Meyer Capital Management

Who Needs a Personal Trainer When You Can Watch the Stock Market. Up...Down...Up...Down. C'mon, Only A Few More...

2011-09-02T14:52:00.011-04:00

Be More Like Buffett: Buy Fear

2011-08-22T15:38:00.003-04:00

Writing for Barron’s this week, Steven M. Sears deftly captures the aspect of buy low—sell high that renders this otherwise simplistic concept virtually impossible for most individual investors. Regarding the much-admired Warren Buffett, Sears says, “Few people have the guts to actually do what he says.” Case in point, Buffett says to be greedy when others are fearful and fearful when others are greedy. Sears hits the nail on the head however when he says that whenever people have the chance to be greedy, (when others are fearful) they tend to be too terrified to do anything.

My 15 years as a professional investment advisor bears this out. When, during fear-driven markets, I have advised buying attractively-priced securities, I’ve often received incredulous looks, as if I were completely out of my mind. On the flipside, I’ve also received strong-willed support for the exact same advice from other, steely-nerved clients who went on to benefit handsomely. This ability to overcome fear (and greed) during turbulent market cycles is undoubtedly one of the top predictors of investment success.

Read the full story here

Timothy R. Meyer
Meyer Capital Management
President & Chief Investment Officer

Focus On Making Money All The Time…Not Some Of The Time

2011-07-18T14:53:00.008-04:00

Even during the best of times, the process of investing is fraught with uncertainty and risk. Think about that for just a moment. During the best of times? Uncertainty? Risk? Really? One could be forgiven for thinking that during the best of times things should be good, clear, predictable, maybe even safe. Frequently, that’s not the case. Often, for investors at least, the best of times and the worst of times look disarmingly similar.

We all know what the worst of times, or in this case, economic turmoil, looks like. It looks a lot like what we have now -- sluggish economic growth, abnormally low interest rates, high unemployment, fiscal crises at the state, federal and global levels, etc. What do the best of times look like? Typically, markets are moving broadly higher, corporate profits are strong, interest rates & inflation are low, and most investors are making money. Take note that there is no green light signal. Even though things are good, worried speculation on the street and in the news is invariably about over-valued assets and imminent corrections and/or contractions destined to send asset prices appreciably lower. Once again, this looks a lot like what we have now – markets moving higher, strong corporate profitability and, without a doubt, plenty of worried speculation.

Since good times and bad can appear the same to investors, switching back & forth between risk seeking (i.e., make money) and risk averse (i.e., avoid losing money) investment strategies is a fool’s errand. It’s much better, in my view, to remain focused on making money all the time and continuously employ investment strategies that are consistent with this stance. Importantly, this does not prevent or eliminate periods of negative investment rate-of-return. What it does do is tilt the odds in your favor that the positive cycle rates-of-return will more than offset the negative cycle returns leaving you, the investor, with a net gain.

MCM’s Melissa Donovan Earns Prestigious Certified Financial Planner Certification

2011-04-07T10:17:00.000-04:00

Meyer Capital Management proudly announces that Melissa Donovan, Managing Director, was granted the Certified Financial Planner (CFP®) designation by the Certified Financial Planner Board of Standards, Inc. The CFP® mark is the best-known financial planning designation and is awarded to those individuals who successfully meet the CFP Board’s rigorous requirements in EDUCATION, EXAMINATION, EXPERIENCE & ETHICS. Of the estimated 250,000 people calling themselves financial planners, less than one quarter of them (22.6%) have earned the coveted Certified Financial Planner mark.

“MCM clients are well aware of the value & expertise Melissa brings to their relationship with MCM. The CFP® designation gives formal recognition to her hard work, extensive knowledge and experience,” said MCM President & Chief Investment Officer, Tim Meyer. He also stated, “Melissa’s CFP® certification fits nicely into MCM’s Registered Investment Advisory (RIA) business because both carry the fiduciary standard – professionals who are required to put their clients’ needs first.”

No explicit changes are planned to MCM’s professional service offerings. Rather, clients will simply continue to benefit from Melissa’s involvement in their investment management relationship with MCM as before.

Congratulations, Melissa!

Musings on 2011

2011-01-07T11:14:00.000-05:00

A week into the New Year, I am reminded of the cottage industry that unfailingly produces a stream of “predictions & forecasts” this time every year. This isn’t a new phenomenon, of course, as we have looked to would-be wizards and wise men down through the ages to preview our fortunes. Taken with a grain of salt, I say “no harm/no foul” to the sport of New Year’s predictions, with one noteworthy exception: financial predictions.

Financial predictions take myriad forms--from which investments will perform best in the year ahead to where the stock market will end the year & everything in between. Financial prognosticators of all stripes make the predictions because they provide easy content for their TV shows, print publications, etc. and they are undeniably entertaining. The danger is that gullible investors bet real money--money they can’t afford to lose--on these highly uncertain outcomes.

To be clear, I revel in the promise and possibilities of the New Year as much as the next person. But rational investors, including me, will concentrate our focus on what we can control—not on what we can’t control. Future predictions and their outcomes are beyond our control and distract us from focusing on things we can actually do something about.

An old quote, “You can’t direct the wind, but you can adjust your sails,” reportedly a German proverb, provides us investors with all the guidance we need. Future predictions are nothing more than wind that will blow in every conceivable direction no matter what we do or don’t do. Our individual portfolios are our sails. This is where we should focus and make adjustments, as necessary. Asset allocation, diversification, risk assessment & mitigation, research, profit-taking & rebalancing, etc. are some of our tools. Not as dazzling perhaps as gazing into the night sky and pondering the stars, but more beneficial to our fortunes in the long run.

Timothy R. Meyer
President & Chief Investment Officer

Why Won't We Learn?

2010-12-27T15:06:00.000-05:00

Here’s a mini-rant to start the week. The lead article in the Wall Street Journal today makes two observations well worth calling out. First, the stock market is hitting two-year highs and, second, investors are feeling “more bullish than they have in years.” The article also points out that the market’s “fear gauge” is at its lowest level since April. I guess that’s three observations, but who’s counting?

To be fair, investors may feel less fearful because they see the market value of their current investments rising. That’s a good thing in so far as it goes, but ignores other critical investor considerations like:

1. Capital markets become more risky as asset valuations rise, not less risky, all other things being equal. Therefore, rational investors will become more risk averse, not less, as markets move higher. Risk averse behavior manifests itself in profit-taking, which collectively, investors are unquestionably bad at doing. Who wants to take chips off the table with the markets moving up every day? Wrong! That’s exactly the time to take chips off the table and reinvest in cheaper, out-of-favor asset classes.

2. Each new dollar invested will now buy less (i.e., fewer shares, bonds, etc) not more than it would have previously. Somehow we manage to overlook this simple but critically important factor; even those engaged in asset-accumulation stages of life. We’re willing to pay anything as long as asset prices subsequently move higher. Unfortunately, they often don’t.

3. Income yields (e.g., dividends, interest) decline as asset prices rise and vice-versa, all other things being equal. However, few investors do this simple math and they are worse off because of it. Ignorance is bliss, I suppose.

No wonder then that most individual investors buy-high and sell-low and relatively few make real, permanent money in the capital markets outside of their corporate retirement plans (where mutual fund managers typically do the trading). If you’re a private investor who’s not prepared to embrace these and other important investing concepts, I urge you to find a competent professional to help you. What you don’t know can and will hurt you.

Don’t Try This At Home

2010-11-09T15:14:00.000-05:00

A new study of the municipal bond market by research firm Aite Group recently concluded that “do-it-yourself-investors” could be harmed if they attempt to invest in municipal bonds without the benefit of an expert advisor.

The study’s author, Aite Group Senior Analyst John Jay, says that a lack of AAA-rated supply, decrease in the issuance of insured muni bonds, the need for specialized knowledge, and the idiosyncratic ways muni bonds can trade combine to make it inadvisable for do-it-yourself-investors to wade into this market.

I have traded muni bonds professionally at Meyer Capital Management for years and I too have watched the fundamentals of the muni bond market change dramatically since the financial crisis. Research that took me hours before the financial crisis now routinely takes days; and I know what I’m looking for. Smaller inventories, less attractive yields, and uncertain credit quality all pose challenges.

The biggest challenge, however, is discerning the creditworthiness of the issuer and its ability to successfully payoff its muni bond debt. Reporting requirements for muni bonds aren’t as stringent as they are for corporate bonds, so reliable information is scarce if you don’t know where to look and how to read what you find.

A default on a muni bond can wreak havoc with any investor’s portfolio. Jay advises private investors “without the luxury and benefit of an advisor” to forego individual muni bonds and stick with muni bond mutual funds or ETFs. That’s good advice.

Are you a do-it-yourself-investor who buys/sells muni bonds for your personal portfolio? I’d like to hear about your experiences.

Melissa Donovan
Managing Director

Private Investors Beat A Path -- In The Wrong Direction

2010-10-19T15:24:00.000-04:00

The recently-ended 3rd quarter was one for the record books. The Dow Jones Industrial Average gained +10.4% during the three-month period and had its strongest September performance since 1939 (+7.7%). That’s an astounding 71 years! September is traditionally the market’s worst month from a performance perspective. The Nasdaq Composite Index did even better than the Dow, up +12.3%, followed by the Russell 2000 Index, +10.9%, and the S&P 500 Index, +10.7%.

The record-breaking rally occurred even though market data show that private investors are fleeing stocks in favor of bonds and gold. Money flows in and out of stock mutual funds were negative every month since May. Conversely, bond fund money flows have been strongly positive all year. These money inflows & outflows are explained by the many media reports trumpeting economic and political uncertainty. Taken together, they dominated the headlines and caused many private investors to abandon their strategic stock allocations for perceived safe havens. History has shown, and the 3rd quarter demonstrated again, that this almost never turns out for the better because it invariably leads private investors to sell-low and buy-high.

Have you substantially changed your investment asset allocations lately? If so, what was your #1 motivating factor?

Client Service Starts With Me

2010-09-10T15:54:00.000-04:00

Ever find yourself in an automated phone tree? Press 1 to press more buttons. Press 8 to go in circles. Press 9 to hear these options again. Sometimes you make it to a human; you tell your story only to learn they can’t help you. You’re transferred to someone else, tell your story again, and on and on. You don’t dare hang up for fear of losing your place in the queue. Eventually you’re lost in the phone tree shuffle.

Unfortunately, a lot of consumers have experienced this brand of client service and they aren’t happy about it. Bloomberg Businessweek recently polled 1,500 consumers to see what makes them most angry when dealing with a business. Their top three responses:

1) Speaking with multiple agents and starting over every time.

2) Dealing with rude or inexperienced representatives or service technicians.

3) Being kept on hold for long periods of time or unable to use self-service options successfully.

As the first point of contact for MCM clients, I can say confidently and with pride that they would disagree with the responses given in the Bloomberg Businessweek poll. In fact, after struggling with another service provider’s auto-menu recently, a client said to me, “That’s what I like about you guys; you always know who I am when I call.”

Our clients don’t see themselves as one of the masses and neither do I. I know them all by name and even the sound of their voice. No explaining who they are or fighting an automated menu. If I transfer a call, no one needs to tell their story again, hoping the next person can help. I’ve already relayed the message and directed them to the right individual.

One of the best things about my job is interacting directly with clients. I’m not only knowledgeable about their accounts, but also their personal lives. I love hearing about their families, travels and other interests. In a nutshell, the things that matter most to them. At MCM, I am the phone tree and I’m a real live human being. The first thing you’re going to hear when you call us is: “Hi, how are you?”

Lindsey N. Harris
Administrative Assistant

MCM Honored with Readers’ Choice Award

2010-08-18T14:14:00.000-04:00

We appreciate our clients’ business. Now they’ve returned the favor. The Readers’ Choice Award is given to businesses that have been recognized by their communities for outstanding service. It is an honor to have the appreciation of MCM’s clients and our community. We pledge to continue providing the same expert financial advice with individual attention and care.

To our current clients, we extend a warm & heartfelt “Thank you” for this much appreciated recognition. To clients we haven’t met yet, we invite you to visit our website at MeyerCapital.com and see what you’re missing when it comes to highly personalized, handcrafted investment advice.

Sidestep This Financial Regulatory Loophole

2010-06-28T11:25:00.000-04:00

These days, pretty much every financial services provider claims to put a client’s interests first. It’s great advertising. It’s also shamelessly misleading.

Long-time personal finance author, Jane Bryant Quinn, sets the record straight in a recent blog post. She writes:

Senator Tim Johnson socked investors with what might be a knockout punch, during negotiations on the financial reform bill last week. Johnson, known as the “senator from Citibank,” habitually sides with the financial industry and against consumers. He’s the only Democrat who opposed last year’s legislation to curb credit card abuses.

A South Dakota Democrat, Johnson laughs at the concept of “fiduciary duty” — the idea that people who advise you on investments should put your financial interests ahead of their own.

At present, Registered Investment Advisers have a fiduciary duty toward you and your money. But there’s an exception for stockbrokers and insurance agents. They can—and do—advise you to buy financial products that benefit themselves more than they benefit you.

For example, it’s okay for them to offer you high-cost mutual funds when low-cost funds are available that invest the same way. It’s okay for them to sell you a high-cost, out-of-state 529 college savings plan when your own state’s plan costs less and gives you a tax deduction, too.

Johnson’s aggressive language might yet be watered down, but brokers and insurance agents won’t have to change their ways anytime soon.

Few consumers really understand what it means for a provider to put a client’s interests first. Try it, ask a friend or neighbor. Invariably they‘ll argue convincingly that their broker or insurance agent does precisely that.

How many of those people would also, at one time, have insisted that their mortgage broker was putting their interests first when he/she sold them a sub-prime or hybrid mortgage that now they can’t afford? How unfortunate…and preventable. We need to wake up!

Ms. Quinn’s examples of fiduciary duty, or lack thereof, make the concept easy to comprehend and recognize in practice. Being familiar with them can not only save you money…it can make you money. Read her full article here: Investor Protection Gets Knocked Out of the Financial Reform Law

We’re Feel’n Mighty Gloomy

2010-06-24T16:25:00.000-04:00

Investing requires some optimism about the future and at the moment we’re not feeling it, according to National data reported today. Reports show that 62% of adults feel the United Sates is on the wrong track, and 57% of voters would prefer to elect a new person to Congress than re-elect their local incumbent representatives.

Glimmers of optimism that emerged in the spring have been snuffed out by frustration over the gulf oil spill. Wars in Iraq and Afghanistan drag on. The economy limps along on one leg. High unemployment persists.

Health care reform passed but left many unconvinced of its value. Wall Street is perceived to be little more than a casino with the odds stacked in favor of the house. Financial regulatory reform grinds slowly through Congress and whatever passes may be so watered down that it is as suspect as the healthcare reform bill. All the while, tougher regulation of the oil and insurance industries waits on the back burner.

Given our sour mood, few of us want to even look at our 401(k) or IRA accounts, let alone actively manage our investments or make additional contributions. It’s easy to procrastinate and rationalize doing nothing.

My advice is don’t give in. Refuse to give up. Yes, things might look bleak. As a country, we’re definitely discouraged. But throwing in the towel never won anything. Sometimes, the best we can do is just persevere. Times change & this too will pass.

"Fee-Based or Fee-Only". What's the Difference?

2010-04-30T15:36:00.000-04:00

Nathan Bachrach’s recent Cincinnati Enquirer column (“Simply Money”, April 30, 2010) sought to address the questions: “What is the difference between ‘fee-based’ and ‘fee-only’ advisors, where else do fees come from, and how is it fair that fee-based advisors get a fee on my (investment) gain?” This issue continues to cause widespread confusion among the investing public and deserves a straightforward, plain English explanation.

A fee-only advisor can only receive compensation directly from you, the client. Period. This means the advisor represents you, and only you, when giving you advice or making investment decisions on your behalf. A fee-based advisor can receive fees paid by you, as well as commissions paid to them by a brokerage firm, mutual fund company, insurance company and/or other investment partnership. These multiple revenue streams, sometimes referred to in the industry as “double dipping,” are good for the advisor but can potentially cause conflicts of interest.

Investment portfolios developed by fee-based vs. fee-only advisors are likely to look different. Fee-only advisors have a fiduciary responsibility under the law to choose investments that are in your best interest. They typically use investments that have low internal expenses, such as individual stocks and bonds, no-load mutual funds and investments with no 12(b)1 fees. Fee-based advisors may or may not be fiduciaries(See Merrill Lynch Rule Exemption) and are financially incented by commission revenue to choose higher-cost investments for your portfolio.

How is it fair that an advisor charging a percentage of assets under management gets a fee on your investment gain? In my company’s case, it’s because in our 15-year history we have never raised our prices. We charge .35-1.0% annually for active investment management depending on the size of the account. By comparison, the average actively managed mutual fund charges nearly 1.5% annually, according to mutual fund research expert ICI.

Our costs of doing business, of course, increase every year. We cover these increases by doing what our clients hired us to do -- increase the value of their portfolios through expert investment management. If we don’t do our jobs well, clients lose money, we lose money and we’re out of business in short order. The performance risk is squarely on our backs. With no commission revenue to fall back on, we have to deliver for our clients in order to survive. This is why the vast majority of advisors are fee-based or commission-based and why respected personal finance columnist, Liz Pulliam Weston wrote, “True fee-only advisors are a rare breed. The leading association for fee-only advisors, NAPFA, has fewer than 800 members.” Conversely, FINRA, the leading stock broker association, claims 665,000 representatives.

Fee-based and fee-only are not the only compensation models clients have to choose from; there are at least four others. I agree that no single approach is best for everyone, but one of those approaches is best for you depending on your particular needs. In my case, I established a fee-only investment management company for one simple reason: It’s the way I would want my own money managed.

Timothy Meyer Named a FIVE STAR Wealth Manager for 2nd Straight Year

2010-03-30T14:58:00.000-04:00

This is a public “THANK YOU!” to the unknown MCM client(s) who nominated me and my colleagues at Meyer Capital Management for the FIVE STAR: Best in Client Satisfaction Wealth Manager Award. We are thrilled to receive this recognition for one simple reason…it comes from clients. In other words, those individuals & families who have experienced our work first-hand and whom we have served for an extended period of time.

FIVE STAR Wealth Managers are limited to no more than 7% of the wealth managers in a market area and are selected via rigorous third-party research. Wealth managers cannot simply pay a fee to be included.

Each nominee is evaluated on 9 criteria: 1) customer service, 2) integrity, 3) knowledge/expertise, 4) communication, 5) value for fee charged, 6) how well the manager meets client objectives, 7) post sale service, 8) quality of recommendations, and 9) overall satisfaction. Nominees are also screened based on their regulatory & compliance history. Wealth mangers must have at least five years of experience to be considered.

We take great pride in our work. To be appreciated by those we work for is the best compensation. Again, "THANK YOU!"

Change in Tax Laws Opens the Door to Roth IRAs for High-Income Earners

2010-03-02T15:01:00.000-05:00

As part of the Tax Increase Prevention and Reconciliation Act enacted in 2006, Congress eliminated the income restrictions on Roth IRA conversions beginning in 2010. What does that mean? It means that while high-income earners still can’t contribute to a Roth IRA, they can convert a traditional IRA(s) to a Roth IRA. This opportunity might remain open indefinitely or Congress could terminate it at the end of 2010. Regardless of how long the new rule remains in effect, the way to maximize the benefits of a Roth IRA is by converting sooner rather than later.

Recall that Roth IRAs are funded with after-tax dollars (i.e., no upfront tax break). The beauty of a Roth IRA is that withdrawals taken in the future are completely tax-free and there are no required minimum distributions. The absence of required minimum distributions makes Roth IRAs attractive estate planning vehicles for those who don’t expect to need their IRA funds in retirement.

High-income earners would do well to take a close look at the 2010 Roth IRA conversion opportunity. Here are some of the key issues to consider:

1. Your age, health, & likely life expectancy. These variables determine the length of your investment time-horizon following Roth conversion. The longer the time-line, the better-off you are since more time allows the benefits inherent in the Roth IRA to accrue. For example, if you’re under 60, Roth conversion may make sense. Consider, also, that Roth IRAs remain tax-free and have no Required Minimum Distributions for beneficiaries. Regardless of your own age, passing on a Roth to heirs may be a valuable estate-planning tool, stretching the potential investment time horizon for decades.

2. Your expected effective tax bracket in retirement. This is a function of your income level in retirement and the structure of the tax brackets themselves at that time. Like #1 above, these variables can’t be known with 100% certainty, but they can be estimated. If you expect to be in a comparable or higher tax bracket in retirement than you are now (potentially driven by IRA Required Minimum Distributions), Roth conversion may make sense.

3. Do you have the funds outside your IRA to pay the conversion taxes? If you convert, you have to pay income taxes on the money coming out of your traditional IRA. Prior to the tax law change, you’d have to pay all the conversion tax in the year you convert. Congress sweetened the 2010 conversion opportunity by allowing you to 1) delay declaring the conversion income, and 2) split the tax payment between the 2011 and 2012 tax years. Be mindful that 2011 and 2012 tax rates will apply to this option. When the taxes come due, pay them out-of-pocket. Using IRA money to pay conversion taxes reduces the net amount converted which, in turn, reduces the conversion benefits proportionately.

Given the uncertainty of some of these issues, an additional option to consider is to do a partial Roth IRA conversion. This strategy recognizes that none of us can know how long we will live or what our effective tax rate will be years from now. Therefore, a partial Roth conversion constitutes a hedging strategy -- you convert some IRA assets and leave some alone.

In general, the Roth conversion offers a unique opportunity for otherwise ineligible investors to accumulate tax-advantaged assets for retirement and estate planning purposes. Deciding whether or not to convert, both partially or in-full, can be tricky and requires the assistance of a qualified, trusted tax expert.

Once the decision to convert is made, a good investment advisor can execute the conversion. Be aware, however, that some unqualified financial professionals see the Roth conversion process as an opportunity to make money for themselves rather than their clients. Respected personal finance columnist, Kathy Kristof, blows the whistle on unscrupulous predators masquerading as financial planners or wealth advisors in her recent article Crooks Are After Your Retirement Plan. I urge you to take a few minutes to read it and protect yourself.

Investor’s 2010 Two-Step: Hold On To ’09 Gains – Build on Them in ’10

2010-01-21T14:33:00.000-05:00

Did you make money in 2009? Hats off if you had a sound investment plan heading into the year and stuck to it…no easy feat! Odds are you were handsomely rewarded as world markets staged a robust if somewhat improbable rally. Amid unprecedented levels of skepticism & pessimism in the spring, equity and fixed income markets embarked on a strong upward move that carried all the way through year-end.

The Information Technology Sector (+59.9%) pushed the tech-heavy Nasdaq Composite Index to a +43.9% annual gain. The small-cap Russell 2000 Index advanced +25.2% followed by the large-cap S&P 500 Index and Dow Jones Industrial Average, up +23.5% and +18.8%, respectively.

Investors fleeing the perceived safety of U.S. Treasury Bonds created a “once in a lifetime opportunity,” according to the Wall Street Journal, for fixed-income returns of +50% or more in riskier investment-grade corporates (+20%) and high-yield (i.e., junk) corporates (+59%). Those left holding U.S. Treasuries suffered as prices fell -9.3% (10 yr. total return index).

Economically sensitive categories like basic materials (+45%), particularly commodities, rallied with base metals (e.g., copper (+139%), zinc (+125%), palladium (+117%)) outperforming precious metals (e.g., silver (+49%), gold (+24%)).

Our advice to investors in December ’08 was that government policy would be the single biggest determinant of economic activity in 2009 and cautioned not to “underestimate the power of the unprecedented economic stimulus being injected into the global financial system.” Moreover, we felt that “the cumulative effect of these actions will begin to gain traction in 2009 and the stock market, as a forward-looking discounting mechanism, will rally on anticipation of better economic times ahead. Likewise in the credit markets, bond prices will rise as the risk of credit defaults show signs of diminishing and more normal financing activity resumes.” No forecast of future events can be completely accurate, including ours, but the major themes we envisioned for 2009 fell into place.

As welcome as the rebound of 2009 was, we are abundantly aware that the market value of many investors’ portfolios remains below their all-time high. The recent gains, therefore, represent a recouping of prior losses rather than the creation of new wealth, and investors may find their enthusiasm tempered accordingly. As professional money managers, we couldn’t be more sensitive to this and, as a result, it is uppermost in our minds as we plan individual portfolio strategies for 2010.

The Game Plan for 2010

Government stimulus & intervention drove the markets in 2009. As the economy slowly strengthens, the reduction of government stimulus will be a major factor impacting both the rate of growth and the direction of capital asset prices. Federal Reserve interest rate policy is central to achieving steady, non-inflationary growth sufficient to create jobs and reduce unemployment. That, in turn, will impact consumer confidence and spending, the latter accounting for two-thirds of all U.S. economic activity. If interest rates rise in 2010 and inflation remains tame, the value of the U.S. dollar will strengthen vs. foreign currencies. That would put downward pressure on the price of oil & oil derivatives as well as gold and other precious metals.

History is littered with examples of instances when the Federal Reserve’s interest rate policy was either too restrictive or too accommodating. Economics, after all, isn’t considered by many to be one of the “soft sciences” for nothing. An earlier-than-expected or larger-than-expected increase in interest rates could send the markets into a tailspin that would effectively give back a chunk of 2009’s investment returns. Therefore, the watchword for 2010 is CAUTION. Aim to hang-on to what you gained in ’09 and build on it. Don’t swing for the fences just in case the Fed gets it wrong.

In the context of the macroeconomic backdrop above, incorporate the fact that the highest-returning investments in 2009 tended to be riskier, low quality names that were pummeled in 2008. Those have had their run on a relative basis so investing in last year’s winners could very possibly be a losing strategy. Rather, a loosely predictable market rotation is likely to occur whereby the early recovery cycle winners yield to mid- and late-stage recovery candidates. For example, Information Technology (+60%), Basic Materials (+45%), and Consumer Discretionary (+39%) stocks led the market in 2009 and, if we are correct, are unlikely to repeat as leaders in 2010. We look for the Financial, Health Care and Energy sectors to outperform on a relative basis in the coming months. Also, selected sub-sectors like Wireless Internet infrastructure & services present attractive growth opportunities, in our opinion.

What investment ideas or strategies do you have for 2010?

The opinions expressed here are those of the author and are not in any way a recommendation to buy/sell any specific investment security. You should do your own research and consider seeking professional investment advice specific to your individual situation before acting on any information contained on this website.

Get Your Investment Advisor to Work for You

2009-12-28T16:10:00.000-05:00

Your physician recommends that you undergo surgery or your attorney outlines a sensitive legal strategy. Regardless of whether it’s your health or serious complications with the law in question, most would agree that there is a lot riding on the advice we receive and the decisions we make based on it.

Since the point of going to the doctor/lawyer in the first place was to seek expert advice, short of seeking a second opinion, the trust we place in them usually sways us to accept their proposals. We believe them to be more expert than us and trust them to have our best interests at heart. Doctors and lawyers and others serve in the role of fiduciary which means to put their patient or client’s best interests ahead of their own. Without this fundamental precept, no rational person would agree to put themselves at risk.

This begs the question then as to why so many people entrust their financial well-being to a non-fiduciary; a financial professional who is not obligated (or required) to act in their best interest? The most likely answer, it seems to me, is that too many people are simply unaware of the fiduciary distinction in financial services. They mistakenly give their financial professional the benefit of the doubt based on a personal referral or some other vote of confidence. Unfortunately, this seemingly innocent omission can, and often does, lead to serious consequences.

According to Barbara Roper, director of investor protection at the Consumer Federation of America, “The average investor would be appalled to see how hard some members of the financial industry are working to avoid acting in the best interests of their clients.”

Doug Holthaus of the Cincinnati Enquirer points out that a little-publicized item in the financial reform bill currently moving through Congress would require anyone who offers investment advice to act in the best interest of their client. “That there’s a need to actually legislate this says a lot about the state of the investment business today,” he said.

So, what is the investing public to do? Simple. Take 5 minutes to become more aware. Holthaus provides a clear, concise description of the differences between investment fiduciaries and non-fiduciaries. Reading his article, Get Your Investment Advisor To Work For You, won’t guarantee success, but it could be your first, best step in the right direction.

Do you think Congress should pass legislation that mandates a fiduciary standard for all investment professionals? If Congress doesn’t pass such legislation, are you more or less likely to hire an investment fiduciary to manage your money?

Can Our Own Spending Habits Be Driving the Loss of Manufacturing Jobs?

2009-11-10T13:38:00.000-05:00

We’ve all heard the claim…that the problem with the U.S. economy is that America doesn’t make anything anymore. That we’ve gotten away from our manufacturing roots and are exporting high-paying manufacturing jobs to China, Taiwan, Mexico, etc.

Daniel Griswold, Director of trade-policy studies at the Cato Institute and author of the book Mad about Trade: Why Main Street America Should Embrace Globalization, makes a compelling case to the contrary.

Griswold acknowledges studies that project China will surpass the United States as the world’s leader in manufacturing by 2015, but he also states that “Manufacturing long ago ceased to be the chief benchmark of economic might & success.” Nevertheless, American manufacturing isn’t declining. As the U.S. economy comes out of recession, Americans will produce more than ever, albeit less than China.

That is as it should be, according to Griswold. He suggests that American’s own evolving consumption preferences are behind the loss of manufacturing leadership, “As incomes rise, we spend a smaller share on goods, such as food and manufactured products, and a higher share on services like healthcare, recreation, education, research, travel, financial services, and more. These are all signs of growing wealth. Americans have traded up the value chain to a more sophisticated array of goods that play more to our strengths as a nation with an educated workforce and plenty of capital per worker. It is time we adjusted our economic and political thinking & understanding.”

Bottom-line: A major reason why manufacturing is relatively less important to what Americans produce is that it is less important to what we consume. Since consumer spending drives the U.S. economy, monitoring consumption trends can point the way to attractive investment opportunities.

Read the full article here: What America Makes Best

How the Rich Save Today

2009-09-10T15:16:00.000-04:00

We don’t always like to admit it, but for most of us, role models have at least some influence over our own personal decisions. Whether they are sports heroes, style icons, movie stars, or other noteworthy characters, they inspire our own creativity & vision of what we can be.

Wealthy individuals, for example, often serve as financial role models for the rest of us. We reason that, because they are rich, they must know something that we don’t, and we want in on the secret.

In an article by Lora Shinn, "How the Rich Save Today", the director of the Wharton Wealth Management Initiative at the Wharton School, Chris Geczy, says “The wealthy are revisiting their investment & savings strategies in light of the nation’s financial volatility. The mass affluent and the emerging affluent are consuming less & saving more because, like so many others, they were overextended in real estate and investments gone sour. They’re still scared of risk and are now more likely to invest in fixed-income vehicles.”

For clarification, the mass affluent have been characterized as those who save more than they spend and invest for their future. Interestingly, your neighbor in the trophy house with the twin BMW’s in the driveway may not have sufficient liquid financial assets to be considered a member of the mass affluent class. In fact, my own professional experience has shown again & again that the mass affluent are more likely to live in ordinary middle class homes and drive five-year old Toyotas. Remember, the mass affluent live below their means.

The Shinn article also reports that many wealthy people are thinking now about the safety of their liquid financial assets over investment rate-of-return. This is leading them to low-yielding, cash equivalent investments like CDs and money market funds. Making even a little bit of money is better than losing money, so the thinking goes.

Unfortunately, the wealthy have to worry about inflation (i.e., rising prices) eating into their savings, just like the rest of us. Nancy Rooney, Managing Director of Private Wealth Management at J. P. Morgan in New York says “If you’re set on cash, your #1 enemy is inflation.” Being overly conservative or under-investing, can be at least as costly as incurring an outright investment loss, if not more so. It’s just harder to discern because the effects of inflation are insidious and few people measure their investment returns on an inflation-adjusted basis.

Therefore, some measure of inflation protection should be built into every portfolio. Common stocks, or equities, have been the traditional inflation hedge for most investors. They are, of course, generally more volatile than fixed-income securities. Other possible inflation hedges are commodities, real estate, and Treasury Inflation-Protected Securities, commonly known as TIPS.

Lastly, Ms. Shinn points out that new proposals introduced by Congress and the Obama administration have the wealthy concerned about the tax efficiency of their investments. Many are turning to trusted advisors for advice on tax-exempt investments, such as municipal bonds. However, Mr. Geczy noted that, “Investing in products like municipal bonds requires a level of sophistication that may be beyond many casual investors.” Ms. Rooney agrees, stating, “It’s an inefficient marketplace. It may be best to…find a qualified advisor to help you select a bond.”

All the experts agree that wealthy investors must be diligent in their qualification of a financial advisor and then monitor their activity continually after the hiring decision is made.

Cincinnati Business Courier Interview on the Economy & the Stock Market

2009-09-01T16:54:00.000-04:00

I sat down recently with Steve Watkins, a reporter for the Cincinnati Business Courier, for an interview about the economy & the stock market. Here’s a preview:

“The possibility for a positive end to 2009 is bright despite the chance of a near-term pull-back,” said Tim Meyer of Meyer Capital Management. “The recession,… is ending. We’re seeing gradual improvement in investor sentiment and consumer confidence.” Meyer had been snapping up stocks in beaten down sectors such as financials, real estate investment trusts and emerging markets. All posted gains of 25-plus percent in the second quarter.”

Read the full interview here: http://www.meyercapital.com/Resources/businessarticle.pdf

Meyer Capital Management’s Melissa Donovan Named to 2009 Class of Forty Under 40 Leaders

2009-08-18T15:27:00.000-04:00

MCM’s Melissa Donovan was recently named a winner of the Cincinnati Business Courier’s prestigious Forty Under 40 award. This annual competition spotlights an impressive group of young, professional & community leaders who haven’t yet reached the age of 40. In its 13th year, the 2009 class saw 470 nominations of which only 40 were selected!

We are understandably proud of Melissa and her work on behalf of MCM clients. Her years of experience and professional education give her a depth of expertise uncommon among her peers. Under her leadership, the Company won the Torch Award for Marketplace Ethics sponsored by the Better Business Bureau, was a finalist for the Small Business Excellence Award presented by the Cincinnati USA Regional Chamber of Commerce, and in 2008 & again in 2009, was named a FIVE STAR--Best in Client Satisfaction--Wealth Manager.

Since graduating with honors from Xavier University in 1994, Melissa progressed through positions of increasing responsibility during her 15-year career in the investment management field. In 1994, at JP Morgan Asset Management (formerly Pacholder Associates), she focused on the high yield bond market. Subsequently, she obtained several years of private client experience at Johnson Investment Counsel. Melissa joined Meyer Capital Management in 2001 where she currently serves as Managing Director & Chief Compliance Officer. She holds a B.S. degree from Xavier University and completed the Certified Financial Planner program at the College for Financial Planning, along with other executive education.

In addition to her career accomplishments, Melissa has made leadership-level contributions to several charities and non-profit organizations in the greater Cincinnati area. These contributions helped focus organizational strategy, increased membership, strengthened financial controls, and raised much needed funding.

In addition to her professional & civic responsibilities, Melissa is a wife & mother who lives with her husband and two children in Kings Mills, OH.

View the Stock Market as a Series of Trading Ranges

2009-07-29T13:28:00.000-04:00

For many years, Abby Joseph Cohen, Senior Investment Strategist at Goldman Sachs, has been a welcome voice of reason and counterpoint to the shrill hucksterism that permeates much of Wall Street commentary these days. In a recent Business Week interview with CNBC’s Maria Bartiromo, Ms. Cohen said:

“…the market should be viewed as a series of trading ranges [a trading range is the spread between high and low prices over a period of time]. Forget the U, forget the V; it looks like a staircase. We’ve had a very significant upward step from March. And we think that the next step will also be upward. There are two very important things here. Number one, we think the recession will be ending. We think that GDP will be positive in the second half of the year. The other thing that will look better will be corporate profits. Keep in mind that we’re getting to some extremely easy comparisons. The third quarter of 2008 was dreadful. So those comparisons are going to look great. Also a bit of an optical illusion is that some of the companies in big trouble that were in the S&P index a year ago, may no longer be there. But the third thing that is more important…is that we do see profit margins picking up.”

As Ms. Cohen noted, because stocks have come so far, so fast since bottoming out in early March, a pause or even modest pullback is not cause for concern. The greater danger is stock valuations getting too far ahead of themselves, setting the stage for a more substantial correction. Think, two steps forward—one step back; two steps forward…

Extreme Makeover Wall Street Edition

2009-07-17T16:33:00.000-04:00

Sentiment on Wall Street underwent an extreme makeover during the second quarter as investors’ collective mindset shifted dramatically from loss avoidance to capital appreciation. “Overall, the second quarter brought a global sigh of relief that we are evidently not falling into a bottomless pit,” said Stewart Schweitzer, Global Markets Strategist at J.P. Morgan Private Bank.

The distinction between “not losing money” and “making money” cannot be overstated and is easily forgotten, even ignored, when fear runs rampant. The former involves risk aversion behavior while the latter requires risk seeking behavior. Thought of this way, it’s easy to see that these two approaches are opposites that require equally opposite investment strategies to achieve. The trick to reconciling these seemingly mutually exclusive states is as follows (in order):

1. Remain focused on capital appreciation, or making money; in good times and bad. Do not let market turmoil change your mindset lest you lose sight of why you invested in the first place (and your goal!). The portfolio strategy you designed to maximize total rate-of-return over your personal investment time horizon is not changed by short-term events (e.g., economic recession).

2. Distinguish between temporary capital losses & permanent capital losses and reconcile yourself to accepting temporary losses in exchange for higher long-term rates-of-return. This requires the temporary suspension of your average annual rate-of-return expectations during short-term market corrections and more prolonged bear markets. Your long-term average annual rate-of-return expectations remain unchanged.

3. Rebalance your portfolio’s asset allocation as aggressively as your frayed nerves will allow to recover from temporary capital losses and ultimately achieve higher long-term rates-of-return. I acknowledge that the positive impact of rebalancing, diversification, etc. is diminished when virtually every asset class tanks as occurred in 2008. Thankfully, global meltdowns like that one are rare and constitute an exception to the rule. Bottom-line, nothing is 100% fool-proof, 100% of the time.

Did Your Portfolio Participate in the Rally?

Too many investors are content to look at the dollar change in their total portfolio value at the end of a period and, if it’s positive, conclude that they’ve done well. This is too simplistic. Just because the market did well does not guarantee that your portfolio did too. It’s important to know if your portfolio benefited in proportion to the market’s gains. Good for you if it did. However, if it outperformed or underperformed, that could be a call to action.

Consider that emerging market stocks, real estate investment trusts, and financial stocks were decimated by the recession. Share prices collapsed as investors sold them in droves in favor of the perceived safety of U.S. Treasury bonds. Consequently, these assets are under-represented in many private portfolios. “Good riddance,” you might say. Yet emerging markets, REITs and financials led the second quarter rally with gains of +25%, +29% and +35%, respectively. In India alone, the benchmark Sensex Index gained +49% in just 12 weeks. As we’ve seen again & again, yesterday’s laggards often become today’s leaders.

Conversely, the safe haven many investors sought, U.S. Treasury bonds, declined -3% for the quarter, taking its losses for the first half of the year to -4.4%. This is the worst six-month performance in the history of Merrill Lynch’s Treasury Master Index, according to the Wall Street Journal. The benchmark 10-year Treasurys lost as much as -6% on the quarter. Riskier corporate bonds and high-yield “junk” bonds gained +23% for the quarter underscoring investors’ new appetite for risk.

Where Does the Rally Leave Us Now?

Some argue that the market has gotten ahead of itself and is due for a pull-back. Others believe the recent rally is a bear market trap and further declines lie ahead. Even Treasury Secretary Geithner conceded that the current recession isn’t over and a double-dip recession is possible. Looming inflation is an ongoing concern, as is the stability of the U.S. dollar. These are real concerns that cannot be discounted.

My view is that we are at the end of Round 1; still early in the fight, with significant opportunities remaining. A pull-back in stocks of as much as 10% would not be surprising or unwarranted and serve only to extend the current buying opportunity. The strength of corporate earnings in the second half will determine the direction of stock prices in coming quarters. Earnings are currently showing tepid signs of strengthening.

Easing of the credit crisis has restored some stability to the bond markets as evidenced by the rally in corporate bonds and several successful new issuances. Municipal bonds remain problematic as municipalities struggle with falling tax revenues.

On balance, I believe that the outlook for a positive end to the year is bright. There is a significant possibility that economic growth (GDP) will return, marking an end to the current recession. Should that occur, the unemployment rate will peak and then begin to decline, giving a further boost to investor sentiment and overall consumer confidence.

Timothy R. Meyer
President & Chief Investment Officer

Advice is Everywhere But How Useful is It?

2009-07-06T15:41:00.000-04:00

You may have noticed that as the recession and credit crisis drag on, all manner of advice on how best to deal with falling stock prices, declining home values, rising unemployment, etc. has proliferated. It’s fair to say that there is a raging bull market in the advice business these days. Two reasons account for this. First, in the context of a crisis environment such as we face currently, the need for sound advice is more important than ever. Second, sensitized as we are by the hit(s) to our financial wellbeing, most of us are simply more receptive than usual to guidance from credible sources. We’re all seeking answers.

Unfortunately, the quality and, by extension, utility, of much of the advice currently flooding the airways is dubious at best. For example, a recent headline caught my attention by trumpeting “Here’s How to Save Your Retirement.” I thought ‘What’s not to like about that,’ as I flipped to the first page. It took only a few moments of reading to discover the secret formula for saving our collective retirements: “save more” and “spend less.” That’s it…simple as that. Save more—spend less. Under-whelming? I thought so too.

In a world where home foreclosures are skyrocketing, most people don’t have the income to save more, to state the obvious. Spend less? Most Americans, including even the super-rich, have already cut discretionary spending to the bone just to keep their heads above water, let alone boost their savings.

That bit of wisdom got me thinking about other insightful nuggets that I came across so I decided to share some of them with you here. The headlines that capture our attention in this way are invariably well written and promise clear, concise answers to vexing problems. It’s the material following the headlines that under-whelms and may even mislead.

1. Build a Stress-Free Financial Portfolio. What could be better? We could all do with a little less stress in our lives. Unfortunately, the article recommends a portfolio consisting entirely of certificates-of-deposit, money market mutual funds, and US treasury bonds all yielding between 1.00%-3.75%. This approach is indeed protected from capital loss and unsettling price volatility. Safety comes at a price, however. How many people can realize their retirement dreams or college saving objectives on such a low total return? Not many. Moreover, after adjusting for inflation and taxes, the real rate-of-return will be even less. That could really cause some stress!

2. 5 Ways to Stretch Your Savings. Make your savings go farther and last longer; excellent idea and another attention grabber. The first of the five secrets…don’t retire…keep working. Never mind those people that don’t want to work into their late 60’s or 70’s, whose health won’t allow them to work longer, or that get laid off, downsized, etc. and can’t find a suitable job or one that pays a comparable salary.

3. 4 Ways to Tame Your Fear of This Market. Taming fear is good. Lots of people today are just plain scared. The solution? Allocate a larger portion of your investment assets to fixed income securities like bonds. This makes sense in principle, but isn’t as easy as it seems. First, all investors with exposure to stocks have seen the value of these assets decline since the market peaked in late 2007. Many have incurred sizable unrealized losses even on quality, blue-chip holdings that are likely to perform well as the recession ends and the economy recovers. Selling stocks now in order to re-allocate to bonds realizes or locks-in those losses. While bonds pay steady interest, their total return is unlikely to match that of stocks as the economy starts to grow again. Taming your fear in this way could cost you a lot of money which is, in itself, frightening.

Further, if the crisis has shown us anything, it’s that even the safest investments are not as safe as we once thought. Prices of some mortgage-backed bonds and bonds of commercial & investment banks, auto makers, etc. once thought to be rock solid, have been as volatile as stock prices. Just ask General Motors bondholders.

4. Safe Moves in Today’s Market. Safety is definitely in vogue as investors have become more risk averse and less risk seeking. This source suggests that a good way to begin building a “safe” portfolio is to buy the S&P Dividend SPDR (SDY). This is an exchange-traded index fund that holds the shares of 52 blue-chip, dividend-paying common stocks. The only problem is that SDY has traded down by as much as 53% in just the last 12-months! Most investors would not consider a capital loss of that magnitude paramount to “safe.” This is not to say that SDY won’t prove to be a fine investment over time. It simply underscores what most investors already know in their hearts, which is that investment risk & reward go hand-in-hand. You cannot benefit from the latter without incurring the former.

5. Make Yourself Recession-Proof. Can we really do that? In a word…NO! The central piece of advice here is to hold on to your job. Yet, how many people lose their jobs by choice? None that I know of. Few people have any significant influence over personnel decisions in their workplace. Sure, we should each maximize our value to our employer and make ourselves as indispensable as possible but 1) it’s to our benefit to do that all the time, not just during recessions, and 2) corporate downsizing decisions are not generally made on an individual-by-individual basis. Doing that is called discrimination and it’s illegal.

Be careful as you read & listen to the advice swirling around today. If it sounds too good to be true...it is! As much as we would like there to be easy answers to the challenges we face, those are few & far between. That doesn’t mean that answers don’t exist. They do. Trust your instincts, first & foremost, and seek out competent professional help when you feel it necessary. Remember, the current recession will end as all the others before it ended. Stock prices are in the midst of a robust month-long rally and bond prices show signs of stabilizing. Recent economic data provide cause for optimism and attractive investment opportunities abound.

Timothy R. Meyer
President & Chief Investment Officer

How to Make Money in Range-Bound Markets

2009-06-17T13:32:00.002-04:00

MEYER CAPITAL MANAGEMENT

Independent Investment Advisers

SECOND

QUARTER REPORT

June 30, 2005

How to Make Money in Range-Bound Markets

As we all know, stock and bond prices move up and down over time. Persistent price movements in one direction or the other eventually develop into trends. Investors, of course, favor up trends and frown upon down trends.

There is a third price pattern however that is almost as common as the up & down price actions we are all familiar with. This is an essentially flat pattern that occurs when security prices fail to move decisively in either an up or down direction. Instead, they do little more than hover around the same level. We find ourselves in this situation today.

The major stock market averages, year-to-date, have bounced around a fair amount but, despite the volatility, remain within a few percentage points of where they began 2005. The trend is essentially flat. Be that as it may, investors remain interested in earning a positive return on their money even as stock and bond prices aren’t cooperating much. There are a number of alternatives available to combat flat market cycles.

1. Increase the income component of the portfolio. This is accomplished by shifting the asset allocation of the portfolio away from growth-oriented investments and toward income-producing securities like bonds and dividend-paying stocks. The interest and dividends earned on these types of securities is real cash paid to the portfolio regardless of what the prices of these securities are doing. We frequently hear this referred to as “getting paid while you wait.”

While this sounds good, there is a trade-off. The income generated comes at the expense of capital appreciation (i.e., growth). Consequently, when security prices do eventually break out of their trading range, assuming an upside move, the income-oriented portfolio will under perform. Therefore, investors must consider whether it is better to stick with the original asset allocation and simply wait out the doldrums or change the portfolio mix as described above.

2. Sell call options. A call option is simply the right to buy a share of stock at a fixed price at a fixed date in the future. A conservative way to sell call options is to sell them on stocks that you already own in your portfolio. These are called covered calls. Selling a covered call is a bet on your part that the share price will drop below a certain level at which the buyer of the call will decline his/her right to buy your stock. He/she already paid you real cash for the right to purchase your stock and now that right has expired. You retain your stock and keep the cash from the sale of the covered call. Successfully executing this strategy again & again can have a materially positive impact on portfolio performance.

As always, however, there is a trade-off. If the price of your stock rises instead of falling, the buyer of the covered call will exercise their right to buy your stock at a lower than market price. You lose your shares and forgo the incremental gain in the stock. Ouch!

3. Security Selection. You’ve probably heard the phrase, “This is a stock picker’s market.” This means that the markets overall aren’t doing much so investors have to pick their spots in order to achieve a positive rate-of-return. This is a research-intensive and time consuming approach.

Utilizing this approach in 2005, investors who over-weighted the energy (+18.84%), utility (+13.16%), and health care (+2.69%) sectors were rewarded. These are the only industrial sectors of the US economy that showed positive performance year-to-date. Interestingly, focusing on just the 12 weeks that comprise the second quarter is also revealing. Utilities (+8.35%) and healthcare (+3.75%) did well again. But financials (+3.65%), telecommunications services (+2.64%) and information technology (+1.60%) all delivered positive performance and surpassed the energy sector (+1.52%). By not owning these newcomers, investors would have hurt their portfolio performance in the second quarter.

So what’s the best solution? Meyer Capital Management uses a combination of all three of the techniques discussed above. Prevailing market conditions and individual client objectives dictate how and to what extent we implement each method. As each client is different, each investment portfolio is also different. Utilizing a case-by-case approach enables us to customize our methods to meet individual circumstances.

How good are the results? Fully, two-thirds of the MCM-managed portfolios show positive, market-beating returns year-to-date. For the second quarter alone, that figure increases to almost ninety percent.

We hope you are having an enjoyable summer. As always, just let us know if there is any way that we can meet your needs better.

Timothy R. Meyer

President

Investors Want Same Rules for Advisors, Brokers

2009-06-17T13:32:00.001-04:00

Survey: Investors Want Same Rules For Advisors, Brokers

November 22, 2004

WASHINGTON (Dow Jones) – Investors don’t understand the difference between brokers and financial advisors and are very concerned that both can offer financial advice without being subject to the same rules, according to a new survey to be issued Monday by a leading discount brokerage firm.

A whopping 90% of the investors surveyed want Congress to step in and set uniform standards of protection for stockbrokers and investment advisors who provide fee-based financial advice, said TD Waterhouse Group, Inc., a subsidiary of Toronto-Dominion Bank (TD), which sponsored the poll.

Confusion abounds when it comes to current laws: The survey found a majority of investors mistakenly believe brokers are legally obligated to act in the investor’s best interest, and only 25% know that investment advisors have such an obligation. It found similar confusion about other rules required of investment advisors, but not brokers, such as the duty to inform customers of any conflicts of interest before providing investment advice.

Fully 84% of those questioned said financial advisors and brokers that offer fee-based financial advice should come under the same industry regulation, according to TD Waterhouse. Almost as many said they are concerned about the differences and agreed they would be more likely to choose an investment advisor over a broker if they knew they would receive more protections by doing so.

Release of the findings comes as the issue returns to the front burner at the SEC. In 1999, the agency proposed allowing brokers to offer discretionary, fee-based advisory accounts without coming under the stricter rules governing investment advisors. The SEC never approved the proposal, dubbed “the Merrill Lynch rule,” but promised not to sue brokers who act as if it were in effect.

Financial planners complained the SEC’s approach was a boon to Merrill Lynch & Co. (MER) and other brokerage firms, allowing them to market advisory services while avoiding stricter advisory rules. Earlier this year, the Financial Planning Association sued the SEC, saying its implicit approval of the 1999 rule without a formal vote violates federal administrative procedures. The lawsuit prompted the SEC to reopen the matter for comment, and it has promised to resolve the matter shortly.

TD Waterhouse said the fight should be decided in favor of investors, not planners or brokers. It suggests the SEC scrap distinctions between brokers and financial advisors, ensuring that investors get equal protection when they get professional financial advice.

“We recommend a common industry standard that provides investors uniform protection,” TD Waterhouse USA President and Chief Executive Timothy Pinnington said in a statement announcing the survey results.

Distinctions between brokers and advisors have blurred over the years, making separate rules a mistake, Pinnington wrote in a Sept. 22 comment letter to the SEC. He said anyone offering fee-based investment advice should be subject to the same disclosure and sale practice rules, and be required to provide the best execution of customer trades while eliminating bans on principal trading now in place for investment advisors. Since distinctions between brokers and advisors are contained in existing laws, TD Waterhouse said the SEC likely would need Congress to rework and update those laws.

The survey, conducted in October, covered 1,000 investors who hold stocks, bonds or mutual funds outside an employer-sponsored retirement plan, such as a 401(k), and has a margin of error of plus or minus three percentage points, TD Waterhouse said.

By Judith Burns, Dow Jones Newswires, 202-862-6692

Buy Low - Sell High: Putting Theory into Practice

2009-06-17T13:31:00.002-04:00

Investment Commentary March 2001
Copyright © 2000 Meyer Capital Management, Inc. All Rights Reserved.

	March 30, 2001	% Change From 12/31/00
DJIA:	9878.78	-8.42%
S&P 500:	1160.33	-12.11%
NASDAQ:	1840.26	-25.51%
Russell 2000:	450.53	-6.82%

If it Sounds too Easy to be True…It Probably is
To many of us, skydiving sounds like it would be a blast, just hop from the plane and float softly to the ground. To others, climbing Mt. Everest drips with the promise of excitement and adventure. In both instances, what sounds great at first takes on a very different meaning when, for example, the moment arrives to throw yourself from the plane or the oxygen on Everest begins to get thin.
So it is with "buy low-sell high." It may be the most basic of all investment axioms. Its appeal is easy to understand because everyone can relate to its simplicity. What isn’t so obvious is the difficulty of putting it into practice.

Investors’ Resolve is Put to the Test
One of the most meaningful benefits a good investment manager can provide for his/her clients is assistance in viewing market events realistically and dispassionately. For the client, whose hard-earned money is on the line, this can be pretty difficult since we’re talking about more than just money. For individual investors, we’re likely to be talking about a sense of security, personal achievement, goals, and dreams. Likewise, institutional investors feel the weight of responsibility for the assets entrusted to their care. If these matters aren’t worth getting a little emotional about, what is? Yet, therein lies the problem, be it fear, panic, greed, or just a loss of patience, emotion makes a poor basis for investment decisions. In fact, most investment mistakes are of an emotional, rather than intellectual, nature.

Today, for the first time in almost 15 years, investors find themselves in the midst of a full-blown bear market. This is foreign territory for anyone who wasn’t an active investor in 1987 or 1981-82, the most recent prior bear markets. The first key to surviving the tumult is coping effectively with the strong feelings that the current market conditions can evoke. During challenging times like these, a brilliant investment decision may be synonymous with avoiding a fear-driven mistake.

While perhaps not immediately obvious, buying low and selling high is intimately associated with the kind of market volatility we’re currently experiencing. Before discussing that more fully, we need some additional perspective. Exhibit 1.1 shows unequivocally that the stock market does deliver higher rates of return over time than alternative investments, in this case long-term bonds. Remember, however, that the length of the investment time period is key.

Contrary to some popular opinion recently, which held that all you have to do is hold some Nasdaq stocks to make loads of money, the stock returns shown above didn’t come easily or cheaply when you look at what investors endured to realize them.

Exhibit 1.2 shows the year-to-year volatility of stock market returns (blue line) since the mid-1920’s. As you can see, the ups and downs occur regularly and randomly. This is normal stock market behavior and it is not possible to predict the pattern. There are two conclusions, each of paramount importance, to glean from this chart:

1. The blue line indicates that, in any given year, it is not unusual for stock market returns to fluctuate +/- 50% and, occasionally, even more. This is what we saw in 1999 when the Nasdaq was up almost 86%. In 2000, it reversed course and dropped 30%, and is down another 30% thus far in 2001.

2. The red line shows that, since the early 1950’s, the average annual return of the market has held pretty steady at or about the 10% return level. This is significantly greater than the historical rate of inflation and the historical rate of return on long-term bonds. Remember also that there were numerous economic recessions, bear markets and stock market corrections during this time period.

People I meet on the street ask me "What’s wrong with the stock market?" I answer, "Nothing is wrong, the market is behaving normally and is doing what markets do." That is to say, they fluctuate, and hidden in the ongoing fluctuation, lies both risk and opportunity. Hence, a basic precept at MCM is that market volatility is not to be feared or avoided, but should be viewed as an opportunity.

Say What?
In modern society, we’ve forsaken mattresses as savings vehicles and we invest our money for two primary reasons. They are to prevent inflation from eroding the purchasing power of our money and to build wealth. Exhibit 1.3 shows that since the mid-1920’s the returns on long-term bonds have been sufficient to offset the negative impact of inflation on purchasing power, but not enough to build much in the way of new wealth. So, if you’re an institutional investor trying to build an endowment fund or a private investor wanting to retire in comfort, long-term bonds alone are not going to get you there.

The difference between the bond curve and the stock curve constitutes new incremental wealth created by investment in common stocks. The question is "how do we get there?" Simply stated, we have to find ways of coping emotionally with stock market volatility.

Let’s look at volatility again, only this time in a slightly different way. Exhibit 1.4 shows the actual volatility of returns, annually, from 1926-1990 for stocks, bonds, and inflation, respectively. You can see that bond returns have been modestly more volatile than inflation. Stock returns, on a year-to-year basis, have been significantly more volatile than bonds.

During short time periods, bond returns frequently under perform the rate of inflation and stock returns frequently under perform both bonds and inflation. Over the long-term, stock returns outperform both bonds and inflation. This is why patient investors win and the impulsive investors invariably lose. Investor patience is the critical ingredient to realizing the rewards.

One final chart demonstrates what has happened historically when investors ignore short-term volatility and remain focused on a long-term investment strategy. Exhibit 1.5 shows historical, cumulative stock market returns. It is clear how patient investors have built considerable wealth despite the Great Depression, numerous economic recessions, several bear markets, and countless stock market corrections. It only looks easy when you smooth out the gut wrenching highs and lows.

The Case for a Balanced Portfolio
A balanced portfolio combines stocks and bonds within the same investment account. Assets can be divided in any proportion between the two asset classes, depending on the investor’s objectives and risk tolerance. Bonds pay interest rather than growing in value over time, as stocks do. So, a balanced portfolio has both an income component and a growth component. One would expect the investment rate of return on a balanced account to fall somewhere in between the stock curve and the bond curve shown in Exhibit 1.3.

The balanced approach works very well and is commonly used by individuals and institutions to achieve a wide variety of investment objectives.

Buy Low - Sell High
Many investors think this common catch phrase refers to deftly calling tops and bottoms in market and/or single security price movements. In fact, it doesn’t. As we discussed earlier, market tops and bottoms occur randomly and aren’t knowable in advance. The buy low/sell high concept is really about overcoming two very powerful emotions: greed and fear. So, while it is intellectually simple, putting it into practice is quite difficult.

For example, think of how hard it is sell a stock that has generated huge gains for your portfolio and continues to appreciate in price almost everyday. You’ve got a winner! Let it ride. Taking some or all of your unrealized gains and rolling them into another investment with a better valuation and greater upside potential, seems crazy. In this case, greed has taken over and is now making the investment decisions.

Conversely, putting new money into the stock market or even remaining invested during a market correction or bear market seems equally ill advised. Stock prices are declining almost every day and the values of our portfolios are dropping right along with them. The popular market pundits all say that the market outlook is poor and that it is the worst time to be invested. Fear, even panic, is widespread on Wall Street.

I’ve heard it said that the stock market is the only place where people get upset when things go on sale. Yet, that is exactly what happens to stock prices during a correction or bear market. Great companies whose stocks were prohibitively expensive to buy earlier can now be purchased for a fraction of their former cost. This dramatically increases the future rate-of-return potential for these holdings and for our portfolios in general.

Overcoming fear and greed poses a challenge for most of us, but it can be done. Again, the solution is to remain focused on the length of your investment time horizon. If that is to maximize investment rate-of-return over say, a 15 or 20-year period, then what happens during any given month, quarter or even full year, isn’t very significant. Look for the opportunity.

Summary & Conclusions
It is not uncommon for market events to become exceedingly complex and threaten to distract us from doing the things that bring investment success. The news media, in particular, fan these flames in their intensely competitive pursuit of viewers. Dramatizing market events obviously works as the success of CNBC, Bloomberg, CNNfn, and the other business news shows would attest.

Our objective is to help you filter out the noise from the markets and the news media so that you can focus on the important things and make objective, well informed investment decisions.

Dealing with the emotional aspects of investing is paramount. Understanding how the markets normally function allows us to maintain perspective. Knowing that patience is an essential element to executing any investment plan, can lower anxiety not only in bear markets, but in bull markets as well. Remember the euphoria of 1999 and the fear of being left out?

Timothy R. Meyer
President

Portfolio Management 101

2009-06-17T13:31:00.001-04:00

An Evening with Pachelbel
Recently, while waiting for my son John’s middle school strings concert to begin, a neighbor settled into the seat beside me. By way of background, this friend regularly lets me know that he is a do-it-yourself investor because, in his words, "there is no magic to picking stocks." Curiously, this doesn’t prevent him from routinely seeking my investment advice, for free of course.

This particular evening he lamented about how he purchased Procter & Gamble stock only a few months earlier at close to its 52-week high of $118.50/share because it looked like the stock price was breaking out to the upside. He then watched in horror as the price of his newly acquired shares fell dramatically to $55.00/share in only a few weeks. I asked if he was a momentum investor since he based his original purchase decision on a short-term movement in the stock price. "No," he said, "I just figured the price would continue to go up and the stock would split two-for-one." If only the world were so simple.

He went on to tell me how, after P&G’s initial free-fall, he swallowed hard and bought more P&G shares near their recent lows only to have the company announce that earnings would fall short of Wall Street’s expectations again and that it’s President and CEO was stepping down. I asked if he was a technician since technical analysts base their investment decisions on movements in stock prices relative to historical price patterns. "No," he said, "I just figured that the price was so low compared to where it had been just a few days earlier that it had to be a bargain." The expression on his face made it clear that these events had taken an emotional toll on him.

His voice took on a hint of hopefulness as he asked me at what price I thought P&G would end the year 2000. I told him, truthfully, that I had no idea whatsoever. I went on to explain that at MCM we are fundamental investors. That means we base our investment decisions and advice on fundamental variables like sales, earnings growth, profit margins, competitiveness, economics, valuation, etc., not on past or present stock prices. This research provides us with a clear basis for making buy/sell decisions.

My friend looked at me, somewhat incredulously, as if I couldn’t possibly know anything about investing if I wouldn’t make a price prediction on a stock six months into the future. With renewed conviction, he said that he thought P&G’s share price would end the year around $85.00/share, up from its current $55.00/share. I asked him what he based this prediction on. He responded with, "I don’t know, I just think it will."

At last, I understood. He is not a momentum investor or a technician or a fundamentalist. He is a speculator and, as Webster’s Ninth New Collegiate Dictionary indicates, speculators base their investment decision on insufficient evidence and unadulterated hope. The fact that my friend construes this to be investing is, I fear, an all too common mistake among professionals and non-professionals alike.

Portfolio Management 101
I share this story with you because it illustrates the naiveté with which people can approach the capital markets and the very real and painful experiences that often result. Even for those who employ investment professionals to manage their assets, it is necessary to understand something of the "what" and "why" underlying the investment activities undertaken on your behalf, lest you become frustrated and dissatisfied.

Risk Aversion
Investment risk is the probability of losing one’s money. Portfolio management, at least as we practice it at MCM, assumes that our clients are more or less risk averse. This means that given the choice between two investments with equal rates-of-return, you will chose the investment with the lower level of risk. Choosing the other only guarantees a higher probability of losing your money. Evidence that most people are risk averse lies in our purchase of various types of insurance, including life, auto, health, etc. Buying insurance implies that we are willing to pay the current known cost of the insurance premiums to avoid the uncertainty of a potentially large future cost related to a car accident or major illness.

This does not mean that everyone is equally risk averse or that investors are completely risk averse. For example, not everybody buys insurance for everything, either by choice or because they cannot afford it. In addition, some of us buy insurance related to some risks such as auto accidents and illness, but also buy lottery tickets or gamble in Las Vegas where it is known that the expected rates-of-return are negative. The latter point means that we are willing to pay for the excitement of the risk involved and that earning a positive rate-of-return is of secondary concern.

This combination of risk preference and risk aversion can be explained by an attitude toward risk that is not completely risk averse or risk preferring, but is a combination of the two that depends on the amount of money involved. Taking on more risk doesn’t guarantee a higher rate-of-return. It can just be a way to go broke faster. My neighbor was attracted to P&G by what he thought would be an attractive rate-of-return, but since he did not act in a risk averse fashion, he failed to earn a positive return at all. While we recognize these various attitudes, our basic assumption is that MCM clients committing large sums of money to developing investment portfolios are risk averse and expect positive rates-of-return.

Expected Rate of Return
I am often asked, "What can I reasonably expect to make annually on my investment portfolio?" It is a fair question. The short answer for an all-stock portfolio is about 10% annually, which is the historical average rate of return for the entire stock market since its inception decades ago. For example, you could lose 10% one year and make 20% the next. The results are different for balanced and/or fixed income accounts.

The real answer is a little more involved. It begins with the idea of a risk-free rate-of-return. This is nothing more than the pure time value of money (i.e., having $1.00 today is worth more than receiving $1.00 sometime in the future because money has the ability to earn interest). The interest rate paid on short-term US Government Treasury Bills is widely accepted as a proxy for the risk free rate. Since an investor buying treasury securities doesn’t incur any risk, he/she should expect to earn a relatively low rate-of-return. We can see that this is the case today with short-term treasuries paying about 6% interest.

We know, however, that inflation exists in the world and acts to erode the purchasing power of our cash and any investments that pay a fixed rate of interest, like treasury bills. Therefore, many investors require that an inflation premium be added to the risk free rate before we will agree to invest. In doing so, we are compensated for any expected rise in inflation. Failing to do so is irrational.

Some investors will still not be satisfied earning the risk-free rate plus the inflation premium. In order to have a chance to earn even greater investment returns, we are forced to overcome our basic tendency toward risk aversion and expose our hard-earned money to risk of loss. In exchange for taking on this increased risk, we have a right to expect potentially higher returns. This added return potential is called the risk premium. The level of risk involved in each and every investment opportunity we consider determines the amount or size of the risk premium. The risk premium has two main parts:

Systematic Risk -- Also called market risk, this is the portion of an individual asset’s price variability attributable to the variability in the total market. In other words, this is simply the risk of being in the market and there is nothing any individual investor or professional investment manager can do to minimize or avoid it. Significantly, this explains why an individual security tends to move up and down with the market regardless of what security it is (i.e., its not a matter of holding the right ones). Market forces impact all securities that, combined, make up the market.
Non-Systematic Risk -- Also called fundamental risk, this is the portion of an individual asset’s price variability attributable to it’s own unique features, unrelated to total market variability. Non-systematic risk is comprised of the following components:

Business risk – the unpredictability of income due to the nature of the business.
Financial risk – the uncertainty coming from how the firm finances itself. The more debt the firm takes on, the higher the financial risk.
Liquidity risk – how easy (or hard) it is for the investor to convert his/her investment to cash, should they so desire.
Exchange rate risk – factors in the uncertainty relating to currency changes.
Country risk – political and economic uncertainty within a country.

Therefore,

Total Risk = Systematic Risk + Non-Systematic Risk

and

Expected Rate of Return = Risk-Free Rate + Inflation Premium + Risk Premium

By carefully combining individual securities with different risk/return characteristics into a single portfolio, non-systematic risk can be completely diversified away! That sounds almost too good to be true, doesn’t it? Wow! This is why crafting well-diversified portfolios is the main focus of our daily research and the primary basis for our trading activity. Moreover, it becomes easy to see how a well-diversified portfolio is far more than just a collection of hot stocks whose all-important inter-relationships may not even be known, let alone understood.

The Efficient Portfolio
In the 1950’s and early 1960’s, a man named Harry Markowitz published what has since become the definitive model for optimizing the relationship between investment risk and return. A portfolio that does so is said to be efficient in that no other portfolio of assets offers higher expected return for the same (or lower) risk, or lower risk for the same (or higher) expected return. An efficient portfolio is, by definition, well diversified. Adequate diversification can be achieved with as few as ten to twenty individual stock holdings. Less than that leaves one exposed to nasty surprises like the one suffered by my neighbor. As too many stocks are added to a portfolio, the additional diversification benefit becomes immaterial. The investor would do better to simply buy more shares of his/her existing holdings.

The name of the game then for investors serious about making money is to invest at the point where we can get the most return for a given level of risk or, conversely, the least risk for a given level of return. Where might that point be? It is unique to each individual investor depending on his/her investment objectives and risk tolerance. Hence, the criticality of understanding these aspects of one’s own or client’s psychological makeup.

Know What to Look For In a Money Manager
We are proud of the diligence, rigor, and expertise we bring to client portfolios. Anyone can buy & sell a stock; that does not make them an investor. It’s likely they are only speculating. It concerns us that many falling into this category are professionals within our own industry. Over the past year, thanks largely to your referrals, we have had the opportunity to establish new working relationships with a variety of institutions, families and individuals. Frequently, we begin by correcting damages incurred previously. Unfortunately, important monies have usually been lost by then and people find themselves trapped in undesirable securities by penalties, fees and/or taxes.

At MCM, all clients can talk directly with the individual making the investment decisions for their account. We encourage questions and are happy to explain our thinking and processes. We operate under a full disclosure policy at all times. Nothing is hidden. There are no soft-dollar arrangements, no sales charges and no product commissions of any kind. As a result, we are free of the conflicts of interest that often accompany these practices.

Timothy R. Meyer
President

Understanding Stock Market Averages

2009-06-17T13:30:00.000-04:00

Investment Commentary March 1999 Copyright © 1999 Meyer Capital Management, Inc. All Rights Reserved.

March 31, 1999
DJIA: 9786.16
S&P 500: 1313.60
NASDAQ: 2461.40
Russell 2000: 397.63

1st Quarter Review
On a recent weeknight evening, my family was sitting around the dinner table discussing the day's events. As I contemplated a second helping of mashed potatoes, my wife Joan posed the following question. "Tim, I heard today that over a billion shares traded on the New York Stock Exchange, the Dow Jones Industrial Average (DJIA) set a new all-time high and advancing stocks outnumbered decliners by a four to three margin, yet the price of an average share actually declined. How can this be?"

Joan's question could be something of a metaphor for the first quarter and I'll share my response later in this report. While the MCM master portfolio performed strongly in January, outpacing all the major averages, the increasingly narrow stock participation across the equity markets dragged us back in February. March saw positive though unspectacular returns. The major market averages were similarly mixed. The DJIA and the S&P 500 Index were up strongly at +6.6% and +4.6%, respectively. Yet within the DJIA and the S&P 500, only a few stocks did well. How can this be?

As I've discussed in previous reports, the answer traces to the way in which the averages are calculated. As reported in the Wall Street Journal, the S&P 500's total year-to-date gain can be traced to only 21 stocks. The other 479 under performed the index. One third of the S&P's performance came from just two stocks, Microsoft and America Online! In the Dow Industrials, just three of its 30 component companies accounted for more than one half its gain. These were United Technologies, J. P. Morgan and American Express. Broader market measures like the Value Line Index, an average of 1700 stocks, fell -3.7% during the quarter, as did the Russell 2000 by -5.8%. These broader measures yield a more revealing view of the stock market's price activity.

The performance gap between the select few large cap high priced stocks driving the Dow Industrials & the S&P 500 and the rest of the market is exceptionally large. Some market historians argue that it is without precedent. Investing in the market movers is not a matter of stock picking prowess. The reality is that concentrating assets in these few stocks would be enormously risky. MCM holds a variety of the large-cap stocks that performed well during the quarter, but we also hold a broader selection of companies in order to keep overall portfolio risk within client guidelines.

One market commentator noted that since America Online was added to the S&P 500 last year, it appreciated so much in price that any money manager who didn't own it would, by definition, under perform the S&P 500 regardless of any other holdings. This is not hard to believe since America Online trades at more than 600 times trailing earnings and its market value is equal to that of Coca-Cola. eBay, the online-auction company, has a market value almost equal to Sears despite significantly lower sales and profits. To equal Sears, eBay would have to double its own sales and profits every year for the next 10 years, according to Ed Keon, director of quantitative research at Prudential Securities. This isn't impossible, but predicting the future 10 years out and betting money on it is, at best, an uncertain business.

The solution, in our view, is to avoid the temptation to chase market strength, hold to fundamentally sound investments, and wait for the market to turn convincingly in our direction. This is what happened, albeit fleetingly, in January. Since then the market has been signaling with increasing frequency that the narrowness of the big-cap rally is waning. One only has to look at the oil sector for example. Crude oil prices have recovered significantly from their lows of last year. So too have the stock prices of integrated oil stocks in general and oil service stocks like Schlumberger, Haliburton, Global Industries, and Nabors Industries, in particular.

Asian economies have stabilized and we believe the recovery will continue. This bodes well for technology companies like Atmel and Texas Instruments as well as big manufacturers like Boeing Co. We also continue to like our holdings in financial services, telecommunications, healthcare and toys.

Now, for the answer to Joan's question. The DJIA is comprised of only thirty of the New York Stock Exchange's 3,098 listed companies. Since this represents less than 1% of the companies traded on the big board, it does not fairly represent the broader market activity. Moreover, each listed company has a different number of outstanding shares of stock available for trading on any given day. Some have many millions of shares while others have fewer in number. When stocks with declining share prices trade a greater number of shares than those with increasing share prices, the average price per share will decline regardless of the number of companies advancing or declining. The magnitude of share price changes also figures into the result.

Bottom line, this illustrates how the major market averages can fool unsuspecting investors by disguising what is actually going on in the overall market. Now, can I have more mashed potatoes please?

Timothy R. Meyer
President