Archives for December 2009

‘New Normal’ Is the Most Overused Phrase of 2009

Have you heard that the U.S. economy now has a “New Normal”?

Bill Gross and the folks at PIMCO use this term to describe their forecast for slower economic growth, increased regulation, and a smaller role for the U.S. in the global economy.

Now, it seems that everyone is using the phrase, “New Normal.”  The phrase, “New Normal”, even tops a list of most overused phrases of 2009.

My question is: What was normal anyway? There’s no such thing as normal.  The economy is always changing.  Our economic future is always uncertain. Cycles of economic growth and contraction are always different.

To say our economy is normal is to say that there is a common, usual, and regular pattern to follow. Not true.

Advances in technology, changing demographics, innovation, and government regulation are constantly creating changes to the economy.  The minute we think something is normal we better look out.  Change is on the horizon.

Let’s can the term “New Normal” and just agree that the economy is constantly changing.

Tax the Rich!

A recent Bloomberg National Poll revealed that 66% of Americans believe taxes on the wealthy should be raised to reduce budget deficits, according to BusinessWeek.  The problem is the wealthy already pay nearly half of all federal income taxes.  In 2007, around 4.5 million households filed returns reporting $200,000 or more of income, according to IRS data.  They paid a combined $610 billion, or 44% of all federal income taxes.  Eventually, tax experts believe that Congress will also need to raise taxes on those making less than $200,000.

China Now Largest Auto Market

Two years ago, J.D. Power predicted that China would surpass the U.S. as the world’s largest auto market in 2025.  Well, they were off by 16 years.  China has officially overtaken the U.S. as the world’s biggest market for autos.  The first time any other country has bought more vehicles than the nation the invented the automobile.  Now that the Chinese buy more vehicles than Americans, it could produce ripple effects for the environment, gas prices, and even the kind of vehicles car automakers design.

More than 12.7 million cars will be sold in China this year, up 44% from the previous year.  This surpasses the 10.3 million forecasted sales for the U.S.

Investment Implications:  U.S. Population = 300 million.  China Population = 1.3 billion.  Vehicles are just one aspect of the expected increase in consumption by the world’s most populated country: China.  We have and will continue to deploy capital to take advantage of the shifting consumer trends taking place in China.

Source: AP Business Writers, Google

We’re Pounded By Data

A new study sponsored by AT&T, Cisco Systems, IBM, LSI, Oracle and Seagate Technology discovered that the amount of information we recieved throught our eyes and ears in 2008, ouside of work, was the equivalent to a stack of paperback novels seven feet high covering the continental U.S. and Alaska!  That translates into 3.6 zettabytes, or 3.6 trillion gigabytes.  The average American recieves 34 gigabytes of information a day outside the workplace.  One gigabyte is close to 1 hour of high-definition video.

The study sifted through information that people come in contact with in hours, words and bytes from TV, radio, computers, phones, print, music and theatrical movies, but all outside of the workplace.  Total consumption in 2008 totaled 1.3 trillion hours, that’s 11.8 hours per person per day (Figure seems high because a person might be reading and watching TV while the radio plays in the background would be triplecounted.)  The average amount of words consumed per day per person in 2008 was 100,500.

This is not to say that people are absorbing all the data, meaning a TV set might be on in the living room, but we’re not always paying attention.  The study will be used mainly for marketing as it defines how many bits and bytes are entering households, spots trends in media use, and will help identify technologies needed to support data growth.

Source: Investor’s Business Daily

16 Days and Counting…

According to my math, there are 16 more days that the stock market is open until this decade is history.  Over the last 119 months, the S&P 500 has posted a total return of -10.8%.  3 out of 10 major sectors have contributed to the negative return:  Technology (-54.1%); Telecom Services (-52.4%); and Financials (-21.7%).  The other seven sectors from best to worst are:

Energy (+149.4%)

Consumer Staples (+66.9%)

Materials (+56.3%)

Utilities (+52.4%)

Health Care (+27.5%)

Industrials (+6.9%)

Consumer Discretionary (-15.5%)

FEAR: The Investor’s Biggest Challenge

Fear and greed are the two most dangerous emotions that investors will face.  But, I think fear is the bigger problem of the two.  Why?  Because fear can prevent you from ever investing in the first place!

FEAR leads to procrastination. It’s good to have an analytical mindset, but don’t let it lead to analysis paralysis.  We can over-analyze to the point where we wait too long to get in an investment and we miss out on gains, or worse, we never invest at all and completely miss an opportunity.  Don’t be afraid to make mistakes.  Every good investor has made their share of mistakes.  Mistakes are good.  We can learn from them.  A good investment strategy includes principles that have been tested over time.  Assuming you are following good principles and decision making rules you will find that over time your wins will become greater and your losses fewer.

FEAR of loss will never bring reward. You have to take risks if you want the rewards of investing.  There are no shortcuts.  You won’t become wealthy by keeping your money in money market funds and CDs.  Of course it’s important to avoid losses, but realize that risk is necessary if you want big rewards.  Learn to take calculated risks.

FEAR intensifies as your portfolio grows. As the dollar amount of your portfolio grows the fluctuations seem larger.  For example, lets say you are an investor just starting out and you have a $10,000 portfolio.   If we have a bad year in the stock market (like last year) your portfolio may take a 10% hit, or a loss of $1,000.  Now let’s fast forward 20 years and assume your portfolio has grown to $1 Million.  A 10% loss on $1 Million would be $100,000.  Now that’s a little harder to swallow than the $1,000 loss…huh?  The loss is still the same 10% but it seems greater because you are now dealing with a much larger dollar amount.

FEAR leads to pessimism.  As we get older we tend to get more conservative.  That’s OK because preserving what we have accumulated in our portfolio is important as we approach retirement.  But, I’ve seen it work against investors too.  Some people get so conservative that they are afraid to take any risk at all.  A natural part of investing is dealing with uncertainty.  It seems that there is always a reason to be uncertain about the future of the economy.  Most investors I know have built there wealth by being optimistic during times of uncertainty.  Uncertainty can lead to fear which can make an investor very pessimistic…always looking for reason not to invest.  While it’s important to consider the risks when investing you should seek to find opportunities and reasons to invest.  Most successful investors I know tend to have an optimistic outlook.

Don’t let FEAR stop you from being a successful investor.  Learn how to manage this powerful emotion.  Learn how to determine when your fears are justified and when they should be ignored.

So, how do you deal with fear when it comes to investing?