Supply & Demand: The Key to Oil, Stocks, and Pork Bellies

Chart - Money

Commodity prices, including oil, are “crashing” according to the pundits and fears are building that this is a precursor to another stock market collapse. Are we on an irreversible path of repeating the bloodbath carnage of the 2008-2009 Great Recession?

Fortunately for investors, markets move in cycles and the fundamental laws of supply and demand hold true in both bull and bear markets, across all financial markets. Whether we are talking about stocks, bonds, copper, gold, currencies, or pork bellies, markets persistently move like a pendulum through periods of excess supply and demand. In other words, weakness in prices create stronger demand and less supply, whereas strength in prices creates weakening demand and more supply.

Since energy makes the world go round and the vast majority of drivers are accustomed to filling up their gas tanks, the average consumer is familiar with recent negative price developments in the crude oil markets. Eighteenth-century economist Adam Smith would be proud that the laws of supply and demand have help up just as well today as they did when he wrote Wealth of Nations in 1776.

It is true that overall stagnation in global economic demand in recent years, along with the strengthening of the U.S. dollar (because of better relative growth), has contributed to downward trending oil prices. It is also true that supply factors, such as Saudi Arabia’s insistence to maintain production and the boom in U.S. oil production due to new fracking technologies (see chart below), have arguably had a larger negative impact on the more than -50% deterioration in oil prices. Fears of additional Iranian oil supply hitting the global oil markets as a result of the Iranian nuclear deal have also added to the downward pressure on prices.

Source: Scott Grannis – Calafia Beach Pundit.

Source: Scott Grannis

What is bad for oil prices and the oil producers is good news for the rest of the economy. Transportation is the lubricant of the global economy, and therefore lower oil prices will act as a stimulant for large swaths of the global marketplace. Here in the U.S., consumer savings from lower energy prices have largely been used to pay down debt (deleverage), but eventually, the longer oil prices remain depressed, incremental savings should filter into our economy through increased consumer spending.

But prices are likely not going to stay low forever because producers are responding drastically to the price declines. All one needs to do is look at the radical falloff in the oil producer rig count (see chart below). As you can see, the rig count has fallen by more than -50% within a six month period, meaning at some point, the decline in global production will eventually provide a floor to prices and ultimately provide a tailwind.

Source: Scott Grannis – Calafia Beach Pundit

Source: Scott Grannis

If we broaden our perspective beyond just oil, and look at the broader commodity complex, we can see that the recent decline in commodity prices has been painful, but nowhere near the Armageddon scenario experienced during 2008-2009 (see chart below – gray areas = recessions).

Source: Scott Grannis – Calafia Beach Pundit

Source: Scott Grannis

Although this conversation has focused on commodities, the same supply-demand principles apply to the stock market as well. Stock market prices as measured by the S&P 500 index have remained near record levels, but as I have written in the past, the records cannot be attributed to the lackluster demand from retail investors (see ICI fund flow data).

Although U.S. stock fundamentals remain relatively strong (e.g., earnings, interest rates, valuations, psychology), much of the strength can be explained by the constrained supply of stocks. How has stock supply been constrained? Some key factors include the trillions in dollars of supply soaked up by record M&A activity (mergers and acquisition) and share buybacks.

In addition to the declining stock supply from M&A and share buybacks, there has been limited supply of new IPO issues (initial public offerings) coming to market, as evidenced by the declines in IPO dollar and unit volumes in the first half of 2015, as compared to last year. More specifically, first half IPO dollar volmes were down -41% to $19.2 billion and the number of 2015 IPOs has declined -27% to 116 from 160 for the same time period.

Price cycles vary dramatically in price and duration across all financial markets, including stocks, bonds, oil, interest rates, currencies, gold, and pork bellies, among others. Not even the smartest individual or most powerful computer on the planet can consistently time the short-term shifts in financial markets, but using the powerful economic laws of supply and demand can help you profitably make adjustments to your investment portfolio(s).

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See Also – The Lesson of a Lifetime (Investing Caffeine)

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 25, 2015 at 4:31 pm Leave a comment

Stock Market Tug-of-War

Image by © Royalty-Free/Corbis

Image by © Royalty-Free/Corbis

Some things never change. There are several certainties in life, including death and taxes. And when it comes to investing, there are several other certainties: the never-ending existence of geopolitical concerns, and incessant worries over Fed policy.

Let’s face it, since the dawn of mankind, humans have been programmed to worry, whether it stemmed from avoiding a man-eating lion or foraging for food to survive (see Controlling the Investment Lizard Brain). Investors function in much the same way.

There is always a constant tug-of-war between bulls and bears, and if you are obsessed with following the relentless daily headlines about a Grexit (European Greek Exit) and an imminent Federal Reserve rate hike, you like many other investors will continue to experience sweaty palms, heart palpitations, and underperformance.

Despite the gloomy headlines, the bulls are currently winning the tug-of-war as measured by the 6-year boom in global stock prices, which has breached a record $70 trillion in value (see chart below).

Source: Scott Grannis

Source: Mark J. Perry (Carpe Diem)

If you become hostage and react to the headlines about Greece, China, Fed policy, Ukraine, ISIS, Russia, Ebola, North Korea, QE Tapering, etc., not only are you ignoring the key positives fueling this bull market (see also Don’t Be a Fool, Follow the Stool) but you are also costing yourself a lot of money. While I have been watching the “sideliners” for years, they have missed a market driven by generationally low interest rates; improved employment picture (10% to 5%); tame inflation; steady improvement in housing market; fiscal deficit reductions; record corporate profits; record share buybacks and dividends; contrarian investor sentiment (leaving plenty of room for converts to join the party), and other fundamentally positive factors.

Yes, stocks will eventually go down by a significant amount – they always do. Stocks can temporarily go down based on the fear du jour (like the 10-20% declines in 2010, 2011, 2012, and 2014), but the nastier hits to stock markets always come from good old fashion cyclical recessions. As I’ve discussed before, there are no signs of a recession on the horizon, and the yield curve has been a great predictor of this trigger (see Dynamic Yield Curve  in Digesting Stock Gains). Until then, the bears will be fighting an uphill battle.

Independent of recession timing, investing is a very challenging game, even for the most experienced professionals. The best long-term investors, including the likes of Warren Buffett and Peter Lynch, understand the never-ending geopolitical and Fed policy headlines are absolutely meaningless over the long run. However, media outlets, blogs, newspapers, and radio shows make money by peddling fear as economic and political concerns jump like a frog from one lily pad to the next. At Sidoxia we  have a disciplined and systematic approach to creating diversified portfolios with our proprietary S.H.G.R. model (“sugar”) that screens for attractively valued investments. We believe this is the way to win the long-term tug-of-war.

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www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 19, 2015 at 10:03 pm Leave a comment

F.U.D. and Dividend Shock Absorbers

Slide1

As the existential question remains open on whether Greece will remain a functioning entity within the eurozone, investor anxiety and manic behavior continues to be the norm. Rampant fear seems very counterintuitive for a stock market that has more than tripled in value from early 2009 with the S&P 500 index only sitting -3% below all-time record highs. Common sense would dictate that euphoric investor appetites have contributed to years of new record highs in the U.S. stock market, but that isn’t the case now. Rather, the enormous appreciation experienced in recent years can be better explained by the trillions of dollars directed towards buoyant share buybacks and mergers.

With a bull market still briskly running into its sixth year, where can we find the evidence for all this anxiety? Well, if you don’t believe all the nail biting concerns you hear from friends, family members, and co-workers about a Grexit (Greek exit from the euro), Chinese stock market bubble, Puerto Rico collapse, and/or impending Fed rate hike, then here are a few confirming data points.

For starters, let’s take a look at the record $8 trillion of cash being stuffed under the mattress at near 0% rates in savings deposits (see chart below). The unbelievable 15% annual growth rate in cash hoarding since the turn of the century is even scarier once you consider the massive value destruction from the eroding impact of inflation and the colossal opportunity costs lost from gains and yields in alternative investments.

Savings Deposits 2015

Next, you can witness the irrational risk averse behavior of investors piling into low (and negative) yielding bonds. Case in point are the 10-year yields in developing countries like Germany, Japan, and the U.S. (see chart below).

10-Yr Yields 2015

The 25-year downward trend in rates is a very scary development for yield-hungry investors. The picture doesn’t look much prettier once you realize the compensation for holding a 30-year bond (currently +3.2%)  is only +0.8% more than holding the same Treasury bond for 10 years (now +2.4%). Yes, it is true that sluggish global growth and tame inflation is keeping a lid on interest rates, but these trends highlight once again that F.U.D. (fear, uncertainty, and doubt) has more to do with the perceived flight to safety and high bond prices (low bond yields).

In addition, the -$57 billion in outflows out of U.S. equity funds this year is further evidence that F.U.D. is out in full force. As I’ve noted on repeated occasions, when the tide turns on a sustained multi-year basis and investors dive head first into stocks, this will be proof that the bull market is long in the tooth and conservatism should be the default posture.

Dividend Shock Absorbers

There are always plenty of scary headlines that tempt investors to bail out of their investments. Today those alarming headlines span from Greece and China to Puerto Rico and the Federal Reserve. When the winds of fear, uncertainty, and doubt are fiercely swirling, it’s important to remember that any investment strategy should be constructed in a diversified manner that meshes with your time horizon and risk tolerance.

Consistent with maintaining a diversified portfolio, owning reliable dividend paying stocks is an important component of investment strategy, especially during volatile periods like we are experiencing currently. Sure, I still love to own high octane, non-dividend growth stocks in my personal and client portfolios, but owning stocks with a healthy stream of dividends serve as shock absorbers in bumpy markets with periodic surprise potholes.

As I’ve note before, bond issuers don’t call up investors and raise periodic coupon payments out of the kindness of their hearts, but stock issuers can and do raise dividends (see chart below). Most people don’t realize it, but over the last 100 years, dividends have accounted for approximately 40% of stocks’ total return as measured by the S&P 500.

Source: BuyUpside.com

Source: BuyUpside.com

Markets will continue to move up and down on the news du jour, but dividends overall remain fairly steady. In the worst financial crisis in a generation, dividends dipped temporarily, but as I explain in a previous article (The Gift that Keeps on Giving), dividends have been on a fairly consistent 6% growth trajectory over the last two decades. With corporate dividend payout ratios well below long term historical averages of 50%, companies still have plenty of room to maintain (and grow) dividends – even if the economy and corporate profits slow.

Don’t succumb to all the F.U.D., and if you feel yourself beginning to fall into that trap, re-evaluate your portfolio to make sure your diversified portfolio has some shock absorbers in the form of dividend paying stocks. That way your portfolio can handle those unexpected financial potholes that repeatedly pop up.

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www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and SPY, but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on ICContact page.

July 11, 2015 at 11:33 pm Leave a comment

Greece: The Slow Motion, Multi-Year Train Wreck

Train Wreck

This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (July 1, 2015). Subscribe on the right side of the page for the complete text.

Watching Greece fall apart over the last five years has been like watching a slow motion train wreck. To many, this small country of 11 million people that borders the Mediterranean, Aegean, and Ionian Seas is known more for its Greek culture (including Zeus, Parthenon, Olympics) and its food (calamari, gyros, and Ouzo) than it is known for financial bailouts. Nevertheless, ever since the financial crisis of 2008-2009, observers have repeatedly predicted the debt-laden country will default on its €323 billion mountain of obligations (see chart below – approximately $350 billion in dollars) and subsequently exit the 19-member eurozone currency membership (a.k.a.,”Grexit”).

Source: MoneyMorning.com and CNN

Source: MoneyMorning.com and CNN

Now that Greece has failed to repay less than 1% of its full €240 billion bailout obligation – the €1.5 billion payment due to the IMF (International Monetary Fund) by June 30th – the default train is coming closer to falling off the tracks. Whether Greece will ultimately crash itself out of the eurozone will be dependent on the outcome of this week’s surprise Greek referendum (general vote by citizens) mandated by Prime Minister Alexis Tsipras, the leader of Greece’s left-wing Syriza party. By voting “No” on further bailout austerity measures recommended by the European Union Commission, including deeper tax increases and pension cuts, the Greek people would effectively be choosing a Grexit over additional painful tax increases and deeper pension cuts.

Ouch!

And who can blame the Greeks for being a little grouchy? You might not be too happy either if you witnessed your country experience an economic decline of greater than 25% (see Greece Gross Domestic Product chart below); 25% overall unemployment (and 50% youth unemployment); government worker cuts of greater than 20%; and stifling taxes to boot. Sure, Greeks should still shoulder much of the blame. After all, they are the ones who piled on $100s of billions of debt and overspent on the pensions of a bloated public workforce, and ran unsustainable fiscal deficits.

Source: TradingEconomics.com

Source: TradingEconomics.com

For any casual history observers, the current Greek financial crisis should come as no surprise, especially if you consider the Greeks have a longstanding habit of not paying their bills. Over the last two centuries or so, since the country became independent, the Greek government has spent about 90 years in default (almost 50% of the time). More specifically, the Greeks defaulted on external sovereign debt in 1826, 1843, 1860, 1894 and 1932.

The difference between now and past years can be explained by Greece now being a part of the European Union and the euro currency, which means the Greeks actually do have to pay their bills…if they want to remain a part of the common currency. During past defaults, the Greek central bank could easily devalue their currency (the drachma) and fire up the printing presses to create as much currency as needed to pay down debts. If the planned Greek referendum this week results in a “No” vote, there is a much higher probability that the Greek government will need to dust off those drachma printing presses.

“Perspective People”

Protest, riots, defaults, changing governments, and new currencies make for entertaining television viewing, but these events probably don’t hold much significance as it relates to the long-term outlook of your investments and the financial markets. In the case of Greece, I believe it is safe to say the economic bark is much worse than the bite. For starters, Greece accounts for less than 2% of Europe’s overall economy, and about 0.3% of the global economy.

Since I live out on the West Coast, the chart below caught my fancy because it also places the current Greek situation into proper proportion. Take the city of L.A. (Los Angeles – red bar) for example…this single city alone accounts for almost 3x the size of Greece’s total economy (far right on chart – blue bar).
Greek GDP Relative to Cities

Give Me My Money!

It hasn’t been a fun year for Greek banks. Depositors, who have been flocking to the banks, withdrew about $45 billion in cash from their accounts, over an eight month period (see chart below). Before the Greek government decided to mandatorily close the banks in recent days and implement capital controls limiting depositors to daily ATM withdrawals of only $66.

Source: The Financial Times

Source: The Financial Times

But once again, let’s put the situation into context. From an overall Greek banking sector perspective, the four largest Greek Banks (Bank of Greece, Piraeus Bank, Eurobank Ergasias, Alpha Bank) account for about 90% of all Greek banking assets. Combined, these banks currently have an equity market value of about $14 billion and assets on the balance sheets of $400 billion – these numbers are obviously in flux. For comparison purposes, Bank of America Corp. (BAC) alone has an equity market value of $179 billion and $2.1 trillion in assets.

Anxiety Remains High

Skeptical bears will occasionally acknowledge the miniscule-ness of Greece, but then quickly follow up with their conspiracy theory or domino effect hypothesis. In other words, the skeptics believe a contagion effect of an impending Grexit will ripple through larger economies, such as Italy and Spain, with crippling force. Thus far, as you can see from the chart below, Greece’s financial problems have been largely contained within its borders. In fact, weaker economies such as Spain, Portugal, Ireland, and Italy have fared much better – and actually improving in most cases. In recent days, 10-year yields on government bonds in countries like Portugal, Italy, and Spain have hovered around or below 3% – nowhere near the peak levels seen during 2008 – 2011.

Source: Business Insider

Source: Business Insider

Other doubting Thomases compare Greece to situations like Lehman Brothers, Long Term Capital Management, and the subprime housing market, in which underestimated situations snowballed into much worse outcomes. As I explain in one of my newer articles (see Missing the Forest for the Trees), the difference between Greece and the other financial collapses is the duration of this situation. The Greek circumstance has been a 5-year long train wreck that has allowed everyone to prepare for a possible Grexit. Rather than agonize over every news headline, if you are committed to the practice of worrying, I would recommend you focus on an alternative disaster that cannot be found on the front page of all newspapers.

There is bound to be more volatility ahead for investors, and the referendum vote later this week could provide that volatility spark. Regardless of the news story du jour, any of your concerns should be occupied by other more important worrisome issues. So, unless you are an investor in a Greek bank or a gyro restaurant in Athens, you should focus your efforts on long-term financial goals and objectives. Ignoring the noisy news flow and constructing a diversified investment portfolio across a range of asset classes will allow you to avoid the harmful consequences of the slow motion, multi-year Greek train wreck.

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www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and BAC, but at the time of publishing, SCM had no direct position in Bank of Greece, Piraeus Bank, Eurobank Ergasias, Alpha Bank or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on ICContact page.

 

July 3, 2015 at 5:01 am Leave a comment

Missing the Forest for the Trees

Forest Free Image

Just days ago, billionaire investor and corporate activist Carl Icahn called the stock market “extremely overheated,” especially as it relates to high yield bonds. He communicated these comments over Twitter after saying markets are “sailing in dangerous unchartered waters.” Given recent Greek developments regarding its inability to strike a debt repayment deal with eurozone leaders, Mr. Icahn might get exactly the volatility he expected when he made those comments. There’s no question a Greek default could definitely cause a short-term contagion effect, but there will be much larger fish to fry than domestic equity markets (I will have much more to say on the Greek topic in my monthly newsletter).

While it’s difficult to argue with Carl Icahn’s long-term investment track record, currently there is little objective data (unemployment, yield curve, corporate profits, GDP, etc.) signaling an imminent recession or economic collapse. Whether you are an optimist or pessimist, there is no doubt we have come a long ways since the lows of 2009 – see Global Stock Market chart below:

Source: Mark Perry (Carpe Diem)

Source: Mark Perry (Carpe Diem)

The rapid price appreciation has been undeniable, but Mr. Icahn and other equity bears may be missing the forest for the trees. There has been a disproportional increase in the value of bond assets versus equity assets. More specifically, as can be seen from the chart below, the value of global financial assets increased an estimated +21.5% to $294 trillion from 2007 to 2014. Of the $52 trillion increase in global financial assets, 92% of the increase ($48 trillion) was derived from expanding debt obligations – not stocks. I’ve said it many times before, but if you are worried about the pricking of an equity bubble, make sure to buy some heavy-duty industrial ear plugs for eventual pricking of the bond bubble.

Source: Business Insider / McKinsey

Source: Business Insider / McKinsey

Former Treasury Secretary and Harvard President Larry Summers recently commented in an interview that a potential “Grexit” could have unforeseen consequences just like the situations leading to the collapse of Lehman Brothers, Long Term Capital Management, and the subprime market. At the time, those particular circumstances were underestimated and characterized as being “contained”. Today, we are hearing the opposite regarding Greece.

In a post financial crisis world, every financial molehill is made into a crisis mountain as it spreads through social media and appears on every TV show, blog, newspaper, and magazine article. In a post financial crisis world characterized with ultra-low central bank interest rate policies, a combination of excessive conservatism from individual investors and opportunistic corporate actions (e.g., share buybacks and M&A), has led to a lopsided increase in debt issuance. Case in point is the bloated debt balances held by the Greek government. There will inevitably be pain associated with a Greek default and potential exit from the euro, but due to its size (<2% of European GDP), Greece should be treated more like a pimple than a body rash.

If you want to reach your financial goals, you need to prudently manage your risk through a broad asset allocation and realize that experiencing turbulence is part of the investing game. The impending Greece default will not be the first financial crisis, nor the last one. Extreme growth in debt should be more of a concern than a tiny, financially irresponsible country missing a debt payment. But rather than panicking, it is wiser to maintain a long-term investment strategy coupled with a globally diversified portfolio across asset classes, which will allow you to not miss the forest for the trees.

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www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) , but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on ICContact page.

June 28, 2015 at 10:41 am Leave a comment

Standing on the Shoulders of a Growth Giant: Phil Fisher

Sir Isaac Newton

Sir Isaac Newton

Since it’s Father’s Day weekend, it seems appropriate to write about about the “Father of Growth Investing”…Phil Fisher.

It was English physicist, astronomer, philosopher, and mathematician Sir Isaac Newton who in 1675 stated, “If I have seen further it is by standing on the shoulders of giants.” Investors too can stand on the shoulders of market giants by studying the timeless financial knowledge from current and past market legends. The press, all too often, focuses on the hot managers of our time while forgetting or kicking to the curb those managers whom are temporarily out of favor. Famous and enduring value managers typically have gained the press spotlight, rightfully so in the case of current greats like Warren Buffett or past talents like Benjamin Graham, because they managed to prosper through numerous economic cycles. However, when it comes to growth legends like Phil Fisher, author of the must-read classic Common Stocks and Uncommon Profits, many people I bump into have never heard of him. Hopefully that will change over time.

The Career

Born on September 8, 1907, Mr. Fisher lived until the ripe age of 96 when he passed on March 4, 2004. Fisher was no dummy – he enrolled in college at age 15 and started graduate school at Stanford a few years later, before he dropped out and started his own investment firm in 1931. His son, Ken, currently heads his own investment firm, Fisher Investments, writes for Forbes magazine, and has authored multiple investment books. Unlike his dad, Ken has more of a natural bent towards value stocks.

Buy-And-Hold

Philip A. Fisher

Phil Fisher’s iconic book, Common Stocks and Uncommon Profits, was published in 1958. Mr. Fisher believed in many things and perhaps would have been thrown under the bus today for his long-term convictions in “buy-and-hold.”  Or as Mr. Fisher put it, “If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.” Not every investment idea made the cut, however he is known to have bought Motorola (MOT) stock in 1955 and held it until his death in 2004 for a massive gain. Generally, he gave initial stock purchases a three-year leash before considering a change to his investment position. If the conviction to purchase a stock for such duration is not present, then the investment opportunity should be ignored.

Fisher’s concentration on growth stocks also shaped his view on dividends. Dividends were not important to Fisher – he was more focused on how the company is investing retained earnings to achieve its earnings growth. Like Fisher, Peter Lynch is another growth hero of mine that also felt there is too much focus on the Price/Earnings (PE) ratio rather than the long-term earnings potential.

“Scuttlebutt”

Another classic trademark of Fisher’s investing style was his commitment to fundamental research. He was focused on accumulating data covering a broad range of areas including, customers, suppliers, and competitors. Fisher also emphasized factors like market share, return on invested capital, margins, and the research & development budget. What Mr. Fisher called his varied approach to gathering diverse sets of information was “scuttlebutt.”

Buying & Selling Points

Although Fisher believed firmly in buy and hold, he was not scared to sell when the firm no longer met the original buying criteria or his original assessment  for purchased was deemed incorrect.

When buying, Fisher preferred to buy stocks in downturns or temporary problems – contrary to your typical momentum growth manager today (read article on momentum).  Fisher has this to say on the topic: “This matter of training oneself to not go with the crowd but to be able to zig  when the crowd zags, in my opinion, is one of the most important fundamentals of the investment success.”

Learning from Mistakes

Like all great investors I have studied, Phil Fisher also believed in learning from your mistakes:

“I have always believed that the chief difference between a fool and a wise man is that the wise man learns from his mistakes, while the fool never does.”

He expanded on the topic by saying the following:

“Making mistakes is inherent cost of investing just like bad loans are for the finest lending institutions. Don’t blindly accept dominant opinion and don’t be contrary for the sake of being contrary.”

 

I could only dream of having a fraction of Mr. Fisher’s career success – he retired in 1999 at the age of 91 (not bad timing).  As my investment management and financial planning firm matures (Sidoxia Capital Management, LLC), I will continue to study the legendary giants of investing (past and present) to sharpen my investing skills.

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www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in MSI, BRKA/B, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on ICContact page.

June 20, 2015 at 1:44 pm 2 comments

Who Gives a #*&$@%^?!

 

Sleep-Relax

The stock market is just a big rigged casino, fueled by a reckless money printing Fed that is artificially inflating a global asset bubble, right? That seems to be the mentality of many investors as evidenced by the lack of meaningful domestic stock fund buying/inflows (see also Digesting Stock Gains). Underlying investor skepticism is a foundation of mistrust and detachment caused by the unprecedented 2008-09 financial crisis, when regulators fell asleep at the switch.

Making matters worse, the proliferation of the Internet, smart phones, and social media, has forced investors to digest a never-ending avalanche of breaking news headlines and fear mongering. Here is a partial list of the items currently frightening investors:

  • Interest Rates: Will the Federal Reserve raise interest rates in June or September?
  • Volatility: The Dow is up 200 points one day and then down 200 the next day. Keep me away.
  • Greece: One day Greece is going to exit the eurozone and the next day it’s going to reach a deal with the IMF (International Monetary Fund) and European leaders.
  • Terrorism / Middle East: ISIS is like a cancer taking over the Middle East, and it’s only a matter of time before they invade our home soil. And if ISIS doesn’t get us, then the Iranian boogeyman will attack us with their inevitable nuclear weapons.
  • Inflation: The economy is slowing improving and as we approach full employment in the U.S., wage pressure is about to kick inflation into high gear. After falling significantly, oil prices are inching higher, which is also moving inflation in the wrong direction.
  • Strong Dollar: Now that Europe is copying the U.S. by implementing quantitative easing, domestic exports are getting squeezed and revenue growth is slowing.
  • Bubble? Stocks have had a monster run over the last six years, so we must be due for a crash…correct?

Seemingly, on a daily basis, some economist, strategist, analyst, or talking head pundit on TV articulately explains how the financial markets can fall off the face of the earth. Unfortunately, there is a problem with this type of analysis, if your evaluation is solely based upon listening to media outlets. Bottom line is you can always find a reason to sell your investments if you listen to the so-called experts. I made this precise point a few years ago when I highlighted the near tripling in stock prices despite the barrage of bad news (see also A Series of Unfortunate Events).

While I am certainly not asking anyone to blindly assume more risk, especially after such a large run-up in stock prices, I find it just as important to point out the following:

“Taking too much risk is as risky as not taking enough risk.”

In other words, driving 35 mph on the freeway may be more life threatening than driving 75 mph.  In the world of investing, driving too slowly by putting all your savings in cash or low-yielding securities, as many Americans do, may feel safe. However this default strategy, which may feel comfortable for many, may actually make attaining your financial goals impossible.

At Sidoxia, we create customized Investment Policy Statements (IPS) for all our clients in an effort to optimize risk levels in a Goldilocks fashion…not too hot, and not too cold. Retirement is supposed to be relaxing and stress free. Do yourself a favor and create a disciplined and systematic investment plan. Being apathetic due to an infinite stream of worrisome sounding headlines may work in the short-run, but in the long-run it’s best to turn off the noise…unless of course you don’t give a &$#*@%^ and want to work as a greeter at Wal-Mart in your mid-80s.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and WMT, but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on ICContact page.

June 13, 2015 at 10:27 am 1 comment

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