Economically, the doldrums settled in this summer. This is not altogether surprising considering the myriad issues confronting countries all over the world. The European financial crisis, the Fiscal Cliff, and the Presidential election are all weighing on the minds of corporate and government leaders. As we approach crunch time for these major events, rhetoric has increased and economic activity has slowed. During the quarter, U.S. economic activity stumbled along at a growth rate of less than 2%. This frustrating performance resulted in a continuation of high levels of unemployment and a significant number of workers who have ceased looking for work. This subset of discouraged workers, known as “Series U-6,” has now reached 6.6% of the workforce, and when added to the official unemployment rate of 8.1%, results in a level of 14.7%. While U-6 has improved, it is still unacceptably high.
In spite of these pending issues, our economy continues to push ahead, albeit at a slower-than-desired rate. This, however, is much better than many other parts of the world. Cracks appeared in the great Chinese economic wall, yet Asia as a whole maintained reasonable forward momentum. The same cannot be said for Europe. Finance ministers grappled with lingering effects of excessive borrowings that violated many countries’ pledges for responsible fiscal policies that were accepted as a condition of joining the Euro. Although European economic growth proved disappointing, we sense the financial challenges did not worsen during the quarter. (more…)
I recently met with a prosperous couple, each well-employed and contemplating retirement. They have children that are grown, a house that is paid for, a combined income around $150,000, and employer 401(k)s exceeding $1,000,000. They don’t have an extravagant lifestyle, but see the best years of their lives in plain view. The last thing they want to do is speculate in the stock market, because the stock portions of their 401(k)s have languished and the economic news is frightening. Principle preservation is their primary concern. A safe portfolio of bond mutual funds and annuities sounds right to them.
This financial plan resonates with just about everyone who is retired or thinking about it. A reasonable rate of return with principle protection is doable and worry-free, right? Well, as in most circumstances, perception and reality often take different paths. First, let’s do the math and compare their working income to their potential retirement income at various rates of return: (more…)
We’re going to try something new on the Hardesty blog. In addition to giving you weekly updates about what we think was important that week, we want to hear from you. With that in mind, we are starting an “Ask Hardesty” column in our blog in which we’ll be answering questions that you send in. The questions can be about an investing concept that isn’t quite clear, something in the financial news, or anything investment-related. Just e-mail johnk@hardestycap.com.
Our first question is seemingly the most basic:
What should I invest in? -Tina D.
It seems the most basic to the asker, but it is perhaps the most complicated to answer. Unfortunately, the answer is going to be, “It depends.” It depends on the timeframe of the investment, your resources, what your goals for the investment are, and your tolerance for risk, among other things.
These are too many variables for just one concise blog post. As such, we’ll look at one at a time in a multi-part post, to be compiled at the end.
Risk
Let’s first consider the most fundamental part of your investments: the level of risk you are taking. Generally, investors think of “risk” as “How much money could I lose?” whereas we at HCM prefer to think of this question in terms of “What kind of price swings might I experience?” The difference might be subtle to a novice investor, so we won’t dwell on it. Basically, with risk, you need to know that in order to make money in the long term, you have to be willing to risk losing money in the short term.
Something else that is essential to understand but is not generally well-understood is that risk and return are not only related, but almost interchangeable. A higher return means a higher risk. At HCM, we have seen countless examples of investors losing money in a supposedly higher-return investment that they thought was “safe.” However, what the market is telling you by offering a higher rate of return is that you are taking more risk. There may be some exception to this rule, but we are certainly not aware of one.
In general, stocks have higher returns (more risk) over time than bonds. Bonds return more than money market funds (cash). Even within these categories, we can have differing levels of return: some stocks are riskier than others, as you might imagine.
If you need your money back in two years to pay for a child’s education, you shouldn’t take as much risk as if you are looking to start saving for your retirement that is thirty or forty years away. Over thirty years, you shouldearn the 8-10% long-term average that stocks provide, even if you lose 25% in the first two. But if you need the money in two years, you can’t take those kinds of risks.
If you can’t stomach the thought of a 45% loss of your investments, you will need to choose safer asset classes than just stocks. Similarly, if you are risk-seeking, you might want to take a higher weighting in riskier stocks than others in a situation similar to yours. Whatever your situation, you need to understand the risks you are (or aren’t) taking.
In sum, when investing, you first need to consider how much risk you want to take over your entire investment portfolio. If you are conservative on risk, it doesn’t mean you can’t have 2% of your assets in a tech stock, as long as your overall average risk is where you want it to be.
The concept of risk and return is one we will return to often. If your goal for the question “What should I invest in?” is a hot stock tip without considering all of these things, you may want to reconsider your strategy.
Look for the next segment soon.
The fast start the economy and markets enjoyed in the first quarter of 2012 faltered as the year progressed. Stocks fell sharply from April to May only to recover modestly in June. For the quarter the S&P 500 declined 2.75%, but for the first half of 2012, the S&P 500 advanced 9.49%. The fixed income markets continued to respond to Federal Reserve Chairman Bernanke’s stated goal of stable, low interest rates. The 10-year treasury began the quarter at 2.22% and finished the quarter at 1.67%.
Signs of a possible economic slowdown in the U.S. emerged late in the quarter as employment gains slowed sharply, retail sales ex-autos stalled, and capital spending slowed markedly. In addition, consumer confidence fell for the fourth consecutive month in June and the ISM Purchasing Managers Index fell below the critical level of 50 (see chart), which means manufacturing contracted. Put simply, the U.S. economy has been unable to establish a steady recovery pattern, and nobody seems to have a clear explanation as to why the economy cannot sustain upward momentum. (more…)
The Hardesty Blog has returned with a renewed vigor.
The markets had a good week, bolstered by news from Europe. The Dow was up 1.97%, the S&P 1.71%, and the Nasdaq 1.12%.
European Central Bank head Mario Draghi’s comments were the focus of the week. Draghi said that he is willing to do whatever is necessary to keep the Eurozone intact. There is still plenty of uncertainty in Europe. There is still plenty of it here, too: a fiscal cliff and an election are among the American uncertainties. But we believe that, in the short term, the Eurozone will not break up. This idea has stabilized the markets somewhat.
Next week, earnings season continues. As well as watching our companies, we’ll look at the unemployment figure, as well as initial claims.
This week’s factoid: In ancient Greece, Olympic athletes were expected to be the pinnacles of both mind and body. Poetry and verse were an important part of the games. At Hardesty Capital Management, we believe the Portfolio Management event would be an exciting addition to the 2016 games.
The first quarter of 2012 was a good beginning to the year. We had solid gains in the economy, which were reflected in a strong upward movement in stock prices. In part, these advances were due to good earnings growth during the Christmas season. The market was also strengthened by forecasts for continued earnings gains for the companies in the S&P 500, not only in 2012, but also for 2013. These increases in forecasts helped to paint a brighter picture for the future of our economy. Turning to the fixed income market, interest rates were steady for most of the quarter, but moved higher at the end of March, resulting in a slight negative total return in the 10-Year Treasury (see back page). Bond results were essentially flat, with the Barclay’s Government/Credit Intermediate Bond Index up .61%. Despite (indeed, perhaps because of) the flat returns in the bond market, we are still confident in equities. In this letter, I will show you why we remain optimistic for both the economy and the financial markets.
The expansion of the economy, despite being slow and uneven, has been one of the better-kept secrets in the U.S. over the last six months. This was confirmed by the recent upward revision of the Real Gross Domestic Product for the fourth quarter to an annualized rate of +3%, a level consistent with our country’s longer-term results. The skeptical stock market of last summer and fall responded to the good news, advancing 12.66% in the first quarter as measured by the S&P 500 index, the best first-quarter advance since 1998. The financial sector, one of last year’s worst-performing sectors, reversed roles and was one of the best in the first quarter of 2012. (more…)
When I was a young boy of ten or eleven, the smartest guy in my class enticed me to take a roller coaster ride with him on class day at Baltimore’s old Gwynn Oak park. Mistakenly thinking he was an experienced rider, we jumped into the last car, which my friend assured me was the safest. Only later did I realize he had never ridden a roller coaster and the last car experiences the most violent movements. We both stepped out of the car terrified by the experience. For me, it was to be my first and last ride on a roller coaster. As I look back at 2011, financially, this was much like that roller coaster ride of 50 years ago. The global financial markets rocked and swerved all over the place, only to finish near where they started. The experience was not as frightening as that real ride, but the markets in 2011 were nonetheless unpleasant.
After the very sharp stock market decline in the third quarter, the equity markets gave us a holiday present, advancing 12% in the fourth quarter, bringing the full year total return to the S&P 500 to 2%. However, 2011’s results were punctuated by over 100 trading days where the Dow Jones Industrial Average closed up or down more than 100 points and experienced 16 days where the Dow advanced or declined by over 200 points. This comes in the context of 252 trading days in a year. These levels of volatility are beat out recently only by those seen in the recession years of 2008 and 2002. (more…)
In one episode of the hilariously funny 1990’s sitcom Seinfeld, George Costanza, a slightly overweight, balding, unemployed and self absorbed 30 something, decides to make a change in his life. He concludes that he should try to do the opposite of his every idea and instinct. Immediately, things begin to go his way; a girlfriend, a job with the Yankees and moving out of his parent’s house (a real achievement if you know the character). Although George Costanza hardly represents a beacon of financial acumen, the history of the markets suggests that “doing the opposite”, zigging when others are zagging, can actually work. Conversely, if you are content to take the tried and true paths of others, in your best case scenario you may wind up equal to the pack and have achieved nothing more than the overall market average.
The dictionary defines a contrarian as a person who takes an unpopular position opposite to that of the majority. A contrarian investor believes crowd behavior among investors can lead to exploitable mispricing of securities. For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks and understates its positive prospects. Widespread optimism, conversely, can lead to speculative bubbles with unjustifiably high valuations. The Dutch tulip mania is a well known example of wild speculation. Contrarian investing is related to value investing in that overwhelmingly negative sentiment can give rise to what Benjamin Graham famously called a “margin of safety” when purchasing stocks, essentially the ability to purchase earnings and income at a discount to their intrinsic value. Arguably, that “margin of safety” is more likely to exist when a stock has fallen a great deal and is usually accompanied by negative news and general pessimism. (more…)
As Warren Buffet said, “Be fearful when others are greedy and greedy when others are fearful.” Maryland investors do not need a “high-powered” New York investment advisory firm to follow this advice. Our Baltimore-based firm believes so strongly in these words that we’ve placed the quote at the top of the agenda for our weekly investment committee meeting. It’s so easy to get caught up in the emotional side of investing because it is our emotions about money that drive us to invest in the first place. We all love to make money and hate to lose it—greed and fear are the engines of the markets no matter where you live.
There are many reasons why truly successful investors are terrific at what they do. Foremost is their ability to take the emotion out of investing, which allows them to sell closer to peaks and buy nearer the bottom. One doesn’t have to look much further than downtown Baltimore to find famously successful investors—Bill Miller of Legg Mason and Brian Rogers of T. Rowe Price come to mind. (more…)
After a brutal third quarter in which the United States saw an unprecedented downgrade of its credit, many weary investors are staying on the sidelines.
By Hanah Cho, The Baltimore Sun November 20, 2011
Put simply, it was a terrible summer for both the U.S. and European markets. The economic recovery that began in 2009 stalled, and the anticipated improvement in employment failed to materialize. Continued structural weakness in housing further retarded the overall recovery. Many other industries reported mixed results with one strong month followed by weakness in the next, resulting in a trendless quarter. Estimates for gross domestic product growth in the third quarter were halved from 3.6% at the start of the quarter to 1.8% at quarter-end.
In addition, a political fight over extending the debt ceiling frightened American consumers, slowing purchasing and threatening the economy with a double-dip recession. Though the debt extension was resolved at the 11th hour, it was not without cost. Standard and Poor’s, an established independent bond rating agency, downgraded the creditworthiness of the U.S. government debt from AAA to AA+. While not of major financial significance to the U.S., it was embarrassing. However, these events did have broad-based negative effects, not only on the U.S. equity markets, which declined 13.9% in the quarter, but also on foreign bonds and equities. (more…)
Every investor should strive to achieve the largest possible return on investment given a certain tolerance for risk. Although this axiom seems obvious, during periods of economic turbulence it is critical to focus on the risk side of the equation. How safe is the principal value of my account? Am I well positioned to weather a market correction and rebound fully when the investment climate turns favorable? Intellectually, we understand that long term appreciation and income are equally important. But, as markets fluctuate, falling prices can blur the investor’s vision and raise the question: Is my money safe?
Our current economic difficulties stem from the financial crisis that began in 2008, when consumers, financial institutions and businesses recognized the dangers of the explosion of debt that accompanied the “housing bubble.” Not surprisingly, investors raced to the sidelines seeking safety for virtually every financial asset. Today we are replaying a different (more…)
With big-bet strategy, the losses could be equally great
MarketWatch.com Robert Powell’s Your Portfolio Oct. 5, 2011, 12:01 a.m. EDT
Some investors fleeing stocks; companies, executives buying back
By Hanah Cho and Liz F. Kay, The Baltimore Sun 10:21 a.m. EDT, August 22, 2011
The economic recovery that began in Q1 2009 slowed unexpectedly in the first half of 2011. Reported growth of the GDP in Q1 2011 was only at an annualized rate of 1.9%, and a similar modest increase is anticipated for the second quarter. At the beginning of the year, a Bloomberg survey had consensus number for the quarter at 2.5%.
The shortfall caught the stock markets by surprise, and after reaching a high of 12,810 on April 29, the Dow Jones Industrial Index fell 3.1% to 12,414 to end the quarter. For the quarter, the Dow was up 1.4%, and up 8.6% for the first half. The S&P 500 was also up a hair, 0.22% for the quarter. Although there was a lot of volatility this quarter, stocks ended up where they started.
On the other hand, interest rates, sensing an economic slowdown, fell to new lows for this cycle. The 10 year U.S. Treasury note closed at a low of 2.86% on June 24th. Returns of short term Treasury notes (U.S. government securities with maturities less than a year) were even more startling. (more…)
