Protect Your Credit

As most of you know by now, the credit reporting agency Equifax was the victim of a massive hack recently. As a result, almost half of all Americans may have had their most sensitive information, including social security number, date of birth and home address, exposed for all the (criminal) world to see. If someone has this information, they can easily steal your identity, allowing them to open an unlimited amount of credit in your name, potentially leaving you exposed to a lifetime of misery. The only good news is that you can protect yourself from financial ruin.

If you haven’t already done so, I strongly suggest that you immediately contact the three main credit reporting agencies and request that they freeze your credit information. This will prevent anyone from accessing your personal information without your explicit consent. Depending on what state you live in, this process will either be free or cost you a modest fee. You should do this for every member of your family with a credit history, including your teenage children.

Here are the phone numbers to call. In order to put a freeze on the credit of multiple people, you will have to place multiple phone calls. So allot yourself sufficient time to call all three agencies as many times as necessary to protect the credit of every member of your family. And make sure you have the date of birth, social security number and home address for each person BEFORE you make the phone calls.

Equifax: 800-685-1111 (automated system only)

Experian: 888-397-3742 (automated system only)

Transunion: 800-916-8800 (human or automated system)

 

The Awesome Power Of Compounding

This week will be a simple blog, yet it could be one of the most important things you’ll ever read. And while the concept may seem rudimentary, it is extraordinarily powerful. This is how true wealth is created; not by excessive trading or via arcane investment strategies. No, true wealth is built by compounding your money over time. It’s really as simple as that.

For the purposes of this illustration, we’re assuming two college friends, each of whom just turned 21. Investor A (Bob) decides to spend his extra money on new clothes and parties each month for the ensuing seven years, while Investor B (Mary) lives more conservatively and instead starts each year by putting $2,000 in her discount brokerage account.

Next, we’ll assume a compounded annual rate of return of 10%, which is a bit high I understand, but you’ll get the idea. After seven years, Mary’s portfolio is worth almost $21,000, while Bob has nothing. Upon hearing of her accumulated wealth at a New Year’s Eve party, Bob finally gets with the program and starts to save that same $2,000 each year. At the same time, Mary decides it’s time to start enjoying herself a little more, so she no longer saves that $2,000. 40 years goes by, after which time Bob and Mary get together over drinks to compare notes on their lives. Mary’s portfolio was then worth $930,641 with only the original $14,000 invested, whereas Bob’s portfolio is worth a smaller $893,704, even though he had put in $80,000 over those 40 years!

So as you can see, thanks to the incredible power of compounding, Mary made 66x her money, while Bob only made 11x his money, simply because Mary started sooner and allowed her money to compound. That is how you build wealth.

Now I realize that it’s not possible to earn a constant 10%, or any percent for that matter, every single year. Some years you’ll make more; others years less. Yet the concept, and the math, is both powerful and irrefutable.

So what does this mean for everyday investors? The first takeaway is to start saving early; the earlier the better. The second is to reinvest your interest and dividends. Third, and related to the last point, is to invest in companies that pay dividends, and preferably, increase those payments every year. One of the greatest investors of the last 50 years, Warren Buffett, built his fortune by compounding his investments.

I have tried to incorporate the same basic strategy into the way I manage investments on behalf of my clients: I buy solid, dividend-paying stocks, reinvest the income, and continue to hold the stock for as long as the investment thesis remains intact, thereby deferring taxes, which also helps you compound your income.

This isn’t rocket science. But it does require discipline and patience. It isn’t sexy but it is the surest way to accumulate wealth. So if you haven’t already done so, get started right away.

 

The Power Of Compounding
(Assumes a 10% compounded annual growth rate)
Investor A Investor B
Age Contribution Year-End Value Age Contribution Year-End Value
21  $               –  $                    – 21  $        2,000  $             2,200
22  $               –  $                    – 22  $        2,000  $             4,620
23  $               –  $                    – 23  $        2,000  $             7,282
24  $               –  $                    – 24  $        2,000  $           10,210
25  $               –  $                    – 25  $        2,000  $           13,431
26  $               –  $                    – 26  $        2,000  $           16,974
27  $               –  $                    – 27  $        2,000  $           20,872
28  $        2,000  $             2,200 28  $               –  $           22,959
29  $        2,000  $             4,620 29  $               –  $           25,255
30  $        2,000  $             7,282 30  $               –  $           27,780
31  $        2,000  $           10,210 31  $               –  $           30,558
32  $        2,000  $           13,431 32  $               –  $           33,614
33  $        2,000  $           16,974 33  $               –  $           36,976
34  $        2,000  $           20,872 34  $               –  $           40,673
35  $        2,000  $           25,159 35  $               –  $           44,741
36  $        2,000  $           29,875 36  $               –  $           49,215
37  $        2,000  $           35,062 37  $               –  $           54,136
38  $        2,000  $           40,769 38  $               –  $           59,550
39  $        2,000  $           47,045 39  $               –  $           65,505
40  $        2,000  $           53,950 40  $               –  $           72,055
41  $        2,000  $           61,545 41  $               –  $           79,261
42  $        2,000  $           69,899 42  $               –  $           87,187
43  $        2,000  $           79,089 43  $               –  $           95,905
44  $        2,000  $           89,198 44  $               –  $        105,496
45  $        2,000  $        100,318 45  $               –  $        116,045
46  $        2,000  $        112,550 46  $               –  $        127,650
47  $        2,000  $        126,005 47  $               –  $        140,415
48  $        2,000  $        140,805 48  $               –  $        154,456
49  $        2,000  $        157,086 49  $               –  $        169,902
50  $        2,000  $        174,995 50  $               –  $        186,892
51  $        2,000  $        194,694 51  $               –  $        205,581
52  $        2,000  $        216,364 52  $               –  $        226,140
53  $        2,000  $        240,200 53  $               –  $        248,754
54  $        2,000  $        266,420 54  $               –  $        273,629
55  $        2,000  $        295,262 55  $               –  $        300,992
56  $        2,000  $        326,988 56  $               –  $        331,091
57  $        2,000  $        361,887 57  $               –  $        364,200
58  $        2,000  $        400,276 58  $               –  $        400,620
59  $        2,000  $        442,503 59  $               –  $        440,682
60  $        2,000  $        488,953 60  $               –  $        484,750
61  $        2,000  $        540,049 61  $               –  $        533,225
62  $        2,000  $        596,254 62  $               –  $        586,548
63  $        2,000  $        658,079 63  $               –  $        645,203
64  $        2,000  $        726,087 64  $               –  $        709,723
65  $        2,000  $        800,896 65  $               –  $        780,695
66  $        2,000  $        883,185 66  $               –  $        858,765
67  $        2,000  $        973,704 67  $               –  $        944,641
Less Total Invested:  $           80,000  Less Total Invested:  $           14,000
Net Earnings:  $        893,704  Net Earnings:  $        930,641
Money Growth Multiple: 11      66

Don’t Succumb To Blind Fear

The past week has been a very turbulent, and nerve-wracking, time for investors. Stock markets around the world have been rocked by massive losses. In just the seven trading sessions, the Dow Jones Industrial Average (#DJIA) has fallen about 850 points, or 5%. By comparison, the S&P 500 has fallen 5.2%, the UK FTSE a slightly better 4.8% while the German DAX has dropped a whopping 6.9%. These are significant losses in only seven trading days.

Today was a microcosm of the past few weeks as the major averages were whipsawed all day long. At one point, the #DJIA was down 2.8%, before finishing down 1%. Similarly, the Dow Jones Transportation Average (#DJTA) was also down 2.8% before actually ending the day 18 points higher. The S&P 500 dropped 3% before winding up down only 0.9%. Investors who panicked today and sold at the bottom will likely regret that when the market inevitably recovers and they find themselves sitting in cash on the sidelines, missing the large gains.

So what are the reasons for the big declines and the crazy volatility? They include (just to name a few): a growing economic malaise in Europe, concerns about a continued economic slowdown in China, fears on an expanding Ebola outbreak, continued trouble in the Middle East thanks to ISIS and other terrorists, plunging oil prices thanks to the dollar surging in value against most other currencies and horrible policy decisions within OPEC. You could probably add concerns over social unrest in Hong Kong. Don’t forget natural disasters like cyclones, hurricanes and typhoons that are growing in frequency and magnitude. And that doesn’t even count worries about economic slowdown in this country, anticipation about future rate increases by the Federal Reserve and uncertainty about the upcoming mid-term elections. Phew, did I miss anything?

Given all the ills that I enumerated above, we should all dump everything, build a bomb shelter and stick all of our money under our mattress, right? WRONG!! Succumbing to fear, acquiescing to panic and abandoning your financial plan is exactly the opposite of what you should be doing.

First of all, in my opinion, you shouldn’t be investing any money that needs to be spent in the next two years. So if we take that as a given, and if we assume (yes, I know what happens when we assume, but that’s the only way I can continue this narrative) that the money you have invested is for some future purpose (of at least five years), than weekly volatility is really irrelevant. In fact, it is normal and present opportunities.

Let’s put things in perspective. On October 9, 2007, almost exactly seven years ago, the #DJIA was 14,164.53. From there it proceeded to go down for the next year and a half, finally hitting bottom on March 9, 2009 at 6,547.05, for a loss of 53.8%. From that low, the market hurtled forward for the next five and a half years, erasing all of those losses before peaking on September 19 at 17,279.74, a gain of 163.9%! Today the #DJIA closed at 16,141.74, which means we’ve fallen 6.6% from the high. Is that really so bad? In the grand scheme of things is that likely to derail your future plans?

The truth about the stock market is that it goes up and it goes down. And after a prolonged period of going up, with only a few very short down periods, we were due for a correction of sorts. Now, I don’t know either the depth or duration of this correction, but I’m confident it won’t be nearly as bad as 2008/2009. Global economic conditions are MUCH better today, even with all of our problems, than they were back then. So relax, have a nice glass of wine (or whatever your drinking pleasure is), take stock of your portfolio and look at your “wish list” of stocks that you’d like to buy. Perhaps now is the tie to use some discretionary cash to pick up one or two of them on the cheap. Then sit back, wait for the rebound and congratulate yourself for remaining calm and sticking with your plan.

Full disclosure: I purchased one new position last week, and another one this afternoon, totaling about $600,000. So I’m putting my money where my mouth is. I’m very confident those will be very opportunistic and profitable purchases, creating solid profits for me and my clients for years to come.

 

Have You Taken My Advice?

This year I’ve written blogs entitled “Don’t Panic”, “I Hope You Didn’t Sell”, “It’s Still Not Time To Panic”, “Tech Stocks On Sale” and “The Market Continues To Climb A Wall Of Worry”, to name a few. Do you see the trend? Throughout the year I’ve urged my newsletter and blog readers, as well as my clients, to simply sit tight, ignore the pundits, and maintain their equity positions. There has been nothing to dissuade me that domestic equities are the best investment category for most investors this year.

And as I sit here moments after the market opened, the #DJIA is trading just over 17,000, again within spitting distance of its all time closing high of 17,138.20 set on July 16. Even better, the #S&P500 is less than two points from its closing high of 1,988.31 set on July 23. The tech heavy #NASDAQ is over 4,500, its highest level in 14 years, and approaching the all time high closing price of 5,048.62 set at the height of the tech bubble on March 10, 2000. Without question, the bull market remains in force.

Why have I been so sure about my position to remain fully invested in the face every foreign and domestic problem, both economic and political? It’s very simple: the Federal Reserve and its easy money policy. As long as their accommodative monetary remains in place, there is no reason to contemplate selling. And I believe there will be no policy changes until the second quarter of next year, at the earliest. They will err on the side of waiting too long to raise rates, and possibly allow inflation to grow more rapidly than they would prefer, rather than risk putting the brakes on economic growth.

Even when they do begin to raise rates, which they will likely do in a VERY measured fashion, I believe the market can continue to rise, because it will be confirmation that the economy is improving, and that is good for business, which is good for stocks. But that will be an argument for next year. For now, my advice remains the same: stay the course. Ignore the Talking Heads and tune out the blather. Buy the dips. Own quality stocks and reinvest your dividends. This is the best way to save an invest for your future.

Invest or Die Poor

Do I have your attention? Good. This is serious stuff. If you are like the vast majority of Americans, you are primarily responsible for your own financial future. And the deck is stacked against you. In the old days, before the 1990’s or so, it used to be that you got a job, worked there for 20 or 30 or 40 years, retired at 60 or 65 with a nice pension, then lived your remaining lives playing golf, tending your garden or doting on your grandchildren. Unfortunately for you, the rules have changed and you must change with the times, before it’s too late.

Today, you must save and invest for yourself, and basically by yourself. Your investing options include a 401k (or 403b or a 457), various IRA’s (traditional, rollover, beneficiary Roth, SEP, SIMPLE) and basic taxable accounts. Within these basic frameworks you can invest in individual stocks and bonds, REITs, MLPs, mutual funds and ETFs, options, etc. The key word in all of that is “invest”.

Unfortunately, traditional avenues for “saving”, like bank deposits and certificates of savings (CDs), are no longer viable options for building, or even protecting, your wealth. With interest rates at or near zero, and inflation around 2%, you actually lose money (after taxes and inflation) by putting your money in the bank. To put that in some perspective, if you put $100,000 in the bank in an account that earns 0.10% (which is generous), you would earn a paltry $100 per year. Assuming you pay about 30% in taxes, that leaves you with a meager $70, or about enough money to pay for one tank of gas.

Even bonds (in this case I mean high quality government or corporate bonds), a staple of many investment plans, offer far too little yield today to compensate you for taking enormous interest rate risk. Sometime in the next 12 months or so rates will likely begin to increase, at which point bond investors will start to lose money on their current holdings. High yield, or junk bonds, do offer slightly better yields, but the easy money has already been made there. The spread between treasuries and high yield is far to small today to warrant new investments in high yield.

So what are your options? What can you do to generate a decent return on 30 or 40 years of saving and investing, that will outpace inflation, and create sufficient wealth to live out your days without running out of money? You MUST invest in the stock market in some way. Whether it be through individual stocks or via mutual funds and ETFs, stocks give you the only viable way, TODAY, to achieve a viable financial future.

I recommend putting your money in high quality, dividend-paying equities that have a history of paying those dividends, in increasing amounts, year after year. Properly selected, a portfolio of stocks like Verizon (VZ), ExxonMobil (XOM), Lockheed Martin (LMT), Pfizer (PFE), Emerson Electric (EMR), Union Pacific (UNP), Medtronics (MDT) and JP Morgan (JPM) just to name a few, will very likely grow much faster than inflation, or any other liquid investment option. (*Disclosure: I own every one of those stocks in my own accounts and for clients).

To summarize, I believe that we must all take responsibility for our own financial futures. In doing so, we must also recognize that times and conditions change. The current conditions dictate that we have to invest the vast majority of our savings in order to have any reasonable hopes of achieving a secure retirement. Looked at over a 5, 10, 15, 20 or 25 year time horizon, this type of investment plan isn’t as risky as you might think, and it offers the only reasonable way to earn enough money to fund your retirement. So if you aren’t already investing your retirement money, you better get started before it’s too late.

It’s Still Not Time To Panic

Even though the market has dropped for four straight days, with losses on the Dow Jones Industrial Average (#DJIA) yesterday exceeding 200 points, it still isn’t time to panic. It would appear that, once again, the turmoil is principally related to the unrest in the Ukraine, with additional worries about stagnating growth in China.

The bottom line to me is that all of this is simply noise. What investors should must focus on is that economic growth in this country is modest but stable. The Federal Reserve remains committed to a slow and steady program of tapering their bond buying program while maintaining low interest rates well into 2015. And the federal government has managed to create a budget compromise that means stability for the next two years. All of this suggests that the market should continue to move generally higher, albeit in fits and starts.

So what should investors be doing? You should be maintaining whatever allocation you have to equities, and buying quality positions on dips. Look to add to the defense, transportation, technology and medical sectors. I would also look at industrials, agriculture and banking as well. Bond-like investments in REITs, BDCs and even utilities can add additional yield to certain portfolios.

I’m not suggesting that anyone take on more risk than they’re comfortable with. Everyone should be invested such that they can sleep at night. That being said, I believe that this is still a good time to be invested in the stock market; it’s not time to sell.

I Hope You Didn’t Sell Last Month

Last month I wrote a blog entitled “Don’t Panic” on February 5 in which I stated that “I believe that this is simply a long overdue correction in a bull market that began in March 2009 and remains in place today.” As it turns out I was fortunate enough to have written this the day that the correction ended. Since that time, the Dow Jones Industrial Average has risen by 6.2% to within a scant 200 points of its all time closing high. At the same time, the S&P 500, the Wilshire 5000 and the Russell 2000 have all exceeded their old records. Clearly, the Bull Market remains in force and that the modest correction has ended.

So where do things stand now? At this moment, the market is still in a clear uptrend. Almost every major stock average is at or near record levels. Treasury yields have stabilized in the range of 2.60 – 2.80%. The value of the dollar index has fallen about 5% since last July and is currently trading near its low. This is helping to increase the relative prices of gold and silver, as well as other commodities, like crude oil.

So what should we be doing? All things considered, we sit tight but remain vigilant. There will likely be more one-off events like what’s going on in the Ukraine that will cause the market to slide. I believe that one- or two-day events like that can create short-term buying opportunities. Unless there is a fundamental and abrupt change in Federal Reserve policy with regards to interest rates, or if our economy were to quickly worsen, or should there be a major conflagration somewhere in the world, then the stock market should continue to work its way higher.

As for me and my clients, we remain fully invested in companies that are participating in this bull market. We didn’t sell last month and we won’t panic the next time the market drops a little because we understand that markets go up and down in the normal course of things. We are patient investors with the courage of our convictions. That’s how you build true wealth.

Don’t Panic

As of the close of business yesterday, the Dow Jones Industrial Average was down 1,136 points, or 6.8%, since the end of 2013. The venerable average was down 5.3% in January, which lead many seers to warn that the market would therefore be down for the full year. I’m here to disagree with that sentiment. I believe that this is simply a long overdue correction in a bull market that began in March 2009 and remains in place today.

Quite simply, the fundamentals underpinning this bull market remain in place. Corporate balance sheets remain pristine and profits continue to grow. The Federal Reserve remains committed to keeping interest rates artificially low and will inject liquidity into the system at the first sign of danger. Congress has already passed a budget deal and is likely to approve an amendment to the debt ceiling without a protracted fight. And finally, the economy continues to grow, albeit at a somewhat modest pace. All of this suggests that the stock market should again move higher.

Keep in mind that there are relatively few alternatives to an intelligently constructed stock portfolio when it comes to saving for your future. Interest rates at the bank are actually negative when viewed after taxes and inflation. Government debt is not much better. Corporate debt generally has positive yields, but you’d have to extend the maturities too far into the future to reap any reasonable yields, and in doing so you would incur significant interest rate risk. On the other hand, there are many solid, blue-chip stocks that pay annual dividends of 3% or better and are increasing those payments at rates far better than inflation. Good examples include Pfizer (PFE), Verizon (VZ), Proctor and Gamble (PG) and Chevron (CVX). [Disclosure: All four stocks are among the Top 25 positions held by Werlinich Asset Management] And while you enjoy those dividends, you also have the possibility of long-term capital growth.

For example, defense giant Lockheed Martin (LMT) pays a dividend that yields 3.5% at the current price. And the stock has tripled over the past ten years, which represents an average annual growth of about 12% per year for the past decade. While there is no guarantee the stock will continue that rate of growth for the next ten years, if it only grows at half that rate, the stock could double over the next decade, not including the dividend payments. What bond can give you the same growth potential? [Disclosure: LMT is the 3rd largest position held by Werlinich Asset Management.]

When looked at through a longer term prism, an intelligently managed stock market portfolio remains the best option available in order to save and invest for long-term growth and future financial security. 

The Market Still Doesn’t Care That The Government Is Closed

We are now in the third week of the government shutdown and we’re careening towards the first “deadline” of October 17 with no deal in sight. By that day the Treasury will reportedly have about $30 billion with which to pay its bills. That will leave less than two weeks to scrimp and scrounge before the next big deadline of November 1, at which time the government will no longer be able to make social security, Medicare, pension and other benefit payments. Then, on November 15, the government could default on about $30 billion worth of interest payments due to bondholders. Most rational market observers, meaning those not affiliated with the Tea Party, believe that defaulting on these obligations would be catastrophic to the market.

So why is the stock market within shouting distance of its all time high? Why is the VIX (volatility index) displaying nothing but complacency? To me, the answer is clear. Stock (and bond) market participants believe strongly that a deal of some kind will be reached sometime this month After that the government re-open for business, the debt ceiling will be raised and the Treasury will pays all its bills as promised. In all likelihood, this will be simply a short-term fix, meaning that in a few short months we could very well be right back in this perilous situation all over again. But that will be a story for another day. All traders care about is that the current crisis will very likely be averted.

So what does that mean to investors? It means you should remain invested. Now is not the time to bail on the market. In fact, you should use temporary market dips to add to your holdings. The Federal Reserve remains highly accommodative; and that means the party in the stock market is likely to continue for at least the rest of the year.

Personally, I put some money to work first thing Thursday morning, as the huge two day rally began. As word leaked that an accord could be forthcoming, the market soared. As it turned out, the rumors were just that, and there was no deal. Yet the rally demonstrated how much buying power is waiting on the sidelines, ready to jump in when an agreement is finally reached. Interestingly, the market opened down 100 points today as investors expressed their disappointment in the lack of progress over the weekend. Yet as trading closed ten minutes ago, the Dow Jones Industrial Average was up 64 points. This is simply a market that does not want to go down.

So if the market doesn’t care that the government is closed, you shouldn’t either. Surf’s up; time to ride the wave.

Market Achieves Record Levels

About an hour into trading today, the S&P 500 and the Dow Jones Industrial Average have both surpassed previous all time highs and achieved significant milestones. As I write this around 10:30am, the DJIA is at 15,003, marking the first time in history the venerable index has reached that level. Similarly, the S&P 500 is at 1,616, the first time that index has ever been over 1,600. And the Dow Jones Transportation Average is only 7 points below its high. Should the DJTA move to record levels concurrent with the DJIA then we’ll have a bullish confirmation according to Dow Theory. This is all great news.

Yet surprisingly, given these lofty levels, the overall enthusiasm seems relatively muted. There are no fireworks, no parties on the floor of the stock exchange and relatively muted commentary on CNBC. I think that’s a good thing. It suggests that this in not a period of “irrational exuberance”, like 1999. Corporate balance sheets and earnings are in much better shape than in 1999 or 2008 and the global economy continues to be propped up by central bankers. So as long as the money continues to flow unabated, the good times should continue.

That being said, it appears to me that market sentiment remains relatively bearish, or at best very overly cautious, despite the record levels. I think too many individual investors have remained on the sidelines since the crash in ’08, missing out on this stupendous rally. Also, the plethora of contradictory economic news, both in the US and around the world, has left market participants confused and scared. It seems as though every day one economic statistic reveals a slowing economy while another suggests that everything is more robust than expected. Earlier this week the PMI data indicated that the manufacturing sector was slowing. Comments by the Federal Reserve seemed to confirm that thesis. Yet today it’s all wine and roses after the BLS released a stronger than expected employment report. More jobs were added than expected in April, and February and March were revised higher. Additionally the unemployment rate dropped to 7.5%, the lowest level since the crisis began.

It’s possible that since the DJIA and S&P have now breached important psychological barriers that the rally will really take hold as cash begins to move from the sidelines and investors and money managers who have under-performed the market rush to add equity positions. If that is the case, the broad market could move markedly higher from here, dispelling the old adage to “sell in May and go away”.

Conversely, these lofty levels could spur some investors to take some profits and wait for the inevitable correction. We’ve already had a great year after only four months. I certainly would have signed up for a 12% return for the year. If this momentum continues, we could be looking at 20%+ returns for the year. Only time will tell as there is still a long way to go before the story of the market for the year is fully written. Personally, my clients and  I remain almost fully invested, but we’re selling weaker holdings into the rally to raise some cash for the next buying opportunity.