Fagan Associates Archive for April, 2009

Over the past few days there have been illuminating comments from several leaders either from government, business or the international finance community detailing the origins of the current economic mess, where we are now or the repercussions of the crisis. We thought you might find them helpful in determining how to invest your hard-earned money.

The first comment comes from the transcript of a press conference that included Jose Vinals, Counsellor and Director of the International Monetary Fund’s (IMF) Monetary and Capital Markets Department. Mr. Vinals noted that “based on the broadening credit deterioration, we have increased our estimated writedowns, actual and potential writedowns, on U.S. originated assets from $2.2 trillion in our interim update in January to about $2.7 trillion in the current report.” It was only last October that the losses projected by the IMF was less than one-half the current figure. According to Mr. Vinals, “of the writedowns that are pending for the banking system, about one-third has already been incurred in 2007 and 2008, and two-thirds are potential writedowns for the period 2009 and 2010.”

The IMF estimated that approximately two-thirds of the losses would be borne by banks with the balance by insurance companies, hedge funds and pension funds absorbing the balance. Of the total, the IMF estimated that U.S. banks have written down about one-half of what they will ultimately end up doing.

Despite the ominous and mind-numbing numbers referenced by Mr. Vinals, at least at this point and absent a revision upward, the equity markets seem to have priced in these writedowns.

In describing the depth of the current recession, the IMF said in its latest World Economic Outlook that “this downturn represents by far the deepest global recession since the Great Depression.” The report also projected that the global economic output will shrink during 2009, the first annual decline in more than six decades.

Calling the public and private infusions of capital into financial institutions thus far “piecemeal and reactive,” the IMF recommended that due to the “current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares even if it means taking majority, or even complete, control of institutions.”

Should this above paragraph come to pass as the IMF, along with others have alluded to the possibility, at least at this time, it would mark the end of capitalism in the United States as we know it. Some investors might welcome this change. However, we think, long-term it would be detrimental to the financial well-being as well as to the standard of living in America.

As noted above in a narrower context, we do believe that the stock market has priced in the majority, if not all of the current economic slowdown. We therefore believe that after the more than twenty-five percent move off the bottom and a necessary consolidation of some of those gains, stocks should move higher.

Experience is very underrated by those that do not have any! Needless to say, these past few years have been a time that provided many lessons to those of us that have been in the financial services business a long time (too long to mention) as well as those that are still wet behind the ears. There is an old saying on Wall Street that goes as follows, “investors make money during bull markets and learn during bear markets.” That said, we thought now might be a good time to reflect on some of the lessons we have learned over the past few years.

An investor buys perceived potential and sells a lack thereof. What did you do when the stock you bought ran up to ludicrous levels? Or, what did you do when the stock you purchase began to tumble as the potential for future growth declined? Have strict buy and sell disciplines. The most important lesson that we have learned from this bear market is that a sell discipline is more important than a buy discipline! Don’t chase hot stocks. Look for stocks with solid, long-term growth potential.

When investing, don’t look to get the final ten percent of a stock’s move upward or believe that you can buy within ten percent of the bottom. Rather look to capture that middle eighty percent move! We believe that we are well on our way through that “middle eighty percent” noted above.

“Stay on the offensive. Always look for good ideas and push out the mediocre ones. If every week you find a couple good things and say, ’stock number thirty-one in the portfolio is okay, but these are better. Sell number thirty-one!’” (Peter Lynch, legendary manager of the Fidelity Magellan Fund). Don’t fall in love with a particular stock or sector! Continually challenge your ideas among yourself as well as your peers. Change when it is appropriate. Don’t carry negative baggage around!

We know that it is impossible to be right all of the time. We just want to be right over time. Recognize that there are many times when you may be wrong! Remember, a .300 hitter is in the hall of fame. However, that batter gets out over seventy percent of the time! The key is when you make a mistake, sell and move on.

Excessive optimism doesn’t yield stock prices at attractive levels, excessive pessimism does. There exists a lot of skepticism about the current rally in the stock market. That is good. The markets climb a wall of worry. Remember during 1999 when excessive optimism reigned? Look what that wrought! Now, there is adequate pessimism! We believe that this pessimism as well as solid economic fundamentals bode well for the market over the next twelve to eighteen months.

“I did so by never becoming too confident in having made the right decision.” (Former Treasury Secretary Robert Rubin, upon his retirement and in response to the question of how he lasted so long) As mentioned above, always challenge your ideas. Be concerned with the downside. The upside will take care of itself.

“I work in a humbling business. That’s what Wall Street is all about. If you are afraid to be humbled by the market, stop reading and go buy a bond.” (Market Analyst, James Cramer). Self explanatory.

“Try not to react too much to the market because the market is reacting to things you don’t want to react to. Keep your eyes on the horizon and ask yourself, ‘which stocks will I be kicking myself over if I don’t own those stocks five year from now.’” (Kevin Landis, Fund Manager, First Hand Technology Value Fund) We believe that those stocks you will be kicking yourself five years from now if you don’t own operate in the power generation, energy, health care and financial services industries.

“Once a bull market get under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, the people superimpose an ‘I can’t miss the party’ factor on top of the fundamental factors that drive the market.” (Warren Buffett, C.E.O., Berkshire Hathaway). That said, at the end of a bear market, stocks are held by their rightful owners. That is where we are now, fundamentals will rule. Never again be suckered into buying a stock just because it is going up! Do the research. Know your holdings.

“An investor doesn’t pull up his turnips every day to find out if they are growing.” (U.S. Treasury Secretary, Paul O’Neill). What do you do? Do you check your portfolio every day over the internet? If so, relax and let some time pass! If you purchased a security for the long haul, don’t check on it every minute. Remember, “a watched pot never boils.”

We hope these little tidbits of information brings into perspective how you view your investments. Perhaps you have fallen into some of the traps noted above. If so, don’t carry around that baggage. Make an investment plan now! Act now! The beginnings of a bull market are opportune times to take some action.

In just one short month, the stock market as measured by the Standard & Poor’s 500 has advanced nearly twenty-two percent, closing at 825.16 this past Wednesday, up from 676.53 one month prior.

Meanwhile, investors who had been cowering in corners, wondering if the stock market would ever stop dropping are now looking for the next home run. Questions of the week include “when will General Electric get back to $20″ and “do you like Bank of America” at these levels. Much like Americans facing a recession and looking for deals at dollar stores, investors are scouring bargain bins for single digit stocks. Regarding this trend, we strongly advise caution and restraint.

This is not a commentary on the merits of any particular company. In fact, we have recently purchased shares of General Electric as well as Bank of America for clients. However, ironically, many of the same investors who were in a state of panic one month ago are those that are now looking to recoup all of the bear market losses in one fell swoop. This doesn’t make sense. We urge investors to work on developing a strategically sound investment plan, one that is appropriate for your goals and objectives and, while reviewing periodically, stick to it. Keep in mind that even the most sound investment plans have lost money over the past years. Nonetheless, balance and patience will win out over hastily made decisions to purchase the bargain “stock du jour.”

There are plenty of data to suggest that the downward trajectory of the economy has begun to level off. Just recently, we have been treated to encouraging (or at least not discouraging ) data from the housing market, the manufacturing sector and have witnessed a slight uptick in consumer sentiment. Furthermore, President Obama has begun to materially tackle the economic issues at hand without appearing like “Chicken Little” and without daily lambasting the business sector. On top of all this, mortgage rates are at or near record lows. The stock market, long a predictive barometer of future economic activity, has made a breath taking advances over the past four weeks.

Speculation can have a part in many portfolios but diversification and quality will see you through this volatility.