A Q1 letter to clients: Bernanke, Buffett and Siegel on the Prospects Ahead

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.

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:

Eco­nomic Growth:

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 20^th 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.”

Should you be inter­ested in watch­ing them, here are links to the com­ments from Ben Bernanke (CLICK HERE) and Chris­tine Lagarde (CLICK HERE).

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.

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Guidance from Buffett, Gross and Siegel — An End of Quarter Letter to Clients

Wednesday, July 6th, 2011

Given recent unrest in Europe and uncer­tainty about eco­nomic growth, 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 that can be a cat­a­lyst for a con­ver­sa­tion about how to posi­tion portfolios.

In the past, I have used quotes from Mark Twain, Win­ston Churchill, Ben­jamin Gra­ham and War­ren Buf­fett to set the tone for these tem­plates. This quarter’s let­ter once again uses a quote from Buf­fett, along with Bill Gross and Jeremy Siegel.

One note of cau­tion — to be effec­tive, this let­ter has to reflect your approach, per­son­al­ity and point of view. Be sure to take the time to cus­tomize the let­ter to incor­po­rate your own views.

July 4, 2011

Buf­fett, Gross and Siegel — Find­ing oppor­tu­ni­ties in today’s mar­ket

“Money will always flow toward oppor­tu­nity and there is an abun­dance of that in Amer­ica .… Human poten­tial is far from exhausted and the Amer­i­can sys­tem for unleash­ing that poten­tial … remains alive and effective.

War­ren Buffett

Berk­shire Hath­away Let­ter to Share­hold­ers, Feb­ru­ary 2011

“In terms of the stock mar­ket, there are amaz­ing oppor­tu­ni­ties … (com­pared to US gov­ern­ment bonds) there’s a huge gap and a huge differential.”

Bill Gross, Morn­ingstar Fixed Income Man­ager of the Decade

CNBC — June 7, 2011

“We’ve almost never seen val­u­a­tions (on the US stock mar­ket) this low when inter­est rates are as low as they are today .… rel­a­tive to bonds today, I’ve almost never seen such com­pelling values.”

Pro­fes­sor Jeremy Siegel, Whar­ton School

Author: Stocks for the long run

Busi­ness News Net­work — June 28, 2011

At the end of each quar­ter, I send clients a let­ter sum­ma­riz­ing events of the past three months … and usu­ally try to find rel­e­vant quo­ta­tions to estab­lish the tone for my note.

Given the recent con­cerns about Euro­pean debt and uncer­tainty about eco­nomic growth, in this quarter’s let­ter I am shar­ing recent per­spec­tives from three of today’s most respected stock mar­ket observers: War­ren Buf­fett; Morn­ingstar fixed income man­ager of the decade Bill Gross; and Whar­ton researcher Jeremy Siegel, con­sid­ered today’s lead­ing stock mar­ket historian.

Before get­ting into their views, here’s a quick recap on the first quarter.

Mar­ket per­for­mance in the first half

Devel­oped mar­kets reg­is­tered solid gains in the first quar­ter, despite the set­back from March’s earth­quake and tsunami in Japan.

The sec­ond quar­ter was a dif­fer­ent story, with con­cerns aris­ing from grow­ing infla­tion threats in emerg­ing mar­kets, sov­er­eign debt wor­ries in Europe and a down­grad­ing of growth fore­casts for the global econ­omy. Below are first half results for key mar­kets — note that these are in local cur­ren­cies, so that the effect of swings in the dol­lar are not reflected here.

War­ren Buf­fett — “Bet­ting on America”

In Novem­ber of 2009, Berk­shire Hath­away spent $26 bil­lion to buy the 77% of rail giant Burling­ton North­ern that it didn’t already own. In inter­views, War­ren Buf­fett referred to this as “bet­ting on Amer­ica.” Buf­fett has been con­sis­tent in his pos­i­tive out­look for the U.S. econ­omy, look­ing past short term events to focus on Amer­i­can inge­nu­ity and resolve and its abil­ity to attract the best and the bright­est from around the world.

Buf­fett is con­sis­tently voted the great­est investor of all time. In the 46 years he’s run Berk­shire Hath­away, annual growth in book value has exceeded 20%, more than twice the gains for the U.S. stock mar­ket index. Even more remark­able, Buffett’s num­bers are after tax, while the index’s gains are pre­tax. And while he lagged in indi­vid­ual years, in his last let­ter to share­hold­ers Buf­fett pointed out that there has never been a five year period where Berk­shire Hath­away under­per­formed the S & P.

To put his record into dol­lar terms, $1000 invested in the Stan­dard & Poors index of US stocks at the start of 1965 would have risen by the end of 2010 to $62,620. By con­trast, that same $1000 under Buffett’s stew­ard­ship would have grown to over $4 million.

Here’s an excerpt from this year’s let­ter to investors, pub­lished in February.

“Last year — in the face of wide­spread pes­simism about our econ­omy — we demon­strated our enthu­si­asm for cap­i­tal invest­ment at Berk­shire by spend­ing $6 bil­lion on prop­erty and equip­ment. Of this amount, $5.4 bil­lion — or 90% of the total — was spent in the United States. Cer­tainly our busi­nesses will expand abroad in the future, but an over­whelm­ing part of their future invest­ments will be at home. 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 often talk of “great uncer­tainty. Through­out my life­time, politi­cians and pun­dits have con­stantly moaned about ter­ri­fy­ing prob­lems fac­ing America.

Yet our cit­i­zens now live an aston­ish­ing six times bet­ter than when I was born. 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 a Civil War — remains alive and effective.”

Here’s a link to War­ren Buffett’s Feb­ru­ary let­ter to share­hold­ers: http://​www​.berk​shire​hath​away​.com/​l​e​t​t​e​r​s​/​2​0​1​0​l​t​r​.​pdf

Bill Gross — “The case for stocks that pay dividends”

My sec­ond expert is some­one who’s not nearly as well known to the invest­ing pub­lic — but is a house­hold name among pro­fes­sional investors.

As man­ager of PIMCO Total Return Fund, the world’s largest bond fund, Bill Gross turned in a track record matched by few oth­ers and was named Morn­ingstar Fixed Income Man­ager of the Decade. In part, this stems from his will­ing­ness to take con­trar­ian views; in 2010, he went on record talk­ing about the “new nor­mal” of lower growth, higher infla­tion and increased risk in hold­ing debt of gov­ern­ments around the world.

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Marketing for Financial Advisors — Differentiate, Develop a niche and Thrive

Wednesday, July 21st, 2010

An excel­lent inter­view is posted at the Knowledge@Wharton, with three Whar­ton School pro­fes­sors, who have recently penned a new book on Finan­cial Advi­sor mar­ket­ing, aptly titled, “Mar­ket­ing for Finan­cial Advi­sors : Build Your Busi­ness by Estab­lish­ing Your Brand, Know­ing Your Clients and Cre­at­ing a Mar­ket­ing Plan,” by Eric T. Brad­low and Patti Williams, and Keith Niedermeier.

Get it here from Ama­zon

The three­some of pro­fes­sors get into a detailed dis­cus­sion of how to dif­fer­en­ti­ate your­self from your peers, gain mar­ket share dur­ing mar­ket slumps, and lead unhappy clients away from other advisors.

There is both a tran­script and audio of the inter­view here.

You can lis­ten to the inter­view feed from K@W here. Click play to listen

Inter­view: Mar­ket­ing for Finan­cial Advisors

Here is an excerpt:

Do dif­fi­cult times call for retreat or attack?

Keith Nie­der­meier: Sure. We see the dif­fi­cult eco­nomic times cer­tainly as prob­lem­atic for advi­sors, but more as an oppor­tu­nity. While advi­sors may be hav­ing prob­lems with their clients, cer­tainly the com­pe­ti­tion is also, which sug­gests this is the time to under­stand your cus­tomers and your clients bet­ter than any other time. It’s an oppor­tu­nity to lock down the clients you have and to cre­ate oppor­tu­ni­ties to get more clients — dis­sat­is­fied clients from other advi­sors. So, Eric, would you like to add to that?

Eric Brad­low: Yes. One of the things we dis­cuss in the for­ward of the book, which has got­ten a lot of buzz, is whether this is a time to attack or retreat? And one of the things we stress in the book is, as you pointed out, that this is an oppor­tu­nity to gain ground against other finan­cial advi­sors. And so we see this as an oppor­tu­nity to attack.

Choose three words that best describe what your prospects take away from your practice/meetings:

Patti Williams: … One of the most impor­tant things that we empha­size in the book is think­ing about your busi­ness, if you’re a finan­cial advi­sor, as a brand. A lot of finan­cial advi­sors are a lit­tle bit afraid of mar­ket­ing, they didn’t get into the busi­ness to be mar­keters. They don’t want to be per­ceived as tak­ing advan­tage of their cus­tomers through mar­ket­ing. But a lot of what they’re doing is actu­ally mar­ket­ing. And we tell them they should think about those three words and really think about the nature of the brand they want to deliver to their cus­tomers. What do they want to be? Who do they want to be to their clients? And how can they set up their entire prac­tice around build­ing that image and that capa­bil­ity so that they can truly be what they want to be to their clients.

K@W is an excel­lent site replete with busi­ness resources, research, and analysis.

Source: Knowledge@Wharton, July 22, 2009

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