I Hope You Listened

My last two blogs were written on February 13 and February 29. In the former I wrote:

“It is not time to panic. Things are not nearly as dire as they were leading up to the crash in 2008. Outside of the negative consequences of a too-strong dollar, corporate revenues, profits and balance sheets are in very good shape. It is part of the normal and natural part of the stock market cycle that after a prolonged period of gains that we must experience a year or two of negative returns. Then, when the gloom and despair have peaked, it will be time for the next rally to begin.

So stick with your plan. In the world of virtually zero interest rates, owning a diverse basket of blue-chip, dividend-paying stocks, returning an average yield of at least 2%, is your best way to secure your financial future. So buckle up and prepare for a bumpy ride. I’ll try my best to guide you along the way.”

As it turned out, my message was particularly well-timed as the market had hit bottom only two days earlier. Since closing at 15,660.18 on the 11th, the #DJIA has surged 12.4% in only 25 trading days. Over the same period, the #S&P500 has gained a similar 12.0%. Even better, the Dow Jones Transportation Average (#DJTA), which suffered mightily on the way down, has jumped a stellar 17.3%, leading the way for the rest of the market.

On the 29th, I wrote the following two points (out of a much larger blog):

  • I would substantially overweight, or even limit, your investments to blue-chip, dividend paying, U.S.-based equities as most of the rest of the world is a mess and income is at a premium.
  • When times get scary, and you aren’t sure what to do, it’s ok to do nothing. Outside of some family accounts, in which I bought some stocks during the downturn in January (which proved too early), I have made next to no trades in 2016. And that’s just fine. Sometimes the best trades are the ones you don’t make.

Again, I believe these suggestions had, and still have, a lot of merit. I basically have done next to nothing so far this year, other than make a few acquisitions to round up existing positions that had been unfairly beaten down during the correction. More to the point; I sold nothing! Now, virtually every stock that had been down has rallied and recouped most, if not all, of the earlier losses. By doing nothing, buy ignoring the noise from the media and the panic of traders and nervous investors, we experienced no losses and have been made whole again. And the stocks we sat with continued to pay us a steady stream of above-average dividends while we waited.

So where are we today and what’s my current thinking? The #DJIA remains 750 points below the high of 18,312 set almost exactly 10 months ago, so there is still room for growth. The central bankers of the world, including our own Federal Reserve, remain highly accommodative, lowering rates to at, or in some cases even below, zero. These policies basically force investors into equities as investing in government bonds guarantees little or no income whatsoever.

I would continue to overweight your investments in primarily blue-chip, dividend-paying, quality U.S.-based companies. Look for businesses with strong brands, pricing power and competitive advantages and a history of paying dividends through good times and bad.

I believe that market will remain positive for at least the next two months, before we head into the traditional summer selling season, and into the Republican and Democratic conventions. I’ll comment more on the election cycle later. For now, let’s rejoice that Spring has arrived and, at least for now, the market is coming up roses.

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What I’m Thinking Today

In honor of the extra day in February this year, and on the eve of Super Tuesday, I thought it was a good time to jot down some random thoughts on the market, the economy and the election. So, in no particular order, here goes . . .

  • I hope you listened to my pleas in the last few newsletters not to panic and sell your quality holdings into the correction. If you didn’t, you’ve enjoyed a gain of almost 1,000 since a bottom was made on February 11.
  • I don’t think February 11 was “the bottom” for the year. We’re likely to have at least one, if not two more, corrections this year. That being said, I do believe the market will be higher over the next few years.
  • I would substantially overweight, or even limit, your investments to blue-chip, dividend paying, U.S.-based equities as most of the rest of the world is a mess and income is at a premium.
  • Although I’m happy to see oil prices firming above $30 I don’t think the pain is over. There is still way too much oil sloshing around the world and not enough demand to soak it all up. When the stories of bankruptcies in the oil patch begin to dominate the national media, that will be time to start buying stocks in the energy sector.
  • Large-cap pharmaceutical and biotech stocks have been too beaten up; some great values are starting to present themselves.
  • There is almost zero chance the Federal Reserve will raise rates this year. The greater chance is that they’ll cut rates, although I don’t think that will happen either, at least not in the next few months.
  • When times get scary, and you aren’t sure what to do, it’s ok to do nothing. Outside of some family accounts, in which I bought some stocks during the downturn in January (which proved too early), I have made next to no trades in 2016. And that’s just fine. Sometimes the best trades are the ones you don’t make.
  • When you’re an investor, it’s paramount that you recognize that markets go up and down. There are good times and bad. Up cycles and down cycles. The sooner you accept reality the better. Then you’ll be able to accept the down down with some equanimity and the good times with humility. Investing properly is a marathon, not a sprint.
  • The stock market does not like uncertainty and one of the greatest uncertainties right now is the election. Notwithstanding Bernie’s surprising resilience, I think most people would agree that Hillary will be the Democratic nominee for President.
  • Less certain, though increasingly likely (and I can’t believe I’m writing this), is that Donald Trump will be the Republican nominee. If he sweeps the majority of the #SuperTuesday states tomorrow, his coronation will be virtually assured. And no sane person could really want that to happen. The closer Trump gets to the presidency the more likely the stock market is to be rattled. And that’s not good.
  • All of the Trump supporters out there who think a vote for Trump is a vote for change (“throw the bums out”) and that he will “Make America Great” again, should stop for a minute, listen closely to what he’s actually saying (or more to the point, what he’s not saying) and ask if he is really the person we want leading this country for the next four years. Perish the thought.
  • Tell the important people in your life how much they mean to you. Spend more time with your friends and your kids. Go out and do the things on your bucket list. Don’t wait to drink that great bottle of wine. Life is too short and too precious to waste a moment of it.
  • Give more of your time and/or your money to those less fortunate and count your blessings for how lucky you are; I do every day.

I’m Back – Time To Speak Some Truth

After a long absence from blogging, it’s time for me to return to writing more frequently. Between the upcoming election and the turmoil in the stock market, there is plenty to write about. So let’s get to it.

To start things off, I’d like to comment briefly on the election. I will certainly be writing at greater length and frequency in the coming months.(Disclaimer: I am a registered Democrat with fiscally conservative leanings, so nobody is speaking for me in this process.)

On the Republican side, I must admit that I’m surprised that The Donald has made it this far. I completely discounted, and underestimated, the appeal of this loudmouthed buffoon. That being said, it looks like he’ll stick around for a while. I’m also surprised by the appeal of the religious zealot, Ted Cruz. There is very little hope for a centrist candidate in this field of “how far right can we lean” candidates. Iowa and New Hampshire managed to winnow away almost all of the pretenders; Ben Carson remains the only Walking Dead remaining in the Republican Field. I imagine he will be gone by the end of the month. That will leave Trump, Cruz, Rubio, Kasich and maybe Bush to wage battle into March. My intuition says the Bush will be the next one to go, leaving the Final Four to duke it out over the remaining few months until the nomination.

The picture on the Democratic side isn’t much better. All of the pretenders have already dropped out of the race, leaving the equally unappealing Hillary and Bernie. Notwithstanding his big win in New Hampshire, I still don’t think Bernie has any chance of getting the nomination. Which means a very flawed Hillary Clinton will likely oppose an equally flawed (and potentially very scary) Donald Trump or Ted Cruz in the general election. The prospect of having to choose between either one, knowing that the winner will become President of the United States has me rethinking my citizenship.

So what is a fiscally conservative, socially liberal voter to do? Well, outside of the slim possibility that Michael Bloomberg will run, I honestly don’t know. I’m not optimistic. And I believe that collectively, the stock market feels like I do. I think a lot of the poor stock market action can be attributed to the uncertainty surrounding a presidential election with no good candidates. And if that’s true, we could be faced with months of market turmoil ahead. Add to that the slowing growth in China, the plunging price of oil, currency devaluation around the globe and a relatively weak domestic economy and you have a recipe for stock market disaster.

That being said, I want to be clear about something. It is not time to panic. Things are not nearly as dire as they were leading up to the crash in 2008. Outside of the negative consequences of a too-strong dollar, corporate revenues, profits and balance sheets are in very good shape. It is part of the normal and natural part of the stock market cycle that after a prolonged period of gains that we must experience a year or two of negative returns. Then, when the gloom and despair have peaked, it will be time for the next rally to begin.

So stick with your plan. In the world of virtually zero interest rates, owning a diverse basket of blue-chip, dividend-paying stocks, returning an average yield of at least 2%, is your best way to secure your financial future. So buckle up and prepare for a bumpy ride. I’ll try my best to guide you along the way.

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.