July 5, 2009
Please find your second quarter 2009 statement enclosed. Year-to-date, the territory – Dow Jones -4%, the S&P 500 +2%, and the Russell 2000 +2%. The value of the S&P 500 as of 6/30/09 = 919 (used to compare your account (from inception) to the S&P 500). We’ve come a long way since March! To the left of your 6/30/09 TOTAL, 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 6/30/09. 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 fee.
Have we learned anything in the last 2,064 years?
“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest we become bankrupt. People must again learn to work, instead of living on public assistance.”
– Cicero of Rome – 55 BC ….
Partisan politics is alive & well & a risk to all of us.
Cheap” Doesn’t Mean You Should Own It…
Many investors think a stock trading under, say, $5, is “cheap.” Citigroup at $1 seems like a no-brainer because it really can’t go any lower than $1 – can it? In many investors’ minds, a blue chip brand like Citigroup can’t simply “go away.”
And you can buy a LOT of shares for $1. And if it goes to $2, well, then you’ve doubled your money.
It’s easy to see how the gambling mentality takes over with low priced stocks. What looks like a value right now may not be if the company earns less than expected. Regardless of a stocks’ price, we must look for companies with solid businesses that will continue to generate cash flow even if things get rockier. Stock prices are not an indicator of value.
Up until the crash of 2008, the prevailing view — called the efficient market hypothesis — was that the prices of financial instruments accurately reflect all the available information (i.e. the underlying reality). But this is not true. Financial markets don’t deal with the current reality, but with the future — a matter of anticipation, not knowledge. Thus, we must understand financial markets through a new paradigm which recognizes that they always provide a biased view of the future, and that the distortion of prices in financial markets may affect the underlying reality that those prices are supposed to reflect.
We have 2 classes of forecasters: those who don’t know & those who don’t know that they don’t know – John Kenneth Galbraith
How Did She Know It?…..
Ayn Rand died more than a quarter of a century ago, yet her name appears regularly in discussions of our current economic turmoil. Her novel, “Atlas Shrugged,” is selling at a faster rate today than at any time during its 51-year history.
There’s a reason. In “Atlas,” Rand tells the story of the U.S. economy crumbling under the weight of crushing government interventions and regulations. Meanwhile, blaming greed and the free market, Washington responds with more controls that only deepen the crisis. Sound familiar?
The novel’s eerily prophetic nature is no coincidence. “If you understand the dominant philosophy of a society,” Rand wrote elsewhere in “Capitalism: The Unknown Ideal,” “you can predict its course.” Economic crises and runaway government power grabs don’t just happen by themselves; they are the product of the philosophical ideas prevalent in a society — particularly its dominant moral ideas.
Why do we accept the budget-busting costs of a welfare state? Because it implements the moral ideal of self-sacrifice to the needy. Why do so few protest the endless regulatory burdens placed on businessmen? Because businessmen are pursuing their self-interest, which we have been taught is dangerous and immoral. Why did the government go on a crusade to promote “affordable housing,” which meant forcing banks to make loans to unqualified home buyers? Because we believe people need to be homeowners, whether or not they can afford to pay for houses.
The message is always the same: “Selfishness is evil; sacrifice for the needs of others is good.” But Rand said this message is wrong — selfishness, rather than being evil, is a virtue. By this she did not mean exploiting others (à la Bernie Madoff). Selfishness — that is, concern with one’s genuine, long-range interest — she wrote, required a person to think, to produce, and to prosper by trading with others voluntarily to mutual benefit.
Rand also noted that only an ethic of rational selfishness can justify the pursuit of profit that is the basis of capitalism — and that so long as self-interest is tainted by moral suspicion, the profit motive will continue to take the rap for every imaginable (or imagined) social ill and economic disaster. Just look how our present crisis has been attributed to the free market instead of government intervention — and how proposed solutions inevitably involve yet more government intervention to rein in the pursuit of self-interest.
Rand offered us a way out — to fight for a morality of rational self-interest, and for capitalism, the system which is its expression. And that is the source of her relevance today.
Keep Your Wits About You…
Despite recent gains in the stock market, portfolios remain badly damaged by the market performance of the past 18 months. With jobs still falling away at a rapid clip, the recession is still a serious concern and policymakers are scrambling to implement expensive and complex solutions. As we wade through these difficult times, how should you think about your own financial situation? A good starting point is to remember what Kipling wrote: Keep your head about you as everyone is losing theirs.
In times such as these, it’s a great temptation to think things will never get better. But if history shows us anything, things do eventually improve. In fact, judging by the standards of past economic shocks, this recession is getting long in the tooth. The average recession since World War II has lasted 11 months, and the longest was 16 months in 1981-82. Our current crisis is 16 months old.
Also, hints of bottoming are starting to surface. Oil prices have begun to rise, indicating some increased demand. China is importing aluminum again. In addition, the stimulus plan will start to kick in later this year, creating jobs and, perhaps, helping soothe some of the enormous fears in the marketplace. To better times and a wonderful summer…..
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.