THE INFORMAL NEWSLETTER
January 6, 2009
Please find your fourth quarter 2008 statement enclosed. Needless to say, ALL the world stock averages were down in 2008: The S&P 500 and the NASDAQ were down approximately 40%, and many of the international indexes were down between 40-60%. It could have been worse. We could have ended on the low note, which occurred 11/20/08. Next to your account’s TOTAL dollar value, I’ve included the value of your account as of this date. Any monies added or subtracted from this date were not factored in. I thought that this might be of interest.
2008 was one of the three worst years in the last hundred years, so it makes sense that it was also the most difficult year of my professional life. To use a boxing analogy – we took a severe body blow but did not get knocked out. We’re on a bumpy journey to a new destination. I truly believe that ‘09 will be better than ’08, but we’re not going back to the good ol’ days anytime soon. However, it’s this period of great uncertainty that just might offer the best values. As the old saying goes – it’s always darkest before the dawn.
The beginning of a new year is the opportune time to take stock (no pun intended). Unless you were in cash or shorted the market, investments in all sectors failed miserably. While 2008 will probably be best known as the year that global stock markets had their values cut in half, it was really much, much more. It was a year in which every major asset class – stocks, real estate, commodities, even high-yield bonds – suffered significant double-digit percentage losses, resulting in the destruction of over $30 trillion of paper wealth. With nearly all markets caught in a tailspin at once, banks have no place to hide. The Federal Reserve recently lowered interest rates to a range of 0% to 0.25%. They have decided to use all of its available tools in an effort to save the economy. These new moves by the U.S. government are going to make the investment environment much friendlier for market players.
The outcome essentially depends on the ability of the Obama administration to rejuvenate capitalism’s “animal spirits” by substituting the benevolent hand of government for the now invisible hand of Adam Smith. To be honest, I’m beginning to wonder if “true capitalism” is dying! Where we are today is anyone’s guess. Make no mistake– because of the events of the past several months, the role and relevance of capitalism and free markets in this brave new world are in question. The major problem with investing at this juncture is that no one wants to catch a falling knife.
What really matters is how much we make when we’re right. If we’re wrong 9 times out of 10, and our stocks go to zero — but the tenth one goes up 20 times — we’ll be just fine. This was the first time in the fifteen years that I’ve been in business that so many stock prices plummeted in unison. Typically, GoldCap has several companies that perform well in a given year, making up for the few that do not. This is the nature of the beast. In 2008, only one company, Telecommunication Systems (TSYS), performed admirably (+140%). As it turned out, it was one of the best performing companies in the entire stock market last year. Fortunately, it was our largest holding but not enough to make up for the many companies sent to the slaughter house.
TSYS makes the case for the virtues of long-term planning and investing. I purchased my first shares of TSYS in the fall of 2001 and continued to buy shares right through 2008. The company has made due on all of its early promise and potential. Because it has become a large percent of your holdings, look for me to be a net-seller in 2009. The fundamentals are still there but it will be time to take some profits. I also believe that you can expect several of our other companies to rebound from their 2008 lows. This gets me to my next point…
This may be a once-in-a-lifetime opportunity. Certain common stocks are being given away. We are in a period of forced liquidation, which has happened only eight or nine times in the past 150 years. I’m currently looking for companies selling at huge discounts to net asset value without the need to access the capital markets (they do not have to borrow money). They have to be credit-worthy. Value isn’t sufficient anymore — value plus credit-worthiness is critical. The balance sheet (assets/liabilities) is paramount. Investors who can take advantage of these opportunities have to be long-term buy and hold and cash buyers.
We will dig out of this. And when we do, I hope for a back-to-basics society – where banks and other lending institutions promote real growth and long-term value for the economy and where American families have rediscovered the peace of mind of financial security achieved through saving and investing wisely. We need to return to the culture of thrift that my parents’ generation learned the hard way… through years of hardship and deprivation. Those are lessons learned that the current crisis will teach us again.
ON A LIGHTER NOTE…
How Pathetic… “2”– The number of dollars saved out of each $1,000 of disposable income by the average American household in the first half of 2008. No wonder our nation is in trouble.
Keep On Working… Affluent Americans who earned their wealth, rather than inheriting it, feel more secure during economic downturns and happier about their wealth overall. The overwhelming majority (69%) of affluent Americans with $500,000 or more in investable assets, earned most of that money through work. Only 6% attained their wealth primarily through inheritance. The rest gained their wealth through a combination of inheritance and earnings.
Testosterone Trading… I may be getting my testosterone and cortisol levels checked before making any major future investment decisions. Two Cambridge researchers recently published a study of hormonal levels in 17 securities traders at a British brokerage house. They found that traders who started the day with elevated levels of testosterone generally recorded higher average profits those days. Volatile trading days raised the stress-reducing hormone cortisol, reducing risk taking. The researchers believe that exaggerated levels of these hormones, building over time, may drive behavior associated with market bubbles (testosterone-driven overconfidence & risk taking) and prolonged market downturns (cortisol-driven lower confidence and extreme risk aversion.
In these challenging times you may be asking yourself, Why hang in there with Goldberg Capital? (It would only be natural) Here’s some help: The Top 10 Reasons to stay with GoldCap:
1. Diversification – Extensive research indicates that the best returns come in small packages. Although GoldCap invests in all size companies, the small companies have proven in the long-run to make us the most money. GoldCap’s specialty is in finding the small, hidden gems. There are very few of us doing hands-on, bottom-up research, in the small-cap sector. For better or for worse, this offers me access to a company’s management.
2. Written communication – Individualized, reader-friendly quarterly statements and informative newsletters that address universal issues, as well as GoldCap-specific philosophies. You will always know where you stand from the start.
3. Transparency – Clients cannot be Madoffed . The monthly Schwab statements ensure full disclosure. GoldCap serves as advisor only and retains no ownership of your assets.
4. Accessibility – You know where I live! You always have someone to turn to for all of your financial questions. The only reason for a phone call or e mail not being returned within 24 hours is because – I did not receive it.
5. Optimism – I’m an optimist, and I operate under the belief that good things are yet to come. In full disclosure – a pessimist would have performed much better during the past 15 months. Currently, I am cautiously optimistic.
6. Fee-only – Never any commissions. Your total expense (management fee), is considered on the lower end of the scale and is known to be adjusted accordingly during difficult times.
7. Conflicts of interest – There are none, plain and simple
8. Ownership – For better or for worse, GoldCap owns many of the same companies as its clients. GoldCap puts its money where its mouth is!
9. Performance – With rare exception, returns have exceeded the S&P 500 in just about every time-period over the long-term (5+ years).
And last, but not least…
10. Tuition payments – Len will have 2 children in college in 2009!
In closing, I want to express how much I cherish my professional relationship with you. I take my work very seriously and truly share in your pain and joy. I would like you to continue this journey with me but would also understand if you’ve had enough. If you still have a 5-10 year time horizon, then I believe we’ll look back at this particular time as one of the best investing opportunities in our lifetimes. A long spell of volatility will gradually give way to a period of better returns in stocks than experienced over the past decade. Confidence (tomorrow better than today) will come back. So, if you want to look forward and stay in the ring with me for another round, I welcome the opportunity to continue to serve you.
TO A HAPPY AND HEALTHY NEW YEAR,
Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past performance is no guarantee of future results.