but home values rose. This taught people the wrong idea that “you can’t lose money in real estate”, which caused a lot of damage during the 2007 financial crisis. Then, by 2009, lenders learned the wrong lesson again—because auto loans outperformed in the downturn. Today they may be setting up future losses by putting too much money into substandard auto loans.

A related problem is best illustrated by a product pitch we recently received from an investment sponsor. Their latest offering is based on “the top performing asset class of the last decade!”

Clients, you know what our issue is with this. We love to buy bargains. The best performer over the past decade is, by definition, no bargain. Piling in after a big runup may be jumping on the bandwagon right before it goes off a cliff. However, the experience of the last decade evidently taught many that the specific sector was the one to buy now. Wrong lesson, again.

One interesting facet of all this is that experience actually can teach us. We just need to be certain we are learning the right lesson.

There were useful and profitable lessons in the tech wreck of 2000 and the real estate bust that began in 2007. In our view, those lessons are that it is dangerous to invest in over-priced assets—and it doesn’t pay to join a stampede in the market. Those lessons help us live with attractively priced stocks, and avoid the flight to safety that made historically more stable assets overpriced (in our opinion.)

So let us leave you with a little Latin of our own devising: cognitio ad felicitatem. (Knowledge leads to prosperity.) Clients, if you have any questions, comments or insights please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

No strategy assures success or protects against loss.

Stock investing involves risk including loss of principal.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Safe is the New Dangerous

© Can Stock Photo / onepony

We strive to see the world as it is, and act accordingly. Going by the textbook and implementing conventional wisdom without testing it against actual conditions is not in our playbook. What we see today is nothing short of astonishing—for two reasons.

“Safe” has become the new dangerous. We are astonished at how the investment world appears to be upside down in some respects. And we are astonished that so few of us seem to have noticed.

During the year 2000, the technology-heavy Nasdaq Composite index fell over 39%1. This crushing of technology and growth stocks at the start of the millennium and the financial crisis that arose just seven years later drove fear of the stock market deep into the psyche of some investors. Consequently, we believe there has been a flight to safety that has created some real anomalies.

Yields on long term government bonds and high yield corporate bonds have fallen to near historical lows not seen in over 50 years2. It isn’t just in bonds, either. Supposedly safe stocks appear to be the most expensive part of the market.

Standard & Poors reports that the market average price to earnings (P/E) ratio is about 18. Food companies, shampoo makers, toothpaste sellers, medical supply companies and utilities are priced at a premium because those lines of business are assumed to be recession-proof…you know, safe. In an 18 P/E market, these companies are priced at 22, 25, 30, or 34 times earnings3.

We have owned many of these companies in the past at P/E’s of 10 or 12 or 14. Why anyone would own an electric utility when solar plus battery technology is bound to turn them upside down is beyond us. (We wrote about the coming change here.)

Consequently, we believe that allegedly “safe” stocks have become so expensive they are dangerous. The textbook says utility stocks are safe. We look at the world and say, “Not really.” Safe is the new dangerous.

Meanwhile, there are market sectors and companies priced below the market average P/E, including some with dynamic prospects in the years ahead. We believe the stocks we own are bargains. That’s an opinion, not a guarantee. You know we don’t offer guarantees, except that values will fluctuate.

Clients, if you would like a longer conversation about this upside down situation or any other topic, please email us or call.

1Nasdaq, Inc.

2Federal Reserve Economic Data, Federal Reserve Bank of St. Louis

3Standard & Poor’s, Inc.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Floating rate bank loans are loans issues by below investment grade companies for short term funding purposes with higher yield than short term debt and involve risk.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Change is the Only Constant

pyramid

The ability to adapt to changing conditions is what sets those who thrive apart from those who merely survive.

Our portfolio theory evolves over time as economic and market conditions unfold. The problem with the textbook approach in a changing world is that a textbook, once printed, never changes. Looking at the world as it is and doing our own thinking, we see things in a new way.

We believe that central bank intervention and counterproductive monetary policies have distorted pricing in the bond market and for other income-producing investments. By crushing interest rates and yields to very low levels, the old investment textbook has been made obsolete.

Therefore the classic advice about the proper balance between stocks and bonds brings new and perhaps unrecognized risks, with corresponding pockets of opportunity elsewhere. Yet the classic advice met a need which still exists: how to accommodate varying needs for liquidity and tolerance of volatility.

Our adaptation to this new world is the portfolio structure you see above. Our classic research-driven portfolio methods live in the Long Term Core. We believe our fundamental principles are timeless, and make sense in all conditions.

But people need the use of their money to live their lives and do what they need to do. So a cash layer is needed, tailored to individual circumstances.

The layer between is ballast. This refers to holdings that might be expected to fall and rise more slowly than the overall stock market. Ballast serves two purposes. It dampens volatility of the overall portfolio, thereby making it easier to live with. Ballast may serve as a source of funds for buying when the market seems to be low.

The client with higher cash needs or who desires lower volatility may use the same long term core as the one who wants maximum potential returns. One may want a ‘cash-ballast-long term core’ allocation of 10%-25%-65% and the next one 4%-0%-96%.

The adaptations we’ve made have generated efficiencies and therefore time—time to work individually with you on your plans and planning, time for more frequent portfolio reviews, time for more intensive research.

Clients, if you would like to discuss how this structure might fit your needs, please email us or call us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Sell in May and Go Away?

© Can Stock Photo Inc. / photocreo

One popular piece of market lore revolves around the idea that virtually all of the stock market’s cumulative gains over large chunks of the past have come between November and May. The other half of the year, from May to November, has produced little in the way of gains, on average. Hence the saying, “sell in May and go away.”

There are three challenges facing anyone who seeks to act on this supposed wisdom. The first one is, any widely expected event gets discounted by the market as it gains currency with the public. If the saying works, it will get overexposed until it stops working.

The second challenge is, the statistics on which the lore rests are averages—they say nothing about what happens in any particular year, much less about what will happen this year.

The third challenge is the most interesting of all. When one examines the results of not selling in May and never going away, one wonders what more could be desired. I (Mark Leibman) was born in May 1956, when the S&P 500 Index stood at 44. As I write this, the index is 54 times higher. This calculation of a 5,300% profit excludes dividends, which would have added considerably. This tells us how not selling in May would have worked over the past nearly sixty years.

Our purpose in writing is to help you avoid being tricked by the “Sell in May” idea into a short-sighted investment decision. There are always reasons to worry about the future, developments which alarm people, and fear mongers peddling pessimism for profit. Against the dynamism and ingenuity inherent in human endeavors, these fears and worries have yet to produce a permanent downturn in the economy or the market.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

Indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

They Say You Can’t Handle the Truth!

© Can Stock Photo Inc. / firebrand_photo

The conventional wisdom in the investment business is that you can’t handle the truth. Our whole business is built around the idea that you CAN handle the truth. Some were born that way, and others may be trained to handle the truth. The stakes are quite high, because those who can handle the truth about investing may be more likely to enjoy success at it.

We humans do have some tendencies which are both deeply rooted and counterproductive to informed investing. The easy path for us would be to pander to those tendencies, affirm them, pat you on the back and take your money. Here are some examples of that:

“They” (the adherents of flawed conventional wisdom) promote the idea that the pain of a loss is twice as great as the pleasure of a similarly sized gain.

“They” speak of temporary downturns as if they were actual losses, a disservice to long term investors.

“They” promote the idea that arithmetic works against investors, since a 20% loss must be followed by a 25% gain in order to break even.

“They” sacrifice total returns on the altar of expensive new products or stagnant investments in the hopes of reducing volatility.

We, on the other hand, believe you can handle the truth. Our experience confirms this. Here is the truth:

1. Long term investing always involves living with volatility, there is no way around it.

2. The ‘pain of a loss’ is optional—it may be offset by the joy of finding bargains, or ignored in the confident knowledge that downturns are temporary. The economy and markets always muddle through and eventually recover.

 3. According to Standard & Poor’s records, over the century’s experience with the Dow Jones Average, so far every 20% loss has been followed by a greater than 25% gain.

4. Investing for the long term in accordance with proven principles, using timeless strategies and timely tactics, in a manner that can get you to your goals, is the right way to do it.

We believe that people who keep some money in the bank, and who know where their needed cash flow will come from, can usually live with our methods and strategies with at least some part of their wealth. And we know that others may not be able to do it. Some lack the confidence that the system will endure, others just cannot tolerate fluctuating account values. It takes all kinds to make the world.

Our aim is to add value to those who can handle the truth, as we’ve defined it here. We work hard to educate and train and impart perspective and context…and it has worked. As always, if you have questions or comments, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.

Sell in May and Go Away?

One popular piece of market lore revolves around the idea that virtually all of the stock market’s cumulative gains over large chunks of the past have come between November and May. The other half of the year, from May to November, has produced little in the way of gains, on average. Hence the saying, “sell in May and go away.”

There are three challenges facing anyone who seeks to act on this supposed wisdom. The first one is, any widely expected event gets discounted by the market as it gains currency with the public. If the saying works, it will get overexposed until it stops working© Can Stock Photo Inc. / photocreo.

The second challenge is, the statistics on which the lore rests are averages—they say nothing about what happens in any particular year, much less about what will happen this year.

The third challenge is the most interesting of all. When one examines the results of not selling in May and never going away, one wonders what more could be desired. I (Mark Leibman) was born in May 1956, when the S&P 500 Index stood at 44. As I write this, the index is 47 times higher. This calculation of a 4,600% profit excludes dividends, which would have added considerably. This tells us how not selling in May would have worked over the past nearly sixty years.

Our purpose in writing is to help you avoid being tricked by the “Sell in May” idea into a short-sighted investment decision. There are always reasons to worry about the future, developments which alarm people, and fear mongers peddling pessimism for profit. Against the dynamism and ingenuity inherent in human endeavors, these fears and worries have yet to produce a permanent downturn in the economy or the market.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

Indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.