As we begin the New Year, Maryland investors find themselves in a bit of a quandary: where to invest in 2014. There do not appear to be any clear options. The consensus view on Wall Street is that interest rates will move higher. If correct, that would mean their more safe investments, bonds, are headed for another difficult year. Stocks are up significantly since the financial crisis and appear fully valued. Perhaps the year will not be kind to stocks either. Cash is yielding nothing and unless the Fed has a drastic change of heart, that is not expected to change. So, what’s an investor to do in this environment?

The bond market is probably not the answer as we are most likely headed for another difficult year. The Quantitative Easing program should end in 2014 and the Fed may begin to seriously contemplate increasing the Fed Funds rate. The mere threat of tapering the QE program in 2013 caused a violent reaction as the yield on the 10-year Treasury spiked from 2% in June to 3% in September. The 10-year Treasury began 2013 yielding 1.76%. An upward bias to yields of most maturities longer than 2 years persisted throughout 2013 and many pundits suggest 2014 will likely be no different. Investors are not used to losing money in their bond investments. (more…)

Several times a month I am asked where I think the stock market will be in six months or a year. The question implies that I am some sort of stock market astrologer, and that would be very scary. I just reply “I have no idea.” In the short term, I doubt that anybody has much of an idea where the stock market will go. But over the last 75 years, the market has provided an average total return of 9.4% compounded annually, comprised of 5.4% price appreciation and 4.0% dividend yield.

But the market direction question is really trying to ask is how do you time the market: when do you sell out and when do you buy in? This strategy of market timing is fraught with risk and can be very dangerous. The timing of the market requires two critical decisions: when to get out and, more importantly, when to get back in. The second decision, when to reenter the market, is really the hard part. (more…)

For the first time in my life, I am being asked when I plan to retire. It seems like only yesterday, when as a ten or twelve year old, I would sit in church on Sunday mornings thinking I would never finish my education, let alone turn sixty-five, then considered a normal retirement age. Now I am sixty-seven and advising clients on retirement planning.

Sooner or later, almost every retired client of our firm; a young sixty something or the very old; the moderately wealthy or the very rich; the big livers or thrifty old ladies, all ask the same question: “Will I run out of money in my lifetime?” I have come to the conclusion that no matter how wealthy you are, you will know you are old when you think you might run out of money. (more…)

Not too long ago someone asked me what kind of an investor I was. I was tempted to make a joke of the question and answer simply, “A good one.” But then I thought of one of my old professors at Columbia Business School, Benjamin Graham, and I realized the depth of the question.

Graham lived from 1894 to 1976, wrote extensively, and was widely accepted as one of the most influential investment minds of all-time. He was credited with educating many investment luminaries including Warren Buffet, former Goldman Sachs partner Leon Cooperman, Mario Gabelli of the Gabelli Asset Management and, of course, me! (more…)

Over the last 30 years, there have been monumental changes to the investment advisory industry in our region. Many great, locally owned firms, like Alex Brown and Mercantile Safe Deposit & Trust, are gone. Others, such as T. Rowe Price and Legg Mason, survived and thrived. Dozens of small money management firms have been created as professionals left larger organizations over the years to start their own. As a result of these movements, the local investment advisory landscape is currently dominated by brokers, Registered Investment Advisors, and banks. RIAs seem to be growing the fastest at the moment, primarily because that business model appeals the most to both clients and practitioners.

The brokerage industry has witnessed mass defections to the RIA model as brokers have struggled with the shrinking compensation levels they have been forced to endure. Most of the compensation to brokers in the past was centered on transaction-based fees and 12b-1 fees from mutual funds. As brokerage firms reduced payouts and attempted to shift clients toward an assetbased fee, many in the industry decided to start their own practice as RIAs. Entire companies were formed to provide platforms for these disenfranchised brokers to start their businesses. (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…)

Baby boomers throughout Maryland are facing a two-pronged assault on their investment portfolios. As we all know, stocks have performed very poorly over the last ten years. Equally as important and probably less obvious is that investment income has been under assault as well. Not only have yields been falling, but during the last recession many companies cut their dividends. It has become very difficult to grow portfolios in the traditional way,and just as difficult to grow investment income. The importance of a growing income stream cannot be overstated, especially as baby boomers begin to retire. Growing investment income is a problem—and that problem in itself is growing. (more…)

Value is in the eye of the beholder. I have been in the investment business for 18 years and have met all kinds of different investors—growth, value, momentum and technical. The one common thread among them is that they believe they are purchasing stocks at a good value. Quite simply put, they are buying a stock trading below their estimate of what it is worth. In this sense, all investors are investing for value. But value investing trumps investing for value over long periods of time.

Investing for value and value investing are very different. Value investing is an often-misunderstood investment style. Benjamin Graham and David Dodd are the founding fathers of value investing. Their book Security Analysis is still considered the bible for true value investors and a must-read for all investors. Although value investing has evolved over time, it is based on fundamental analysis used to derive the intrinsic value of a company. This calculated value is compared to the current share price for relative attractiveness. (more…)

When valuing an asset, one assesses the present value of the future returns that asset will bring.  The present value, PV, of a future cash flow, C, is calculated using the number of years in the future that the flow will be received, t, and the interest rate, i. Specifically, PV= C/(1+i)^t.  The important thing to note from this equation is that the interest rate i is in the denominator of the equation— as it rises, the value, PV, falls.  To say it another way, lower interest rates generally mean higher values of current assets and thus, higher stock prices.  Thus, high interest rates portend lower stock prices.

With this in mind, keeping interest rates low should bolster stock prices.  Jim Hardesty has prognosticated that interest rates will remain low, and we will see no major changes in the Fed’s strategy in the next 18 months.

The  importance of the upcoming earnings announcements cannot be underestimated.  As we enter the earnings-reporting season, we are confident that the numbers released by many companies will be stronger than anticipated.  This development will be a sure sign that we are well on our way to an economic recovery.