Archives for July 2019

During my 55 years in the investment business, two of the questions I have received most often while talking clients and customers, are “Should I get out of the market?” and “How should I weight my portfolio?”

The answer to the first question is easy, no. Stay invested. Jumping in and out of markets will only make you miss days you’ll wish you hadn’t.

The answer to the second question is straightforward but might take more discipline on the part of the investor to implement. It is balance. You should always aim for a portfolio that works to counterbalance risk. Here’s how I explained balance and staying invested in September 2013:

Harleys, Records, and Winchesters

It was 1957, and I owned all three. Today, 56 years later, I still have a Harley. The very same Winchester sits on a rack four feet from where I am writing to you. And my record collection could fill a closet. My current Harley is not the same old oil dripper from 1957, and my portable RCA record player has been replaced by an AR/Dyna system from the ’60s (still pretty vintage). On my desk is the single investment book I have ever relied on, Ben Graham’s Security Analysis, published 51 years ago. So a lot has stayed the same for me for over 50 years, since I first entered the investment business. There has been no reason for me to change my basic approach. I continue on making timely adjustments depending on the economic and investment climate at the time. Here is my approach in a nutshell.

As Always, Stay Invested, Stay Balanced

I rely on balance, compound interest, low turnover, dividends, and interest. That’s it. I do not market-time, and I stay invested in a finely tuned and balanced all-weather fashion. I have written in the past that I can be your economic and financial market weatherman, but I cannot be the weather. I tinker with my portfolio based on conditions as I read the daily tea leaves. I add to my portfolio to maintain balance. And I stick to a basic group of dividend- and interest-paying securities that I have followed for a long time. I invest to receive a stream of dividends for compounding. My annual returns show a general pattern of consistency with much less volatility than many other approaches.

Commit yourself to staying invested and to keeping your portfolio balanced. You’ll be glad you did.

I have now been working in the investment industry for 55 years, and over that time I have lived through four stock market super cycles, including the present, and most dangerous one. I explained the four cycles in March 2011, writing:

Stock Market Super cycles

I assure you, I do not plan to get gored on the next angry charge. Here is exactly how to look at things. Read and re-read what I am going to tell you here, and remember this stuff for the rest of your life. Since I got into the investment business, there have been three completed big cycles swings in the stock market. Cycle number four has now begun.

The first cycle featured a nasty run-up in interest rates that ended with the 1981/1982 recession. During this period, the T-bill rate neared 20%, and the Dow ended 1981 below its year-end 1965 level. Not so good for cycle #1.

Cycle #2 kicked off at the outset of the 1981/1982 recession and ended as the decade of the ’90s came to a close. It was a great two decades for stocks and bonds, as interest rates collapsed.

With the new century, cycle #3 got under way. It was a roller-coaster ride in interest rates: rates declined in the early years of the new century, rose in the middle of the decade, and fell back to complete a final cyclical trough. The stock market completed a volatile 10 years right back where it began, with no net gain in the decade. Cycle #3 was a loser.

OK then, in the first three stock market super cycles, we had two losers and one winner. Now what? As cycle #4 is forming, interest rates could not be lower. The cyclical bottom has passed. The rate on Fed funds is basically zero. Savers are being paid squat while the Fed fraudulently subsidizes the Wall Street banks at the expense of America’s thrifty, retired savers. It is a travesty.

That fourth super cycle is still underway. Savers aren’t being paid enough, and interest paid to savers is set to decline before it rises.

In tricky investing times like these, it is important for investors to manage risk. If you are looking for ways to do that, fill out the form below. You’ll be contacted by a seasoned member of the team at my family run investment counsel, Richard C. Young & Co., Ltd. They can conduct a no obligation portfolio review for you, examining strategies to help you avoid risk.

Investing wisely demands due diligence. While there are certainly thousands of variables affecting any investment decision, narrowing down your focus with some broad questions can help you get started. In August of 2003, I encouraged investors to start with these four questions. I wrote:

Ask These Four Questions

As I’ve written, the first four questions I ask about a company concern dividend increases, share decreases, debt reductions, and cash accumulations. Many managements decry each of my benchmarks, pleading that the reinvestment of cash is best for shareholders long-term; that actual share increases, as well as the buildup in debt, bring in more capital for expansion; that cash can’t possibly be a productive asset. You and I both know that there are management teams that win with such a strategy, but there are far more that do not.

There is ample historical evidence that investors are better off with dividends. Evidence suggests that managements are far less successful in reinvesting cash than is portrayed. As for debt, Microsoft has been pretty successful sans debt. And, by the way, has a cash horde of over $46 billion (not a typo).

Scrap Growth Stocks

If you stick with my four-part formula, you will bypass most of the hot growth stories. I am not a fan of the growth-stock concept. I’ll take my four-part mini formula any day. I can assure you with great confidence that any company that increases its dividend year after year, steadily reduces its number of shares outstanding, regularly reduces its debt load, and accumulates a healthy cash horde is doing a lot of things right. This progression indicates conservative management. It’s the type of investment that makes sense for seasoned, conservative investors likely to have a strong affinity for my basic investor tenet: diversification and patience built on a framework of value and compound interest.

Learn more about my dividend focused investment philosophy in the monthly client letter of my family run investment counsel, Richard C. Young & Co., Ltd. You can sign up for the letter by clicking here. It’s free, even for non-clients.

In April of 2011, I wrote:

My job is to help you separate fact from fiction and lay out a game plan for you and your family that will ensure your personal and financial security in the unstable and unsettling times that lie ahead. The broad battle plan that I’ll cover over the next few months will include the complete scope of the energy consumption/investment/personal security issue. Here is what separates what you read from me from most others: (A) I have no financial axe to grind and no ulterior motive. (B) I am not looking to make any new friends or curry favor. I am not, not surprisingly, a politician. (C) I do not work for a Wall Street investment firm with something to peddle. (D) I tell you exactly what I have done for my family and for myself and what I plan to do over the next couple of years.

I do not have all the answers, but I do have some good ones and a battle plan that will make us all more secure financially and personally. I say this to you with the enthusiasm of someone who has been researching and plotting financial strategies for nearly five decades. My strategies are suitable for all investors, but most specifically for my private management clients who are predominately conservative small-business owners and retired, or soon-to-be retired, investors. This group tends to be one that, over many decades, has accumulated substantial capital. Today the goal is to protect that capital and maintain purchasing power through all types of weather.

If you have ever ridden a motorcycle through the Dakotas, Wyoming, or Montana, you know full well that betting on the weather is a bankrupt strategy. Prepare ahead as if you do not know what is ahead, and with plenty of concern for the unknown. Have your foul-weather gear and full-face helmet on from dusk till dawn, because conditions will change without warning and become violent in a flash. Of this I am certain. Do not be a bettor, be a planner.

There is no way gambling in securities markets can prepare an investor for the devastating effects of a bear market like those seen this century. Only a systematic approach, that of a planner, not a bettor, can provide some shelter during hard times in the markets. If you would like to discuss a plan for your investments with a professional who puts your interests ahead of their own, please fill out the form below. You will be contacted by a seasoned advisor from my family run investment counsel firm, who will discuss with you ways to improve your investment plan.

With over 100,000 miles of Harley touring behind me, I can assure you of the value of a smooth ride. No one enjoys being jolted and jarred, not on the road or in securities markets. When markets become volatile, every investor is looking for smoother performance. In August 2013 I explained that the key to smooth performance, whether on the road or in markets is counterbalancing. I wrote:

Managing a common stock portfolio takes— above all else—patience. Your goal should never be what to sell next; rather, it should be what stocks you can hold through thick and thin. It is true that portfolio activity, for most investors, runs inversely to consistent long-term performance. How should you measure performance and how should you construct an all-weather portfolio? First, “all-weather” means you do not want to be jumping in and out of the market attempting to predict bull and bear markets. For five decades, I have been investing my own money as well as advising conservative investors saving for retirement. As such, I have invested through many gut-wrenching bear markets and disastrous single years like 2008, which ended with the speculative non-dividend-paying NASDAQ down a frightening 40% for the year. Through all the years of turbulence, I have remained fully invested in a balanced, widely diversified securities portfolio featuring a counterbalanced approach.

I have firsthand experience of what happens when counterbalancing is not in force. The Harleys I rode back in the old days had engines bolted straight to the frame. Talk about vibration and calamity. The constant vibration caused nuts and bolts to loosen and fall off. When you’re on a long-distance road trip, a breakdown in the middle of nowhere is cause for concern. I have found myself in just such a situation and it’s no fun. Today’s Harleys feature counterbalanced engines offering both a smooth ride and a minimum of road trip calamities.

Examine your portfolio today to see if it can be described as fully invested, balanced, and widely diversified. If not, it’s time to trade it in for a new model.

Securities markets endure any number of threats each day. Sometimes news that appears dire isn’t necessarily so. Other times, the market overlooks the little signals that portend a rout. After the 2005 revaluation of the yuan by China, I discussed how such seemingly small developments could create major change via the “butterfly effect.” I wrote that September:

I’ve written over the years about Chaos Theory, a subject on which I have read extensively. Of the scads of neat books on Chaos Theory on my shelf, I would send you first to Chaos—Making a New Science by James Gleick (author of the Life & Science of Richard Feynman). In his prologue, Gleick tells us, “When the explorers of chaos began to think back on the genealogy of their new science, they found many intellectual trails from the past. But one stood out clearly. For the young physicists and mathematicians leading the revolution, a starting point was the butterfly effect.”

Richard Feynman (groundbreaking research for the atom bomb, a Nobel prize for this theory of quantum electrodynamics, and his shocking expose regarding the Challenger space shuttle disaster) once said physicists like to think that all you have to do is say, these are the conditions, now what happens next?

Errors & Uncertainty

Gleick writes, “By the seventies and eighties, economic forecasting by computer bore a real resemblance to global weather forecasting. The models would churn through complicated, somewhat arbitrary webs of equations, meant to turn measurements of initial conditions (i.e., a yuan revaluation) atmospheric pressure or money supply—into a simulation of future trends. The programmers hoped the results were not too distorted by the many unavoidable simplifying assumptions. If a model did anything too obviously bizarre— flooded the Sahara or tripled interest rates—the programmer would revise the equations to bring output back in line with expectations. In practice, econometric models proved dismally blind to what the future would bring, but many people who should have known better acted as though they believed in the results…. Computer modeling had indeed succeeded in changing the weather business from art to science…but beyond two or three days the world’s best forecasts were speculative and beyond six or seven they were worthless…the butterfly effect was the reason. For small pieces of weather—and to a global forecaster, small can mean thunderstorms and blizzards—any prediction deteriorates rapidly. Errors and uncertainties multiply, cascading upward through a chain of turbulent features, from dust devils and squalls up to continent size eddies that only satellites can see.”

Gleick offers perspective that helps clarify a number of issues for us. (1) “A butterfly stirring the air today in Peking (now Beijing) can transform storm systems next month in New York.” Think of China’s mini yuan revaluation as the butterfly flapping its wings, and contemplate the future with considerable reservation. (2) Ponder the head faking of today’s complex hedge funds, and ask yourself how the butterfly effect may be the logic behind the explosion of multitudes of these highly leveraged time bombs.

Markets are stirring today. If you haven’t already counterbalanced your portfolio with a mixture of interest paying investment grade bonds and dividend paying, blue-chip stocks with long records of increasing dividends, I encourage you to do so. If you aren’t sure how to proceed, and would like to read more about such a strategy, sign up for the monthly client letter produced by my family run investment counsel firm, Richard C. Young & Co., Ltd. You can sign up here, and it’s free, even for non-clients. Don’t wait for chaos, prepare for it.