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.
Thursday, November 20, 2008
Roth Idea
For those of you who are married, actively participating in a company sponsored retirement plan and making over $169,000 in adjusted gross income in 2008 ( $116,000 if you are a single filer), consider making non-deductible IRA contributions in 2008 and 2009. The goal would be to convert the balance to a Roth IRA in 2010. In 2010, the income limit for Roth conversions (currently $100,000 in adjusted gross income) goes away and you can pay the tax due on the conversion over two years. Given the expectation that marginal tax rates will be going up, it may be a way to give higher earners an opportunity to get some money into Roth accounts.
There are several other aspects to consider such as will the income limit really go away in 2010, how much you can set aside and where the dollars will come from to pay the tax due. So send us an email at planting@harvestfinancialpartners.com for more information and to discuss your specific situation.
There are several other aspects to consider such as will the income limit really go away in 2010, how much you can set aside and where the dollars will come from to pay the tax due. So send us an email at planting@harvestfinancialpartners.com for more information and to discuss your specific situation.
Thursday, November 13, 2008
Dividend Aristocrats
I was doing some research this morning and came across this chart on the Dividend Growth Investor website (http://www.dividendgrowthinvestor.com/). It shows the performance of the S&P 500 versus the S&P Dividend Aristocrats index. It also makes pretty clear why we like companies that pay dividends.
Dividend Aristocrats are companies which have paid and increased their dividends for the last 25 years. These are the types of companies that we look at when researching stock ideas. Some examples of Dividend Aristocrats are General Electric, Johnson & Johnson, Pfizer and Procter & Gamble.
This chart may not mean much today given the turbulent market environment, but it should help to provide some comfort that buying quality dividend paying companies is an attractive long term strategy.
Tuesday, November 11, 2008
Gift of Knowledge
I saw this story about mothers talking to daughters about financial matters on NBC News last night. The basic premise was that a subset of moms consider themselves the CFOs of their households and make it a point to discuss finances with their daughters. That is great, but the story does point out another very important reason why women in particular should be financially literate. You live longer than us men do and given that difference in life expectancy, as the piece says, 90% of women will be alone at some point in their lives. So by all means teach away about the timeless tenets of personal finance – how to make money, spend less than you make and put the difference someplace safe – but include sons too. It’s knowledge they won’t get at school so you are the only, or at least the best source. And it’s knowledge that will pay dividends over their lifetime. If you know it's important to discuss but don't know where to begin send Jim or I an email; we have some ideas about how to get the conversation started.
Thursday, November 6, 2008
President-elect Obama
So we now have settled on who will be the next president. Congratulations Mr. Obama! He certainly will have a full plate when he assumes the presidency on January 20th.
But what does this mean for our clients. In two words, not much. Please don’t take this to imply that we are oblivious to the fact there will be changes under an Obama administration. Of course we know there will be winners and losers. What we do mean is that we will continue to search for high quality companies that pay a dividend and are inexpensively valued.
Some investors may respond to the election of Barack Obama and sell off certain stocks or sectors. We hope to take advantage of some of these overreactions and add new names to the portfolio. We believe the type of companies that we like and the managements we want to partner with can operate effectively in any political environment. We also are confident that strong balance sheets have no political allegiance. The new president and his policies may have some impact on how we value a company, but even that will be relatively minor.
Bottom line, the agenda of President Obama will be one of many factors that may have a modest influence on how we construct a portfolio, but it will not lead to a fundamental change in our approach.
But what does this mean for our clients. In two words, not much. Please don’t take this to imply that we are oblivious to the fact there will be changes under an Obama administration. Of course we know there will be winners and losers. What we do mean is that we will continue to search for high quality companies that pay a dividend and are inexpensively valued.
Some investors may respond to the election of Barack Obama and sell off certain stocks or sectors. We hope to take advantage of some of these overreactions and add new names to the portfolio. We believe the type of companies that we like and the managements we want to partner with can operate effectively in any political environment. We also are confident that strong balance sheets have no political allegiance. The new president and his policies may have some impact on how we value a company, but even that will be relatively minor.
Bottom line, the agenda of President Obama will be one of many factors that may have a modest influence on how we construct a portfolio, but it will not lead to a fundamental change in our approach.
Friday, October 31, 2008
Trick or Treat
Tonight is Halloween and kids will be out trick or treating. It is a fun time and it is great to see the many creative costumes that come to our door.
I remember when I was younger, how much I loved Halloween. As someone with a serious sweet tooth, this is my time of year. My favorite part after a long night of trick or treating was searching through my bag of candy for something special and unique amid all the M&Ms, Hershey or Snickers Bars. Back then, special was Dots or Bit of Honey or Sugar Babies.
October has certainly given us a whole lot of tricks. But today the market is a lot like Halloween and we are out trick or treating. But instead of Dots, we , we are looking to find a special stock or two for our portfolios. They are out there as the recent market decline has created lots of treats. We may have to go to a few more houses to find them, but we will find them! And when we do it will feel just as good as when we munched on our Halloween candy. The biggest difference between now and when I was younger is I don’t have to wear a costume and I am a lot more patient.
Happy Halloween!
I remember when I was younger, how much I loved Halloween. As someone with a serious sweet tooth, this is my time of year. My favorite part after a long night of trick or treating was searching through my bag of candy for something special and unique amid all the M&Ms, Hershey or Snickers Bars. Back then, special was Dots or Bit of Honey or Sugar Babies.
October has certainly given us a whole lot of tricks. But today the market is a lot like Halloween and we are out trick or treating. But instead of Dots, we , we are looking to find a special stock or two for our portfolios. They are out there as the recent market decline has created lots of treats. We may have to go to a few more houses to find them, but we will find them! And when we do it will feel just as good as when we munched on our Halloween candy. The biggest difference between now and when I was younger is I don’t have to wear a costume and I am a lot more patient.
Happy Halloween!
Thursday, October 30, 2008
The Three Most Important Things To Do Now
With apologies to the real estate industry, the three most important pieces of advice an investment advisor can give his or her clients right now are – rebalance, rebalance and rebalance. You and your advisor initially set an asset allocation – the percentage of your portfolio invested in stocks, bonds, cash, maybe real estate and commodities as well – for your investment portfolio. (If your investment advisor did not do this with you, make them your former investment advisor immediately.) The asset allocation was set based on your personal circumstances and risk tolerance. Even with Tuesday's monster rally, the stock market, as measured by the S&P 500, is down over 30% this year. So your portfolio is most likely out of balance. By rebalancing now, selling some bonds to buy stocks, you are increasing your odds of actually buying low and selling high. And the discomfort you feel in contemplating buying stocks right now shows why buying low and selling high is so difficult in practice while so obvious in theory. While past performance is no guarantee of future results, if you rebalance now, I think you will be very pleased you did in a year or two.
Friday, October 24, 2008
Earnings Season
Right now we are in the midst of earnings season and investors are reacting to news from individual companies, and in general it has not been good. This reflects the fact that we are in a very weak economic period. But it also reflects the lack of visibility by company managements and so they are keeping expectations low. I think it is the appropriate strategy. Expectations need to be lowered. It may make investors nervous, but eventually we will see positive surprises. That may not happen next quarter, but it could be sooner than most think. Recessions (and let us agree that we are in one now) tend to last on average 11 months, but stocks bottom about half way through and then begin to move up. We may not be in an “average” recession, but the point is stocks begin moving up before we see an improvement in GDP.
Of course, this morning all the talk was about how the overseas markets were down big and the futures in the US were at their limit lows. It looked like today could be really bad, and for awhile it was. But as the day progressed, investors began to buy. The market seemed to be acting more rationally. Still we ended up down over 300 points, but it appeared like it could have been much worse.
I am certain we are still seeing some panic selling. I also know that we are still feeling the effects of hedge funds liquidating their positions. This will all take some time to work through, but we will. And when it does, we will once again return our focus to company fundamentals. I said to many people during the tech bubble of the late 90s that valuation matters and it still does today. There are some incredibly cheap stocks available for purchase. Do your homework during earnings season and be prepared to buy.
Of course, this morning all the talk was about how the overseas markets were down big and the futures in the US were at their limit lows. It looked like today could be really bad, and for awhile it was. But as the day progressed, investors began to buy. The market seemed to be acting more rationally. Still we ended up down over 300 points, but it appeared like it could have been much worse.
I am certain we are still seeing some panic selling. I also know that we are still feeling the effects of hedge funds liquidating their positions. This will all take some time to work through, but we will. And when it does, we will once again return our focus to company fundamentals. I said to many people during the tech bubble of the late 90s that valuation matters and it still does today. There are some incredibly cheap stocks available for purchase. Do your homework during earnings season and be prepared to buy.
Monday, October 20, 2008
Old Friends
I spent this past weekend with some old friends. We played some golf, caught up and reminisced about the past. As we get older, the weekends become more sedate but the stories about our past exploits become more impressive. It is always a good time and something I look forward to every year.
There is a lot going on in the markets, some of it is important, but much of it is noise. That made this weekend especially refreshing as it was a great way to clear my head. I still feel very comfortable with our approach to dealing with this crisis. Look for good businesses, with good balance sheets operated by excellent managers and buy them at the right price. I am confident if we stick with this discipline our clients will come through this a great shape. It is not really complicated, but executing it requires patience. After a nice weekend, I feel rejuvenated and ready to go.
There is a lot going on in the markets, some of it is important, but much of it is noise. That made this weekend especially refreshing as it was a great way to clear my head. I still feel very comfortable with our approach to dealing with this crisis. Look for good businesses, with good balance sheets operated by excellent managers and buy them at the right price. I am confident if we stick with this discipline our clients will come through this a great shape. It is not really complicated, but executing it requires patience. After a nice weekend, I feel rejuvenated and ready to go.
Great Minds...
We are glad to see our thinking about the attractiveness of US stocks is shared by another successful investor.
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&ref=opinion&oref=slogin
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&ref=opinion&oref=slogin
Wednesday, October 15, 2008
Panic Is Not An Investment Strategy
The title of this piece came from a quote I heard while listening to NPR last week. I cannot think of a more apt name given the state of affairs in the markets recently. The carnage has been terrible and equity investors have seen portfolio values decline markedly over the past few weeks. It is really scary!
But, it is not the time to panic. The Treasury and the Federal Reserve have been doing everything possible to help alleviate the problems in the market today. There is some question whether they were late to act, but the point now is they are acting and they are acting in unison with many other countries. We are witnessing a global intervention on a scale rarely seen. We believe that it will ultimately prove effective, but we are unable to say when. We just know we want to be there when stocks turn.
Now we are not just sitting idly by watching the markets. We are taking action. First, we are looking to upgrade the quality of our portfolios. Stocks have sold off dramatically, good and bad companies. We are using this time to sell the weaker names and buy the companies we expect to be the long term winners. We are also focused primarily (but not exclusively) on buying those companies that are self financing. By that, we mean that we want to own companies who are not at the whim of the banks or the bond market to finance growth. These companies can use their financial strength to prosper in these tougher times. Some examples would include Johnson & Johnson and Paychex.
We also continue to focus on dividends. We have always been a big fan of dividends, but today they provide some downside protection and a stream of cash flow that can be used to buy additional stock. We like to see companies with the confidence to increase its dividend during these times. It sends a message that management has comfort in the future. United Technologies just raised its dividend 20% last week. It may not have caught the eye of many investors given what was taking place in the stock market, but it caught our eye.
There are tremendous opportunities today. There are many great companies with solid balance sheets available at attractive valuations. Our shopping list is very long and we are buying. That said, we are moving money in at a deliberate pace. This turmoil may not be over, but we do believe that we are close to a bottom. We are also confident that the companies that we are buying today will serve us and our clients well into the future.
(Disclosure: We own Johnson & Johnson, Paychex and United Technologies in our clients’ portfolios as well as our portfolios. Please write our offices for a complete list of securities transactions.)
But, it is not the time to panic. The Treasury and the Federal Reserve have been doing everything possible to help alleviate the problems in the market today. There is some question whether they were late to act, but the point now is they are acting and they are acting in unison with many other countries. We are witnessing a global intervention on a scale rarely seen. We believe that it will ultimately prove effective, but we are unable to say when. We just know we want to be there when stocks turn.
Now we are not just sitting idly by watching the markets. We are taking action. First, we are looking to upgrade the quality of our portfolios. Stocks have sold off dramatically, good and bad companies. We are using this time to sell the weaker names and buy the companies we expect to be the long term winners. We are also focused primarily (but not exclusively) on buying those companies that are self financing. By that, we mean that we want to own companies who are not at the whim of the banks or the bond market to finance growth. These companies can use their financial strength to prosper in these tougher times. Some examples would include Johnson & Johnson and Paychex.
We also continue to focus on dividends. We have always been a big fan of dividends, but today they provide some downside protection and a stream of cash flow that can be used to buy additional stock. We like to see companies with the confidence to increase its dividend during these times. It sends a message that management has comfort in the future. United Technologies just raised its dividend 20% last week. It may not have caught the eye of many investors given what was taking place in the stock market, but it caught our eye.
There are tremendous opportunities today. There are many great companies with solid balance sheets available at attractive valuations. Our shopping list is very long and we are buying. That said, we are moving money in at a deliberate pace. This turmoil may not be over, but we do believe that we are close to a bottom. We are also confident that the companies that we are buying today will serve us and our clients well into the future.
(Disclosure: We own Johnson & Johnson, Paychex and United Technologies in our clients’ portfolios as well as our portfolios. Please write our offices for a complete list of securities transactions.)
Thursday, October 9, 2008
Client Letter
The following is a letter we recently sent to our clients:
This has certainly been a volatile time in our markets! We have seen enormous price swings throughout the quarter, and some huge swings intraday. These market moves have been the result of some historic changes on Wall Street. Starting with the collapse and sale of Bear Stearns to JP Morgan Chase, we have seen Lehman Brothers go bankrupt, Fannie Mae and Freddie Mac bought by the government, and AIG effectively get taken over by the government. We have also seen the largest bank failure in history (Washington Mutual) while other smaller banks have faced a similar fate. Finally, as the 4th quarter begins, we have the White House and congress agreeing to a $700 billion bank rescue plan. There is much angst whether bailing out the banks and Wall Street is a good idea, but ultimately the biggest beneficiary may be those on Main Street who could benefit from looser credit and stronger bank balance sheets.
This is the economic and financial backdrop that we have faced as we focus on the management of your, and our, portfolios. While these events are tremendously important, we have tried not to lose sight of our objective: to manage your money for the long term growth of income and principal. Note the emphasis on long term. While we would like to buy something and see it go up in price immediately, we recognize that is not realistic. Rather, we expect the stocks and mutual funds we purchase to go up in price significantly over a time frame we measure in years, not in days or in hours. To accomplish this, we look for companies that we want to own well into the future. The prices of these good businesses have been subject to a great deal of fluctuation in the short term (for the reasons we described above) but we view that as an advantage for long term investors. It occasionally provides the opportunity to buy very good businesses at very fair to downright cheap prices. Since inaction carries no penalty, we can afford to wait for the stocks that we want to own to reach the prices we want to pay. If not, we will find something else.
We do not have a crystal ball to tell us when the economy will perk up and stocks will rise again. But we will continue to build our portfolios with high quality, well managed companies that we will be pleased to own for many years.
We want you to know that we have been working on updating our website. In the next few days, you should see the results. While the look of the site similar, we have added a section called the Harvest Newsroom. Here you can find a link to our blog that will provide you some of our thoughts on stocks and the markets. Also, in the Newsroom you will find a section highlighting some of our favorite websites and a list of books that may help to provide some perspective on what is taking place in the markets today. We plan to regularly update all of these sections. We also hope to include some articles and maybe even videos on important financial topics. Suggested improvements and topics are always welcome.
We also want to take a moment to thank you all for choosing to work with us. We both love what we do and are hesitant to call it work. We are fortunate to work with you and are always available. Please feel free to call us (610-240-4740) or email us (jim@harvestfp.com or john@harvestfp.com).
Best wishes!
Jim Wright
John Fattibene
This has certainly been a volatile time in our markets! We have seen enormous price swings throughout the quarter, and some huge swings intraday. These market moves have been the result of some historic changes on Wall Street. Starting with the collapse and sale of Bear Stearns to JP Morgan Chase, we have seen Lehman Brothers go bankrupt, Fannie Mae and Freddie Mac bought by the government, and AIG effectively get taken over by the government. We have also seen the largest bank failure in history (Washington Mutual) while other smaller banks have faced a similar fate. Finally, as the 4th quarter begins, we have the White House and congress agreeing to a $700 billion bank rescue plan. There is much angst whether bailing out the banks and Wall Street is a good idea, but ultimately the biggest beneficiary may be those on Main Street who could benefit from looser credit and stronger bank balance sheets.
This is the economic and financial backdrop that we have faced as we focus on the management of your, and our, portfolios. While these events are tremendously important, we have tried not to lose sight of our objective: to manage your money for the long term growth of income and principal. Note the emphasis on long term. While we would like to buy something and see it go up in price immediately, we recognize that is not realistic. Rather, we expect the stocks and mutual funds we purchase to go up in price significantly over a time frame we measure in years, not in days or in hours. To accomplish this, we look for companies that we want to own well into the future. The prices of these good businesses have been subject to a great deal of fluctuation in the short term (for the reasons we described above) but we view that as an advantage for long term investors. It occasionally provides the opportunity to buy very good businesses at very fair to downright cheap prices. Since inaction carries no penalty, we can afford to wait for the stocks that we want to own to reach the prices we want to pay. If not, we will find something else.
We do not have a crystal ball to tell us when the economy will perk up and stocks will rise again. But we will continue to build our portfolios with high quality, well managed companies that we will be pleased to own for many years.
We want you to know that we have been working on updating our website. In the next few days, you should see the results. While the look of the site similar, we have added a section called the Harvest Newsroom. Here you can find a link to our blog that will provide you some of our thoughts on stocks and the markets. Also, in the Newsroom you will find a section highlighting some of our favorite websites and a list of books that may help to provide some perspective on what is taking place in the markets today. We plan to regularly update all of these sections. We also hope to include some articles and maybe even videos on important financial topics. Suggested improvements and topics are always welcome.
We also want to take a moment to thank you all for choosing to work with us. We both love what we do and are hesitant to call it work. We are fortunate to work with you and are always available. Please feel free to call us (610-240-4740) or email us (jim@harvestfp.com or john@harvestfp.com).
Best wishes!
Jim Wright
John Fattibene
Monday, September 15, 2008
Our Principles in Action
Lot of news this weekend: big banks meeting with Treasury and the Fed, Lehman Brothers having to file for bankruptcy, Merrill Lynch agreeing to sell itself to Bank of America, AIG looking for cash.
Fortunately major media outlets were calming influences:
“Street of Fear” – Fox News website
“Crisis on Wall Street…” – Wall Street Journal
“A Hellacious Hurricane Hits Lehman Brothers” - Barron’s
Okay, a little sarcasm.
So what do Jim and I think? Well first we remember two of our principles (we actually remember them all, but two of them are particularly appropriate):
· Strive to be patient investors in an impatient world.
· Never look for validation in conventional wisdom.
We thought of these two principles because today will be a tumultuous day in financial markets; it has started out that way as I type this. And in tumult we believe we can find opportunity. We will be looking for companies that have little or nothing to do with some of the financial assets causing the current problems – subprime mortgages, CDOs, etc – where selling has caused the price to decline well below our estimate of the company’s business value. Or, as I like to say, we will be looking for really easy decisions. Here is hoping that we will find some.
-John
Fortunately major media outlets were calming influences:
“Street of Fear” – Fox News website
“Crisis on Wall Street…” – Wall Street Journal
“A Hellacious Hurricane Hits Lehman Brothers” - Barron’s
Okay, a little sarcasm.
So what do Jim and I think? Well first we remember two of our principles (we actually remember them all, but two of them are particularly appropriate):
· Strive to be patient investors in an impatient world.
· Never look for validation in conventional wisdom.
We thought of these two principles because today will be a tumultuous day in financial markets; it has started out that way as I type this. And in tumult we believe we can find opportunity. We will be looking for companies that have little or nothing to do with some of the financial assets causing the current problems – subprime mortgages, CDOs, etc – where selling has caused the price to decline well below our estimate of the company’s business value. Or, as I like to say, we will be looking for really easy decisions. Here is hoping that we will find some.
-John
Friday, September 5, 2008
Volatility may create opportunity
Goldman Sachs released a report recently called “potential 2-3 year doubles” The report discusses how the market volatility over the past year has created tremendous opportunities in the equity markets. It goes on the discuss 10 stocks the firm believes could double in value over the next 2-3 years.
This report got us thinking about the stocks that we own. Typically, when we purchase a stock, we are not expecting to see the stock double over a 2-3 year period. Instead, we are seeking an attractive and growing level of dividend income coupled with some stock price appreciation. This combination should lead an attractive total return. That said, we believe there are some names in our portfolio that appear so cheap, we would not be surprised if the stock doubled in price over the next 2-3 years. Keep in mind, this is more of a thought exercise than a prediction or recommendation, but it helps to illustrate the attractiveness of the stocks that we own:
Corning ($16.50): With businesses that are involved in fiber optics, LCD screens, diesel fuel and solar power, we think this company is well positioned in some very attractive areas. Of course, recently, Corning has seen some weakness in its LCD business due to slower consumer demand for televisions. We believe this will be short lived and expect demand to pick up again next year. Expectations are that the company will earn $1.80 this year. We think that with this mix of businesses, it is not impossible to see 10% average earnings growth over the next 3-5 years. So, if one looks out to 2011, this company could be earning around $2.40. If you apply a multiple of 15 to those earnings, you get a stock price of $36.
Legg Mason ($42): This investment management firm has seen its share price crushed over the last couple of years. Certainly, the company has caused its share of problems, but investors have punished the stock mercilessly. We think a company with $900 billion in assets under management (AUM) should be valued at least at 1% of its AUM. If we use that amount, the stock is worth over $60 today. But, if you assume some growth in the AUM over the coming years, it is not hard to see a stock worth $80 in 3 years.
We own many stocks with very attractive upside, but it might be hard to expect a double in a short period of time. Still, we are very excited about the names we own today, and fully expect to be purchasing some additional stocks with great potential upside in the coming days.
This report got us thinking about the stocks that we own. Typically, when we purchase a stock, we are not expecting to see the stock double over a 2-3 year period. Instead, we are seeking an attractive and growing level of dividend income coupled with some stock price appreciation. This combination should lead an attractive total return. That said, we believe there are some names in our portfolio that appear so cheap, we would not be surprised if the stock doubled in price over the next 2-3 years. Keep in mind, this is more of a thought exercise than a prediction or recommendation, but it helps to illustrate the attractiveness of the stocks that we own:
Corning ($16.50): With businesses that are involved in fiber optics, LCD screens, diesel fuel and solar power, we think this company is well positioned in some very attractive areas. Of course, recently, Corning has seen some weakness in its LCD business due to slower consumer demand for televisions. We believe this will be short lived and expect demand to pick up again next year. Expectations are that the company will earn $1.80 this year. We think that with this mix of businesses, it is not impossible to see 10% average earnings growth over the next 3-5 years. So, if one looks out to 2011, this company could be earning around $2.40. If you apply a multiple of 15 to those earnings, you get a stock price of $36.
Legg Mason ($42): This investment management firm has seen its share price crushed over the last couple of years. Certainly, the company has caused its share of problems, but investors have punished the stock mercilessly. We think a company with $900 billion in assets under management (AUM) should be valued at least at 1% of its AUM. If we use that amount, the stock is worth over $60 today. But, if you assume some growth in the AUM over the coming years, it is not hard to see a stock worth $80 in 3 years.
We own many stocks with very attractive upside, but it might be hard to expect a double in a short period of time. Still, we are very excited about the names we own today, and fully expect to be purchasing some additional stocks with great potential upside in the coming days.
Monday, July 28, 2008
Harvest Financial Partners
I thought I might take a moment and update you on our firm, Harvest Financial Partners. The firm was formed by John Fattibene and me because we love the investment business and want to help clients with their investment and financial goals. We began discussing forming a partnership about 18 months ago. At first, the conversations were preliminary and vague. But as the months passed, we both began to get more excited about the opportunity. To make matters easier, John and I have known each other for over 25 years (we were roommates together at Vassar College), we both have a “value” bias in our investment approach and we both understand the importance of dividends to an investor’s total return. We also felt (and still feel) that many investors are overlooked by the vast majority of investment firms and are often forced to go it alone. For some people, that is not a problem, but for many it may be beyond their interest level or expertise. Harvest was formed to help those people.
One of the most frequent comments that I hear when I tell people I have started a firm, is that I picked a tough market to start. I respectfully disagree because I believe at times like this, quality advice from a quality advisor can make a world of difference. In a great bull market, it is pretty easy to make money in stocks. But in times like these, it is difficult and investors need someone who has managed through some tough markets and can offer re-assurance and perspective. We certainly do not have all the answers and are as surprised as others by how far down some stocks have dropped. But we also know that if you have patience and discipline, you can survive just fine or even thrive. The worst thing to do is to sell indiscriminately, which is a natural reaction for many people. We can help them see the value of patience.
While helping investors with their investment needs, we can also assist them with the myriad of questions that come up on a daily, monthly, annual or generational basis:
Can I afford to retire?
Can I purchase a second home?
Should I refinance my first home?
How should I provide for spouse, children and grandchildren after I am gone?
Do I have enough life insurance?
Should I purchase long term care insurance?
Am I allocating my 401(k) investments properly?
These are not easy issues for anyone, but our experience can help our clients understand and answer these questions and the many others that will arise.
So far John and I have been working hard and having a great time. It is really very exciting to attempt to build something from scratch. We both have a lot of passion for what we are doing and enjoy working together. We are also fortunate to have some wonderful clients!
We will keep you updated on our progress. We know there will be some short term obstacles, but we are certain we can persevere. We are in this for the long run!
One of the most frequent comments that I hear when I tell people I have started a firm, is that I picked a tough market to start. I respectfully disagree because I believe at times like this, quality advice from a quality advisor can make a world of difference. In a great bull market, it is pretty easy to make money in stocks. But in times like these, it is difficult and investors need someone who has managed through some tough markets and can offer re-assurance and perspective. We certainly do not have all the answers and are as surprised as others by how far down some stocks have dropped. But we also know that if you have patience and discipline, you can survive just fine or even thrive. The worst thing to do is to sell indiscriminately, which is a natural reaction for many people. We can help them see the value of patience.
While helping investors with their investment needs, we can also assist them with the myriad of questions that come up on a daily, monthly, annual or generational basis:
Can I afford to retire?
Can I purchase a second home?
Should I refinance my first home?
How should I provide for spouse, children and grandchildren after I am gone?
Do I have enough life insurance?
Should I purchase long term care insurance?
Am I allocating my 401(k) investments properly?
These are not easy issues for anyone, but our experience can help our clients understand and answer these questions and the many others that will arise.
So far John and I have been working hard and having a great time. It is really very exciting to attempt to build something from scratch. We both have a lot of passion for what we are doing and enjoy working together. We are also fortunate to have some wonderful clients!
We will keep you updated on our progress. We know there will be some short term obstacles, but we are certain we can persevere. We are in this for the long run!
Thursday, July 24, 2008
What a week!
I guess things must be a lot better in the world this week. I was just reviewing some numbers and see that many of the financial stocks are up over 35% or more (in Bank of America’s case it’s a staggering 81%) since July 15th. Are the companies really worth that much more a week later, or was the extreme and indiscriminate selling prior to the 15th completely divorced from underlying business value? I will leave that as a rhetorical question. One thing we did learn was that while the earnings for these financial stocks were not good, the expectations were so low that even ugly numbers looked attractive. I guess beauty really is in the eye of the beholder!
I am not going to tell you the volatility is over. We still have high food and energy prices, a weak dollar, a slowing consumer, weak housing, an unpopular war... We also have a presidential election taking place and all the uncertainty which it entails. So I am not sure we are out of the woods, yet. But as I have been saying, there are good opportunities out there, you just have to look and have some patience.
I wish I could tell you that we were smart enough to buy all our financial stocks last Tuesday, but we were not. But we owned some of these stocks that did very well, and will likely buy more. We think the worst may be over for the financials, but caution is still necessary. But for investors with a longer time horizon, there is money to be made in this market.
I am not going to tell you the volatility is over. We still have high food and energy prices, a weak dollar, a slowing consumer, weak housing, an unpopular war... We also have a presidential election taking place and all the uncertainty which it entails. So I am not sure we are out of the woods, yet. But as I have been saying, there are good opportunities out there, you just have to look and have some patience.
I wish I could tell you that we were smart enough to buy all our financial stocks last Tuesday, but we were not. But we owned some of these stocks that did very well, and will likely buy more. We think the worst may be over for the financials, but caution is still necessary. But for investors with a longer time horizon, there is money to be made in this market.
Thursday, July 17, 2008
Making a list
What an ugly market! That may be the most obvious statement I have made today. That said, what may not be so obvious is that if you have some cash and patience, times like these can be very interesting. We are witnessing excellent companies, with strong fundamentals, being sold as if they have some kind terminal disease. There are numerous purchase opportunities developing and we are doing our homework. We have a list that we refer to as our “Farm Team” consisting of stocks we are considering owning, and this list of prospects is getting quite long.
Keeping with our baseball analogy, I think we will be promoting several stocks from the Farm Team into the big leagues shortly. I am also pretty sure that we may have a future hall of famer or two on that list!
(Written on 7/11/08)
Wednesday, July 16, 2008
Planting for your future
This is the inaugural post in our blog. We have titled it “Planting for Your Future”, because we believe that investors can get too caught up in the short term noise and forget what is most important, their long term goals. Most of us invest today with some purpose. That purpose could be a comfortable retirement, to send their kids to college, to buy a house (or a 2nd house) or to leave money for the next generation. In almost all cases, if you invest in the stock market, you need to have a long term time horizon. Stocks are great investments, when viewed over an extended time frame, but can be quite volatile in shorter periods. At Harvest, we only utilize equities for that portion of a client’s assets that are not needed in the next 3-5 years.
Jim, just to let you know that this market doesn't bother me at all and I'm not bothered by negatives on my performance reports. . When I see stocks like GM hitting 53-year lows, it brings back memories of Chrysler at $2 per share. As far as I'm concerned you can be as aggressive in buying equities as you see opportunities.
Why was I so happy? Simply, because this client gets it. He clearly understands that markets can be very volatile. But, if you have a long time horizon, we should be utilizing the weakness in the markets to be buying. If we purchase solid companies at today’s lower valuations and sprinkle in a little patience, we can make a lot of money for our clients. I am not calling a bottom, but I am looking at companies and asking whether they represent compelling values today. The answer I am giving far more often is “yes”.
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