As Seen on TV
Not too long ago, I saw a program on CNBC about selling via infomercial. Even though I’ve never availed myself of the opportunity to “act in the next five minutes and enjoy free shipping”, I found the show interesting. It featured Ron Popeil and others who invent clever gadgets and then make infomercials to sell them to the rest of us. The show made the point that infomercials are typically well produced making each item offered appear useful, unique – and unavailable elsewhere. Of course, without a great infomercial, the products would never sell.
I am not a gardener but I have heard that a tomato plant which produces ten pounds per season is doing pretty well. A friend went to visit his father the other day and noticed two shot glass-size cups on the window sill. When he asked about them, he learned that they were tomato plants which, according to the infomercial, could be counted upon to produce 60 pounds per plant per season. Time will tell if that particular offer meets expectations.
In addition to plants and pocket fishing rods, you can also find investment advice on television. Regular readers of my articles know that I don’t watch much TV but new acquaintances are sometimes surprised to learn that I don’t tune in to Jim Cramer every night to hear his investment ideas. Mr. Cramer was apparently a successful hedge fund manager (apparently because hedge funds are subject to very little regulation so their true performance is difficult to accurately determine) but, more critically for television, he is entertaining. According to research I have found, his investment advice has not been any better than average, although he certainly does make some good recommendations. The article I cited is not the only one which evaluates his skills. According to Google, the next most popular story about him comes from a source I consider to be one of his competitors, the Motley Fool. Like Mr. Cramer, that organization provides free investment advice in order to bring viewers to its articles and website. Those viewers make it possible for the Motley Fool organization and CNBC to sell advertisements. Of course, there’s nothing wrong with selling ads but when that’s the reason a site (or column or infomercial) exists, it certainly increases the value of an entertaining presentation.
You may be familiar with two additional sources of investment advice: Suze Orman and Dave Ramsay. Ms. Orman hit it big on Oprah but began her career somewhat more humbly, selling insurance in California. She now receives fees from the annuity products she endorses which makes me wonder if her advice can be truly unbiased. Mr. Ramsay offers very practical advice, then recommends local salespeople to implement his strategies. These individuals apparently agree to follow his approach in working with their customers but before buying from one, you might want to ask if any of their sales commissions are shared with Mr. Ramsay. While both of these nationally known figures have undergrad degrees, neither has earned professional certification in financial planning. That makes me a bit unsure about why their advice should be considered inherently more trustworthy than that available through any other infomercial, selling any other product.
Information is critical when making investment decisions. Whether you count on a guru or subscribe to professional publications, all the research in the world won’t guarantee success because investments don’t always perform as expected. Warren Ward Associates utilizes a “slow but sure” approach, employing the Nobel prize-winning strategy known as Modern Portfolio Theory. We have always agreed with famed economist Peter Bernstein that the future is unknowable, so we allocate investments among a range of categories. The downside of this approach is that if one segment does extremely well, i.e. technology stocks in the late 1990’s or housing stocks in the recent past, our clients are going to miss out on some of the excitement. On the other hand, when the inevitable correction follows each bubble, our clients receive protection through the diversification, again avoiding some of the excitement.
I believe that most people who offer free advice do so in hopes of selling something, whether it’s products for the home or investment products. WWA’s only source of compensation is the fees paid by our clients, so our advice is never influenced by our desire to sell anything. If you’d like to receive unbiased advice, instead of a sales pitch disguised as advice, give us a call.
The Philosopher’s Stone
Those of you who were better history students than I may remember the philosopher's stone from your study of the Middle Ages, although it was Van Morrison’s song of the same name which recently piqued my interest. The philosopher’s stone is a legendary alchemical tool, supposedly capable of turning lead into gold. In the view of some early scientists, even one as otherwise advanced as Sir Isaac Newton, it would provide its owner with enlightenment in addition to extreme wealth.
Clearly anything possessing the ability to turn lead into gold would have value literally beyond measure. But, in fact, I think a large number of us have cooperated to accomplish something quite similar over the past six months. Through our combined efforts, we have turned the lead of our investment portfolios into gold or, at least, have increased most account values considerably.
Following an up-and-down start at the first of the year, the market (as measured by the S&P 500) gained about 17.5% through the end of July. When I wrote back in November and December that we were going to remain invested on behalf of our clients, one of the reasons I did not include is that selling into a declining market requires not one but two decisions. After having chosen to sell, you have to decide when to buy back in. When I hear from people who are considering that step now, the usual reasoning is something like, “It looks as if the recovery is real.” The problem is, having absorbed whatever loss accompanied their decision to sell, they are now significantly behind the market and may feel the need to assume an overly aggressive approach in hopes of catching up.
It’s important to remember that stock markets are a leading indicator, that is, their rise predicts an improvement in the overall economy. I believe it’s too soon to say that the recession is over, thus too soon to declare that a long-term positive market trend has begun. Back in December, I quoted Warren Buffett’s comment: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Greed is one of the primary drivers of people’s return to the markets. I have become concerned that those amateur investors who tend to do the wrong thing at the right time (or vice versa) are preparing to leap into a market that’s not yet ready to sustain significantly increased buying.
Peter Bernstein was an economist and historian whose writings I have followed for many years. He maintained that, regardless of the amount of information available, the future will always be unknowable. Even though some analysts claim to have forecast the market’s meltdown in response to the mortgage crisis, I don't know of any whose overall predictive successes are greater than chance. Thus I continue to believe that Bernstein is correct: it is impossible to predict the future, including market declines. Our underlying investment philosophy is to protect our clients from the worst of the market’s ravages through diversification. That has worked for us in the past and worked again during this most recent correction. One additional advantage of this approach is never having to decide when it’s the right time to get back into the markets.
That said, the further bullish sentiments spread, the more concerned I become. Although markets have made a good showing so far this year, I suspect that we’ll get at least one more pull-back so I am repositioning some of our clients’ assets in hopes of once again helping them avoid significant losses.
Unfortunately, the philosopher’s stone has eluded me just as it did the thinkers of the Middle Ages. I have achieved neither the promised enlightenment nor the ability to turn my clients’ assets into gold. However, I can safely reiterate our firm’s commitment to a strategy that tries to protect them from market-related losses while also allowing them to participate in market upswings. Unless and until I obtain the philosopher’s stone this seems the most prudent course of action.
Warren Winston and Forest
I learned long ago that I’ll never have all the right answers, although that doesn’t stop me from trying to improve my percentages. I spend a lot of time reading articles and books by different authors covering a wide range of fields. Let me turn to the thoughts of a couple of them as I close the year with an update on the markets and resultant changes in our investment strategy at Warren Ward Associates.
I am one of many who appreciate the work and wisdom of Warren Buffett, arguably the most successful investor of our age. He has always maintained that his investment process is basically the application of common sense and that he never invests in a business he can’t understand. He is very conscious of the extreme swings which markets endure, having offered this insight on the topic: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” Here’s another of his thoughts, regarding how he makes the decision about whether to be in the market or not: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. With consumer confidence at its lowest level since the index was created in 1967, perhaps fearful is not too strong a word to apply to the current situation.
Winston Churchill, while not quite as approachable as Mr. Buffett, proved to be exactly the right leader for his time. One of his better known quotes is: “Pessimists see problems in every opportunity. Optimists see opportunities in every problem.” I consider myself more a pragmatist than either of those but must confess to feeling somewhat optimistic right now, at least about the future of the markets.
I have written before that, among its other activities, the St Louis branch of the Federal Reserve keeps track of the “immediately available” segment of the domestic money supply – what is known as Money at Zero Maturity (MZM). This figure now stands at its highest level since I have been following it. At the end of November, it was over $8.8 trillion and increasing at a compounded rate of about 3.8% annually. If it gets much higher, it will reach the gazillion level made famous by Tom Hanks in the movie Forrest Gump. To put that number into perspective, the US government stimulus package signed into law in early October totaled about $700 billion. US consumers and businesses have more than ten times that much on the sidelines and ready to put to use. It is our experience that most of those MZM dollars make their way into the stock and bond markets as people’s fears subside. We hope to keep our clients positioned so their account values are lifted as that tide rises.
A common thread running through many of the investment-related articles and newsletters which have appeared recently is “there’s been no place to hide”. Regardless of which of many investment strategies is being discussed, the song has remained pretty much the same. Our approach to investing has always centered on the prudent allocation of assets among multiple segments of the stock and bond markets. The reason is simple: in the past, that strategy has offered our clients protection against market downturns, in part because investors typically buy bonds as they are selling stocks. This time around, bonds have been sold as well and, as others have reported, there has simply been no refuge other than cash – which has led to the increase in MZM.
Although our managed accounts have shown losses, in many cases they appear to have been smaller than those suffered by the broad markets. Asset allocation has not eliminated losses for our clients but it has buffered their account values as we intended. We will continue to utilize that strategy even as we attempt to refine it.
The US economy is clearly not the only one in the world but I do think it remains the most important. It seems to me that both recessions and recoveries have a tendency to begin and end here, with the rest of the world following in turn. Although WWA invested in Japan on behalf of our clients about a year ago, we have closed those positions and have also reduced our broader overseas exposure. We will redeploy those assets domestically, adding to the large cap value and small cap growth sectors. Also, since oil and most other commodity prices have fallen dramatically, we are adding a small position in the natural resources sector as a hedge against a future upswing. We will also begin to transition to a less volatile approach to owning bonds on behalf of our clients and will include tax-free municipal bonds in those accounts where it makes sense.
As always, these changes will be made automatically for our wealth management clients. We suggest that those who read my articles but are not yet clients discuss ongoing strategies with their own advisors.
This has been a very difficult period to be an investment advisor. I am an almost compulsive reader, perhaps hoping that the next book or article will be the one that provides the key to unlocking even better performance for our clients. Although no single right answer has appeared so far, we continue to make incremental improvements and use the wisdom of people like Warren Buffett, Winston Churchill and even Forrest Gump to guide us. Life’s “box of chocolates” has included some pretty unpleasant selections this year but WWA continues to employ a diversified strategy aimed towards improving our clients’ returns in both up and down market situations.
