Fagan Associates Archive for September, 2009

According to the Congressional Budget Office (CBO), a federal agency within the Legislative Branch of the Federal Government charged with providing Congress with objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions on the wide array of programs covered by the federal budget, the “federal budget is on an unsustainable path, primarily because of the rising cost of health care.”  Today, according to many sources, spending on health care by all Americans represent approximately 17% of our national output as represented by the Gross Domestic Product.  Furthermore, the number of individuals (Americans as well as illegal aliens) that are uninsured who reside in the United States is expected to increase from 45 million today to approximately 54 million ten years from now and the federal share of Medicare and Medicaid are expected to increase from its current level of four percent today to nearly six percent in 2019.

Clearly, there needs to be some reform to our health care system and there appears to be some agreement between the Democrats and the Republicans on the need for providing coverage to all Americans, although the definition of “American” is under debate.  Should the plan cover those individuals here illegally or not?

There also appears to be some common ground regarding the requirement that private insurers offer basic coverage to all without regard to preexisting conditions.  Both sides of the political aisle also appear to be in agreement regarding subsidizing those individuals that cannot afford the insurance.  However, there is disagreement on how this will be paid for.  In his speech this past Wednesday President Obama pledged that he would not sign any health care legislation “that adds even one dime to our deficit over the next decade.”  However, this will most likely be accomplished by further taxing those that earn above a certain threshold rather than the cost-cutting scenario outlined by the President.

A final point of agreement pertains to the potential for allowing individuals to purchase health insurance across state lines.  Although currently not available, should this be changed it would most likely increase competition thereby bringing down costs.

Arguably, this is where much of the agreement between the Obama Administration and the Democrats versus the Republicans ends.  Generally speaking the former advocates a Public Option, one similar to Medicare and Medicaid while the latter favors a private remedy.

THE BOTTOM LINE – As fiscally conservative individuals, we believe that a remedy that includes the private sector and excludes a public option is preferable.  However, keeping in mind that our job is to identify areas of potential for profits in the stock market, we will table our views and concentrate on what the most likely outcome might be as a result of this debate.  We believe that some sort of public option will be included in health care reform resulting in an erosion of profit margins for most health care providers including equipment manufacturers.  Therefore, given the level of uncertainty as to how health care reform will play out, we would recommend an underweighting of the sector with three exceptions, large-cap, profitable biotechnology companies, pharmacy benefit managers and medical record providers.

These days, when the media wants you to believe that you can buy into the stock market at the perfect time and then sell at precisely the right time, when the media wants you to believe that we are in a “trader’s market” and that you need to spend every waking moment watching the business channel and then tweaking your portfolio, it pays to take a moment to become better acquainted with some sound, time-tested, investment principles.  After this fifty percent run-up in the stock market, it makes sense to review your long term investment objectives and determine whether your portfolio is constructed appropriately to achieve those objectives.

Our first recommendation to the readers is to become an investor rather than a trader.

Don’t concern yourself with what will occur in the stock market over the next week,

month or even quarter, but rather what do you believe will be the direction of stock prices

over the next one to three years.  As noted above, keep in mind that the media wants you to be a trader so that you will stay abreast of the markets on a daily basis.  Become an investor.  Tune out the “halftime report” of each trading day.  Tune off “market wrap.”  Tune off news teasers like “you can’t afford to miss these earnings releases.”  Forget the fact that “September is historically a bad month to invest.”

Assuming that you agree and are an investor rather than a trader (trading may have

worked during the last bull market, but is counter productive to long term growth of

capital), make certain that your stock holdings are diversified across four to six different

industries.  You therefore are able to weather any unexpected downturns in a particular

sector.

A third recommendation that may help you invest more profitably over time is to realize

that you will not be right all of the time.  However, the important factor is to be right over

time.  Once again, don’t appraise your portfolio on a daily basis.  It becomes not unlike

weighing yourself every day.  Given these market conditions over the past couple of

years, you will never be happy, eventually become exasperated and give up.  Measure

your performance versus appropriate indices over time and recognize that you will make

errors.

What matters during periods of consolidation is that you exit with the right portfolio.  Simply put, when evaluating your portfolio you must assess the potential of your holdings as we exit the current economic malaise.  Do you own the companies

with earnings growth potential?  Do you own the companies that are increasing their

share of the market?  Do you own the companies with a proprietary product or service?

Continue to invest on a systematic basis through your company sponsored pension plan

such as 401(k) or 403(b).  Assuming that you are allocated appropriately between stocks

and bonds to meet your long-term objectives, it is imperative that you do not make major

changes to your investment patterns during this downturn.  Use the “sale on stock prices”

to continue to dollar cost average.  Each dollar invested will now go a bit further in

purchasing shares based upon their low net asset value.

Remember that excessive optimism does not yield stock prices at attractive levels, excessive pessimism does.  Where do you think we are now?

During times like these it pays to upgrade your portfolio to industry leaders.  Do not

accept the marginal investments that you currently own.  If they will not come out of this

correction as industry leaders, trade up to ones that will.

Once again, utilize weakness in the stock market to tailor your portfolio to what you believe the serves your best interest.  Average down in your mutual fund and/or look for companies that will lead us during the next leg of this market.

BOTTOM LINE – Retail investors have a tendency to buy high and sell low.  Look to buy low, when anxiety is high.  Also, keep in mind that the intent of the news media is to create a “you can’t miss this next story” atmosphere.  We say that, when it comes to your investment portfolio, most of the time, yes you can.  Don’t think anybody is smart enough to catch the bottom and top of market moves.  They don’t exist.  However, what has been proven to work is allocating your assets according to your objectives and then sticking with it.