Thursday, December 30, 2010

Having an Advisor Who is Ahead of the Game

Why Is The Stock Market Continuing To Climb?
Financial markets have an annoying tendency to reach overvalued or undervalued conditions that can continue for several years prior to reaching a critical turning point. On a short-term basis, the stock market has been called a "voting machine," driven by either "greed" or "fear" as the source of direction. On a long-term basis, the stock market is considered to operate as a "weighing machine." In other words, the weight of the evidence of true valuation will eventually overtake the herd mentality of the voting machine. Recent examples include:

1. The Tech Bubble of 2000-2002

2. The Real Estate Bubble of 2008-2009

3. The current 2009-? "Artificial Stimulus" Bubble, where stocks are rocketing upward. I believe that this current rocket does not have adequate fuel to pierce through the atmosphere and will likely, run out and come crashing down to earth instead.

Feelings About 2011
As we entered 2010, I was on record stating many concerns that influenced how aggressive (or not) I have been in WFG portfolios that allow me the discretion to alter the allocation to stocks. I appear to have been early. That said, I have not changed my opinion and based upon the current economic landscape and stock market levelsm I am equally concerned as we enter 2011.

The Punishment For Being Ahead of the Game--But Right Nonetheless
In the past, investors have severely punished financial advisors who were perceived as too cautious as stocks and real estate kept growing towards the moon.

eremy Grantham Example
His world-class investment firm had its assets under management shrink 45 percent in the late 1990s as his pessimistic outlook for high-priced technology stocks spurred clients to buy better-performing mutual funds.
While ultimately being right, like all humans, he was unable to predict with precision the exact date that the earth would stand still. The 49 percent plunge in the S&P 500 from March 2000 to October 2002 proved Grantham, 72, was right to warn of overvalued U.S. shares.

The Herd is Overweight Emerging Markets
Investment strategists at Bank of America Corp., Credit Suisse Group AG and Societe Generale SA have all said in the past month that emerging-market stocks may climb above levels justified by companies’ assets and earnings because of surging economic growth and the Fed’s efforts to reduce yields on debt securities.

Investors poured more than $60 billion into emerging-market stock mutual funds in 2010. Professional investors are more bullish on emerging markets than any region, according to a Bank of America survey last month.

“Everyone and his dog are now overweight emerging equities, and most stated intentions are to go higher and higher,” Grantham, who helps oversee about $104 billion, wrote in his quarterly letter to clients posted on the firm’s Website. Developing nations’ faster expansion “will give a powerful impression of greater value,” he said.

Valuations are the “most stretched” in emerging markets, making them vulnerable to a selloff should global growth disappoint investors, Bob Janjuah, the co-head of cross-asset allocation strategy at Nomura International Plc, said in a Bloomberg Television interview on Oct. 27.

Stocks, bonds and currencies in developing nations are likely to climb to bubble levels as the Fed has rolled out another round of bond purchases, Michael Hartnett, Bank of America’s chief global equity strategist, wrote in an Oct. 21 report.

Credit Suisse’s London-based global equity strategist Andrew Garthwaite says the combination of high savings rates, negative real interest rates and rising asset prices has made emerging-market countries including China and India vulnerable to speculative inflows.

“If ever the stage were set for an emerging market bubble, we think it is now,” Garthwaite wrote in an Oct. 27 research report.


“The headache posed by bubbles depends on the asset managers’ perspective,” wrote Grice. “For skeptics, the pain is on the way up; for true believers, it’s on the way down.”

I am still more comfortable at this juncture accepting the "pain of being early" vs. not safeguarding our client's wealth from what I believe is another bubble brewing.

Savannah Film Festival Review Summary

Below are my reviews of the movies I saw at the Savannah Film Festival this fall, followed by some additional comments.

Reg: Regular Hollywood movie with big budget.
Ind: Independent film with low budget.







Black Swan



Natalie Portman



The Conspirator


True story

Lincoln Assassination



Redford movie filmed in Savannah

Beneath Hill 60


True story WW I



A must see movie

Nice Guy Johnny


Modern day “The Graduate"

Ed Burns and unknowns


Very funny!



Documentary about people who turn cars into art



Very interesting

Night Catches Us


Objective story about the Black Panthers

Actor from the

Hurt Locker


Very informing

You Don’t Know Jack


The true story of Jack Kevorkian

Al Pacino, John Goodman, Brenda Vaccaro


Very good

Don’t Go Into The Woods


Slasher/Musical about teenagers



Very funny for a certain audience

The Kid


True story of boy that grew up with child abuse. Goes on to become best selling author




Gods and Monsters


True story of the H-wood director of Frankenstein

Ian McKellen

Brendan Fraser


Funny and interesting

Blue Valentine


Drama about poor relationships

Ryan Gosling, Michelle Williams


A downer

Made in Dagenham


True story about equal pay for women



Very informing

Another Year


Story about relationships



Too slow with thud of an ending

127 Hours


True story about hiker who cuts arm off to stay alive

James Franco


Tedious film about survival

Additional Comments:

Beneath Hill 60: Simply one of the best war films ever made. A true story about an unknown aspect of how WWI was fought. A drama with no core and a love story to boot!

Nice Guy Johnny: Made by Ed Burns on a $25,000 budget. Can download via iTunes. Number seven at the Apple Store at this time.

You Don't Know Jack: Regular movie with Hollywood budget but a must see.

Don't Go Into The Woods: Young people will like this movie. A "B" style horror movie that the actors sing songs through!

The Kid: A true story about how even with the worst upbringing, the human spirit can prevail. Also shows how big an impact positive role models can have.

127 Hours: Do not waste your money. If you think James Franco is hot, rent another movie he has been in.

In Closing

I will follow up this blog with some observations about various, powerful life learnings that impacted me by various films.

Tuesday, December 28, 2010

Mark Twain and Investing

Not only is sentiment wildly bullish on stocks and equally as bearish on bonds, but history says that when yields and equity values soar in tandem, as they did in the summer of 2007, we almost always see a reversal in both markets. On average, equity prices corrected 12% in the next six months.

On a similar note is Barron's Outlook 2011 ― none of the 10 strategists see a down market, the average forecast is for a double-digit advance and the range is 1,250 to 1,450!

To quote Mark Twain ...

“When I find myself on the side of the majority, I know it’s time to find a new place to side.”

Only by standing against the prevailing winds-selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising, based upon the momentum of the herd vs. fundamental valuations.

Friday, December 17, 2010

What Types of Stocks to Own in a Sideways Market

Vitaliy Katsenelson, a Denver-based money manager of whom I respect, just published a "bible" on investing. He asserts that he is looking for a “sideways” market and screening for “companies that have a lot of cash.” He has a ton of cash too — a 35% cash position and lays out the reason very clearly: Nobody “can win buying an overvalued asset and hoping it will appreciate.”

The above is 100% consistent with WFG's
Paid to Wait approach of buying companies that:
  1. Are cash rich
  2. Have low debt
  3. Have paid dividends over a long period of time
  4. Have a record of increasing their dividends
  5. Have a high return on capital
  6. Have strong competitive positions within their business sector
Investing Lessons

1) If you are going to invest in the stock market, why not get
Paid to Wait? Paid to Wait for the future appreciation of the stock(s) that you own to unfold over time and ignore the day-to-day ups and downs!

2) Investing is a marathon, not a race. The future winning professional money managers will be the current laggards of 2010, who continue to pursue the virtues of capital preservation and income-orientation strategies over speculation.

3) If you are sitting on the sidelines, you are missing out, regardless of the future ups and downs of the markets. Investors who make all or nothing, 100% in or out bets with the stock market, are proven over the course of time to have shot a large hole in their foot. If there were only "financial gun permits" to protect them from the emotions that lead to ill timed decisions based upon the news media and fear.

4) I personally have a very low overall exposure to stocks of 38%. This is about as low as any long term investor should ever go.

I Still See The U.S. Stock Market As Over Extended

From David Rosenberg:

"Market sentiment is wildly bullish.The latest Shiller P/E ratio jumped to 21.87x in November from 21.38x — we have not seen it this high since June 2008 (and recall that the market went down 45% from there to the lows of 2009). According to this metric, the U.S. stock market is overvalued by 33%. Yikes! And the typical Wall Street strategist thinks this market is cheap!"

Only by standing against the prevailing winds-selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising, based upon the momentum of the herd vs. fundamental valuations.

A contrarian style of investing is the ONLY method that has proven, over time, to reduce risk and take advantage of opportunities.

Saturday, December 11, 2010

Recent Stock Additions As We Enter 2011

The Christmas season is one of the times during the year that I devote substantial time to "shopping for stock bargains." To qualify, the stocks that make the buy list possess many of the following attributes:
  1. They are an out of favor stock, in an out of favor industry.
  2. Their recent performance has been poor (possibly over the last year).
  3. If they are smaller companies they need to have some ownership by insiders.
  4. They need to pass the analysis of various research providers that we value and trust.
  5. They should be owned by other value driven investment firms that we follow and trust.
  6. We have an expectation that they will hold up better in a stock market correction.
  7. We have an expectation that with patience, these stocks can make up lost ground in a flat or up market.
We "shopped for the following bargins" today in WFG portfolios: The following stocks were new additions: CFFN, COV, CSCO, IBKC, INTC, KMB, PBCT, PFE, SCHW, SYK, VPFG. The remaining stocks we already own and are adding to existing positions.

Only by standing against the prevailing winds-selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising, based upon the momentum of the herd vs. fundamental valuations.