Posts Tagged ‘Market Performance’
Wednesday, April 4th, 2012
“By making one small change to my weekly routine, I’ve been able to recapture some of my excitement for the business.” – Veteran Chairman’s Club advisor
Successful advisors consistently tell me they’ve lost enthusiasm and passion for their work compared to 10 or 15 years ago. Advisors have two choices when this happens; either accept it as a sad reality or, put in place strategies to rekindle the fire that burned earlier in their career.
In many regards, loss of enthusiasm is understandable:
· If you’ve been at this for a while, you often don’t have the same sense of excitement about winning new clients that you did in your early years the industry
· Clients are much more demanding and the media dramatically more critical
· Your focus has shifted from building a business to managing it; often with added complexity and the hassles of managing people along the way
· The global financial crisis has added huge stress and put pressure on revenues
· Age is a factor: few of us have the same energy at 60 that we did at 45, or at 45 that we did at 30
And then of course there’s market performance over the past ten plus years. One veteran advisor described it this way:
“I’ve been in this business for over 30 years. For most of the first 20 years I looked forward to meetings with clients; they were making money and I felt I was adding value. By contrast, most of the past ten years have been brutal; in meeting after meeting I’ve found myself apologizing for performance.”
In the circumstances it’s absolutely understandable that our excitement is down compared to the past. That said energy and passion is essential to implement new initiatives and inspire confidence with existing and prospective clients.
Here are three different approaches that can help you restore your energy and excitement level, including one that helped a veteran advisor significantly increase his enthusiasm.
Strategy One: Boost your energy level
While energy alone won’t rekindle your passion, feeling alert and energized is a necessary ingredient to bring excitement to your work.
Some advisors tell me they feel exhausted at the end of the day. I’ve written in the past about four proven strategies to boost your energy level:
· Regular exercise to start your day:
Even a brisk 30 minute walk makes a difference.
· Fresh air and sunshine:
Especially as the weather is getting better, build in 5 minute fresh air breaks in the morning and afternoon and before key meetings (and much better at boosting energy than a trip to Starbucks)
Astonishing as it may appear a recent New York Times article reported that parole board verdicts grew dramatically more severe as the day progressed and fatigue set in, but were more lenient after board members restored energy with some fruit.
If your energy level dips later in the day, consider lightening up on lunch and adding servings of fruit to your daily routine.
· Frequent vacations:
Most of us need annual breaks of two weeks or longer to recharge. Beyond this, frequent short breaks can help maintain motivation; even a three or four day long weekend can have a positive impact.
That’s because research shows that the biggest boost on motivation from vacations isn’t actually the vacations themselves, but rather the anticipation beforehand. Scheduling quarterly or bi-monthly short breaks means we always have a mini-vacation to look forward to.
Strategy Two: Get energy outside your business
Many advisors get reinvigorated through activities that have little to do with our business. That energy will have a positive impact when it comes to the excitement you bring to bear on client interactions.
Some examples of doing things outside the norm:
· Physical challenges: Training for marathons or for hikes up Machu Picchu or Mount Kilimanjaro
· Dream vacations: Going on two to four week trips to destinations that you’ve always dreamed of; whether it be Hawaii, Australia or an African safari
· Intellectual challenges: I talked to one advisor who began attending the leading edge TED conference (TED stands for Technology, Entertainment and Design) in California; another advisor attends summer courses at Oxford. In both cases they return excited and inspired.
· Expanding your thinking: You don’t have to travel long distances to get fresh ideas. The Rotman MBA program at the University of Toronto, where I teach, offers 5pm speakers series with some of today’s top business thinkers. Last fall, I spoke to an industry participant who began attending these sessions to get fresh ideas and consistently walked away energized as a result
· Giving of ourselves: I’ve recently talked to four different advisors who organize ambitious fundraising events in their community. In every instance they say the sense of accomplishment from the success of these events has made this among the most rewarding things in their lives
In the perfect world, we’d get all the satisfaction and fulfillment we need from within our business. In the real world, we sometimes have to look beyond our business for the motivation to operate at a peak level.
Strategy Three: Get energy inside your business
Recognizing that many advisors have to look externally to create motivation, the most sustainable way to rebuild passion is by doing so from within your business.
In late February, I wrote an article about three ways advisors can motivate their team. One of those was to help the people you work with feel they’re making a real difference and get a sense of mission from their work. To help instill that feeling of purpose, I suggested that advisors set aside five minutes in their weekly staff meeting to focus to talk about one client they met with in the past week who they had really helped.
I got a call from a successful veteran advisor who had followed this advice and was astonished by the result:
“This was on the agenda for five minutes but we ended up going well past that. It was the most engaged I can recall seeing the members of my team. But the biggest surprise was how I felt afterwards. By making one small change to my weekly meeting to focus on a client where we’d made a real difference in their lives, my enthusiasm increased. As a result, I’ve been able to recapture some of my excitement for the business; and we’re making this a permanent addition to our weekly planning meetings.”
I heard from another advisor who had been using a variation of this idea. Whenever clients express appreciation for the good work that she’s done, she thanks them and then goes on to say:
“I’m delighted you’re pleased; that’s ultimately the biggest reward I get from the work I do. If possible, I’d like a favour: I want to share your comments with the members of my team. I wonder if I could ask you to send me a short email, summarizing what you’ve just told me. A few lines are all I’m looking for. I could tell them about this of course, but it would have much more impact coming from you directly.”
Clients almost always agree. The advisor sends an email thanking them in advance for taking the time to do this, and tells them it would be greatly appreciated if they would reply with a few lines. There have been three benefits to this: The advisor feels more positive; her team is more energized and finally, they got permission from some clients to put their comments on the advisor’s website.
Every advisor has to find their own approach to maintaining motivation. Whatever strategy works for you, if you have ambitious goals to move your business forward, bringing genuine passion and enthusiasm to your business is Job One. After all, if you’re not excited about the work you do, you can’t expect your team and your clients to be.
Tags: Business Veteran, Circumstances, Complexity, Confidence, Energy Level, Excitement Level, Global Financial Crisis, Hassles, Industry Clients, Initiatives, Managing People, Market Performance, Passion, Place Strategies, Prospective Clients, S Market, Sad Reality, Stress, Three Different Approaches, Two Choices
Posted in Dan Richards | Comments Off
Wednesday, April 4th, 2012
Each quarter since 2008, I have posted a template for a letter to serve as a starting point for advisors looking to send clients a summary of what’s happened in the past 90 days; and the outlook for the period ahead.
Advisors have told me that they’ve got a great response to these quarterly letters and the templates rank among my most popular articles. This letter goes into more depth on global growth forecasts than past templates. If this is more detail than you think your clients will be interested in you can easily delete this section.
Just a reminder that if you’re going to use this letter, take the time to customize it and put it into your own words, so that it truly does represent your point of view.
An overview of Q1 2012 markets: Bernanke, Buffett and Siegel on the prospects ahead:
The first quarter of 2012 represented the strongest start for the U.S. stock market since 1998; with Japan turning in its best first quarter gains in 24 years. This was largely driven by a reduction of fears about an extremely negative outcome in Europe, as well as stronger economic data in the U.S.
Of course, there are some formidable issues still to be addressed. This letter provides perspective on some of these issues, and outlines some thoughts on what we can expect for the balance of 2012 and beyond. As part of that, I have tapped into recent comments from Ben Bernanke and Warren Buffett, as well as Christine Lagarde; managing director of the International Monetary Fund and the Wharton School’s Jeremy Siegel, today’s leading market historian.
Before getting into their views, here’s a summary of market performance in the first quarter, all in local currency so as to exclude currency fluctuations. Even with strong first quarter returns, most markets with the exception of the United States are underwater over the past 12 months. Its resource exposure has meant that Canada has been a particular laggard over the past year.
|Last 12 months||–11%||7%||–4%||1%||–4%||1%|
The IMF’s view: A reduced forecast for global growth:
The single factor that more than any other will drive stock markets over the mid-term is the path of global economic growth; Europe in particular remains a question mark. In early January, the International Monetary Fund reduced its forecast for global growth, and predicted that continental Europe would see a mild recession in 2012. Here are excerpts from the IMF’s January forecast for economic growth:
|Actual||Projections||Changes from Sept 2011 forecast|
Bernanke & Lagarde: Sign of improvement … but efforts must continue:
Since this forecast was released in January, actions by global governments have changed the European outlook for the better. Indeed, it was greater optimism about a resolution to Europe’s issues that fueled the first quarter’s strong market performance.
There is still much work to do, however. March 20th featured a press conference by Christine Lagarde, Managing Director of the International Monetary Fund and, formerly Finance Minister in France. She painted a more positive but still cautious picture. Here’s how her remarks began:
“In terms of global economic outlook, we are certainly not, and I do say not in as bad a situation as we were only three months ago; and there have clearly been some significant improvements.”
“Coupled with an uptick coming out of the United States of America, it gives an overall picture (for Europe) that is slightly more positive than it was three months ago; not to say that all the difficulties have been cleared. If I have one message, it’s that the reforms and the efforts underway in advanced economies have to continue and that the same vigorous rigor has to be applied by Governments in the programs and the efforts that they have undertaken.”
The very next day, Ben Bernanke spoke to the House Committee on Oversight and Government Reform about the Federal Reserve Board’s views on Europe. He pointed to improvement in Europe and focused on three positive steps on the continent to increase stability. He also discussed favourable results of stress tests of banks in the event of a severe pullback in the U.S. economy.
But his closing comments echoed Christine Lagarde’s note of caution about the need for further action to address Europe’s structural issues:
“The recent reduction in financial stress in Europe is welcome given our important trade linkages. The situation however remains difficult and it’s critical that European policy leaders follow through on their commitment to achieve a lasting stabilization. I believe our European counterparts understand the challenges they face and they’re committed to take the necessary steps to address those issues.”
Also, you can CLICK HERE to go to the IMF’s most recent global growth forecast.
From my own point of view, it’s worth noting that given European issues and a slowdown in China, there is broad consensus that the next five years will see “2, 6 and 4” growth; an average of 2% in developed countries, and 6% in emerging economies, leading to 4% global growth overall. It’s this divergence in growth between developed and emerging countries that is driving increased focus by multi nationals on faster growing emerging economies.
Warren Buffett: “America’s best days lie ahead:”
In the face of challenges for developed economies, there is a persistent view of America as an “empire in decline.” This was reinforced by last year’s downgrade of US debt and by the stalemate in Congress over dealing with America’s deficit and debt challenges.
As I look at formulating recommendations for my clients, I don’t subscribe to the view of a declining America. Without dismissing its issues, the biggest competitive advantage for United States is its vitality and capacity for change and innovation. It continues to dominate in high tech, and remains a magnet for the best and brightest talent from around the world.
I’m not alone in this view. Here’s an excerpt from Warren Buffett’s annual letter to investors released in February:
“In 2011, we will set a new record for capital spending, $8 billion and spend all of the $2 billion increase in the United States. Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.”
“The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential, a system that has worked wonders for over two centuries; despite frequent interruptions for recessions and even Civil War remains alive and effective. We are not natively smarter than we were when our country was founded, nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”
You can read Warren Buffett’s full letter to investors HERE.
A long term perspective on valuations:
While economic growth enables long term increases in corporate profits as a whole, in the short and mid-term we have to pay a fair value for the companies we buy. Anyone who invested at the peak of the U.S. market valuations in 2000 learned a hard lesson about the perils of losing focus on what we pay for a dollar of earnings.
There are few more hotly debated issues on Wall Street than whether today’s market is overvalued, undervalued or priced just right. In looking at all the available data, my own conclusion is that the market is roughly fairly valued.
That’s not to say it doesn’t face some speed bumps in the period ahead. But I was interested to see a March 29 interview with Jeremy Siegel of the Wharton School. Author of Stocks for the Long Run, which examined almost 200 years of market data, in this interview Siegel looks at historical precedent; and sees significant upside potential at today’s stock valuations. To see his interview, CLICK HERE.
What this means for your portfolio:
While all portfolios are customized to clients’ specific needs, there are three guiding principles to the advice that I offer.
1. The first relates to the allocation between stocks and bonds, and comes from Benjamin Graham; the Columbia professor who was Warren Buffett’s teacher, and who is considered the father of value investing. In a recently discovered 1963 talk, Graham had this to say on asset allocation:
“In my nearly fifty years of experience on Wall Street, I’ve found that I know less and less about what the stock market is going to do but I know more and more about what investors ought to do. My suggestion is that the minimum amount (of the investor’s) portfolio held in common stocks should be 25% and the maximum should be 75%. Consequently the maximum amount held in bonds would be 75% and the minimum 25%; any variations should be clearly based on value considerations.”
2. The second principle relates to, barring a significant change in circumstances, sticking within the investment framework that we’re decided upon.
Some of you may recall my advice in early 2009, as we faced what appeared to be an end of the world scenario and some stocks hit lows they hadn’t seen in 20 years. At that time, I urged clients to maintain a core level of equity exposure. Recently, I have had questions from clients about increasing equity weight in portfolios, given low interest rate and strong stock performance in the first quarter.
While I am always happy to discuss this on a case by case basis, given the level of uncertainty that still exists, I generally advise against increasing equity allocation from the level that we had going into 2012.
3. The final principle relates to the role of cash flow from investments. In an uncertain environment for economic growth and equity returns, we continue to place priority on the cash yield from investments. In my view, the returns on some REITs, corporate bonds and dividend stocks in selective sectors continue to make these attractive relative to the available alternatives.
Should you have any questions on anything I’ve covered in this note or on any other issue, please feel free to contact myself or one of the members of my team directly. And as always, thank you for the opportunity to serve as your financial advisor.
Tags: 24 Years, Ben Bernanke, Christine Lagarde, Currency Fluctuations, Economic Data, First Quarter, Global Growth, Growth Forecasts, Historian, International Monetary Fund, Jeremy Siegel, Leading Market, Managing Director, Market Performance, Negative Outcome, Outlines, Quarterly Letters, U S Stock Market, Warren Buffett, Wharton School
Posted in Dan Richards | Comments Off
Wednesday, May 11th, 2011
An end of quarter letter to clients — Investment advice from Mark Twain
Given recent events in Japan and North Africa, many clients are looking to their advisors for direction on what they should do.
This template for an end of quarter letter is intended to be a starting point for your own letter to clients. One note of caution — to be effective, it has to reflect your approach, personality and point of view. Be sure to take the time to customize the letter to your own situation.
April 4, 2011
Two critical lessons from Japan
“The only certainty is that nothing is certain”
Pliny the Elder
First century Roman author and naval commander
“It ain’t what you don’t know that gets you into trouble.
It’s what you know for sure that just ain’t so.”
Mark Twain, 1835–1910
At the end of each quarter, I send clients a letter summarizing events of the past three months … and usually try to find a relevant quotation to establish the tone for my note.
For this quarter’s letter, I have selected quotes written 1900 years apart to highlight two important lessons for investors, made tragically apparent from the recent events in Japan. One is the need to construct portfolios that expect the unexpected and anticipate the unanticipated. And the other relates to avoiding one of the costliest traps that ensnares investors.
Before getting into detail on those lessons, here’s a quick recap on the first quarter.
Market performance in the first quarter
Markets in January and February reflected a continuation of last year’s positive sentiment. This was spurred by solid corporate profits and a broad consensus that while the global economy might not experience a strong recovery going forward, it would see growth.
March did begin with an initial setback . The earthquake and tsunami in Japan on March 11, which took a dreadful toll in human lives, clearly reduced short-term prospects for the global economy. The turmoil in North Africa, while positive for oil prices, also had a negative impact on markets due to concerns about the effect on consumer demand. By the end of March, however, positive economic growth reports in the US and Europe allowed most markets to recover their initial losses.
As a result, developed markets generally saw gains at the end of the first quarter that put them on track for solid performance in 2011. Below are first quarter results for key markets — note that these are in local currencies, so that the effect of swings in the Canadian dollar are not reflected here.
% change (all in local currencies)
Learning to live with uncertainty
If they operate efficiently, stock and bond markets incorporate all the available information at a given point in time. That’s why when sovereign debt problems emerged in Greece early last year, other European countries seen as having potential problems along the same lines saw an immediate spike in the cost of insuring their debt. Even though they hadn’t run into problems yet, the market factored this possibility in.
Market analysts spend many thousands of hours each year on these kinds of issues — with enough time and research, slow forming problems like government debt problems can be identified before a crisis unfolds.
What can’t be anticipated are developments that are by their nature unpredictable. We’ve had at least four such events in the past year:
- Last April’s volcanic eruption in Iceland that spewed ash in the air, shut down 100,000 transatlantic flights and cost the airline industry $2 billion;
- Also last April, the explosion of the Deepwater Horizon oil rig in the Gulf of Mexico;
- Commencing last December, street protests resulting in changes of leadership in a number of countries in North Africa, leading directly to the current war in Libya;
- And of course the earthquake, tsunami and nuclear-reactor crises in Japan.
In light of episodes like these, investors need to take away two key lessons.
Lesson One: Expect the unexpected
The only way to deal with uncertainty and manage the impact of unforeseen events is to build strict risk controls into portfolios, similar to those used by the most sophisticated pension funds. While the risk of one time incidents can’t be eliminated, through diversification and risk management we can limit the damage when negative events occur — whether they be massive frauds such as Enron, sudden bankruptcies like Lehman Brothers, volcanic eruptions, oil rig explosions or earthquakes.
I thought it might be useful to provide an overview of my approach to risk management in portfolio construction. There are three steps in this process.
Step one: Identify target mix
First, we identify the target mix of stocks, bonds and cash that, based on historical precedent and current valuation levels, will over time have a high likelihood of providing the returns you need to achieve your long term goals with a level of volatility you can live with along the way.
Step two: Diversify
Next we and the money managers we work with carefully diversify your portfolio, by placing limits on the exposure to any one company, industry sector or region. For individual holdings, it’s typically an absolute percentage of your portfolio — so for example no one stock should make up more than 5% of your equity holdings and no one bond should represent more than 3% of your fixed income exposure.
As well, no matter how optimistic we are about an industry sector or region, its weight should never be more than 50% above its underlying importance in the market as a whole.
Step three: Stay balanced
In the final step, at least once a year we conduct an in depth analysis of each portfolio. Over time, asset classes, industry sectors and individual stocks that do well will increase their presence in your portfolio and bump up against the risk control limits.
At that point, your portfolios need to be rebalanced back to the target asset allocation and some of the positions that have outperformed might be trimmed to stay within risk control limits. Some investors find this very difficult — after all you’re selling exactly those investments that have done the best.
But it’s the only way to stay truly diversified and control the risk that accompanies overexposure to any one stock, industry sector or geographic region. And it’s also the only way to get some protection from things that simply can’t be anticipated.
Lesson Two: Avoid overconfidence
Aside from the time entailed, there is one big negative to the risk controlled approach to portfolio construction — in the short and mid-term, there will always be someone who’s made a big bet that’s paid off and who is doing better than you as a result. Because it eliminates big bets, a risk controlled approach to investing will seldom give you bragging rights on the golf course.
Investors who take the big bet approach typically have a high degree of confidence in their investments; after all, if you’re absolutely certain about a company or industry, why bother to diversify? On the other hand, research by the University of Chicago’s Richard Thaler has demonstrated that overconfidence is among the most costly traits an investor can have.
Think no further than the Canadians who stuffed their portfolios with Nortel during the tech boom. At its peak, Nortel represented 35% of our market — and 50% plus of many portfolios. While not nearly as extreme, a case can be made that as a result of their strong performance over the past ten years, today many investors have too much of their savings in Canada’s banks, gold, oil and mining stocks and Canadian stocks as a whole. In fact, many global analysts today identify Canada as one of the most expensive stock markets among all the developed countries.
The quote from Mark Twain at the start of this letter says it all — what gets us in trouble aren’t the things we’ve identified as question marks and causes for concern. Rather, portfolios crater because of the things that we’re absolutely positive about — right until unanticipated occurrences catch us by surprise.
We’ve always had unexpected events and always will — and despite these economies have grown, companies have prospered and stock markets have generated positive returns. The key to benefiting from this long term growth has been to diversify so that no single event can create permanent damage to portfolios. When it comes to long term investing, it’s not only that a slow and steady approach wins the race, but more importantly slow and steady survives to cross the finish line.
I believe that we will work through the recent events also — and that investors with a balanced approach and a long term view will be well rewarded. The approach to risk management I’ve described may not be fun or sexy in the short term, but all the evidence at hand suggests that over time it will serve you well, getting you to your goals with the least amount of stress and distress along the way.
At our next meeting, I’d be happy to discuss the impact of rebalancing on long term returns. Should you have any questions in the meantime on your portfolio, the contents of this note or any other issue, please give me a call — I’d be happy to deal with your questions on the phone or at our next meeting.
As always, thank you for the opportunity to work together.
Name of advisor
Tags: Continuation, Corporate Profits, Critical Lessons, First Quarter, Global Economy, Initial Setback, Investment Advice, March 11, Mark Twain, Market Performance, Naval Commander, North Africa, Pliny The Elder, Portfolios, Quarter Letter, Relevant Quotation, Sentiment, Term Prospects, Tsunami In Japan, Turmoil
Posted in Dan Richards | Comments Off