October 8, 2009
Please find your third quarter 2009 statement enclosed. Year-to-date, the territory – Dow Jones +10%, the S&P 500 +17%, and the Russell 2000 +20%. The value of the S&P 500 as of 9/30/09 = 1,057 (used to compare your account (from inception) to the S&P 500). As a reminder – to the left of your 9/30/09 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 9/30/09. 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.
Still nervous? Here are a few things to keep in mind….
1. Be an investor first, a stock trader second. I am a passionate student of businesses and management teams and strive to find the best of both in our investments — an A+ business run by an A+ management team. Once I find that winning combination (at the right price), we invest and hold as long as our thesis holds true.
2. Invest with your head, not your heart or your stomach. Don’t jump in and out of tickers willy-nilly or try to ride the momentum stocks of the day. Make buy and sell decisions based on the fundamentals. I constantly analyze our companies using a three- to five-year time horizon, and am willing, even eager, to hold that long to watch our gains compound.
3. Save aggressively; invest perpetually. I consistently put money to work in my favorite small-cap ideas, regardless of what the “market” is doing.
4. Diversify, diversify, diversify. Diversification across companies, industries, and even the growth-value spectrum is especially important in small-cap investing. It won’t protect you when the market melts down, but it’s good to have stocks that zig when others zag (TSYS).
The question is now ‘Where do we go from here?’
The market surge of the past six months has been a celebration of the government’s success in staving off financial doom. Stocks deserved to rise from panic lows. To keep rising in the future, the market needs a sign of real economic recovery, and that requires a surge in consumer spending, business investment, and home buying. That is what is in doubt, and one word explains why: debt. Despite an uptick in consumer saving, debt levels have only barely begun to come down. Even after the recession ends, economists expect the gradual reduction of the nation’s massive consumer debt to take years. In the meantime, they are warning that the economic-growth surge expected for the second half of this year could be followed by slower growth and a softer stock market in 2010.
The optimists see signs that the recession is ending, and they forecast the normal next step: a stronger stock market. The pessimists believe the most important development is not the end of the recession; it is the long process of debt reduction by families and businesses. So, what do we do?
Easy–refer to the 4 steps above!
If you are still complaining about politicians, remember Plato’s words of wisdom, “Those who are too smart to engage in politics are punished by being governed by those who are dumber”
Thought you had it bad? ….
It’s a tie in the Harvard-Yale investment game. Both schools were thrown for colossal losses. The universities said their endowments, higher education’s two largest, each lost 30% of their value in the year ending June 30. Combined, the pair of investment pools shrank by a staggering $17.8 billion. Declines in the endowments have forced the two schools to cut budgets and delay plans to expand facilities and hire staff, as even the country’s top colleges are being forced by the financial crisis to retrench. The pain is being felt widely across higher education. While many private colleges are getting less help from their endowments, public universities are also suffering because of state budget cuts. (Can’t wait for my two children to graduate!…What were we THINKING???)
We all make mistakes; How you handle them makes a difference.
If there’s one lingering conundrum that has plagued investors over the past year and a half, it’s this one: “If only I had acted differently—if only, if only, if only…..”.
Yet here’s the problem: While we know that we made investment mistakes and vow not to repeat them, most people have only a vague sense of what those mistakes were, or, more importantly, why they were made. Why did we think and feel and behave as we did? Why did we act in a way that, in hindsight, seems so obviously stupid? Only by understanding the answers to these questions can we begin to improve our financial future.
This is where the concept of behavioral finance comes in. Most investors are intelligent people, neither irrational nor insane. But behavioral finance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are “normal smart” at times, and also “normal stupid” at times.
The trick, therefore, is to learn to increase our ratio of smart to stupid behavior. And since we cannot (thank goodness) turn ourselves into computer-like people, we need to find tools to help us act smart even when our thinking and feelings tempt us to be stupid.
Here’s one example: Investors tend to think about each stock purchased in a vacuum, distinct from other stocks in our portfolio. We are happy to quickly realize “paper” gains in each stock, but procrastinate when it comes to realizing losses. Why? Because while regret over a paper loss stings, we can console ourselves in the hope that, in time, the stock will roar back into a gain. By contrast, all hope would be extinguished if we sold the stock and realized our loss. We would feel the searing pain of regret. So we do pretty much anything to avoid that pain—including holding on to the stock long after we should have sold it.
Successful professional investors are subject to the same emotions as your every-day investor. But we counter it in two ways. First, we know our weakness, placing us on guard against it. Second, we establish “sell disciplines” that force us to realize losses even when we know that the pain of regret is sure to follow.
Before the end of this year, I will have to make some tough decisions. There is a point of no return; when the odds are slim to none that a company’s stock price will rebound. Dozens of facts that go into each and every buy/sell decision but in the game of investing – one must also be able to take losses.
I ask that you trust me with these decisions while also realizing that, indeed, I’m only human. Here’s to a fruitful, profitable autumn!
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.