April 7, 2010
Greetings!
Please find your first-quarter, 2010 statement enclosed. All stock averages are up approximately 4% through the first quarter. The value of the S&P 500 = 1,169 (used to compare your account (from inception) to the S&P 500). As a reminder – to the left of the 3/31/10 TOTAL at the bottom of your spreadsheet, is the value of your account as of March 9, 2009 (the stock market bottom). The March 9th number does not include monies added nor subtracted from this date through 3/31/10. When comparing your account to the indices, remember that the indices are unmanaged – they do not include management fees or reinvested dividends. The growth of your account always reflects my management fees.
Exactly a year ago, we were trying to make sense of the worst market downturn we have ever faced. I referred back to my April 5, 2009 letter and would like to share a relevant excerpt.
Conventional wisdom has it that in economic slumps, it’s best to invest in big companies that can better weather tough times. Then, as a market bottom seems near, investors should switch to shares of smaller companies, which often outperform in the early phases of a market recovery. These days, the steady stream of disappointing company earnings and job cuts makes the timing of an economic recovery difficult to anticipate. Despite the conventional wisdom, larger stocks as a group haven’t provided as much shelter lately as investors had hoped. {Can you say GE, GM, and DOW?} As the financial crisis deepened this year, the collapse of some financial giants overwhelmed the relatively stronger performance of other large stocks. As a result, both large-stock and small stocks have had dismal total returns. Nevertheless, many investment professionals believe that small stocks will be winners when the market rebounds. In past cycles, small caps have jumped as much as 50% in the first 12 months of a market recovery. Currently, even “really good” small caps are trading at historically inexpensive levels — and as credit markets thaw, a lot of these companies will become targets of larger companies because they are so deliciously cheap. That could help fuel a rebound in the small-cap sector.
In an unsettled economic climate, it’s more important than ever to be a stock picker; looking for high-quality, well-financed companies. This market requires stock-picking, first and foremost. We want to be investing in those companies that aren’t overleveraged and have plenty of cash or access to it. Here’s my prediction: WE WILL MAKE MONEY with WELL-CAPITALIZED COMPANIES and PATIENCE, but we have to look forward. I know and you know that your accounts are down quite a bit from mid-2007. But we need to deal with the present and the future, albeit keeping the past as a reminder. Here’s some good news – I am still buying many of the companies I was buying 2-3 years ago; If I liked it at $8, and nothing but the stock price (and economy) has changed, I love it at $2. But to emphasize… the stories and financials still have to be intact. As we all know, change is inevitable – except from vending machines!
Wow – how true! For those of us who stuck it out, we are conservatively up 60+% from the March, 2009 lows. We did it with a cooperative market and with smaller companies. Going forward – we are committed to sticking with our knitting (small, well-capitalized companies).
Looking back at how cheap stocks became last spring, one may conclude that any novice should have known to be buying them hand-over-fist. But mutual-fund investors sold out of stocks all year long. In March 2009 alone, at the very moment when stocks were cheapest, fund investors dumped $25 billion worth. The critical elements that Goldberg Capital brings to the table are (or why the average investor should work with a professional) — the ability to deal with facts vs. emotion and patience.
Although I won’t hesitate to make an investment if my analysis shows an appropriate risk/reward trade-off, I’m more than happy to hold onto our cash and wait for the right investment — a steady temperament that shouldn’t be abandoned by an urge to make money. We might not know where 2010 will take us, but we’ll stick to the methods that we know work and make sure that your hard-earned cash is only put toward the best of the best.
Benjamin Graham proposed that the price of every stock consists of two elements. 1. “investment value,” which measures the worth of all the cash a company will generate now and in the future. 2. the “speculative element,” driven by sentiment and emotion: hope, greed and thrill-seeking in bull markets, fear, regret and revulsion in bear markets. The market is quite efficient at processing the information that determines investment value, but predicting the changing emotions of tens of millions of people is no easy task. The speculative element in pricing is prone to huge and rapid swings which can swamp investment value. Thus, it is important not to draw the wrong conclusions from the market’s inefficiency. Evidence suggests that the market is not rational, but watch out for the voice of the devil inside of you saying that it must be easy to beat the market.
There are at least two reasons why deep recessions generally lead to strong recoveries. First, recessions get rid of the “malinvestment” that produced the initial downturn. So the longer the treatment, the better the patient’s health once improvement starts. Second, and more directly, a deep decline in production and consumption creates the pent-up need to replace what is gone. For evidence of this rubber-band phenomenon, consider what happened after the mild downturns of 1991-92 and 2001 versus the deep ones of 1973-75 and 1981-82. The economy grew more than twice as fast following the deep recessions as it did following the mild ones. Since the 2007-09 recession was even longer and deeper than those other two, we might expect the recovery and expansion to be the longest and strongest. Instead, growth will more closely resemble the periods following the mild recessions. Projecting ahead, we can expect that most of the gains in the stock market will have been made over the past 12 months (April 09-Mar 10) vs. the 12 months going forward.
Springtime is here, which means the start of baseball season. In the spirit of our national pastime, here’s a riddle to be solved.
Three elderly woman are at their first ball game. They’re very excited and smuggle a bottle of Jack Daniels into Fenway Park. They are enjoying themselves immensely as they mix Jack Daniels with soft drinks. Soon they realize that the bottle is almost empty and the game still has many innings to go. Based on the given information, can you guess what inning it is and how many players are on the bases? (give this serious thought before finding answer below)
Hoping that your spring season is fruitful one.
Len
Answer: It’s the bottom of the fifth and the bags are loaded
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.