Weâ€™re on the verge of a new year, and that always means investors will be showered with ideas about what to do differently in the coming year. I usually prepare one of those messages too, but mine looks much different than most.
I find it rather pointless to recommend that investors change their portfolios just because the calendar year is changing, but that doesnâ€™t seem to stop all the others. Of course, they have something to sell, and compelling investors and their financial advisors to make changes helps keep trading activity high.
The day after Thanksgiving 2007 found the stock market, as shown by the S&P 500 index, positioned right where it was at the start of the year! In a tough market like this, big brokers and the independent brokers who cater to do-it-yourself investors need to generate income from somewhere–therefore they need trading activity to keep money flowing.
Maybe the best reason not to follow advice about changing investments by the calendar is the most obvious one: who really knows what will happen with next yearâ€™s stock market or the overall economy? How many stock market promoters got this year right when offering their â€˜â€™Outlook 2007â€™â€™ last year?
An article in a recent issue of Barrons Magazine presents the latest twice-yearly â€œBig Money Proâ€ roundtable discussion, which shows how managers of some of the biggest mutual funds are weighing in with their top picks and choices for what not to buy (â€˜â€™pansâ€™â€™).
For three of the last four gatherings, the stocks they liked best have under-performed those they liked least and recommended selling.
If a fund manager or other stock market promoter graces us with his/her best ideas and those top picks subsequently fare poorly, what accountability is there? Such predictions simply fade away in the minds of most who read them, and the same promoter is invited back to recommend more top picks for next year!
If fund managers are such good stock pickers, why do few of them manage to better their most relevant benchmark (the S&P 500 index) over long time periods? Wouldnâ€™t you think that a talented manager could look over the list of shares included in the benchmark for his market sector, eliminate those that lack future potential and ride along, owning only the best picks?
And that is exactly what many do, but still, their results are far from encouraging in many cases. I am amazed that so many fund managers with mediocre track records garner broadcast time or print space to air their opinions. Obviously, hosts seldom bother to check their performance from previous advice.
Oh, I could play the same game and tell you about the changes I am making to my managed accounts for 2008. But if you have followed this column in the past, you might be somewhat disappointed! Why? My outlook for 2008 looks much like my outlook for 2007. In fact, the outlook for 2008 looks a lot like my outlook for 2004, and what fun is that?
Much of my strategy involves how little actually changes from year to year when investors follow only the trends worthy of involvement. For me, those are durable, secular trends that become the stuff of investorsâ€™ hopes and dreams. I am still making allocations based on my â€œOutlook 2000-2010,â€ which I produced several years ago.
I know how those annually-adjusted outlook prediction sets have worked out for most market promoters. And I also know how my secular trend strategy is working, and I wouldnâ€™t trade places with most, if any, of those short-term-thinking managers!
Some time ago, I guessed that the falling dollar was in the midst of what could be the strongest, most durable secular bear market on record. Based on that thinking I made investments in energy, precious metals and other commodities that are working even better than expected. Which indicators could possibly make me think that the falling-dollar trend is ending and that my strategy should be adjusted or changed entirely?
Some shorter-term trends still qualify as secular in nature, and one, which helps guide my investing, is the nearly â€œuninvestableâ€ quality of domestic stock markets. Look at a chart for S&P 500 performance for the current duration of this decade to see what I mean. That index topped out at about 1,520 in early 2000; right now, it sits at 1,441!
That index is lower now than it was nearly eight years ago! Imagine the opportunities lost by investors who could have been happily involved in commodity sectors and international and emerging markets, which have done so much better!
Secular bull and bear markets tend to last 15 to 20 years, much like the secular bull market in the S&P 500 from 1982 to 2000. Another fine example occurred in the secular bull market in Japanâ€™s Nikkei index from 1975 to the end of 1989, when it rose from about 5,000 and went all the way up to about 39,000.
In the ensuing 17 years, that index has fallen dramatically lower, now sitting at about 14,900. These are great examples of how longer-term trends work. So how good were â€œannual outlookâ€ opinions from 1989 to present day for investors in the Japanese market? And what good have they done for investors in the U.S. domestic stock markets with the S&P 500 having gained nothing for almost eight years?
I have visual images of investors flailing through papers and articles each year, as they try picking winners in bad markets. They make decisions based on what this or that stock market promoter has offered as a vision of which stocks should double or triple in price during the coming months. All the while, better investors, who sought out longer-term trends and simply rode them higher, based on better fundamentals, have been gaining significant ground each year — with much less trading activity and fewer portfolio alterations.
In my estimation, the falling dollar is not about to become a rising dollar in any meaningful way. Sure, some weeks or even months will find the dollar rising in value against other currencies. But the disastrous fiscal policies of the Bush administration have promoted borrowing and spending without limits, while the world is flooded with export dollars and debt used to finance consumption.
Equally reckless monetary policies used by Alan Greenspan and now by his successor at the Federal Reserve, Ben Bernanke, seem assured to keep pressuring the dollar for as far as we can see. So why would I alter allocations in the investments that rise in price when the dollar loses value?
Of course, any rising long-term trend is bound to catch on with the crowd and then suffer shorter-term setbacks. Remember â€œBlack Monday,â€ the 1987 stock market crash when the Dow lost about 22% of its value in a matter of hours? Yet within six months, the Dow was moving to another new high.
No doubt, weâ€™ll see short-term setbacks in energy, precious metals and other commodities as they become too popular. But those who were involved well before the crowd and bought at much lower prices can afford to ride along until prices for their favorite commodities become inflated to such an obvious degree that even long-term bulls cannot resist selling.
Today, the price of oil is nearing $100/barrel. Gold is selling well above $800/ounce. Are we nearing the end of good times in those sectors? Personally, I donâ€™t think so, since those commodities have been in rally mode only for about eight years, while history would strongly suggest this is only about half way to their eventual climax.
Iâ€™m staying put, and my only modifications for the new year will be scaling out of some emerging markets that have done very well (such as those known as the â€˜â€™BRICâ€™â€™ economies of Brazil, Russia, India and China) and allocating profits from those sales into a few markets in Europe offering much better pricing and residing well off the radar screens of most investors.
How many other market promoters are talking about promise in the Belgian market? Other than that, little distinguishes my Outlook 2008 from Outlook 2004. And I think that is exactly as it should be.
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.