January 5, 2010
Please find your year-end 2009 statement enclosed. For the year the – Dow Jones was up 19%, the S&P 500, 23%, and the Russell 2000, 25%. The value of the S&P 500 as of 12/31/09 = 1,115 (used to compare your account (from inception) to the S&P 500). As a reminder – to the left of the 12/31/09 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 12/31/09. 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 fees.
In my last Newsletter I wrote the following; “Successful professional investors 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”. As you noticed, I did just that but also let our winners run. Many stocks that were retained at the market bottom in March are up significantly (2-5X). Fortunately, the ones labeled as losers and were sold have not made progress (thus far) due to their financials. I believe that our bond of trust lies in this paragraph. You have hired me to make the tough decisions.
Goldberg Capital Management (GCM) has been operating for fifteen years, and there has never been a greater disparity in annual client returns than this year. Everyone profited in 2009, but he percentage difference among client returns is atypical. Some of the obvious reasons are that clients do not own the same stocks or number of shares, account values vary and risk profiles are different. The most meaningful reason for this chasm in 2009 was individual response to the market crash/bottoms from September ‘08- March, 09. Now, please allow me to digress and use this as an educational topic.
First of all, everything stated today is with the benefit of hindsight. We now know the market rebounded from the lows of March 9th , but at the time NO ONE knew the eventual outcome. Therefore, when we talked during this time frame and you offered your sentiment, neither of us knew what would follow. This is not a matter of right and wrong but an issue of the pain one was willing to endure during the market tumult.
I spoke with all clients between November and March and recorded sentiments. I asked the following questions of everyone: What would you like to do with your available cash (raise cash or invest)? and How do you feel about the short-term and long-term future?
Many of you asked what I thought or what I was doing personally, and my pat answer was; I believe most of our stocks are priced for failure, and if the world is not coming to an end, then this is a great time to put money to work. I also reminded that I am not you (I am very aggressive) and that this has to be an individual call. The truth was that I had no idea what was going to happen, particularly in the short-term, but also stated that never had I seen valuations of so many good companies priced for failure! The result? – It was virtually split between those wishing to sit tight or raise cash and those wishing to follow me into the abyss. And I do mean the abyss. It was terrifying. Just ask my wife.
Another reason for the 2009 disparity was due to clients wishing to harvest losses at year-end 2008 for tax benefits. Please note that when I sell an investment, I’m reluctant to buy it back (even though I like it) because there is nothing worse in my profession than being wrong twice. I know, I’ve done it. Not having certain stocks in client portfolios also affected returns, but again, who knew at the time? Not me! It just might have been the better choice. For the most part, it’s now clear; being aggressive and retaining most of our investments was the better choice, but who knew?
The U.S. stock market wrapped up its worst decade ever (there’s dispute about this being the actual end of the decade). In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000’s. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade. Since the end of 1999, the Standard & Poor’s 500-stock index has lost an average of 3.3% a year on an inflation-adjusted basis, compared with a 1.8% average annual gain during the 1930’s when deflation afflicted the economy. While the recent market trend has been a steady march upward, the last decade is a reminder that stocks can decline over long periods of time. Of the 30 stocks today that comprise the Dow Jones Industrial Average, only 13 are up since the end of 1999, and just two-Caterpillar Inc. and United Technologies Corp.- doubled over the 10-year span. For the ten-year period that just ended, the S&P was off by 24%!
So, what went wrong for the U.S. stock market? It turned out that the old rules of valuation mattered. It’s what I’ve stated time and time again. The reason why I buy and sell a company is most often based on valuation! Just ask Warren Buffet! Little is left standing, regardless of a company’s valuation, when the market plummets, however. That’s why it takes intelligence gathering, courage, patience and luck to do this successfully. Emotion has no role in the process; Patience does.
ALL clients who have been with GCM for 10 or more years have handily beaten the stock market indexes. This even takes into account my management fees (a negative affect on returns) and the fact that we are never 100% invested. Those clients who started with GCM at the beginning of the decade have steadily outperformed the indexes. On average, we outperformed the S&P by 55 percentage points. For example, if a client started with $1million, and the S&P as stated above was down by 24% for the decade, the value as of 12/31/09 (without management fees and reinvested dividends) would approximate $760,000 vs. $1,310,000 for the typical GCM account. We can therefore state that GCM added $550,000 of value to this account. Keep in mind that most accounts are blended – a combination of fixed income and equity. This implies that the S&P is not truly representative but is the best index for our purpose. The clients who started with GCM between the years 2005-2007 are holding their own, but further work is necessary. I readily admit that starting clients during market highs takes time to overcome. In hindsight, we would have been better off sitting on cash and waiting for the right moment. However, I could not predict that moment. I’m confident that having a long-term investment horizon will afford the same financial success as that of GCM’s longer-term clients.
On March 9th (the day the market bottomed), I was with a friend and fellow investment manager. We were traveling back from a small-cap conference that had only one-half of the normal attendees due to the dire economic climate. While waiting in the Vegas airport (how apropos), he received several calls from clients telling him to sell every investment they owned. I recall him asking incredulously, “You want me to sell the 7% IBM bonds too?” Sell everything, was the rally cry! We sat in shock watching the markets plunge on CNN. Many of the so-called CNN experts believed that the financial world was imploding. The ultimate fear!
Later, I asked my friend what happened to those clients who opted out. He told me they asked him when they should get back in to which he replied, “You tell me, I have no idea.” All of them missed out on the significant “bounce” because they wanted control over the process. Lessons learned: the stock market is difficult to time, emotions have no place in the investment process, turn off CNN, and it is better to buy when others are selling. I’m certain some of you were thinking similarly to my friend’s clients but avoided making that financially fatal phone call. And for that, we have benefited…. and I thank you.
Having a practical, long-term horizon …
GCM’s oldest and largest holding is Telecommunication Systems – (TCS). My first scheduled meeting with them (as mentioned in a prior newsletter) was in Annapolis, MD, on an infamous day in history – 9/11/2001. Of course, the meeting was canceled and rescheduled for the following month during a time of great uncertainty. I did my homework prior to the meeting but found the company difficult to understand – text messaging, location based services, E911, 3G networks, secure communication devices sought by the government.
Here is today’s business description for TCS: TeleCommunication Systems, Inc. engineers and delivers highly reliable wireless communications technology. TCS is a leader in wireless text messaging and location-based technology, including E9-1-1 services and commercial applications like navigation that use the precise location of a wireless device, and secure satellite-based communications systems and services. Customers include leading wireless and VoIP carriers around the world, cable MSOs, automotive telematics vendors, and agencies of the U.S. Departments of Defense, State, and Homeland Security. TCS is one of six primary vendors on a $5 billion Army Worldwide Satellite Systems Contract vehicle.
Think back to 2001. Many of you may not even have been using a cell phone yet. No one I knew was texting or knew anything about it. Smart phones, for the most part, did not exist, so surfing the web was non-existent. There was certainly no camera on your phone, and if you called 911 on your cell, good luck! You’d still be waiting to be rescued.
Here is a TCS press release dated 12/29/2009: TCS is set to process close to 700 billion text messages by the end of 2009 and is poised to handle the tremendous surge in messaging forecasted for this holiday season. The company expanded its deployed messaging platform base by nearly 30 percent in 2009, as TCS wireless carrier customers continue to experience and forecast strong growth in text messaging. According to a recent report from Frost and Sullivan, the text messaging demand is estimated to increase by more than 50 percent in 2010. Based on latest growth trends, TCS messaging software in carrier customers’ networks is expected to power well over two and a half times the volume it handled in 2008 by the end of 2009. Additionally, TCS expects the upcoming 2009 New Year’s Eve busiest hour spike to be nearly three times the spike of last year.
As TCS was explaining its business during this 2001 meeting, I asked them to back up and please define texting. Today it seems silly that none of the guests in the meeting knew anything about texting and could not comprehend its benefits. We were told that texting started in Asia, was already in Europe and would eventually be accepted practice in the U.S. Kids would use it first and then it would filter up to us older folk. I cannot recall the exact number of texts they estimated would eventually be sent, but I can tell you this– it’s a fraction of what has actually occurred (as stated in the paragraph above). Who knew? Not me, that’s for sure. Liking what I heard, including the management team, the financials and the company’s technology, I decided to take the plunge. The first shares were bought for $1.19. TCS closed at $9.68 on 12/31/09, up 8X from original purchase. The good news is that I think this company still has room to run, and here’s why:
The first reason is that TCS now holds 108 patents with over 300 applications pending. Additionally, they have recently purchased a couple of companies in the location-based services (LBS) space. Demand for LBS services is exploding with the availability of the 3G+ networks and the prevalent use blackberrys, iphones, etc. TCS has cornered a significant piece of a market that experts say is valued at $15 billion+. Just like their vision for texting 10+ years ago, their vision for LBS and E911 (public safety) is prescient.
Mobile location services appeared to be one of the next natural steps in our move toward a truly unwired, permanently connected society. The ability to link a user’s content and personalized services with its geographic location seems like a “killer” application. Many business sectors, from entertainment to weather to tourism, etc., are coming to understand that location information can become an invaluable tool in their marketing armory and, therefore: they will pay to attract new customers. It is for this reason that TCS has developed VoyagerTM, which merges the three cornerstones of the next stage in mobile services – messaging, location and content access – into one consistent, coherent and ultimately flexible whole. Now that’s a mouthful!
In 2001, calling 911 on a cell phone was not dependable. The routing of the call was unreliable, and the emergency department contacted could not identify or locate you. The government instituted standards requiring carriers (Verizon, AT&T) to solve these issues. Eventually, a caller’s location needed to be verified within a couple of meters. TCS is one of two companies in the U.S. that performs the routing of E911 calls today and has met and or exceeded the government standards. If you look at your cell phone bill, you will see a charge for the E911 service. TCS has poised its businesses for the future. They are on the cutting edge of a technological revolution and… we are along for the ride!
In conclusion, being a patient, well-informed investor has its virtues. Yes, it’s great when a stock’s price takes off immediately after purchase, but that’s nothing more than the luck of timing. Believe me, it feels good, but I know that I am more lucky than smart. TCS has been volatile since the day of purchase. It has significantly affected the financial outcome of client accounts at quarter/year-end, but I tend to ignore this noise and focus on the distant horizon. If LBS is as big as I expect it to be, and TCS is the significant player I believe them to be, then it is best to be patient.
An assignment, if you wish to accept…
Wasn’t it obvious in 2007 that financial institutions and financial markets were about to collapse? (ha!) Well, it wasn’t to me and probably not to you, either. Hindsight error leads us to think that we could have seen in foresight what we see only in hindsight. Hindsight often makes us overconfident in our certainty about the future. Want to check the quality of your foresight? Write down in permanent ink your forecast of one or two stocks you own for each of the next twelve months, then measure the accuracy of your predictions. You are likely to find that your foresight is not nearly as good as your hindsight. Some prognosticators say that we are now in a new bull market and others say that this is only a bull bounce in a bear market. We will know in hindsight which prognostication was right, but we don’t know it in foresight. When my inner voice says that the stock market is sure to zoom or plunge, I activate my Bose “noise-canceling” headphones rather than trade. You might wish to activate a similar device, as well.
On a more personal note –
Despite our focus on financial health, we could not attempt to put a price on the physical health of our loved ones. Although I rarely discuss personal matters in my communications, I feel compelled to do so at this time.
My daughter, Hannah, recently underwent surgery due to her Crohns disease (an autoimmune disease that affects the intestine). She is recovering at home now and will be returning to college at the end of the month. She was having tremendous success in her first semester – earning excellent grades and making the lacrosse team– but was interrupted by her illness. As difficult as it has been to watch her suffer, we’re optimistic in her future because she is a bright and resilient young woman.
As her caring doctor explained the surgical options, he said to her, “Your father understands the value of long-term vs. short-term thinking. I’m certain that he does his job well because he’s focused on the bigger picture, and that’s what I also want you to understand. We can take the simpler route for short-term benefit or the more difficult one for a better long-term outcome. It may be harder now, but you will appreciate it in the future when you are able to enjoy a full life.” Comforting words of wisdom for us all.
As I tip my hat to you, here’s to long-term success and things that matter most. I am very optimistic for some of our holdings in the coming months and years. Best wishes for good health in the 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.