Dis and Dat - The Beginning - July 2008
The Beginning
Dear Friends:
I hope everyone is enjoying their summer! Currently, we doubt that anyone is enjoying this rocky negative stock market. That leads us into the purpose of writing today. We know that investing is a difficult journey. This shows up in studies like those done by Bogle financial center. They showed that from 1984 to 2002 the s& p 500 return an average 12.9% per year. The average mutual fund returned 9.6%. The most disappointing result was that the average fund investor returned only 2.7% per year over this time frame. We believe the reason for this is that we as humans let our emotional side determine our current investment strategy. The belief that the grass is greener on the other side takes over and the investment strategy changes usually at the point that the investor has received the worst results of the current strategy, and hits the new strategy right AFTER the best performance period, never realizing the “good times” of either strategy. We believe that a skeptical, contrarian mentality will help. Unfortunately, the media needs to encourage emotions in order to gain and hold viewers through the commercials. We have decided that periodically we will attempt to offer some skeptical, contrarian thoughts on current headlines or trends in this column. It will contain a little bit of DIS and a little bit of DAT, hence the name.
Where will the value of the S&P 500 be a year from now? You hear this questioned asked a lot on CNBC and other financial news channels. The truth is, we do not know and neither does anyone else. That does not stop the countless opinions that an investor may receive on the subject. Unless you are planning on a short life expectancy for you and your heirs, which include spending all of your money in the next year, you will want to also be concerned about the many years past 2008. This long-term perspective is not offered by the media, mainly because of the lack of excitement involved. The current media seems to be heavily concerned on whether or not the U.S. economy is or will dip into recession. Now that’s entertaining! You get two guru’s with opposing thoughts, and just when their voices begin to raise, the sharp looking anchor asks the audience to please hold through the commercial messages. As we are getting entertained we forget to ask now what does that have to do with my personal investment strategy? We know that recessions are very hard to “call” even after the fact, so if you are relying on someone to “call” it right, good luck, you are going to need it!
In this periodic column we will share with you our beliefs. They will be centered on a couple of themes. One is that for the average long-term investor a skeptical approach to the news would serve them better, because it may allow them to stick with their strategy during it’s darkest of days. In general investments are cyclical and "trees do not grow to the sky." This is not to argue against the long-term drift of equity prices over the decades but to realize that companies making up the stock indices have changed over time. For example, there is no more Enron in the S&P 500. It is just to say that the media usually gives more attention to investments that have performed in a certain manner and give off the impression that that will continue into the far future. Another belief is that investors should concentrate on avoiding large mistakes. This does not mean that retirees should move all of their investments to CDs or a shoe box under the bed.
We know that everything has risk. For example cd’s have re investment risk and inflation risk. If your money is held under the mattress this may require you to be armed at all times, due to the security risk. The reason we do not encourage a concentration in one investment is that we know dark days will come, and a concentration in a single investment may not allow you to make it past those times. We believe instead that analysis should be done to avoid over weighting investments that may be severely over valued. One good way to avoid that is by avoiding large positions in the first place. We also believe that most of the hot investments of today help to sell advertising, and therefore will receive most of the media's attention. For example, even though there maybe “some scholar” who believes that oil prices will be $40 a barrel in the next couple of years he, or she is getting no attention right now. Our focus here will not be in trying to locate an investment that will be the best investment over the next three years or, for that matter, any other time frame. Instead, our goal here will be to throw out some contrarian thoughts on the popular investments of today, and, as times dictate, to review some of the cold, unpopular investments. We consider it very important for investors to ask a few simple questions when they hear a guru on T.V. say something like,” this investment will double in the next 6 months “. Who are they talking to? Do they even know my name? Should I even be considering something that would act like that? Are they going to be around to let me know what they think when the performance is different from what is being touted? And of course what’s the downside?
It is nice to be entertained, but we believe that you should focus on YOUR risk tolerance, and YOUR objectives when building and monitoring your investment portfolio. It has often been said that emotions are an investor’s worst enemy, and the financial media has a direct incentive in bringing that emotional side out in order to sell us more commercials.
Hopefully this periodic communication will allow us all an excuse to step out of the popular opinion of the day and reflect on our own goals, objectives, and current situation. Please let us know if you want to review your investment strategy and discuss any changes that may have occurred in your life.
See you next time.
James Pope
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