newsletter
In The Eye of The
Storm
March 2009
We know it is much harder to stay the course in the eye of the storm than it is when sailing in calm seas. Persistence is important because mistakes and failure are inevitable in life and without persistence you will not reach your goals. Staying persistent you will overcome those mistakes and failures and reach your goals. This is especially true with your investment goals.
We continue to be faced with an extraordinarily difficult market environment; one that is testing our patience and confidence, however, we believe there is far less downside risk in this market than there is upside potential. We understand that watching the value of your wealth decline creates a strong desire to “do something” about it. Going to cash may lock in losses, but at least it creates a certainty amidst a great deal of fear and uncertainty. The conflicting forces that every investor faces right now is the certainty of locking in a set (albeit painfully lower) level of wealth vs. the uncertainty of possibly more near term losses and the hope of better long term returns.
It may seem impossible to imagine a market rally from here, but it will happen at some point. Investors are most pessimistic at a market bottom and there’s a huge amount of cash on the sidelines which is positive. We can see several rallies and declines before we see another bull market, but we are confident in our longer term expectations. We must be prepared for a very rocky ride for at least a few more months – perhaps quarters.
Longer time horizons have the highest value when short term fear is greatest because that’s when the greatest opportunities are created, but those are also the times when a long term perspective is most difficult to sustain. Like you, we find this environment literally gut-wrenching and for investors who are not sure they can stand more declines we suggest a discussion with us to go over the many alternatives that are available.
We confess that we are nervous just like the rest of you. We are projecting our gross income to be down 40-50% in 2009. We are not immune to the economic downturn, but there is a difference between being nervous vs. fear and panic. We are doing what we advise all of our clients to do – building our cash reserves, cutting expenses and stepping up our marketing activities. We spend most of our days now in meetings or phone calls with clients trying to calm ravaged nerves. A typical phone call goes something like this…
Us: “Hi, how are you doing?”
Client: “Nervous about the
economy, market,
Us: “Well, I know your investments are down 40-50%.” (Pick a number).
We talk a lot about the economy,
Us: “How’s your cash flow?” “Are you doing ok with your budget?” “Do you have a reasonable cash reserve?” “How do you feel about your job security?” “Have any of your goals changed?”
The answer is usually...
Client: “I’m doing ok, but I’m really nervous about where the economy and the market are headed. What if my investments go to zero?”
Us: “That’s not very realistic for your investments to go to zero; 500 to 1,000 (pick a number) of the largest companies in the world that you’re invested in would have to go bankrupt. Do you think that’s probable?”
Client: “No, probably not.”
Us: “Remember, you only have paper losses until you sell. Do you really want to let Wall Street buy your investments at a 40-50% discount?”
Client: “Well, no but I feel like
I’m losing money everyday.”
Us: “Let’s look at some of our options:
#1 - We can go to cash and earn little to no interest.
#2 - We can go to a more conservative asset mix (i.e. move some or all to fixed income, CD’s and/or bonds) and earn currently 1-5% in interest or dividends. But when interest rates rise you’ll see your bond values go down. In either case, you will change your losses from “unrealized” to “realized” and in Option #1 you will now be fearful of not being able to pick the market bottom and odds are that you will buy back in at a higher price than you
sold for, thereby adding to your real losses.”
Client: “Ok, let’s set a
time to get together and discuss the alternatives in more detail.”
Once in a while we lose and the market (fear) wins. On January 26th, Jim met with a long time client. She is divorced, in her early 70’s and is of modest means with a little over $100K in an investment portfolio. She was nervous; they had the usual discussion. She was ok with her cash flow, had reasonable reserves, had a well-balanced portfolio and was even reinvesting some of her dividends. By the end of the meeting she was ok, but nervous because her values were down just like everybody else. On February 19th the market hit a new low, Jim got the call…
Client: “I can’t stand it
anymore – cash me out.”
Jim: “Ok, but what are you going to do with the money?”
Client: “I don’t
know.”
Jim: “Well, you know you’ll trigger the tax on your IRA’s.”
Client: “I know.”
Jim: “Do you want to look at an annuity that will guarantee you a 5% income?”
Client: “No, just get me out
before I lose it all.”
Jim: “Ok, sorry.”
This is a classic example of fear and panic winning out over logic. We lost a good client, but what bothers us most is that she has no plan or strategy as to what she’s going to do now. We didn’t even lose her to a competitor; we lost her to that powerful emotion, fear. Unrealized losses cannot be regained by putting money into investments that returns 2-4% annually nor by taking undo risk. It has been reported that individual investors bet more on lottery tickets than stocks in economic downturns, the same is true for people who live in counties with high unemployment rates as well as those whose household income is below average for their area.
We can’t control the economy, the politicians, Washington, the cheats and thieves of the world so we need to focus on the things that we can control. Be thankful for the positive things in our lives; revisit and assess our current state of affairs, our cash flow and our cash needs. Ask ourselves, “Is our budget under control?”, “Do we still have confidence in our advisors and our money managers?”, “Are we invested in good sound companies?”, “Are we well-balanced and well-diversified?”. If we stay focused on the things we are in control of and make the best decisions we can with the information at hand, we will be fine moving forward.
The free market economy is the most efficient and effective method of distributing goods and services. It works under some basic fundamental and natural laws, in spite of manipulations by governments, bureaucrats, and greedy corporate executives. It also is the most punitive to those that abuse those laws through greed and power. So we believe the market will make the necessary corrections and will reward those who stay patient and prudent.
Again, we know that these are scary times, so please give us a call when you have questions or concerns and we’ll do our best to help keep you on a successful track.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
We continue to believe in the wisdom and teachings of the late Sir John Templeton. We believe if we continue to adhere to his investment philosophy and principals we will do just fine.
The following quotes
were made by the late Sir John Templeton –
JUNE 1949
Now that the bear
market for stocks has lasted three years, it is well to remember that both bear
markets and business depressions are temporary. People do not remain pessimistic
forever.
DECEMBER 1950
The investor who
selects stocks on the basis of long-term intrinsic value must expect certain
problems. In the first place, he
should expect usually to purchase stocks which are thoroughly unpopular. Only when a stock is unpopular is the
price likely to be depressed greatly below intrinsic value. It is not easy to act contrary to popular
opinion. In the second place, the
investor who selects stocks on the basis of long-term intrinsic value should
not expect that the stocks selected will immediately begin to show a profit.
JANUARY 1961
The true idealist
preaches not class hatred but universal love; not to redistribute the wealth
but multiply the wealth; not more regulation but more freedom; not security but
opportunity. The true idealist is
the missionary for individual freedom and competition.
MARCH 1994
Bear markets have
always been temporary. And so have
bull markets. Share prices usually
turn upward from one to twelve months before the bottom of the business cycle
and vice versa. If a particular
industry or type of security becomes popular with investors, that popularity
will always prove temporary and, when lost, may not return for many years.
JANUARY 1995
In almost every
activity of normal life people try to go where the outlook is best. You look for a job in an industry with a
good future, or build a factory where the prospects are best. But my contention is if you’re
selecting publicly traded investments, you have to do the opposite. You’re trying to buy a share at
the lowest possible price in relation to what that corporation is worth. And there’s only one reason a share
goes to a bargain price – because other people are selling. There is no other reason. To get a bargain price, you’ve got
to look for where the public is most frightened and pessimistic.
Securities
through KMS Financial Services Inc.
520.884.7550
jpw@financial-architects.com brienne@financial-architects.com
3971 E. Paradise Falls,