Archives for August 2018

Emotionalism in the market is too damaging to your portfolio. It’s too easy to miss all the rewards of the market by making bad decisions trying to time the market. In February of 1992 I used this example to explain to readers just how badly they could lose out by jumping in and out of the market.

It’s Too Easy to Miss It All

Here’s another stunning analysis on why trading in and out is not for you. Analysis of stock market returns from 1946 through 1990 by Ibbotson Associates shows the following: One dollar invested in stocks in 1946 grew to $130.52 in 1990. If you take out just the best 30 months for the stock market over the 1946-90 period, the same one dollar grew to only $8.88, versus $8.43 for Treasury bills. Can you really time the market well enough to target the right 30 months in 45 years? Most certainly not.

And yet another example of how trading can kill your total returns. These direct quotes are taken from Forbes 28 October 1991. Professor P.R. Chanoy of University of No. Texas and William Reichenstein of Baylor conducted the research for these conclusions. The professors studied returns for the S&P 500 from 1926 through 1987. “They found that if the best 50 months—only 6.7% of the total time period—were deleted, the S&P 500’s entire 62-year return disappeared.”

In conclusion: Do not be a trader or a timer. Stay fully invested and ride out the storms in high-yielding, big blue chips that will bounce back no matter how violent a given market correction.

Nothing has changed in 26 years about market timing. It was a bad idea then, and remains so today. As I wrote at the beginning of this month, marry compound interest, divorce market timing.

The underlying value of a company isn’t always fairly reflected in its share price. Some stocks carry stratospheric price multiples when compared to their peers. And some trade at rock-bottom discounts.

There doesn’t always seem to be a ready answer for why companies with similar assets, similar business plans and similar potential carry such varying valuations. You can rest assured however, that there is one thing driving all of these discrepancies, supply and demand.

Twenty years ago, I wrote that there are short, medium and long-term influences on share prices that have little to do with company fundamentals. But these forces do affect supply and demand. Here’s how I explained it back in 1998:

More Buyers Than Sellers. This is the basic reason that stocks go up rather than down. It is useful to gauge supply and demand, short and intermediate term, as well as long term. Short term, I like the first quarter of the year for its especially favorable supply/demand fundamentals. Every pension plan owner wants to fully fund his program in the first quarter in order to take advantage of a full year of compounding. It only makes sense to get your money working as fast as possible. Intermediate term, I like the supply/demand kicker of pre- and presidential election year politics. The pols do not want to rock the boat in the year leading up to and the year of a presidential election, and they sure as heck don’t want to ignite a recession (a killer for stocks). The old phrase, “It’s the economy, stupid!” packs a mean wallop in presidential elections. Long term, I am impressed with the power of baby boomers’ savings. I have written before about the excellent number-crunching PaineWebber’s Ed Kerschner has done on this subject. It’s the best I’ve seen. Ed expects that individual investors will continue to be big buyers of stocks. “This could represent $25 trillion incremental market value over the next 15 years, truly big bucks when you consider that the value of the equity market is about $13 trillion today.” I like the long-term supply/demand picture for stocks.

Don’t allow the ups and downs of oscillating supply and demand for stocks affect your investment decisions. Stick to your plan of patient compound interest generation and you will undoubtedly avoid the horrors of trying to chase performance through short, medium, and long-term cycles.

Waylon Jennings can teach you a lot about being a successful investor. The most important part of Jennings’ success was his go-it-alone, do-it-yourself strategy. Jennings didn’t attempt to sound like anyone else. He charted a musical course that was unique to him. He avoided the herd by making his own decisions. That’s how I want you to invest. In 1995, I wrote of Waylon and his success:

“Well, I Nearly Got Caught at a Burger King.”

“And a couple of times on a plane./I thought I was safe from detection with all of the weight I had gained./But walking around in a jumpsuit—that didn’t work worth a dang./So I bought me some Levi’s and grew me a beard, and you’ll never guess who I am./Nobody knows I’m Elvis: Nobody knows this is me./After all of my tries, I’ve got the perfect disguise, and I’m who I want to be.”

Waylon Jennings, who penned the above song, “Nobody Knows,” is one of the only people on the face of the earth who can actually preface a story with “One night, me, Buddy, Elvis and Roy Orbison were sittin’ in a restaurant in Lubbock” and be telling you the truth.

As producer Don Was noted (in Jennings’ powerful new CD—“Waymore’s Blues, Part 2” RCA 66409-2), in an era when record companies kept their artists on a tight creative leash, Waylon was the only one allowed to produce his own records, and in so doing, created a formidable string of distinctive hits that few artists can ever rival.

Doing it himself and bringing his own powerful creativity to bear has made Waylon Jennings successful in music. And I promise, these traits can make you successful in investing far beyond your wildest dreams. You simply need to pledge to do your own thinking, your own homework—which I’m here to help you with—and make your own decision. Most investors, especially institutional investors, run with the herd, traveling en masse from one investment idea to another. The herd game is not for you. Bring on individuality.

When you develop an investment plan that is geared to your specific needs, you buck the herd mentality.

You must chart your own unique investment course. At my family-run investment counsel firm, Richard C. Young & Co., Ltd., no client is part of the “herd.” Each client has his own needs and circumstances addressed Read more about how we help clients by signing up for our monthly client letter, written by my son Matt, the firm’s President and CEO. The letter is free, even for non-clients, My hope is that it will help you chart your own course.

If there’s one thing investors do to waste a lot of their time, it is comparing the performance of their portfolios to the S&P 500 or the Dow Jones Industrial Average. These indexes have little in common with any well balanced and well diversified portfolio. They simply aren’t good proxies for conservative, retired or soon to be retired investors to use for their investments. In December 2004 I called the practice a big waste of time. I maintain that view today. I wrote then:

A Big Waste of Time

One of the most inane exercises carried out by professional and amateur investors alike is comparing performance against, for example, the S&P 500 or Dow 30. These things are moving targets. Investors are not comparing apples to apples. For example, the original Dow began in 1896 with 12 components. What are you comparing yourself against? American Cotton Oil or American Sugar Refining or perhaps Chicago Gas? No, all of these companies have long since disappeared from the Dow 30. In fact, only one of today’s Dow 30 companies started out in Charles Dow’s index back in 1896. The sole survivor is General Electric. The others have either gone bankrupt or merged and merged again. The Dow today is even 10% different from the Dow in 1999, as Eastman Kodak, AT&T, and International Paper have been replaced by AIG, Verizon, and Pfizer.

Both the Dow and the S&P 500 not only are moving targets, but are survivalist weighted. Losers and bankruptcies are dropped and replaced with up-and-comers. And neither index is encumbered with sales charges, expenses, or fees of any kind. And indices don’t pay taxes, which takes a giant bite out of most investors’ portfolios. No, you will do yourself no good comparing your own efforts or those of your manager’s against moving targets.

Instead, measure yourself against a set of reasonable goals based on long-term growth of the economy and normalized interest rates, both nominal and real. With a clear understanding of probable long-term growth and income characteristics, you are equipped to establish your own personal targets.

There are thousands of indexes available, including some with greater value as comparisons for investor portfolios. Those should be sought out and used in a way that takes into account all the factors I mentioned back in 2004. Don’t make the mistakes so many do by comparing your portfolio to an index that has nothing to do with your goals, risk tolerance, or desire for diversification.