Be More Like Buffett: Buy Fear

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

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.

Musings on 2011

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?

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

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

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

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.