I hope this finds everyone having had a great Summer. All has been well at SJM. I have been taking the opportunity over the past few months to visit with clients and key members of the community, grow the business and increase resources and, yes, take some time off to reflect and recharge for the Fall.
The Summer brought many interesting headlines and events. Europe still dominated the investment headlines and more talk surfaced about growth, or maybe I should say lack of growth, in China. As I have mentioned to many clients, don’t expect any of this talk to go away soon. No fix to Europe exists without more pain, and export-driven economies such as China cannot grow if the world’s largest trading block (Europe) is in recession.
Mr. Market has brushed off slow growth news, however, and has had a good run. The S&P500 is up approximately 10% since May.
I am happy with this increase in asset values but, based on concerns about growth, I remain cautious. Stocks seem to have moved higher based on the hope that governments around the globe will continue to pump money into the system with low rates or bond purchases. I would prefer to see the market going higher based on solid top line revenue growth and strong bottom line profit growth but, as is often said, don’t fight the Fed.
At the end of last week, Bernanke gave his annual Jackson Hole speech. As anticipated, he suggested that the Fed will keep rates quite low for the foreseeable future. He also left the door wide open for more easing. If the Open Market Committee announces some form of QE3 in September, stocks are likely to continue up for the rest of the year.
Outside the U.S., if markets sense that more consensus exists among European policymakers toward market support (again, true stability and long-term resolution of issues in Europe are very unlikely), risk assets such as stocks should also get a short-term boost.
What does all of this portend for the Fall?
It is a very uncertain time. Day to day, markets seem to be reacting more to comments from policymakers than to economic fundamentals. As I have experienced on the water this Summer, winds, particularly winds driven by politics, can change quickly.
Bulls and Bears both continue to have solid arguments, and I could easily take either side of the debate. The most recent issue of Barron’s has a good summary of thoughts from many well-respected market strategists titled “Tough as Teflon” (you might need a Barron’s subscription but hopefully this link will allow you one view for free). As the piece points out, despite some rough news, the market keeps bouncing back and remains tough. Strategists such as Tom Lee from JPM are considered to be bullish, Bob Doll at Blackrock is cautiously optimistic, and individuals such as Barry Knapp at Barclays have in the past been concerned about a pullback. Beyond the hotlinks above, we will post updated links to the latest thoughts from many industry leaders on our Idea Flow page later this week.
So, what should investors do?
The market could remain tough and move higher or, as happens after too much use, the teflon coating might start to come off.
As is always wise on the water, be respectful that conditions can change rapidly. Be prepared and stay broadly diversified. Don’t reach for returns. Keep focused on your long-term plan and don’t be sold the hot investment strategy. Staying with the boating theme, and an old tried and true saying, make sure your “ventures are not in one bottom trusted” (Merchant of Venice – Shakespeare).
To offer some ideas that I hope you will find useful, below I have listed 10 rules of investing for successful long-term market navigation. They are certainly not “the” rules but are ideas that I have found useful.
Enjoy the start to the Fall!
10 Rules To Consider
1. Investing is Not a Competition – Invest for Your Goals
2. View Risk in Terms of Evaluating the Permanent Loss of Capital – Risk is Not the Variation of Returns / Standard Deviation
3. Do Not Run with the Herd – Be Contrarian
4. Understand the Position of the Person or Firm Producing the Research and Remember that Many Investment Theories are, well, Theories
5. Be Patient – Good Ideas of True Long Term Investors Often Are Rewarded
6. Avoid Leverage – It Can Offer More Upside but the Risk / Reward Often is Not Worth It Over the Long Term
7. Understand and Value Liquidity – It Should Always Be Placed at a Premium
8. Be Curious and Understand All Sides of A Trade / Argument
9. Only Invest in What You Understand – Do Not Be Sold
10. History Tends to Repeat Itself or At Least Rhyme (Thank You Mr. Twain) – Try to Learn from the Past Mistakes of Others – The Investment World Certainly Offers us Many Mistakes to Learn From