Archives for April 2009

Why Should the Next 10 Years Be Better For Investors Than the Last 10?

Last week Tony wrote about “The ’99 Rolloff“.  He discussed 10-year returns, and the “lost decade” we just experienced.  Although the last 10 years in the stock market have been disappointing, the next 10 years should be better for investors.

Historically, periods of recovery have followed disappointing periods.From 1928-2008 there have been ten 10-year periods where the stock market has returned less than 5%.In every case, the 10 years following these disappointing periods produced satisfactory returns.These periods of recovery averaged 13% per year and ranged from a low of 6.6% to a high of 18% per year.
It is also important to remember that lower prices may increase future returns.Consider two times in history.The first is March 2000:

  • The Dow is at 11,119
  • With a trailing P/E of 25
  • A dividend yield of 1.5%
  • And a trailing 10-year return of 17.9%.

The second is March 2009:

  • The Dow is at 7,609
  • With a trailing P/E of 10 to 14
  • A dividend yield of 3% to 4.4%
  • And a trailing 10-year return of -0.4%.

In March of 2000 future return expectations were high, we saw record inflows into stock mutual funds and investor sentiment was euphoric.The next 10 years produced a dismal return of -0.4%Compare March of 2000 to the environment in March of 2009.Now the future return expectations are low, we have seen a massive level of redemptions in stock mutual funds and investor sentiment is that of despair.We do not yet know what the next 10 years will produce, but with a P/E that has been cut in half and a dividend yield that has been doubled, we are betting that the next 10 years will look much better than the last 10 years.~AdamSources: Thomson Financial, Lipper, Bloomberg, Davis Advisors

The ‘99 Rolloff

I serve on the Endowment Committee of a local not-for-profit organization, and this morning we had our annual review from the Investment Manager of the portfolio (not me).  I’m sure it was quite daunting to sit in front of 10 other people and explain the horrible performance and market environment we are in, but he did a nice job.  He’s from out of town, so he doesn’t know that I, too, am a portfolio manager, but I took it easy on him:)

He reminded me though of something I had read a few months ago, but I had forgotten about it and thought that you, gentle reader, should know.  A lot of times, you’ll hear about the rolling 10 year average for the market.  Since the dawn of time, very few of these rolling 10 year averages have been negative, only 6 since 1900.  Most of the time, if you can stay invested for 10 or more years in the market, you’ll most likely have made money.  In early 2009, you began to hear about ‘the lost decade’, meaning that we were at the same level as we were 10 years ago.  Well, at the end of this year, we’re set up for another disappointing 10 year rolling average as we know that the Dow in 1999 produced a return of 25.2%.  Well, at the end of this year, that return ‘rolls off’, making it quite hard to produce a compelling story of the new rolling 10 year average.  My rough calculations show that the Dow would have to produce a 13% return in 2009 just for the rolling 10 year period to break even.  A lot can happen the rest of 2009, but note that as of now, the Dow is down over -9% YTD.

All this to say, consider yourself warned.  If it happens that the Dow doesn’t return over 13% in 2009, the media will have a heyday with this news and it will most likely cause investors to become anxious again.  You need not be one of those because you heard my warning clear back in April:)

While it may make for interesting investment banter, we’re not interested in 10 year rolling averages, and neither should you be.  Instead, be interested in prudent investment choices that protect and increase your wealth.  We strive to that end, and you should do the same.  Ignore the noise, stay the course.



Notes from Due Diligence Meeting

Last week, I had the opportunity to travel to New York City to conduct due diligence on Selected American Shares (SLASX), one of the funds we own for our clients.  I met with co-managers Chris Davis and Ken Feinberg to discuss the intricacies of the fund.  While a majority of our time together was spent delving deeper into the Fund itself (which gentle reader, you might find quite boring), I wanted to pass on a few nuggets of wisdom from Chris and Ken about investing in general.  (In no particular order.)

  • Predicting when things will get better is worthless, no one knows.  Its better to stay the course, the rewards will come in due time.
  • Long term, investing in equities is the best choice as you are an owner of a company, you own a piece of GDP.
  • Getting out until things get better is disastrous.  Timing the market never works.  Market recoveries tend to be front end loaded, and if you’re in cash, you may miss the opportunity.
  • Global vs. Domestic distinction will soon disappear as global becomes the norm.
  • 45% of S&P 500 earnings are derived from outside the U.S.
  • China will continue to buy our treasuries if we continue to buy their goods.  (How many ‘Made In China’ labels are on your household goods?)
  • Future opportunities: solar energy, globally dominant businesses, beneficiaries of crisis, energy, commodities, agriculture.

Ultimately, I took over 5 pages of notes and remain confident in their Fund for the long term.  I only mention the few things above to give some general thoughts they had regarding investing.


PS: My wife traveled with me to NYC and we had a great time exploring the city.  Should you ever find yourself there, we’d certainly recommend doing the Gray Line New York bus tour (we did the Downtown Loop), where we saw Central Park, Times Square, Ground Zero, Wall Street, and many other things.  We also had a fabulous dinner at Anthos, which we’d highly recommend.


Disclaimer: Some clients of Freedom Financial Solutions, LLC and/or Tony Hixon’s family accounts own shares of SLASX.

March Was a Fabulous Month For Stocks

Stocks posted nice gains during March after 6 down months in a row. It’s about time isn’t it? We have not had a 5%+ up month for the S&P 500 since December 2003…a streak of 62 months. We were well overdue for a positive month.

Here are the facts:
  • For March, the Nasdaq turned in a 10.9% gain – its best month since November 2002, when the last bear market bottomed.
  • The S&P 500 rose 8.5% in March, the best monthly gain since October 2002.
  • The Dow Jones Industrial Average was up 7.7% in March, it’s strongest monthly gain since October 2002.
Normally, a month like this would be big news. But, I’m seeing very little written about it today. This is probably because:
  • stocks still ended the first quarter with a loss.
  • this is the sixth quarter in a row that stocks have ended with a loss.
  • the market hit a new 12-year low on March 9th.
  • investors still lack confidence and fear dominates the TV.

BUT, we just had the best month in more than six years! Perhaps this is the V-shaped recovery that Brian Wesbury forecasted. Check out this YTD chart for the Dow:

Here are even more stock market stats for the quarter and month for the data freaks (like me).
Now that we finally broke the six month streak of poor monthly performance for the market, let’s hope that the 2nd quarter will break the six quarter streak of poor quarterly performance:-)