Some say the seeds of future gains are planted in the downturns. The future is always uncertain, but the past is not: we know many investments can be owned for less money today than last month or last year.
As we go about our work, we are seeking three kinds of bargains.
Great companies available at good prices.
Cyclical companies at low points in their cycle.
The best bargains in the investment universe, wherever they are.
Often, the companies we most admire seem expensive. We know farmers that are always excited to talk about buying their favorite iconic tractor maker. We hear the same thing from parents about the entertainment conglomerate that makes the movies and runs the theme parks their children enjoy. Downturns sometimes reduce stock prices to attractive levels.
Everyone knows that recessions usually hurt company revenues and profits. We are thinking how the inevitable recovery might improve revenues and profits. That long view improves our appetite for temporarily depressed cyclical companies.
Some of our favorite past bargains have come from the sector politely known as “high yield bonds.” (You and I can use a more descriptive term, junk bonds.) From time to time, at rare intervals over the past twenty years, we have found something we believed to be investable hiding in the junk pile. Times might be ripe for that again.
Now is the time. We are studying and thinking and researching to make the most of it.
Clients, if you would like to talk about this or anything else, please email us or call.
Years ago, the Wall Street firm of E.F. Hutton advertised “We make money the old-fashioned way. We earn it.” This tag line evoked a world of indepth research into securities and markets, and investment analysis by experienced professionals.
E.F. Hutton disappeared into a series of mergers, and making money the old-fashioned way is increasingly scarce. One popular theory now is that security selection does not matter, only the allocation of money across the different sectors of the market.
Combined with the idea that past patterns of volatility and past returns by sector should dictate what one should own for the future, many modern ‘investment advisors’ pay no attention to individual company stocks or bonds.
It seems to us that owning stock in a failing chain of department stores is a lot different than owning the world’s largest online retailer. A few automakers survived, hundreds did not. Buying a corporate bond for 50 cents on the dollar is a totally different proposition than selling it for 50 cents on the dollar. Owning some of everything is different than being selective.
Our experience says security selection DOES matter.
One of our strategies is to try to find ownership in great companies at decent prices, to buy and hold. Looking for cyclical companies at low points in the cycle is another strategy. And simply seeking bargains anywhere in the investment universe is a third.
This is not easy. Conditions are always uncertain. There are no guarantees. It takes a lot of effort and energy. There is no assurance that the old-fashioned way will make money, as E.F. Hutton claimed.
But we are trying.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
We believe potential investment gains live in the gap between the unfolding reality and consensus expectations. Often, this means finding undervalued companies in unpopular industries. The theory is, if the future turns out better than expected, values may rise. No guarantees, of course.
We look for promising investments by studying opportunities in detail, reading annual reports, SEC filings, analyst commentary, and doing our own arithmetic.
Although we look at individual companies, we often find themes in our list. Our current Buy List has certain points of emphasis.
Natural resources continue to attract us. Producers of copper may do well in the years and decades ahead, as solar and wind power and batteries combine in a new energy revolution. These things require copper for their manufacture. Companies that mine precious metals may do well in an environment of political and economic uncertainty.
Shares in biotech companies do not seem to reflect the potential for continuing dramatic strides in treatment and cure of disease. They sell at a discount to the market multiple; some offer dividend income.
The price of airline stocks have slipped, over fears of recession. We believe the current share prices more than adequately discount that possibility. And recessions are followed by recoveries (at least, they always have been).
Owning the largest company in a highly fragmented industry has sometimes been a good recipe for investors in the past. As industries consolidate, the bigger players often get bigger by acquisition of smaller companies. This may give them a growth rate in excess of the overall economy. We see opportunities in this concept.
We continue to be struck by the performance gap between international equity markets and the US, going back a decade. Overseas diversification makes increasing sense to us.
Our list includes other things as well, but each of these themes is well represented. We believe picking our spots, and paying attention to the fine points, is the right approach.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Clients, you represent a vast treasure of human capital, educated in every field of study, experienced in working at everything from farming to pharmaceuticals. We are seeking your help and perspective.
The world is awash in facts and data… about short-term factors. But we invest time in trying to understand longer-term trends because they may have a major impact on the world and our work with you. Slower-moving trends and concepts can be more difficult to spot, so here’s how you can help us help you with two goals.
Finding bargains. Hidden trends may produce mispriced investments. An example: our belief that the next energy revolution, solar plus batteries, will change the world. We may see many years of increased demand for the materials that go into solar cells and batteries and electrical equipment. Also, pipelines and conventional electricity generation might have less activity than anticipated. No guarantees on any of this, of course. But here we are, seeking to understand more about the future—as always:
• What is the coming thing in your area? What is just over the horizon but cannot yet be seen?
• What in today’s world is going away, but few have noticed yet?
Avoiding hype. Obvious trends with investment market implications may get overplayed, again producing mispriced investments. The tech boom of 1999–2000 is a good example. Some said the internet would change everything. It did. But internet-related stocks fell dramatically even as the story came true. So talk to us about what you see in your areas of interest:
• What is everybody talking about today that may be overhyped? What do you see that others don’t?
Clients, please comment, email, or call to talk about these topics or anything else. We look forward to learning to see what you see.
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.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Stock investing involves risk including loss of principal.
There is a split in the investment world. One camp believes people should just buy passive products that seek to mimic the investment universe at low cost. They think it is not possible to gain any advantage by actively managing portfolios. The other camp believes there IS a benefit to actively managing portfolios and choosing particular investments.
You know where we fit: investment research, the selection of securities, and managing portfolios is about all we do—except talk to you. We are in the “active” camp, not the “passive” one. The debate rages on.
One thing is certain. The passive camp enjoys lower expenses, because they ordinarily only do a fraction of the work that we do: we research about individual companies, read annual reports, sell this and buy that to try to gain an advantage.
When you think about it, the whole universe of active investors cannot all deliver above-market returns—with their higher expenses. So the idea is the whole universe of passive investors must therefore do better than the whole universe of active investors, due to lower costs.
Our view is that the average performance of active investors is determined by some investors who are above average and others who are below average. So it is imperative for us to be above average—to be worth more than our freight—to have a sustainable business.
Once upon a time an active manager purchased a bond that had declined after it was issued, for 50 cents on the dollar. It was purchased from another active investor, who took a 50 cent loss. The bond later matured for a dollar, so the bargain-buyer had a 50 cent gain. On average, active investors broke even. But one active manager did better than average, and one did worse than average.
We do a whole lot more than manage investments, of course. Planning to help you work towards your goals, putting market action in context, answering your money questions, coordinating with your legal and tax advisors… these things are also part of our work. But striving to grow your bucket is why we get up in the morning.
Average (ordinary, middling, mediocre, unexceptional) is not good enough. Active investors need to be above the line over the long term. We have no guarantees to offer. But our goal is to be exceptional.
Clients, if you would like to discuss this or anything else, 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 indices are unmanaged and may not be invested into directly.
All investing, including stocks involves risk including loss of principal. No strategy assures success or protects against loss.
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.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
Mentally challenging activities and social engagement may support brain health, according to the Alzheimer’s Association.
We love doing puzzles. Some companies have bonds outstanding that are trading at half their face value because the issuing company has evident problems. Which companies have a good chance to survive and pay all the interest and principal due? Which ones are likely to go broke, with losses to bond owners?
To solve that kind of puzzle, we need to read financial statements, do analysis, search through SEC filings, study the annual reports, and review action in the bond market. And that puzzle might lead to another one: how can we quickly put $1 million or $2 million to work for you, with everyone getting an appropriate amount of the bonds at a favorable price?
You provide us with puzzles, too. When can I afford to retire? How should I balance the split between cash liquidity and long-term core investments? What are my options for the dormant 401(k)? How should I pay for a new home?
Figuring out how to maintain the infrastructure of staff and resources to manage the needs of more than a hundred investment advisory clients is another puzzle.
So we have the mental part of the prescription covered. The other piece is social engagement. How many times have you heard me say I’m in business to talk all day? We share coffee and conversation, have breakfast or lunch together, talk on the phone and by email—and increasingly through Twitter or LinkedIn.
In addition to engaging with you, the team in the office is in constant contact with one another to take care of your business.
I didn’t create the enterprise at age forty so that when I was in my sixties I would have a way to reduce the risk of Alzheimer’s. But two of my heroes worked to age 92 in their businesses, working effectively with people they enjoyed, and they were joyful and vibrant all the way.
Anyway, thank you for your role in our Alzheimer’s project. If you’d like to talk about this or any other pertinent topic, please email us or call. (You can learn more or donate to the real Alzheimer’s project at www.alz.org.)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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.
Our union? Yes, you and we are partners in a unique enterprise. As a client, you share our confidence about the long term. Many of you are willing to live with volatility in the short term to get where you want to go. And many of you don’t join stampedes or sell out in panic. This investment behavior puts you in a select group. It is a vital ingredient in the beginning of your success—and ours.
The 21st anniversary of the decision to embark on our ultimate business venture is a natural time to take stock. Where are we now? Where are we going? We’ll assess this in terms of our three key activities.
Communications.
We love to talk—you know this. About two years ago, we began to figure out how to talk to all of you, every day if you would like. The new media has two aspects. Real time commentary and news shows up in the social media venues like Facebook and Twitter. A permanent library of all of our philosophy and strategies and methods can be found 24/7 at 228Main.com.
Paradoxically, the success of our new media has given us more time to talk one on one, by telephone or email or in person. So now we spend more time doing what we love, connecting with you directly. We expect to continue to build both our archives and our skill at real time interaction.
Investment Research.
To a surprising extent, our research capabilities are tied to new media activity. We interact with great minds in economics and market strategy, trading ideas and insights and finding topics we wish to investigate more deeply.
The one-to-one communications with you also contain a research element. We gain perspective on global markets by talking to executives who have traveled the world on business. We have a better understanding of specific industries and companies because we talk to people who are in those businesses. Every one of you is a consumer, and we talk to you about companies and products you deal with every day.
Our conventional sources have never been better, either. LPL Financial continues to build out our back office research staff by adding and developing talent. Bottom line: we are connected to ever-richer sources of ideas and trends as well as the specific data we need to do our work.
We also have tweaked our strategy. Now, client portfolios see more activity but in smaller pieces. Instead of looking for opportunities where we can invest 5% of a portfolio balance, we will take action if 1 or 2 or 3% position sizes are appropriate. With more holdings comes greater diversification. Theoretically, this may give us a smoother ride to our goals.
The markets are like a thousand piece mosaic whose tiles are constantly changing. So we cannot tell you what changes are coming in the future—only that we will always be trying to figure out how to grow your buckets more effectively.
So the state of our union is grand. We have focused on our systems and processes so we can take care of business no matter what happens in our lives or the economy and markets. We offer no guarantees about the future, except for our intent to get better as we go along. Thank you all for your part in our unique partnership. Clients, if you’d like to talk at greater length about these things or anything else, please email 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.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
You already know Mark Leibman and Greg Leibman. But you might not know our allied staff economist, our fixed income research director, our market strategist, or the fellow who oversees the whole allied research effort. The executives at LPL have decades of combined experience, advanced degrees, specialized training and the appropriate professional designations.
Most importantly, they each have the ability to communicate economic and market developments with the context and background needed to get at the real meaning and significance.
These folks do not work at 228 Main. They are the key people among dozens in LPL Financial’s Research Department. In our quest to find the right investments, and to understand the economic and market environment in which we live, they play a major role. They put out reports, they help conduct the daily Research Morning conference call, they blog, they tweet—they communicate.
One of the wonderful things about life in the 21st century is the vast amount of information available. We’ve spent a lot of time appraising the quality of commentary from across the financial industry. We are able to follow key specialists at Schwab and Morgan Stanley and Wells Fargo and other firms, as well as our most respected peers and money managers.
The Washington Post, the Wall Street Journal and the New York Times provide a great overview of the major stories of the day, and more detailed trade publications are a vital source of news about the industries in which we’ve invested. People with specialized knowledge are available through blogs and social media, as well. We read the Detroit newspapers for auto industry news, Australian papers for news on global raw materials producers, and we find news sources for other situations as needed. Subscription-based investment research and data round out our fundamental sources.
We have what we need to do our own thinking, draw our own conclusions, and take action in pursuit of your interests. If you have specific questions, please call or write to ask them.
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