Template for a mid-year letter

Wednesday, April 18th, 2012

Below is a tem­plate for a mid-year let­ter to go to clients. Please make sure you read the accom­pa­ny­ing post, Guide­lines for An Effec­tive Mid-Year Let­ter.

Please remem­ber that this let­ter is intended as a tem­plate only, be sure to take the time to mod­ify this to reflect your per­sonal views.

June  22, 2009

A mid year note to clients

For many of us, the July 1 Canada Day hol­i­day is the offi­cial begin­ning of summer.

It also marks the half-way point of the year.  Look­ing for­ward, I am cau­tiously opti­mistic -  and want to share some thoughts on why that is, where mar­kets stand today and what we can look for in the period ahead.

Where we are today

If you’d asked fore­cast­ers in early March about prospects for the econ­omy, you’d have heard some very dire pre­dic­tions — this was when the con­ver­sa­tion about the pos­si­bil­ity of a depres­sion or Japan-like lost decade was at its loudest.

While we still face sig­nif­i­cant chal­lenges and there’s no short­age of neg­a­tive fore­casts, it does appear that the worst is behind us:

• Although we are still see­ing some tough news on job losses and cor­po­rate earn­ings, it appears that global economies have gen­er­ally sta­bi­lized and early March was the point of max­i­mum fear and pes­simism. Since the mar­ket bot­tom on March 9, we have seen global mar­kets rise by about 40%
• Con­sumer and busi­ness sen­ti­ment has shown mod­est improve­ment and some impor­tant eco­nomic indi­ca­tors have gone from neg­a­tive to neu­tral and in some cases pos­i­tive.  Much has been made of the so-called “green shoots” point­ing to early signs of recovery.
• While busi­nesses are still cau­tious, access to lend­ing has improved and we are see­ing some pos­i­tive prospects for a resump­tion of eco­nomic growth. The cur­rent fore­cast is for the U.S. to exit its reces­sion in the sec­ond half of this year and for mod­est growth in 2010, fol­lowed by a return to stronger growth in 2011.

Select one of the two arti­cles below to insert here

As an exam­ple of the improv­ing out­look, here’s a June 16 arti­cle from the Wall Street Jour­nal on an upgraded fore­cast for the U.S. econ­omy by the inter­na­tional Mon­e­tary Fund :

WSJ​.com — IMF Upgrades Its View of U.S. Econ­omy*

or

The arti­cle below from the June 19 Globe and Mail, titled “IMF sees eco­nomic slump mod­er­at­ing”, is an exam­ple of the more upbeat think­ing on tim­ing of a U.S. recovery.

http://​www​.the​globe​and​mail​.com/​r​e​p​o​r​t​-​o​n​-​b​u​s​i​n​e​s​s​/​c​r​a​s​h​-​a​n​d​-​r​e​c​o​v​e​r​y​/​i​m​f​-​s​e​e​s​-​e​c​o​n​o​m​i​c​-​s​l​u​m​p​-​m​o​d​e​r​a​t​i​n​g​/​a​r​t​i​c​l​e​1​1​8​8​6​05/

Rea­sons for cau­tion in the near term

In my con­ver­sa­tions with clients over the past while, the num­ber one ques­tion relates to the out­look for the period ahead and what we should be doing in our port­fo­lios as a result.

Hav­ing said that the worst appears to be behind us doesn’t mean we won’t see con­tin­u­ing chal­lenges in the econ­omy and stock mar­kets in the period ahead.

As I said at the out­set, I am in the cat­e­gory of “cau­tiously opti­mistic.”  Here are some of the things that make me cau­tious — note that some of these will be pos­i­tive in the mid and long-term, but are prob­lem­atic in the short-term.

• Amer­i­cans have responded to declines in stock mar­kets and house prices by reduc­ing spend­ing and increas­ing sav­ing. Lower con­sumer debt is pos­i­tive long term but given that the con­sumer accounts for 70% of the U.S. econ­omy this lim­its growth prospects in the near term.
• The U.S. hous­ing mar­ket is still a mess, with 20% of Amer­i­can mort­gages “upside-down” cat­e­gory, where the mort­gage exceeds the value of the house.  House prices do show signs of bot­tom­ing but it will take some time for the hous­ing mar­ket and U.S. gov­ern­ment poli­cies to work through this.
• Many of you have read about “delever­ag­ing” by busi­nesses and finan­cial insti­tu­tions. This is a fancy word for reduc­ing debt — and while decreas­ing debt lev­els will increase sta­bil­ity and reduce pain in a down­turn (a good thing), it will also lead to lower earn­ings than we saw in the past few years.
• Reduced debt will par­tic­u­larly hit the prof­its of many U.S. and Euro­pean banks, which are also elim­i­nat­ing high risk oper­a­tions. While this will result in fewer acci­dents and lower volatil­ity in earn­ings, it also means that some of the sources of wind­fall prof­its from trad­ing and cap­i­tal mar­ket activ­i­ties over the past decade will dis­ap­pear going forward.
• With the global econ­omy still oper­at­ing well below capac­ity, in the near term many com­pa­nies will strug­gle for rev­enue growth and will also be fac­ing pres­sure on mar­gins; this will inevitably hurt profitability.
• Gov­ern­ments are fund­ing their stim­u­lus spend­ing with record issuance of new debt and bud­get deficits. At some point, this will have to be repaid — and also runs the risks of fuelling infla­tion down the road.

Why I’m opti­mistic in the mid-term

While these chal­lenges are real, I believe they are fun­da­men­tally man­age­able and that they are out­weighed by the mid and long-term pos­i­tives. I don’t believe any­one can pre­dict mar­ket move­ments in the short term and so avoid doing so myself — instead I try to focus on prospects for the econ­omy and mar­kets look­ing out eigh­teen months to three years.

When I do that, there are numer­ous rea­sons for optimism:

• The coor­di­nated action by cen­tral banks and gov­ern­ments around the world appears to have sta­bi­lized the econ­omy and pre­vented the pre­cip­i­tous decline that many had feared. We’ve never seen the level of inter­na­tional coop­er­a­tion on the eco­nomic front that exists today.
• Some of the most extreme fears about the global bank­ing sys­tem now appear exag­ger­ated. The stress tests of bank bal­ance sheets in the U.S. gave most banks a clean bill of health and some have started repay­ing the funds they received ear­lier this year (although these stress tests also high­lighted con­tin­ued prob­lems with a few large finan­cial institutions.)
• We’re going to come out of this with a more solid, bet­ter reg­u­lated global finan­cial system.
• The focus on energy self-sufficiency and clean fuels has unleashed a frenzy of entre­pre­neur­ial activ­ity around the world, with break-through tech­nol­ogy being devel­oped by many small and mid-size com­pa­nies. In the past year, For­tune Mag­a­zine has devoted con­sid­er­able space to pro­fil­ing some of these com­pa­nies, here’s a link to an arti­cle on green firms of the future.

6 green tech firms of the future — Green Wom­bat*

• Many of the build­ing blocks that led to opti­mistic fore­casts a year ago are still in place — the impact of tech­nol­ogy on pro­duc­tiv­ity and prof­its, record lev­els of research and devel­op­ment around the world, the emerg­ing mid­dle class in China, India and other devel­op­ing coun­tries, con­tin­ued growth of trade and the global move to open markets.
• Canada’s econ­omy is well posi­tioned for the future, despite the cur­rent issues with the man­u­fac­tur­ing sec­tor and com­mod­ity prices. Our banks and real estate mar­ket never par­tic­i­pated in the excesses seen else­where, our man­u­fac­tur­ing sys­tem is going through the nec­es­sary adjust­ments to com­pete going for­ward (albeit some of these are very painful) and as we see a return to global growth we’re likely to see com­mod­ity prices rise in response.
• Most impor­tant for investors, the bulk of the bad news appears to be fully priced into cur­rent stock val­u­a­tions. Many vet­eran money man­agers with strong track records are iden­ti­fy­ing excel­lent val­ues and a num­ber have said recently that they are able to buy good qual­ity assets at prices well below their real value.

What I’m rec­om­mend­ing today

While the eas­i­est prof­its may be behind us, I still see good oppor­tu­ni­ties in qual­ity stocks with attrac­tive div­i­dends, with strong cov­er­age should prof­its decline. Even after the recent runup, for exam­ple, the div­i­dends on all the Cana­dian bank stocks are well over 4% and the div­i­dend on BCE is over 6%.  The div­i­dends on these stocks not only gen­er­ate good income but also pro­vide a buffer should mar­kets move down.

As well, I like the value in invest­ment grade cor­po­rate bonds and high yield bonds. While the greater volatil­ity in these requires a stronger stom­ach than gov­ern­ment bonds, the gap between the inter­est rates on these and gov­ern­ment  bonds is at his­tor­i­cally high lev­els, even after nar­row­ing over the last while.

Going for­ward, expect con­tin­ued volatil­ity and head­lines that will cause alarm. As a result, I am focus­ing on well known com­pa­nies with strong bal­ance sheets and on build­ing bal­anced, diver­si­fied port­fo­lios — one of the impor­tant lessons from 2008 was the crit­i­cal impor­tance of true diver­si­fi­ca­tion across dif­fer­ent asset classes. I am also mon­i­tor­ing any signs of sig­nif­i­cantly higher infla­tion or a pat­tern of cor­po­rate earn­ings com­ing in below fore­cast, either of which would cause a rethink­ing of our port­fo­lio strategy.

In light of what’s hap­pened in the last year, all investors need to take a hard look at their risk tol­er­ance and finan­cial sit­u­a­tion. I would be happy to sit down to update your finan­cial plan and dis­cuss any changes aris­ing from this process.

In con­clu­sion, I want to express my thanks for your patience and under­stand­ing through what has been an excep­tion­ally dif­fi­cult period. All of us have found our­selves chal­lenged over the past nine months — and I look for­ward to being able to look back on this last while as a once in a life­time test of our dis­ci­pline and resolve.

Best wishes for a relax­ing and rest­ful sum­mer — and remem­ber, should you have any ques­tions what­so­ever, my team and I are here to take your calls.

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Tags: Beginning Of Summer, Business Sentiment, Canada Day, Corporate Earnings, Decade, Depression, Economic Growth, Economic Indicators, Forecasters, Global Economies, Global Markets, Job Losses, July 1 Canada Day, Market Bottom, Personal Views, Pessimism, Prospects, Recession, Resumption, Second Half, Wall Street, Wall Street Journal
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A Letter for Pessimistic Clients/Prospects in Q1-2012

Wednesday, January 11th, 2012

If you’re at odds for a let­ter to send to clients this first quar­ter of 2011, as you’re going about com­mu­ni­cat­ing with them in the midst of all the cur­rent pes­simism, and in the con­text of this RRSP sea­son, here’s a great (white label) one  we just received from the folks at Cap­i­tal Inter­na­tional Asset Man­age­ment (Canada). Use it, mod­ify it, put your own opin­ion or out­look in it. Also, for an addi­tional back­ground read we shared yes­ter­day, The Year of Liv­ing Uncer­tainly – The Case for Bet­ter Times Ahead.

Here’s the letter:

2012 Out­look

Dear Client:

It’s not easy to be an opti­mist after a year like 2011. Cana­dian stocks sank more than 8%, led by a 52% drop in infor­ma­tion tech­nol­ogy. Even Cana­dian bank stocks offered less of a safe haven than in years past. Around the world, 2011 was a year marked by nat­ural dis­as­ters, debt and deficit prob­lems, upris­ings and protests. Time mag­a­zine asked in its Decem­ber issue: “Is there a global tip­ping point for frustration?”

I believe there is. Things that are bro­ken beg to get fixed, and chal­lenges of any kind are often accom­pa­nied by oppor­tu­ni­ties. Here are my obser­va­tions for the year ahead:

First, bleak points in his­tory are not nec­es­sar­ily bad times to invest. The worst time to invest is often when investors are overly opti­mistic and asset prices are unjus­ti­fi­ably high. When there’s worry and neg­a­tiv­ity, stock prices gen­er­ally reflect that sen­ti­ment. Today, I’m find­ing stocks of many high-quality com­pa­nies sell­ing at very attrac­tive prices. The way I see it, global mar­kets are offer­ing investors an oppor­tu­nity to upgrade the qual­ity of their port­fo­lios right now.

U.S. com­pa­nies have been remark­ably resilient. Despite a less-than-robust econ­omy, and a host of other prob­lems, U.S. com­pa­nies con­tinue to rebound. The S&P 500 was up 4.6% in 2011, and U.S. cor­po­rate prof­its are at record highs by some mea­sures. When you com­pare cor­po­rate earn­ings to what gov­ern­ment bonds are yield­ing, it’s hard not to be opti­mistic about stocks.

Emerg­ing mar­kets are alive and well. Emerg­ing mar­kets have rel­a­tively lit­tle debt, access to cap­i­tal like they’ve never had before, pow­er­ful tech­nol­ogy and a rapidly grow­ing mid­dle class. That’s real growth poten­tial. Many Cana­dian, U.S. and Euro­pean com­pa­nies that do busi­ness in emerg­ing mar­kets may also be well posi­tioned, even if their local economies aren’t strong. It’s where a com­pany does busi­ness, not where it’s based, that mat­ters most.

Inno­v­a­tive com­pa­nies around the world are cre­at­ing new prod­ucts and solv­ing the world’s prob­lems. I think that’s what makes mar­kets go up over time — it’s the effort of the indi­vid­ual com­pa­nies solv­ing prob­lems. That’s a rea­son for opti­mism, as long as you’re patient.

The biggest risk right now could be over­con­cen­trat­ing your port­fo­lio. When we don’t know what’s going to hap­pen, it’s often wise to invest in dif­fer­ent types of secu­ri­ties. Many peo­ple end up own­ing too much of a “good” thing, whether bonds, cash or high dividend-paying stocks. My job is to make sure you stay prop­erly diver­si­fied, even when the mar­kets make you nervous.

If you feel you’re at your tip­ping point for frus­tra­tion, let’s talk. And even if you’re not, it’s a good idea to check on your finan­cial sit­u­a­tion and any changes that may have occurred. My office will be in touch with you soon to set up a meet­ing or time for a phone call.

Best regards,

Click inside the fol­low­ing Select-All box and CTRL+C to copy the full text of the let­ter — then you can paste it any­where you want:

[textbox rows="20"]

2012 Out­look

Dear Client:

It’s not easy to be an opti­mist after a year like 2011. Cana­dian stocks sank more than 8%, led by a 52% drop in infor­ma­tion tech­nol­ogy. Even Cana­dian bank stocks offered less of a safe haven than in years past. Around the world, 2011 was a year marked by nat­ural dis­as­ters, debt and deficit prob­lems, upris­ings and protests. Time mag­a­zine asked in its Decem­ber issue: “Is there a global tip­ping point for frustration?”

I believe there is. Things that are bro­ken beg to get fixed, and chal­lenges of any kind are often accom­pa­nied by oppor­tu­ni­ties. Here are my obser­va­tions for the year ahead:

First, bleak points in his­tory are not nec­es­sar­ily bad times to invest. The worst time to invest is often when investors are overly opti­mistic and asset prices are unjus­ti­fi­ably high. When there’s worry and neg­a­tiv­ity, stock prices gen­er­ally reflect that sen­ti­ment. Today, I’m find­ing stocks of many high-quality com­pa­nies sell­ing at very attrac­tive prices. The way I see it, global mar­kets are offer­ing investors an oppor­tu­nity to upgrade the qual­ity of their port­fo­lios right now.

U.S. com­pa­nies have been remark­ably resilient. Despite a less-than-robust econ­omy, and a host of other prob­lems, U.S. com­pa­nies con­tinue to rebound. The S&P 500 was up 4.6% in 2011, and U.S. cor­po­rate prof­its are at record highs by some mea­sures. When you com­pare cor­po­rate earn­ings to what gov­ern­ment bonds are yield­ing, it’s hard not to be opti­mistic about stocks.

Emerg­ing mar­kets are alive and well. Emerg­ing mar­kets have rel­a­tively lit­tle debt, access to cap­i­tal like they’ve never had before, pow­er­ful tech­nol­ogy and a rapidly grow­ing mid­dle class. That’s real growth poten­tial. Many Cana­dian, U.S. and Euro­pean com­pa­nies that do busi­ness in emerg­ing mar­kets may also be well posi­tioned, even if their local economies aren’t strong. It’s where a com­pany does busi­ness, not where it’s based, that mat­ters most.

Inno­v­a­tive com­pa­nies around the world are cre­at­ing new prod­ucts and solv­ing the world’s prob­lems. I think that’s what makes mar­kets go up over time — it’s the effort of the indi­vid­ual com­pa­nies solv­ing prob­lems. That’s a rea­son for opti­mism, as long as you’re patient.

The biggest risk right now could be over­con­cen­trat­ing your port­fo­lio. When we don’t know what’s going to hap­pen, it’s often wise to invest in dif­fer­ent types of secu­ri­ties. Many peo­ple end up own­ing too much of a “good” thing, whether bonds, cash or high dividend-paying stocks. My job is to make sure you stay prop­erly diver­si­fied, even when the mar­kets make you nervous.

If you feel you’re at your tip­ping point for frus­tra­tion, let’s talk. And even if you’re not, it’s a good idea to check on your finan­cial sit­u­a­tion and any changes that may have occurred. My office will be in touch with you soon to set up a meet­ing or time for a phone call.

Best regards,
[/textbox]

You may also down­load the MS Word .doc here.

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A Positive Perspective for Discouraged Clients

Wednesday, December 21st, 2011

These days, it often feels that we’re totally enveloped in a mood of pessimism.

At one level, that’s under­stand­able; start with sub­par mar­ket returns for ten years and count­ing, severe debt prob­lems in Europe and a slow growth econ­omy in North Amer­ica. Add in a gen­er­al­ized “aus­ter­ity” mind­set and a work envi­ron­ment that for many com­bines stress and inse­cu­rity, and it’s no sur­prise that many Cana­di­ans are in, to use the tech­ni­cal descrip­tion, “a funk.”

Chances are that this mood will be with us for a while. The only ques­tion is how we choose to respond.

The short term reality

Start by rec­og­niz­ing that given the level of uncer­tainty and volatil­ity, talk­ing to clients about pro­jected per­for­mance in the next 12 to 36 months is a fool’s game. Using one set of met­rics, you can make the argu­ment that the mar­ket is sig­nif­i­cantly over­val­ued, then turn around and make the case with a dif­fer­ent set of val­u­a­tion mea­sures that it’s sub­stan­tially undervalued.

In truth, there are only three things about the mar­ket out­look for the next two to three years we can tell clients with a high degree of confidence:

1. Macro events and gov­ern­ment fis­cal and mon­e­tary pol­icy will con­tinue to play a much big­ger role in mar­ket direc­tion than was his­tor­i­cally the case.

2. There’s a high like­li­hood of con­tin­ued lev­els of very high mar­ket tur­bu­lence and volatility.

3. If clients don’t have the time­frame or the stom­ach for that tur­bu­lence and volatil­ity, then together you need to reassess their portfolios.

A con­ver­sa­tion about the long term

These days, talk­ing about the “long term” has fallen into dis­re­pute. Some mem­bers of the media and some investors view a focus on the long term as abdi­cat­ing respon­si­bil­ity for what’s hap­pen­ing in the here and now.

And while we can’t ignore the impact of short term devel­op­ments, the truth is that the large major­ity of clients have a time­frame that is out ten and twenty years. In con­ver­sa­tions with these clients, we need to strike a bal­ance between talk­ing about what’s hap­pen­ing now (which is all too often in the “no one knows” cat­e­gory in any event) and focus­ing on the mid and long term.

A com­mon view is that hav­ing come out of a ten year period of sub­stan­dard returns, we’re going into another ten years of poor eco­nomic growth and infe­rior mar­ket per­for­mance (some­times referred to as “the new nor­mal.”) That’s why I was struck by a com­men­tary released this fall by Michael Nairne of Tacita Cap­i­tal, point­ing to some opti­mistic research on the out­look for global growth.

Pos­i­tive prog­no­sis for growth

The research was con­ducted by Willem Buiter and Ebrahim Rab­hari of Citi Invest­ment Research and Analy­sis (CIRA), based on detailed bot­tom up fore­casts of growth for the next four decades in coun­tries around the world.

The chart below shows the results: Real global growth for the next thirty years is pro­jected to be on par with the post world war two period – and 50% higher than growth in the last thirty years.

Here’s some of the com­men­tary by Tacita on this study:

Cap­i­tal invest­ment, tech­no­log­i­cal imi­ta­tion, insti­tu­tional devel­op­ment, human cap­i­tal avail­abil­ity and indus­tri­al­iza­tion were the key fac­tors in the post WWII boom. Notwith­stand­ing the strong real annual GDP growth rate of 3.9% in the US from 1950 to 1973, it was the 9.3% and 5.5% respec­tive annual growth rates of Japan and the Euro­pean Union-15 that really lifted world GDP growth.

These same fun­da­men­tal dri­vers of growth are at work again in the emerg­ing economies and this is expected to repli­cate the brisk global growth achieved after WWII. In par­tic­u­lar, CIRA fore­casts that devel­op­ing Asia will con­tinue its ascent in the world econ­omy. Devel­op­ing Asia grew from 14% of real world GDP in 1990 to 27% in 2010; a nearly dou­bling of its share of global GDP — and is fore­cast to reach 44% of real world GDP by 2030.

The CIRA is not alone in pro­ject­ing more robust long-term global growth. The Con­fer­ence Board Global Eco­nomic Out­look 2011 has fore­cast a 4.4% real annual growth in world GDP over the next decade, while Gold­man Sachs has pro­jected a 4.1% real annual growth rate over the next twenty years. In gen­eral, the devel­oped nations are fore­cast to expand at a tepid pace while emerg­ing mar­kets grow robustly. As emerg­ing economies become a big­ger share of the world econ­omy, their faster growth accel­er­ates total world GDP growth.

Long-term GDP growth is ulti­mately a key deter­mi­nant in the growth in cor­po­rate earn­ings which, in turn, drive stock price appre­ci­a­tion and div­i­dend increases. For exam­ple, dur­ing the period 1991 to 2010 when the world real GDP grew by a more mod­er­ate 3.2% per annum, the real price appre­ci­a­tion of the MSCI All Coun­try World Index was sim­i­lar at 2.9% per annum. Hence, an increased real annual growth rate for the global econ­omy of 1.0% to 1.5% per annum in com­ing decades would, all other things being equal, enhance real cap­i­tal appre­ci­a­tion by an equiv­a­lent amount.

Iden­ti­fy­ing the dri­vers of global growth

CIRA’s research iden­ti­fies 11 coun­tries that it calls global growth gen­er­a­tors or 3G dri­vers, based on three sources of information.

1. A set of bot­tom up indi­vid­ual coun­try fore­casts of GDP pre­pared by the 50 econ­o­mists on Citi’s Eco­nom­ics team.
2. His­tor­i­cal GDP data for the most recent 10-year period.
3. A few cen­turies of eco­nomic research on the dri­vers of long-term growth.

Here’s an excerpt from CIRA’s report:

Our 3G coun­tries, there are 11 of them, com­prise Bangladesh, China, Egypt, India, Indone­sia, Iraq, Mon­go­lia, Nige­ria, Philip­pines, Sri Lanka, and Vietnam.

They were selected on the basis of their aver­age real per-capita GDP growth over the period 2010–2050; 5% or higher at PPP exchange rates. There was a dis­tinct dis­con­ti­nu­ity of more than 0.5% in pro­jected per-capita growth rates between the 11 3G coun­tries and the fastest-growing coun­try not included in the 3G cat­e­gory, which was Thailand.

Of the 11 coun­tries we iden­tify as global growth gen­er­a­tors, nine are in emerg­ing Asia. This is prob­a­bly not sur­pris­ing, but our next find­ing, that the other two are African nations may well be some­thing of a sur­prise. We believe that this may well turn out to be Africa’s cen­tury as well as Asia’s century.

China will over­take the US to become the largest econ­omy in the world by 2020 (at PPP exchange rates; it would take a decade longer at mar­ket exchange rates) and will itself be over­taken by India by 2050.

There are sev­eral rea­sons why two of the BRICs, Brazil and Rus­sia, are not in the 3G cat­e­gory. One is that they are sig­nif­i­cantly richer than the 3G coun­tries. A lot of catch-up has already occurred and most of the low-hanging fruit is gone. The sec­ond rea­son is their low invest­ment rates. The third is that, for the later stages of the con­ver­gence process, the qual­ity of insti­tu­tions and poli­cies mat­ters more than for the early stages. Brazil and espe­cially Rus­sia have mate­r­ial weak­nesses in the qual­ity of their key eco­nomic insti­tu­tions and poli­cies which limit their growth prospects.

Impli­ca­tions for investors

The last time we saw a change in global power on this order of mag­ni­tude was in the 1800s, when the United States replaced Great Britain as the pre­em­i­nent dri­ver of global growth.

This fore­cast for buoy­ant eco­nomic growth and the shift in the locus of growth to emerg­ing coun­tries has pro­found impli­ca­tions for com­pa­nies around the world, and also for investors. We’ve already seen sophis­ti­cated investors increase their allo­ca­tion to emerg­ing economies; this is a trend that will only accel­er­ate in the period ahead.

Mean­while, the out­look from Cit­i­group and other cred­i­ble eco­nomic fore­cast­ers gives advi­sors the oppor­tu­nity to have con­ver­sa­tions with clients about the pos­i­tive mid and long term growth prospects for the global econ­omy and what that means to investors with a long term view.

To read more, here’s the link to the CIRA study

http://​www​.cepr​.org/​p​u​b​s​/​P​o​l​i​c​y​I​n​s​i​g​h​t​s​/​P​o​l​i​c​y​I​n​s​i​g​h​t​5​5​.​pdf

And here’s the com­men­tary from Tacita:

http://​tac​i​ta​cap​i​tal​.com/​f​i​l​e​s​/​T​h​e​_​G​l​o​b​a​l​_​O​l​d​_​N​o​r​m​a​l​_​S​e​p​t​e​m​b​e​r​_​3​0​_​2​0​1​1​.​pdf

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Why Warren Buffett is optimistic — A quarterly letter to send clients

Wednesday, July 6th, 2011

Among my arti­cles that draw the most inter­est from advi­sors are the draft tem­plates for a quar­terly let­ter to send clients.

This quarter’s let­ter is designed to bal­ance some of the extreme pes­simism among many investors. This neg­a­tive sen­ti­ment is under­stand­able given the real chal­lenges fac­ing the U.S. and Euro­pean economies, but is also a func­tion of the over­whelm­ingly neg­a­tive media cov­er­age that clients are exposed to. (This is the exact oppo­site of the blindly pos­i­tive media at the begin­ning of 2000.)

To bal­ance today’s dis­pro­por­tion­ately neg­a­tive views, you need hard facts.

That’s why this let­ter is based on a Sep­tem­ber 13 con­fer­ence in Mon­tana, at which War­ren Buf­fett, GE’s Jeff Immelt and Microsoft’s Steve Ballmer all expressed very pos­i­tive views about what’s hap­pen­ing at their com­pa­nies. It also fea­tures a recent sur­vey of global exec­u­tives, show­ing gen­er­ally pos­i­tive sen­ti­ment.

Given the atten­dees and their com­ments, the most strik­ing thing about the Mon­tana con­fer­ence was the lack of media cov­er­age, aside from a brief com­ment by War­ren Buf­fett that we won’t have a dou­ble dip recession.

Per­haps that was because of its rel­a­tively iso­lated loca­tion in Mon­tana, but I also sus­pect that right now mem­bers of the media are so pes­simistic per­son­ally that they tune out good news. (It’s not just the media who do this, by the way, we all fall into the trap of ignor­ing infor­ma­tion that isn’t con­sis­tent with our mindset.)

That cre­ates both the need and the oppor­tu­nity for advi­sors to pro­vide off­set­ting per­spec­tive to today’s per­va­sive gloom and doom, not by sug­gest­ing that every­thing is won­der­ful of course, but by point­ing out real and con­crete pos­i­tives that are being gen­er­ally over­looked … in other words to pro­vide balance.

A reminder that for a client let­ter to work, it has to be short, to be writ­ten in client-friendly lan­guage and to tap into cred­i­ble third party sup­port for your opinions.

It also has to reflect your own writ­ing style and views — be sure to cus­tomize this let­ter, replac­ing lan­guage that you wouldn’t nor­mally use with your own words.

And be sure to take the time to tai­lor the wrap up at the end of the let­ter, sum­ma­riz­ing what this all means to clients, to reflect your per­sonal point of view.

Octo­ber 2010

Why War­ren Buf­fett is optimistic

“I’m a huge bull on this coun­try … we won’t have a dou­ble dip reces­sion. I see our busi­nesses com­ing back almost across the board”   .…

War­ren Buf­fett, Sep­tem­ber 13, 2010

I’m writ­ing to share some thoughts on today’s eco­nomic out­look, look­ing beyond the head­lines and to bring you up to speed on stock markets.

First a short sum­mary of stock mar­ket per­for­mance in 2010 to date:

Mar­kets in the last three months saw a con­tin­u­a­tion of the roller-coaster like tur­bu­lence of the past cou­ple of years:

After a strong first quar­ter and a big pull­back in the sec­ond quar­ter, July saw a strong recov­ery in global markets.

This was fol­lowed by weak per­for­mance in August. … and Sep­tem­ber (his­tor­i­cally a trou­ble­some month for mar­kets) actu­ally saw a nice bounce back.

Here’s how mar­kets have per­formed in the last quar­ter and so far this year.

Emerg­ing            World

Canada            U.S.          Europe        mar­kets         stockmarket

July                       +3.9%         +6.9%         +5.8%         +6.2%            +5.8%

Aug                       –1.0%           –4.4%         –7.4%         –1.4%             -3.3%

Sept

July to Sept

2010 to date

Source: MSCI index. All returns are in local currency

Note: Need to insert num­bers for Sep­tem­ber, July to Sept and 2010 to date at month end — if you go to www​.cli​entin​sights​.ca on Octo­ber 1, this will be updated

The impor­tance of a bal­anced perspective

One of the keys to suc­cess for investors is main­tain­ing emo­tional equilibrium,

pre­vent­ing the highs from being too high and the lows from being too low.

Today, many Cana­di­ans are pes­simistic about the Amer­i­can and global economies … dri­ven by daunt­ing head­lines about slow eco­nomic growth, depressed hous­ing prices, high unem­ploy­ment and deficit prob­lems in the U.S. and Europe,  not to men­tion polit­i­cal dis­cord in Washington.

This pes­simism is ampli­fied by the media cov­er­age given to voices of gloom such as Nouriel Roubini and David Rosenberg.

As a result, it’s easy to miss some of the good news beyond the headlines.

The Big Sky Con­fer­ence: Look­ing past short term issues

That’s why a con­fer­ence that took place in mid Sep­tem­ber is impor­tant as it pro­vided some off­set­ting per­spec­tive on the mid and long term pos­i­tives for the United States and globally.

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Year end letter for clients… Investment advice from Winston Churchill

Wednesday, December 15th, 2010

For the past two years, I’ve posted quar­terly let­ters that advi­sors can use as a start­ing point to develop client let­ters of their own … the year-end let­ters have been par­tic­u­larly popular.

The draft year-end let­ter for 2010 fol­lows. A reminder of the essen­tial qual­i­ties of an effec­tive  client letter:

1.    Rea­son­ably short (3 to 5 pages max­i­mum — and even that will be too long for some clients)

2.    Inter­est­ing and conversational

3.    Can­did and to the point

4.    Using client friendly language

5.    Reflect­ing your own per­son­al­ity and point of view.

6.    And where pos­si­ble tap­ping into cred­i­ble third party sup­port for your views

For the past eigh­teen months, my draft let­ters have been designed to bal­ance some of the extreme pes­simism among many investors — the draft year-end let­ter for 2010 con­tin­ues with that goal.

To make them mem­o­rable and inter­est­ing, each client let­ter has a theme — past let­ters have been based on War­ren Buffett’s annual mis­sive to investors, a lost lec­ture by Ben­jamin Gra­ham and a Sep­tem­ber con­fer­ence at which War­ren Buf­fett, GE’s Jeff Immelt and Microsoft’s Steve Ballmer dis­cussed pos­i­tive views about what’s hap­pen­ing at their companies.

The draft 2010 year-end let­ter that fol­lows bor­rows from Win­ston Churchill’s  insight into the dif­fer­ence between opti­mists and pessimists.

I hope you find this let­ter use­ful.  And be sure to take the time to tai­lor the wrap up at the end, sum­ma­riz­ing what this all means to clients to reflect your per­sonal point of view.

Decem­ber 2010

“The pes­simist sees dif­fi­culty in every oppor­tu­nity. The opti­mist sees oppor­tu­nity in every difficulty.”

Sir Win­ston Churchill

As we approach the end of the year, I’m writ­ing to share some thoughts on today’s eco­nomic out­look and the cur­rent psy­chol­ogy among many investors, reflected in the above quote from Win­ston Churchill.

First a sum­mary of stock mar­ket per­for­mance in 2010.

It’s a cliché to describe the stock mar­ket as a roller coaster .. but some­times clichés are rooted in real­ity. Stock mar­kets over the past cou­ple of years have seen extreme swings, some­thing that con­tin­ued this year.

Here’s how mar­kets have per­formed in 2010. Note the strong recov­ery after a first half that was chal­lenged by the Greek debt cri­sis and BP oil spill.

Six months to June30                  11 months to Novem­ber 30

Canada                           (3.5%)                                    +6.7%

US                                 (6.8%)                                    + 8.2%

Europe                           (6.2%)                                    +1.9%

Emerg­ing mar­kets           (4.2%)                                    +9.5%

World stock mar­ket         (6.6%)                                    +5.2%

Source: MSCI index. All returns are in local cur­rency

Today’s pes­simistic mood

Today we’re see­ing a mood of wide­spread fear and intense pes­simism, as many investors feel over­whelmed by prob­lems in the US, led by high unem­ploy­ment, Gov­ern­ment deficits, depressed hous­ing prices and grid­lock in Wash­ing­ton.

Look to Europe and you’ve got many of the same chal­lenges, as well as bank­ing prob­lems in Greece and Ire­land, with Spain and Italy rumoured to follow.

This could be omit­ted for space:

Clearly there are sub­stan­tial issues that have to be worked through. That said, a key con­cern is that the pos­i­tive, opti­mistic can-do mind­set that has fueled so much of the growth and suc­cess of the US is being mired down in pes­simism.

What’s impor­tant to remem­ber is that through­out his­tory peo­ple have reg­u­larly over­come prob­lems of sim­i­lar mag­ni­tude and big­ger. This is one of the themes of a thought-provoking new book by lead­ing sci­ence writer Matt Rid­ley — The ratio­nal opti­mist: How pros­per­ity evolves.

In it, Rid­ley makes the case for opti­mism about the future. In a review of this book by Bill Gates that ran in the Wall Street Jour­nal, Gates points out that Rid­ley doc­u­ments con­stant pre­dic­tions of a bleak future through­out human history.

Rev­erend Thomas Malthus, a con­tem­po­rary of Adam Smith in the late 1700s wrote that increas­ing pop­u­la­tion would arrest advances in the qual­ity of life. In the 1960s you had Paul Erlich’s best­selling book The Pop­u­la­tion Bomb and in 1972 The Lim­its to Growth was pub­lished by the Club of Rome; these both posited that increas­ing pop­u­la­tion and finite resources would cap our abil­ity to grow.

And more recently still many will remem­ber the end of the world sce­nar­ios around Y2K com­puter shutdowns.

It’s not that these weren’t real issues — but they were blown out of pro­por­tion. As Bill Gates writes:  “Despite these prob­lems, our lives have improved dra­mat­i­cally in terms of lifes­pan, nutri­tion, lit­er­acy, wealth and almost any other mea­sure you’d care to name. ”

The role of innovation

There are at least two rea­sons to be opti­mistic for the mid term — the role of inno­va­tion and some of the incred­i­bly pos­i­tive things that are hap­pen­ing in emerg­ing economies in Asia, Latin Amer­ica, East­ern Europe and even Africa.

With regard to inno­va­tion, in his review of Ridley’s book, Bill Gates wrote:

“Pes­simism is so often wrong because peo­ple assume a world where there is no change or inno­va­tion. They sim­ply extrap­o­late from what is going on today, fail­ing to rec­og­nize the new devel­op­ments and insights that might      alter cur­rent trends.”

Today, we’re con­tin­u­ing to see record  spend­ing on inno­va­tion around the world. Coun­tries like China and India are mak­ing mas­sive invest­ments in research and devel­op­ment. In fact next year China is expected to trail only the U.S. in the num­ber of patents filed, truly remark­able when you con­sider that twenty years ago it had no his­tory of pro­tec­tion of intel­lec­tual property

The sec­ond fac­tor dri­ving inno­va­tion is the impact of the inter­net in dis­sem­i­nat­ing infor­ma­tion about new devel­op­ments. By allow­ing peo­ple around the world to share new infor­ma­tion and dis­cov­er­ies in real time, you dra­mat­i­cally increase the pro­duc­tiv­ity of invest­ments in innovation.

Good news from emerg­ing markets

The other big pos­i­tive is what’s hap­pen­ing in emerg­ing economies.  Peo­ple who return from China and India talk about being blown away by the drive, energy and ambi­tion they see there. You’ve got a new mid­dle class that wants a bet­ter life and you’ve got a whole new gen­er­a­tion of incred­i­bly tal­ented young peo­ple who are get­ting edu­cated, apply­ing a strong work ethic and mak­ing a huge impact as a result.

In fact China and India are fore­cast to con­tinue grow­ing by 8 to 10%. You’re also see­ing strong growth from other coun­tries like Brazil, Turkey and Indone­sia.  This video graph­i­cally depicts world­wide devel­op­ments over the past two cen­turies and in par­tic­u­lar the recent  growth in emerg­ing markets:

http://​www​.youtube​.com/​w​a​t​c​h​?​v​=​j​b​k​S​R​L​Y​S​ojo

This could be omit­ted for space

This is not to say that these coun­tries aren’t fac­ing chal­lenges of their own — there’s a big dif­fer­ence between being a ratio­nal opti­mist and a blind opti­mist. Emerg­ing economies have huge infra­struc­ture issues to deal with. They’ve got big dis­par­i­ties between incomes in cities and in rural areas that are caus­ing ten­sions. In some cases, they’ve got mini real estate and hous­ing bub­bles. But they key is that there’s no rea­son to believe they won’t work through these.

What this means for the West

Think­ing back to Win­ston Churchill’s com­ment about opti­mists and pes­simists, pes­simists read about China, India and other devel­op­ing coun­tries and con­clude that they’re going to achieve growth at the expense of West­ern coun­tries, that in fact all those super-bright, super-ambitious young kids are going to eat our lunch.

And while this could in the­ory take place, it doesn’t have to hap­pen. Many west­ern com­pa­nies are well posi­tioned to cap­i­tal­ize on the grow­ing mid­dle class in devel­op­ing economies. A ris­ing per­cent­age of rev­enue and prof­its from top con­sumer goods firms like BMW, Proc­ter and Gam­ble, Nike, Apple, Nes­tle and McDon­alds are com­ing from these emerg­ing coun­tries — more and more the key to suc­cess for west­ern com­pa­nies is oper­at­ing globally.

And the good news is that these multi­na­tion­als not only have strong brands but also strong bal­ance sheets. West­ern con­sumers and gov­ern­ments may be stretched finan­cially but com­pa­nies have record lev­els of cash and are in good shape financially.

As for the argu­ment that these emerg­ing economies are going to win at our expense, this assumes that the size of the wealth pie we’re divid­ing up is fixed. It’s not — through trade and glob­al­iza­tion, those emerg­ing mar­kets are going to dra­mat­i­cally increase the amount of wealth in the world.

It also assumes that west­ern economies and com­pa­nies won’t adapt. The econ­o­mist Joseph Shum­peter wrote about some­thing called cre­ative destruc­tion — how the process of inno­va­tion in open mar­kets trans­forms economies, destroy­ing old busi­ness mod­els and jobs, replac­ing them with new ones.

This is the essence of how open mar­kets work. It’s messy and very painful if you’re caught in the mid­dle of this tran­si­tion but in spite of that it’s still far and away the best model for run­ning an econ­omy. If you don’t believe this, ask your­self if we’d be bet­ter off if China and India were closed, cen­trally run economies, like they were in the 1980s. It’s sim­ply impos­si­ble to make that case.

Cus­tomize the sec­tion below:

Impli­ca­tions for investors

In light of this, as I meet with clients we dis­cuss three broad themes for 2011.

First, under­stand how much volatil­ity you can live with. There’s no rea­son to believe that mar­kets won’t con­tinue to gyrate — with every client, we work through how much short term volatil­ity and risk they can live with. For retired clients, I advise set­ting aside three years of cash needs from sav­ings in safe liq­uid invest­ments, some­thing that can reduce stress in volatile markets.

Sec­ond, con­cen­trate on high qual­ity com­pa­nies with strong brands and bal­ance sheets and that also offer fair val­u­a­tions. When decid­ing on the man­agers to run client port­fo­lios, we empha­size expe­ri­enced man­agers with a con­ser­v­a­tive approach to buy­ing qual­ity com­pa­nies at attrac­tive prices. Of note, the mar­ket rally of the last eigh­teen months has seen higher qual­ity com­pa­nies under­per­form lower qual­ity com­pa­nies — we don’t think that will continue.

Finally, we need to take a “ratio­nally opti­mistic” view of the future, walk­ing the fine line between suc­cumb­ing to dire pes­simism on the one hand and blind opti­mism on the other. This will not nec­es­sar­ily pay off in the next six or even twelve months  — but his­tory tells us that we’ll ulti­mately be very well rewarded for invest­ing in the com­pa­nies best posi­tioned for the future.

Thank you for the oppor­tu­nity to work together over the past year. Should you have any ques­tions on any­thing in this note, please give me a call. Mean­while, best wishes for a relax­ing hol­i­day sea­son — I look for­ward to talk­ing in 2011.

Name of advisor

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Do You Need a Code of Conduct?

Tuesday, October 19th, 2010

Recently, I got an email from an advi­sor ask­ing for sug­ges­tions on how to deal with clients who sold some or all of their port­fo­lio near the 2008-lows.

More specif­i­cally, he wanted to know if it’s worth­while edu­cat­ing these clients of where they would be had they not sold out? Or does he risk fur­ther dam­ag­ing their ego and what remains of the rela­tion­ship?

He also asked for my thoughts on deal­ing with three types of per­son­al­i­ties he has seen emerge among his clients:

1) Almost a per­ma­nent “pes­simism” about the world and mar­kets will crash again (not sure he wants to keep these ones)

2) Acknowl­edge­ment that it was not a good time to sell and con­sid­er­ing re-entry in the mar­kets    (these make him slightly ner­vous since there will be drops in the future)

3) Those who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates.

Clients who sold at the bottom

For clients who bailed out in late 2008 or early 2009, I do think it’s worth approach­ing them about sit­ting down and revis­it­ing where they stand.

The key is to make this con­ver­sa­tion forward-looking, focus­ing on the oppor­tu­ni­ties today – there’s noth­ing to be gained by going back over missed oppor­tu­ni­ties.

So it comes down to mak­ing an assess­ment of today’s val­u­a­tions, clients’ time frames and abil­ity to with­stand mar­ket down­turns – and also the rate of return they need to achieve their goals.

As for clients who are still appre­hen­sive, many investors are spooked by all the neg­a­tive head­lines in the media.

Here you need third party sup­port. On my web­site I have posted arti­cles refer­ring to pos­i­tive com­ments about prospects for the period ahead by War­ren Buf­fett, Steve Ballmer and Jeff Immelt at a con­fer­ence in mid Sep­tem­ber.

And I also have an inter­view with Jeremy Siegel of Whar­ton, con­sid­ered today’s lead­ing stock mar­ket his­to­rian, that I recorded in July - “The case for under­val­ued mar­kets” – that is still rel­e­vant today.

When talk­ing to clients about reen­ter­ing the mar­ket, assum­ing you are mod­estly pos­i­tive in the mid term as I am, you could rec­om­mend phas­ing their shift from cash to equity in over a twelve month period, invest­ing the funds in two or three stages .

This feels less risky and is more com­fort­able for many clients and also sends the pos­i­tive sig­nal that you’re not in a rush to get their money invested and gen­er­at­ing rev­enue for you.

Three trou­ble­some client profiles

For clients who are “almost per­ma­nently pes­simistic” about the world and mar­kets will crash again, I agree that it’s gen­er­ally not pro­duc­tive keep­ing “per­ma­nently  pes­simistic” clients – they’re unlikely to change and will likely sap your own energy with lim­ited return.

For clients who acknowl­edge that it was not a good time to sell and are con­sid­er­ing re-entry in the mar­kets , but make this advi­sor slightly ner­vous since there will be drops in the future, these cases I wouldn’t be as hard on.

Lots of peo­ple (includ­ing advi­sors) got spooked in 2008 and early 2009, it truly did feel like we might be look­ing into the abyss. In these cases, you need to have a can­did con­ver­sa­tion about the cer­tainty of con­tin­ued volatil­ity – and have a dis­cus­sion about their abil­ity to with­stand this.

Finally, for clients who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates, low rates are obvi­ously a huge issue, espe­cially for seniors.

In some of these cases, advi­sors are going to have to broaden their hori­zons, look­ing at mov­ing out on the volatil­ity curve, putting part of client port­fo­lios in solu­tions like invest­ment grade cor­po­rate bond funds, emerg­ing mar­ket bond funds (cur­rently yield­ing 6%), REITs and bank alter­na­tive lend­ing firms.

You obvi­ously need to talk to clients about the greater risk of these alter­na­tives com­pared to Gov­ern­ment bonds – but even if it takes more time to have these con­ver­sa­tions, they’re still going to be essen­tial in many cases.

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Tags: Acknowledgement, Code Of Conduct, Ego, Good Time, Historian, Jeff Immelt, Jeremy Siegel, Low Interest Rates, Lows, Negative Headlines, Pessimism, Prospects, Rate Of Return, Steve Ballmer, Stock Market, Time Frames, Types Of Personalities, Valuations, Warren Buffett, Wharton
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Navigating Post-Financial-Meltdown Reviews

Tuesday, October 19th, 2010

Recently, I got an email from an advi­sor ask­ing for sug­ges­tions on how to deal with clients who sold some or all of their port­fo­lio near the 2008-lows.

More specif­i­cally, he wanted to know if it’s worth­while edu­cat­ing these clients of where they would be had they not sold out? Or does he risk fur­ther dam­ag­ing their ego and what remains of the rela­tion­ship?

He also asked for my thoughts on deal­ing with three types of per­son­al­i­ties he has seen emerge among his clients:

1) Almost a per­ma­nent “pes­simism” about the world and mar­kets will crash again (not sure he wants to keep these ones)

2) Acknowl­edge­ment that it was not a good time to sell and con­sid­er­ing re-entry in the mar­kets    (these make him slightly ner­vous since there will be drops in the future)

3) Those who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates.

Clients who sold at the bottom

For clients who bailed out in late 2008 or early 2009, I do think it’s worth approach­ing them about sit­ting down and revis­it­ing where they stand.

The key is to make this con­ver­sa­tion forward-looking, focus­ing on the oppor­tu­ni­ties today – there’s noth­ing to be gained by going back over missed oppor­tu­ni­ties.

So it comes down to mak­ing an assess­ment of today’s val­u­a­tions, clients’ time frames and abil­ity to with­stand mar­ket down­turns – and also the rate of return they need to achieve their goals.

As for clients who are still appre­hen­sive, many investors are spooked by all the neg­a­tive head­lines in the media.

Here you need third party sup­port. On my web­site I have posted arti­cles refer­ring to pos­i­tive com­ments about prospects for the period ahead by War­ren Buf­fett, Steve Ballmer and Jeff Immelt at a con­fer­ence in mid Sep­tem­ber.

And I also have an inter­view with Jeremy Siegel of Whar­ton, con­sid­ered today’s lead­ing stock mar­ket his­to­rian, that I recorded in July - “The case for under­val­ued mar­kets” – that is still rel­e­vant today.

When talk­ing to clients about reen­ter­ing the mar­ket, assum­ing you are mod­estly pos­i­tive in the mid term as I am, you could rec­om­mend phas­ing their shift from cash to equity in over a twelve month period, invest­ing the funds in two or three stages .

This feels less risky and is more com­fort­able for many clients and also sends the pos­i­tive sig­nal that you’re not in a rush to get their money invested and gen­er­at­ing rev­enue for you.

Three trou­ble­some client profiles

For clients who are “almost per­ma­nently pes­simistic” about the world and mar­kets will crash again, I agree that it’s gen­er­ally not pro­duc­tive keep­ing “per­ma­nently  pes­simistic” clients – they’re unlikely to change and will likely sap your own energy with lim­ited return.

For clients who acknowl­edge that it was not a good time to sell and are con­sid­er­ing re-entry in the mar­kets , but make this advi­sor slightly ner­vous since there will be drops in the future, these cases I wouldn’t be as hard on.

Lots of peo­ple (includ­ing advi­sors) got spooked in 2008 and early 2009, it truly did feel like we might be look­ing into the abyss. In these cases, you need to have a can­did con­ver­sa­tion about the cer­tainty of con­tin­ued volatil­ity – and have a dis­cus­sion about their abil­ity to with­stand this.

Finally, for clients who are frus­trated and almost par­a­lyzed… unsure what to do espe­cially given low inter­est rates, low rates are obvi­ously a huge issue, espe­cially for seniors.

In some of these cases, advi­sors are going to have to broaden their hori­zons, look­ing at mov­ing out on the volatil­ity curve, putting part of client port­fo­lios in solu­tions like invest­ment grade cor­po­rate bond funds, emerg­ing mar­ket bond funds (cur­rently yield­ing 6%), REITs and bank alter­na­tive lend­ing firms.

You obvi­ously need to talk to clients about the greater risk of these alter­na­tives com­pared to Gov­ern­ment bonds – but even if it takes more time to have these con­ver­sa­tions, they’re still going to be essen­tial in many cases.

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Tags: Acknowledgement, Ego, Financial Meltdown, Good Time, Historian, Jeff Immelt, Jeremy Siegel, Low Interest Rates, Lows, Negative Headlines, Pessimism, Prospects, Rate Of Return, Steve Ballmer, Stock Market, Time Frames, Types Of Personalities, Valuations, Warren Buffett, Wharton
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“The pendulum never stops……”

Sunday, September 19th, 2010

Occa­sion­ally, some­thing we hear sticks in our minds and stays with us.

When I was in busi­ness school in the 1970s, my finance prof used a phrase that I often find use­ful in con­ver­sa­tion with clients and investors — espe­cially in mar­kets such as we’re in today.

That phrase: “The pen­du­lum never stops in the middle.”

My finance pro­fes­sor was one of the big names in the field — he con­sulted with many of the Wall Street firms and was fre­quently quoted in the press.

He used this phrase in the con­text of mar­ket val­u­a­tions and mar­ket sen­ti­ment. He talked about the his­tor­i­cal real­ity that mar­kets inevitably swing from one extreme to another, from peri­ods of out­landishly ele­vated val­u­a­tions to ridicu­lously beaten down lev­els, from peri­ods of unques­tion­ing eupho­ria to absolute pessimism.

“The pen­du­lum never stops in the mid­dle” applies in lots of other cases as well.

Look at the market’s and media’s atti­tude to risk and lever­age — a year ago com­pa­nies that used insuf­fi­cient  lever­age to boost prof­its were pun­ished for being “dull and bor­ing”, today even pru­dent risk has become a dirty word. (The most pop­u­lar arti­cle in the online New York Times last week was a piece lay­ing out Cana­dian banks as the model for the global bank­ing sys­tem — a notion that six months ago would have been com­pletely absurd.)

Con­sider investors’ atti­tudes to own­ing resource stocks — where not long ago load­ing up on these was all that many investors wanted to talk about, today they don’t even want to hear about own­ing resources.

This is also reflected in expec­ta­tions on oil prices. A year ago, the “peak oil” the­ory held sway and demand from China and India was going to push oil to $200 by year end. Today we’ve begun to hear about the “peak demand the­ory”, the view that demand for oil peaked last year and we’ll never, ever see demand at that level again.

Recall all the invest­ment fads and “flavour of the day” investments.

And think about the wild swing in con­sumer sen­ti­ment on appro­pri­ate spend­ing that’s taken place in the last lit­tle while– from the norm of lav­ish expen­di­ture to “the new frugality.”

The key point that my finance prof made was that while the stock mar­ket may be effi­cient and ratio­nal in the mid and long term, in the near term the “swing­ing of the pen­du­lum” cre­ates ter­rific oppor­tu­ni­ties for com­pa­nies and for investors who can main­tain their perspective.

That was true thirty years ago … and it’s arguably even truer today

So when talk­ing to investors who are spooked by recent events and dire eco­nomic fore­casts, con­sider talk­ing about the fact that “the pen­du­lum never stops in the middle”.

We may not be all the way to the extreme of despair and pes­simism, but we are almost cer­tainly well past the mid point — and into the area that we’ll look back on years from now and rec­og­nize that the dras­tic shift in sen­ti­ment has cre­ated sig­nif­i­cant value for those bold enough to look past the swing­ing of the pen­du­lum and rec­og­nize it.

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Tags: Banking System, Business School, Canadian Banks, Demand Theory, Dirty Word, Euphoria, Fads, Finance Prof, Finance Professor, Flavour, Global Banking, Market Sentiment, Market Valuations, New York Times, Oil Prices, Peak Demand, Peak Oil Theory, Pendulum, Pessimism, Resource Stocks
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Two Compelling Articles to Send Clients

Sunday, September 19th, 2010

“I’m a huge bull on this coun­try … we won’t have a dou­ble dip reces­sion. I see our busi­nesses com­ing back almost across the board.”  .…War­ren Buf­fett, Berk­shire Hathaway

“GE is now find­ing it prof­itable to build man­u­fac­tur­ing and ser­vice cen­ters in the United States rather than over­seas, because it is more com­pet­i­tive to do so.”   … Jeff Immelt, CEO, GE

“I am very enthu­si­as­tic about what the future holds” .… Steve Ballmer, CEO, Microsoft

One of the most impor­tant roles for advi­sors is to be an emo­tional anchor for clients … pre­vent­ing the highs from being too high and the lows from being too low.

Today, many Cana­di­ans are pes­simistic about the U.S. and global economies … dri­ven in large mea­sure by daunt­ing head­lines about slow growth, weak hous­ing prices, high unem­ploy­ment and deficit prob­lems in much of the devel­oped world, as well as polit­i­cal dis­cord in Washington.

This pes­simism is ampli­fied by the media cov­er­age given to voices of gloom such as Nouriel Roubini and David Rosenberg.

Pre­sent­ing an upbeat outlook

That’s why a con­fer­ence that took place just last Mon­day gives advi­sors the chance to pro­vide clients with some off­set­ting per­spec­tive on the mid and long term pos­i­tives for the United States.

Speak­ing on Mon­day Sep­tem­ber 13 to 2000 busi­ness and polit­i­cal lead­ers in Mon­tana, War­ren Buf­fett, Steve Ballmer of Microsoft and GE’s Jeff Immelt talked about good news at their com­pa­nies and a pos­i­tive out­look for the future.

Here are two arti­cles on this con­fer­ence that you can send clients, one from Bloomberg and other from Yahoo News:

http://www.bloomberg.com/news/2010–09-13/buffett-rules-out-double-dip-u-s-recession-says-berkshire-units-growing.html

http://​news​.yahoo​.com/​s​/​a​p​/​2​0​1​0​0​9​1​3​/​a​p​_​o​n​_​b​i​_​g​e​/​u​s​_​e​c​o​n​o​m​y​_​l​e​a​d​ers

And here are some of their comments:

War­ren Buf­fett, Berk­shire Hathaway:

“I’m a huge bull on this coun­try … we won’t have a dou­ble dip reces­sion. I see our busi­nesses com­ing back almost across the board … … it’s night and day from a year ago.”

“I’ve seen sen­ti­ment turn sour in the last three months or so, gen­er­ally in the media. I don’t see that in our busi­nesses … we’re employ­ing more peo­ple than a month ago, two months ago.”

“The things that worked for the coun­try through a cen­tury of two world wars, a depres­sion and more — all while increas­ing the stan­dard of liv­ing — will work again.”

“Banks are lend­ing money again, busi­nesses are hir­ing employ­ees and I expect the econ­omy to come back stronger than ever.”

Steve Ballmer, Microsoft:

“There soon will be more tech­no­log­i­cal advance­ment and inven­tion than there was dur­ing the Inter­net era and that will help drive busi­ness growth.”

“I am very enthu­si­as­tic about what the future holds for our indus­try and what our indus­try will mean for growth in other industries.”

“We will see new tech­nolo­gies that move beyond the Inter­net to tie together com­put­ers, phones, tele­vi­sions and data cen­ters to cre­ate amaz­ing new prod­ucts. And the pace of inno­va­tion will increase as tech­nol­ogy makes work­ers more productive.”

“All areas of sci­ence today are mov­ing for­ward more quickly. The speed of sci­en­tific break­through is accelerating.”

Jeff Immelt, GE:

“Angry polit­i­cal rhetoric is not help­ful and head­lines are too focused on find­ing neg­a­tive indicators.”

“Busi­ness at GE is improv­ing. Signs across the world show growth improv­ing as evi­denced by a rise in GE’s orders.”

“GE is now find­ing it prof­itable to build man­u­fac­tur­ing and ser­vice cen­ters in the United States rather than over­seas, because it is more com­pet­i­tive to do so.”

“The U.S.‘s cen­tral chal­lenge will be to speed growth. We need an increase in exports of man­u­fac­tured goods to help com­pete glob­ally. Expan­sion will be fur­ther bol­stered when smaller busi­nesses and con­sumers regain con­fi­dence in banks and are able to bor­row more.”

“We need peo­ple to be able to feel like they’re going to get loans, the process is going to work and that they under­stand the rules.”

“The U.S. is going to need to adjust, though. The econ­omy since the 1970s has been dri­ven by con­sumer credit and a mis­guided notion in build­ing a “lazy” ser­vice econ­omy. Man­u­fac­tur­ing, with an aim to reduce the trade deficit, is the key.”

“The push for an exclu­sively  service-based econ­omy was just wrong. It was stu­pid. It was insane .The future of the econ­omy has to be as an exporter.”

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Tags: Berkshire Hathaway, Buffett Rules, Ceo Microsoft, David Rosenberg, Discord, Double Dip Recession, Economy Leaders, Emotional Anchor, Global Economies, Jeff Immelt, Last Monday, Lows, News Yahoo, Nouriel Roubini, Pessimism, Political Leaders, Positive Outlook, Steve Ballmer, Upbeat Outlook, Warren Buffett
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