2008 has been a horrendous year for investors. However, turning the page on the calendar does not ensure things will get better; so what can an investor do? We recommend a portfolio check-up.
A thorough check up includes:
1) Upgrading the quality of investments in your portfolio. A very obvious question would be how you can tell the difference between high quality and low quality stocks. We look at several key aspects:
• Low levels of debt: In this tough environment, we would prefer to own companies with little or no debt.
• The ability to generate lots of cash. We want to own companies that can take more of a sales dollar and turn it into cash that can be used to benefit shareholders. That cash can be used to pay dividends, reduce debt, buy back stock (which makes a lot of sense when the stock is really cheap) or make strategic acquisitions.
• Consistency of earnings: We favor companies that do not have large cyclical swings in earrings. In today’s weak economy we would not be surprised to see growth slow down or plateau for even the best companies, but, for now, we try and avoid areas where the swings can be large.
Both high quality and lower quality stocks are down dramatically this year. Chances are you own a few of the lower quality ones, so now is a good time to sell them. Don’t get hung up on what you paid for the stock, the market does not care. If you sell a low quality name, you can very likely reinvest the proceeds in a high quality company whose stock is also off considerably. When the market does improve, the better name will participate, but more importantly the higher quality company will ride out any lingering difficult times much better.
2) Rebalance. When you first structured your portfolio, you most likely made some decisions about what percentage to invest in stocks, bonds and cash. Given the large declines in most stocks, your portfolio is out of balance. For example, if you started 2008 with a 70% allocation to stocks and the remainder in bonds and cash, you probably only have about 60% of your (smaller) portfolio in stocks today. If you really believe in your original allocation, then now is the time to take some of your cash and bonds, buy some stocks and bring your portfolio back into balance.
3) Add dividend paying stocks. We love dividends. They provide a steady (and hopefully) growing stream of cash flow to holders. That cash can be used to meet current expenses and therefore lessen the need to sell beaten-up stocks. If you do not need the cash for current expenses, then reinvest it into some of the many cheap stocks available to you.
4) Review your fund holdings. Many mutual funds have not performed well this year. Now is a good time to re-evaluate your holdings. Is the same manager still running the fund? Has its performance lagged the averages? If a fund has lagged for one year, we do not necessarily view that as a problem, but if a fund lags for several years, it may be time to make a change.
Just like getting a routine physical from a doctor, there may be nothing wrong with your portfolio, but it is important to check. It is also important because you will no longer feel like you letting the markets control you. Instead you will feel empowered as you have taken back some control. Don’t let fears of the market prevent you from making changes!
If you are not comfortable giving your portfolio a check-up, you should talk to a professional advisor. If you do not know of one, give us a call. We would be pleased to help!
Best wishes for a happy and healthy New Year!
Monday, December 29, 2008
Wednesday, December 17, 2008
Safety First
The Bernard Madoff saga has emphasized a central tenet of successful investment – keeping your money safe. For those of you not following the story, Mr. Madoff has been a presence on Wall Street since the 1960’s. He operated a brokerage firm and an “investment management” arm. The quotation marks around investment management qualify the term as Mr. Madoff was found to have been running a giant Ponzi scheme. Investors will be lucky to see ten cents for every dollar invested once the firm’s holdings are sold by the receiver.
Besides relief at not being one of the investors, what can one take from this latest incarnation of Charles Ponzi’s brainchild? I see a few lessons:
Putting money in a common private pool raises risk. Pooling money for investment purposes is, of course, a description of the mutual fund industry. But mutual funds are regulated by the SEC, have required disclosures and safeguards. Private pools (like hedge funds) have no SEC-mandated disclosures and they give the managers substantial control over the assets. Pooling into a common fund lessens the oversight an investor might bring when reviewing his or her account.
If it looks too good it probably is. Mr. Madoff reported consistent profits in up markets, in down markets and in sideways markets. No investment strategy works all the time in every type of market, never has never will.
Homework is very important. Some potential investors reviewed Mr. Madoff’s claims and found them dubious. For example, Mr. Madoff said he bought and sold specific options as part of his strategy. However the amount of money he was managing meant that he would have had to buy and sell options well in excess of the actual amount they traded. The Wall Street Journal cites one example where he would have had to have bought 22,000 contracts and only 400 traded. There were some early warning signals like this article from in an industry newsletter back in 2001 where other investment professionals raised issues about Madoff’s reported results http://nakedshorts.typepad.com/files/madoff.pdf. Barron’s had concerns, as well http://online.barrons.com/article/SB989019667829349012.html (subscription required).
So Harvest will continue to offer only separately managed accounts, where client money is held at an unaffiliated brokerage firm (we currently are using Charles Schwab) in the client’s name and set off from all other accounts. We will continue to accept the inevitable ups and downs the market will bestow on our investment approach and we will continue to do our own work because we believe sleeping well at night is a worthwhile investment objective.
Besides relief at not being one of the investors, what can one take from this latest incarnation of Charles Ponzi’s brainchild? I see a few lessons:
Putting money in a common private pool raises risk. Pooling money for investment purposes is, of course, a description of the mutual fund industry. But mutual funds are regulated by the SEC, have required disclosures and safeguards. Private pools (like hedge funds) have no SEC-mandated disclosures and they give the managers substantial control over the assets. Pooling into a common fund lessens the oversight an investor might bring when reviewing his or her account.
If it looks too good it probably is. Mr. Madoff reported consistent profits in up markets, in down markets and in sideways markets. No investment strategy works all the time in every type of market, never has never will.
Homework is very important. Some potential investors reviewed Mr. Madoff’s claims and found them dubious. For example, Mr. Madoff said he bought and sold specific options as part of his strategy. However the amount of money he was managing meant that he would have had to buy and sell options well in excess of the actual amount they traded. The Wall Street Journal cites one example where he would have had to have bought 22,000 contracts and only 400 traded. There were some early warning signals like this article from in an industry newsletter back in 2001 where other investment professionals raised issues about Madoff’s reported results http://nakedshorts.typepad.com/files/madoff.pdf. Barron’s had concerns, as well http://online.barrons.com/article/SB989019667829349012.html (subscription required).
So Harvest will continue to offer only separately managed accounts, where client money is held at an unaffiliated brokerage firm (we currently are using Charles Schwab) in the client’s name and set off from all other accounts. We will continue to accept the inevitable ups and downs the market will bestow on our investment approach and we will continue to do our own work because we believe sleeping well at night is a worthwhile investment objective.
Tuesday, December 9, 2008
Media Mention
Here is a link to a story in one of our local papers where Jim is quoted. He highlights a number of attractively valued businesses we see in today's market.
http://www.dailylocal.com/articles/2008/12/08/business/srv0000004231644.txt
http://www.dailylocal.com/articles/2008/12/08/business/srv0000004231644.txt
Wednesday, December 3, 2008
Recoveries
I saw this interesting blog from Disciplined Investing. It explains that much of the positive returns following a bear market, come in the first year. This helps to reinforce our point that it is important to stick with your asset allocation and keep money in the equity markets. In order to participate in the next uptrend in stocks, you need to be there. If you wait too long to get back in, your returns will diminish. This study is very timely given that we have come off a sizable upward move in the stock market. We are not sure whether the bear market is over, but we do know that we want to be there when the next bull market begins.
http://disciplinedinvesting.blogspot.com/2008/11/bear-market-recoveries-returns-occur.html
http://disciplinedinvesting.blogspot.com/2008/11/bear-market-recoveries-returns-occur.html
Monday, December 1, 2008
The Obama Economic Team
President-elect Obama announced his economic team last week. While it is too early to assess the strength of the team (like a football team, let’s see what they do on the field), we can make a few observations:
1) It is a mix of old and new faces:
A. Tim Geithner is a relatively new name on the national scene. He has been the head of the New York Federal Reserve and has been actively involved in the current financial crisis. That experience should be helpful as it provides some continuity. It also gives the Obama team a seat at the table prior to his taking officer on January 20th.
B. Larry Summers will head the National Economic Council. He was Treasury Secretary during the Clinton administration and he may well become Obama’s closest economic advisor. There was some belief that he would be given a second term at Treasury, but given his ill-conceived remarks made about woman while President of Harvard, a confirmation hearing in front of the senate may have been difficult.
C. Paul Volker will head the newly formed President’s Economic Recovery Advisory Board . I like this choice. Volker is experienced (having been the head of the Federal Reserve during the Carter and Reagan administrations) and seems willing to do the right thing, not always the politically expedient thing. His decision to raise interest rates in the late 70s and put the country through a tough recession was crucial in reducing inflation. At the press conference announcing the appointment, Obama said of Volker “He pulls no punches. He seems to be fairly opinionated.” I am confident that Volker will provide Obama with his uncensored opinion.
D. Christina Romer will head the Council of Economic Advisors. She is a well regarded economist, who has some supply side economic beliefs.
2) The new team does not appear to be full of ideologues and even Karl Rove generally liked the choices. It strikes me as a centrist group who will seek to combat the current financial crisis and deal with the recession. They will eventually deal with making broader changes to the tax code, but that is not the primary concern today.
3) While a tremendous amount has been spent and will be spent on “bailouts”, it does not appear that there will be a blank check. The Big 3 auto executives, which represent one of the most populist of groups to ask for money, were sent back to Detroit to craft a plan that will show how the companies can remain solvent if they receive government help. It was clear that Obama was disappointed with the auto executives.
One other thing that is important to note is that investors do not like uncertainty. Now that we know the group who will be overseeing economic policy (and it seems like a solid team), it is not a surprise that the markets have been stronger.
1) It is a mix of old and new faces:
A. Tim Geithner is a relatively new name on the national scene. He has been the head of the New York Federal Reserve and has been actively involved in the current financial crisis. That experience should be helpful as it provides some continuity. It also gives the Obama team a seat at the table prior to his taking officer on January 20th.
B. Larry Summers will head the National Economic Council. He was Treasury Secretary during the Clinton administration and he may well become Obama’s closest economic advisor. There was some belief that he would be given a second term at Treasury, but given his ill-conceived remarks made about woman while President of Harvard, a confirmation hearing in front of the senate may have been difficult.
C. Paul Volker will head the newly formed President’s Economic Recovery Advisory Board . I like this choice. Volker is experienced (having been the head of the Federal Reserve during the Carter and Reagan administrations) and seems willing to do the right thing, not always the politically expedient thing. His decision to raise interest rates in the late 70s and put the country through a tough recession was crucial in reducing inflation. At the press conference announcing the appointment, Obama said of Volker “He pulls no punches. He seems to be fairly opinionated.” I am confident that Volker will provide Obama with his uncensored opinion.
D. Christina Romer will head the Council of Economic Advisors. She is a well regarded economist, who has some supply side economic beliefs.
2) The new team does not appear to be full of ideologues and even Karl Rove generally liked the choices. It strikes me as a centrist group who will seek to combat the current financial crisis and deal with the recession. They will eventually deal with making broader changes to the tax code, but that is not the primary concern today.
3) While a tremendous amount has been spent and will be spent on “bailouts”, it does not appear that there will be a blank check. The Big 3 auto executives, which represent one of the most populist of groups to ask for money, were sent back to Detroit to craft a plan that will show how the companies can remain solvent if they receive government help. It was clear that Obama was disappointed with the auto executives.
One other thing that is important to note is that investors do not like uncertainty. Now that we know the group who will be overseeing economic policy (and it seems like a solid team), it is not a surprise that the markets have been stronger.
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