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In Case of Emergency… Listen to This!

May 28, 2010

Money-Guy 05-28-2010

So we head to Chicago for a conference and the market decides to misbehave! The Euro-Zone deteriorates, there is an oil spill that can’t be stopped, and the Korea’s are fighting. Sure sounds like an emergency to me… But wait, is there hope? My answer is yes…

To start off the show I share some thoughts from a market commentary (soon to be available to Premium Members) that we sent out to our wealth management clients last week. In this commentary I address just exactly what is going on with Greece and the PIIGS. In the show, I explain why these things might actually be good for the U.S. and the global markets going forward. Greece has begun setting the example of making tough decisions that are necessary to fix some of these looming economic problems. Some of those austerity measures include:

  1. Freezing public sector salaries
  2. Cutting off annual 13th and 14th month salary bonuses
  3. Increasing the number of workers companies can lay off
  4. Raising the retirement age from 61 to 65
  5. Altering the pension benefit calculation
  6. Clamping down on tax evasion

From here, I shift gears to a presentation from the NAPFA (National Association of Personal Financial Advisors… the fee-only guys) conference we attended last week. One of the presenters was  Christopher Davis, co-portfolio manager and chairman of Davis Advisor who run the Davis Funds. His presentation, “Is the Recovery Real? And Other Questions Investors Frequently Ask” was, to the say the least phenomenal! It was so good and his slides were so powerful, I thought ‘Man, I have to share some of these with my listeners!’

Unfortunately, because these aren’t my slides and I in no way don’t want to take credit for the work and effort that Davis Advisors has put into these illustrations, I can’t put them out here for you guys. However, I do go through them and share some of the incredible numbers pertaining to how the markets have performed in the past. Because I go through so many slides and share so many numbers, I thought it best to just put some of those more powerful numbers out here for you to reference (please remember, these are not my numbers or the numbers of Preston & Cleveland Wealth Management. I am sharing with you, for illustrative purposes, the numbers we saw at a presentation by Davis Advisors):

  • On Dec. 31, 1999 the  S&P was at 1,465 with an earnings yield of 3% ($48). As of May 10, 2010 the S&P was at 1,110 with an earnings yield of 6%($66 est.) What does lower price with a higher yield mean? It means better value.
  • From 1995 – 2009, if you invested in the S&P 500 and stayed the course for the entire period, you would have annualized 8.0%. If you missed only the 10 best days (just under .25% of the total trading days in that period) your return would have dropped to 3.2%.
  • From Jan. 1, 1990 to Dec. 31, 2009, Dalbar states that the average Stock Mutual Fund return was 8.8%. The average investor in these funds earned only 3.2%. The reason for this is “unhealthy” investor behavior and trying to time the markets.
  • The average holding period of stocks for investors has steadily decreased from right at 10 years in the 1940s to 6 months in 2008.
  • From 1928 – 2009:
  1. On a monthly basis, the stock market delivered a positive return in 607 out of 984 monthly periods (62% of the time).
  2. On a one-year basis, the stock market delivered a positive return in 61 out of 82 one-year periods (74% of the time).
  3. On a rolling five-year basis, the stock market delivered a positive return in 68 out of 78 five-year periods (87% of the time).
  4. On a rolling ten-year basis, the stock market delivered a positive return in 68 out of 73 ten-year periods (93% of the time).
  • On Sep. 3, 1929 the DJIA closed at 381 and on Nov. 23, 1954 the DJIA clost at 383. If you invested $100,000 on 09/03/1929 it would be worth $380,038 on 11/23/1954. That is an annual 5.4% return during a “flat” market. If you started investing $10,ooo every year beginning on 09/01/1929, your total investment of $260,000 would be worth $1.5 million on 11/23/1954. That is an annualized 11.7% return during a “flat” market.

I also touch on some very good (and some interesting) quotes from individuals such as Alan Greenspan, Ben Bernanke, Warren Buffett, and Benjamin Graham. The moral of this show? Develop a strategy, stick to it, and be courageous! When you look back many years from now, you will be happy you did.

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