Archive for November, 2012
With the holidays now upon us, this period provides me the opportunity to briefly escape the daily investment rat race, and reflect on the numerous aspects of my life for which I am grateful. There is so much to be thankful for, but it’s easy to lose sight of what’s important, especially when time is flying by in the blink of an eye. As the old saying goes, “Life is like a roll of toilet paper. The closer you get to the end, the faster it goes.” The proliferation of gray hair, coupled with my sprouting kids, is a constant reminder that life is not slowing down for me, but actually speeding up.
As I lay here like a slug on the couch, which is slowly absorbing me, I take no shame in unbuttoning my top pant button to relieve the belly-busting pressure of excessive turkey and mash potato consumption. The cranberry sauce on my chin and pumpkin pie crust on my shirt does not distract me from the football game or prevent me from reflecting upon my life’s gifts.
In that vein, here is a list of my top 10 things for which I am grateful:
10. Sugar: Without sweets, being relegated to a life of bread, water, and broccoli would be a boring challenge. Thankfully, once I became a grown adult earning a paycheck, I also earned the right to eat Cap’n Crunch (with Crunch Berries) for breakfast; peanut butter-Nutella & banana sandwich for lunch; apple fritter & milk for dinner; and some Double Stuf Oreos for dessert (yes, only one ‘f’ in Stuf!).
9. College Sports: Watching professional sports is fun, but when A-Rod earns $275 million for the NY Yankees and rides the pine during the playoffs, the business aspects take a little allure away from the sport. Although college athletes may sneak a few bucks under the table, they are nonetheless a lot less corrupted, and the electric atmosphere of a live college event cannot be replicated. The opportunities are fewer due to adult responsibilities, but nothing beats a crisp fall afternoon on the couch with a bowl of hot chili, a frosty beverage, and a remote control, while flipping through a series of college football games.
8. Gadgets: Seems like yesterday when I was introduced to my first computer, a 1983 Compaq Portable computer that weighed 28 pounds; had a 9 inch green screen; integrated two 320k drives; and retailed originally for about $3,500….ouch! Today, my iPhone 5 is more than 99% lighter, stores 100,000 times more information, and costs a fraction of the price. If you add my iPad, Kindle, Roku video streaming box, my DVR set-top box, my GPS, and other electronic gadgets, it’s hard to imagine how I could have lived a life without these luxuries five years ago.
7. Cards: I analyze numbers, probabilities, and emotions in my day job every day, it’s no wonder that I somehow need to do the same thing in my leisure time. No-Limit Texas Hold ‘Em is the name of the game, and I was introduced to it by world champion “poker brat” Phil Helmuth when he personally taught a group of us at an investment conference in 2003. I haven’t entered the $10,000 World Series of Poker in Las Vegas yet, but it’s on my bucket list.
6. Challenges: I’m a washed up basketball hack after an insignificant high school career and about 12 years of old-man basketball leagues, but my competitive juices keep flowing today. In hopes of not turning to a fully gelatinous blob, I have periodically pushed myself to some competitive athletic challenges, including a hike to the peak of Mt. Whitney; a couple half marathons; a sprint triathlon; a Colorado bike trip; and a few seasons of indoor co-ed soccer. Next up, I’m training for a “century” bike ride – a 100 mile race in early 2013 near Santa Barbara. I guess I better work off some of that stuffing, mash potatoes, and gravy.
5. Good Books: I pretty much read for a living on average 8-12 hours per day, but I suppose I’m a glutton for punishment. Given all my other interests and responsibilities, it’s tough to find the free time to curl up to a good book, but if I can squeeze in a book every quarter, I give myself a pat on the back. Nothing beats true, real-life experiences, but I’ve learned a tremendous amount through all the books I’ve read (for leisure and schooling). Regrettably diversity has gotten the short end of the stick, since about half the books I read are investment related, including a few that I’ve reviewed here on my blog like The Big Short, Too Big to Fail, The Greatest Trade Ever, and Winning the Loser’s Game (to name a few). Currently, I’m reading a fascinating New York Times Bestseller on world religions, called Religious Literacy, which leads me to my next Top 10 item…
4. Spirituality: While I am probably a lot more apathetic and ignorant in the area of religion as compared to the average person, nevertheless I have learned to appreciate the importance and benefits of religion and spirituality through my life experiences. From Judaism to Islam, and Buddhism to Christianity, there is no denying the moral lessons and spiritual balance these religions provide billions of people around the globe. I have a long way to go on my spiritual journey, but I’m slowly learning and progressing. On days where the Dow plummets a few hundred points or when the share price of a top holding tanks, I’m quickly reminded of the importance of spiritual balance.
3. Travel: While many people have hardly ventured from their hometown during their lifetime, I have been blessed with the fortune of seeing many places around the world. Not only have I lived on the East Coast, West Coast, and in the Midwest, but I have also traveled to five different continents. Appreciating different cultures and viewpoints is what truly makes life more interesting for me.
2. Friends: The digital age has not only brought friends closer together through social networks like Facebook (FB) and LinkedIn (LNKD), but has also pushed us further apart because vicariously spying on someone online is much easier than calling someone or grabbing coffee with them. Thankfully, I have a core set of friends that I can share my life’s ups and downs.
1a. Investing: Enough said. I’ve been investing for close to 20 years, and this blog is evidence of the blood, sweat, and tears I’ve dedicated to this endeavor. Various investments will go in and out of favor, and economic cycles will go up and down, but one trend that I know will persist is that I will be investing for the rest of my life.
1b. Health: It goes without saying, but if I don’t have my own good health, then very little on my top 10 list is possible. I’ve outlived two close family members of mine, so needless to say, I am very thankful to be breathing and living.
1c. Family: Having all these great experiences, including al the highs and lows, means absolutely nothing, if you have nobody to share them with. My family means the world to me, and days like Thanksgiving remind me of how lucky I really am.
Although this list was originally scheduled for 10 items, it looks like it has unintentionally expanded to a few more. But how can you blame me? I’ve had some tough times like everyone, but it is virtually impossible to not be thankful for the life I get to live now. Not only do I get to do what I love, but I also get paid to do it.
Last but not least, a special thanks needs to also go out to you, my devoted blog reader. I know you’re devoted, because you have made it to the end of this lengthy article. Without you, I wouldn’t have the motivation to continually scribble down my random thoughts.
Happy Thanksgiving and happy holidays!
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds (ETFs), AMZN, and AAPL, and a short position in NFLX. At the time of publishing SCM had no direct positions in LNKD, FB, HPQ or any 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.
It’s a sad day indeed in our history when the architect of the Twinkies masterpiece cream-filled sponge cakes (Hostess Brands) has been forced to close operations and begin bankruptcy liquidation proceedings. Food snobs may question the nutritional value of the artery-clogging delights, but there is no mistaking the instant pleasure provided to millions of stomachs over the 80+ years of the Twinkies dynasty. Most consumers understand that a healthy version of an organic Twinkie will not be found on the shelves of a local Whole Foods Market (WFM) store anytime soon. The reason people choose to consume these 150-calorie packages of baker bliss is due to the short-term ingestion joy, not the vitamin content (see Nutritional Facts below). Most people agree the sugar high gained from devouring half a box of Twinkies outweighs the long-term nourishing benefits reaped by eating a steamed serving of alfalfa sprouts.
Much like dieting, investing involves the trade-offs between short-term impulses and long-term choices. Unfortunately, the majority of investors choose to react to and consume short-term news stories, very much like the impulse Twinkie gorging, rather than objectively deciphering durable trends that can lead to outsized gains. Day trading and speculating on the headline du jour are often more exciting than investing, but these emotional decisions usually end up being costlier to investors over the long-run. Politically, we face the same challenges as Washington weighs the simple, short-term decisions of kicking the fiscal debt and deficits down the road, versus facing the more demanding, long-term path of dealing with these challenges.
With controversial subjects like the fiscal cliff, entitlement reform, taxation, defense spending, and gay marriage blasting over our airwaves and blanketing newspapers, no wonder individuals are defaulting to reactionary moves. As you can see from the chart below, the desire for a knee jerk investment response has only increased over the last 70 years. The average holding period for equity mutual funds has gone from about 5 years (20% turnover) in the mid 1960s to significantly less than 1 year (> 100% turnover) in the recent decade. Advancements in technology have lowered the damaging costs of transacting, but the increased frequency, coupled with other costs (impact, spread, emotional, etc.), have been shown to be detrimental over time, according to John Bogle at the Vanguard Group.
During volatile periods, like this post-election period, it is always helpful to turn to the advice of sage investors, who have successfully managed through all types of unpredictable periods. Rather than listening to the talking heads on TV and radio, or reading the headline of the day, investors would be better served by following the advice of great long-term investors like these:
“In the short run the market is a voting machine. In the long run it’s a weighing machine.” -Benjamin Graham (Famed value investor)
“Excessive short-termism results in permanent destruction of wealth, or at least permanent transfer of wealth.” -Jack Gray (Grantham, Mayo, Van Otterloo)
“The stock market serves as a relocation center at which money is moved from the active to the patient.” - Warren Buffett (Berkshire Hathaway)
“It was never my thinking that made big money for me. It always was my sitting.” – Jesse Livermore (Famed trader)
“The farther you can lengthen your time horizon in the investment process, the better off you will be.”- David Nelson (Legg Mason)
“The growth stock theory of investing requires patience, but is less stressful than trading, generally has less risk, and reduces brokerage commissions and income taxes.” T. Rowe Price (Famed Growth Investor)
“Time arbitrage just means exploiting the fact that most investors…tend to have very short-term time horizons.” -Bill Miller (Famed value investor)
“Long term is not a popular time-horizon for today’s hedge fund short-term mentality. Every wiggle is interpreted as a new secular trend.” -Don Hays (Hays Advisory – Investor/Strategist)
A legendary growth investor who had a major impact on how I shaped my investment philosophy is Peter Lynch. Mr. Lynch averaged a +29% return per year from 1977-1990. If you would have invested $10,000 in his Magellan fund on the first day he took the helm, you would have earned $280,000 by the day he retired 13 years later. Here’s what he has to say on the topic of long-term investing:
“Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.”
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
“My best stocks performed in the 3rd year, 4th year, 5th year, not in the 3rd week or 4th week.”
“The key to making money in stocks is not to get scared out of them.”
“Worrying about the stock market 14 minutes per year is 12 minutes too many.”
It is important to remember that we have been through wars, assassinations, banking crises, currency crises, terrorist attacks, mad-cow disease, swine flu, recessions, and more. Through it all, our country and financial markets most have managed to survive in decent shape. Hostess and its iconic Twinkies brand may be gone for now, but removing these indulgent impulse items from your diet may be as beneficial as eliminating detrimental short-term investing urges.
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 positions in WFM, BRKA/B, LM, TROW or any 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.
Chemotherapy is a treatment that uses a mixture of toxic drugs designed to destroy cancer cells, so patients can recover to a healthy state. Similarly, our government system combines a mixture of toxic politicians designed to destroy our nation’s problems, so Americans can benefit from a healthy, expanding economy. In the long run, history teaches us that despite painful periods of political battles, beneficial results are eventually achieved.
Unfortunately, in the short run, political side effects relating to our country’s legislative process can result in extremely unpleasant outcomes, just like experienced during chemotherapy treatment (including nausea, vomiting, hair loss, and fatigue). Politically, we are going through a comparably repulsive period. The good news is, regardless of your political persuasion, a major source of contention is now behind us in the rearview mirror (i.e., the presidential elections) and we can temporarily recover from the barrage of venomous super PAC commercials that have temporarily halted.
Regrettably, the looming “Fiscal Cliff” poses larger consequences than election outcomes, if these out-of-control economic issues are not credibly resolved (see Fiscal Cliff: Repeat or Dead Meat?). Most Americans realize a responsible mixture of real spending cuts coupled with limited tax hikes, like proposed by the bipartisan Simpson-Bowles commission is a great starting blueprint to hammer out a deal. For the time being, I’m happy to hear both Republicans and Democrats are playing nicely in the sandbox. Republican Speaker of the House, John Boehner has signaled he is willing “to put (tax) revenue on the table” and President Obama has said he is “open to compromise.” So what’s all the worry then? We already know that $600 billion in tax increases and spending cuts kick in seven weeks from now, which has the real potential of spinning our economy into another recession if Congress doesn’t act.
You don’t need to go far back in history to see what the effects could be from continued gridlock or a lackluster agreement that kicks the can down the curb. For starters, last year’s initially unsuccessful debt ceiling negotiations resulted in a swift kick in the pants for stocks, as investors watched the S&P 500 index crater -18% within three short weeks. If the $600 billion impact of the Fiscal Cliff and sequestration actually occur, many pundits are predicting up to a -4% hit to GDP (Gross Domestic Product), which makes it virtually certain the economy will slip back into recession.
This game of political chicken can last only for so long. Congressional approval ratings are near record lows, and if inaction continues, voters will ultimately take powers into their own hands and vote out apathetic politicians.
Preparing for the Melt-Up
Would I be surprised to see a market pullback in the coming weeks and months? The short answer: NO. While I may be cynical about the short-term probabilities of a bipartisan “grand bargain” because brinksmanship will likely win in the coming weeks, as both sides jockey for negotiating leverage, I am also keenly aware of the melt-up risk that few investors are currently talking about. You don’t have to be a brain surgeon or rocket scientist to see the amount of pessimism that has built up over recent years. If you don’t believe me, you can just look at the following charts to get the gist:
i) A half of a trillion dollars has been pulled out of the equity markets by nervous investors, despite the market more than doubling from its 2009 lows.
ii) Panicked bond buying has caused the yield on the benchmark 10-year Treasury note to evaporate by about -90% since its peak more than 30 years ago.
iii) Fear insurance has been gobbled up by worrywarts as witnessed by gold prices sky-rocketing more than 500% in a little more than a decade.
A grand bargain doesn’t guarantee a return to the stock market circa the 1990s, but in an environment where trillions of dollars have been stuffed under the mattresses of corporations and individuals, earning next to nothing, it won’t take much to ignite the animal spirits of investors. Changing the perception of a market that sees the glass as -90% empty to the view of a glass 10% full, could lead to a happier 2013 for equity investors. However, if no Fiscal Cliff agreement is made, locating me may be a challenge – I suggest you try me in my bunker.
While our fiscal and political health conditions have reached crisis levels in recent years, there are reasons to be optimistic, now that a hotly contested presidential election has concluded and discussions move forward on a Fiscal Cliff solution. Chemotherapy involves a toxic and destructive regiment of harsh medicines, but in certain situations, like the present political environment, investors need to survive the unpleasant side effects before economic health and prosperity can be gained.
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 positions in any 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.
Article is an excerpt from previously released Sidoxia Capital Management’s complementary November 1, 2012 newsletter. Subscribe on right side of page.
Hurricane Sandy wreaked havoc across the East Coast, negatively impacting an estimated 60 million people and leaving more than 8 million people literally in the dark, without power. The hurricane may have been downgraded to a “superstorm” but the 90+ mile per hour winds and waves reaching up to 40 feet high created devastating economic impacts. How large were these impacts you may ask? This big swirly cloud that slammed into the Atlantic coastline shut down about ¼ of our economy; led to about 15,000 canceled flights; is expected to cut our nation’s
Q4 output by up to -1.5% in GDP (Gross Domestic Product); and closed our financial markets for two days (the longest weather related closure of the New York Stock Exchange since 1888). Although the damage has been distressing for millions, about 5 million kids I think were okay with missing school on Monday (I’m going out on a limb with that guess).
Besides a superstorm-hurricane offered to us by Mother Nature, our country is about to undergo a new political hurricane next week with our nation’s presidential elections. Many polls show a statistical dead heat among the two candidates (Mitt Romney and Barack Obama), but political pundits point to the key battleground state of Ohio as the key determinant of the overall election results (Obama currently appears to have a slight lead in several polls). Some wildcard issues that could throw a wrench in an incumbent victory include a potential apathetic turnout by the Democratic voter base (hurt worse by “Superstorm Sandy”); worsening employment figures reported four days before the election; or perhaps a political gaffe. None of these polls are set in stone, and the situation remains rather fluid (no Sandy pun intended).
Regardless, whatever the political outcome, history shows us that the victor’s political affiliation has little correlation with the results in the financial markets. Ed Yardeni illustrated this point recently with the following chart:
What many people seem to overlook is that there are many other variables besides political affiliation that can and will impact future financial market performance including, Congressional control that may be dominated or split by the opposing political party; monetary policy set by the Federal Reserve Bank; or uncontrollable globalization influences. As emerging market countries continue to outpace our economic growth, our country’s power and persuasion will naturally diminish due to the “law of large numbers”. In other words, as the largest, most powerful economic country in the world, the mathematical gravity hinders our country’s ability to grow rapidly.
Despite the economic and political challenges our country faces, we continue to move in the right direction, albeit at a very slow historical pace. As you can see from Ed Yardeni’s chart below, our recovery from the recent recession (bottom red line) is the worst recovery in more than 50 years. On the bright side, the freshly reported Q3 GDP figures came in at a +2.0% GDP rate – uninspiring, but an improvement from Q2, and better than Wall Street consensus forecasts.
The growth has been considerably weak, yet the U.S. has still recorded 13 consecutive quarters of positive growth. Not bad considering Europe is in recession and countries like Spain are Greece are suffering unemployment rates of about 25%.
In order to maintain or accelerate economic growth, most Americans understand the Fiscal Cliff (~$700 billion in automatic spending cuts and tax hikes) needs to get resolved immediately. Failure to face this urgent challenge could have dire consequences, so voting for politicians who understand the immediacy of this problem is important.
Moving into Seasonally Strong Period
Selling in May, and going away for six months has not been a profitable strategy this year, as measured by the S&P 500 index. Furthermore, investors have also survived the historically scary performance months of September and October. Nothing is ever guaranteed, but historically the months of November through April tend to be rewarding periods.
Blowing against this positive seasonal trend have been lifeless earnings. In fact, corporate profits and revenue growth have slowed to a trickle in Q3, thanks to lackluster results from companies like Caterpillar (CAT); General Electric (GE); 3M Company (MMM); United Technologies (UTX); McDonalds (MCD); and others. Denying the global slowdown is difficult, but there are signs of stabilization and fortunately financial markets look forward and not backward.
Overshadowing some of that recent slowing growth has been the positive development in the housing market. As one can see in the chart below, housing starts are up significantly at +60% from early last year, but history tells us there is still plenty of room to move higher.
Year-to-date stock performance has been nothing short of spectacular either. Although stocks were down about -2% in October, the S&P 500 index remains up +12% through October, and that excludes about +2% in dividends. If you look at the overall asset classes in the chart below, real estate is the winning segment this year with U.S. stocks not far behind. Commodities have fared the worst and the fixed income asset class showed modest gains relative to global equities.
Within U.S. stocks, the largest of large stocks (“Megacaps”) have enjoyed the best results. This trend is not surprising given the significant uncertainties investors are reviewing (e.g., elections, Fiscal Cliff, Europe, etc.).
The recent Hurricane Sandy turned superstorm caused enormous damage to our country, and the political and economic hurricanes we have experienced over the last few years have yet to be conquered. The good news, in all these cases (physical and financial), is that the clouds are in the process of lifting; the worst damage should be behind us; our outlook will be more certain; and we can now begin focusing on the rebuilding process.
Like Washington, individual investors cannot afford to ignore their own personal Fiscal Cliffs. In a future entitlement-pressured world, investors need to proactively develop an investment plan, because ignoring your investments by kicking the can down the road only does more harm than good. I’m confident that, regardless of the election results next week, cooler heads will eventually prevail, and Democrats and Republicans can work together to solve our country’s Fiscal Cliff problems. Superstorm Sandy will not be the last natural disaster our country faces, but like investing, the more prepared one is for these unforeseen events, the better you will be equipped to conquer your financial future.
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 positions in CAT, MMM, GE, UTX, MCD, 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 IC Contact page.