Category: Quarterly Newsletters

As a young stockbroker in the 1980’s, I was hungry for disciplines which could help me make money for clients. One of the most sensible things I came across was a theory by an investor that we refer to as the 70-20-10 rule. Human nature dictates an urge to make money in stocks quickly and for me that was proving to be difficult and problematic. Hence, the hunger to learn from theories like this rule.

Many a spring and summer outdoor celebration culminates in a tug of war. It is where an equal number of folks hold onto each end of a long rope and seek to pull the other side across the midpoint line. We believe a tug of war has existed in the US stock market over the last year between two forces which have been pretty equal in force while pulling in opposite directions.

The media and most major stock market strategists have been talking lately about beginnings and endings. The S&P 500 Index just celebrated the seventh anniversary of it taking off from its bear market lows on March 10, 2009. We enjoy watching many experts who didn’t participate in the more than tripling of the S&P 500 Index over those seven years comment and make dire predictions about the future. When it comes to negative nabobs, there must be some pretty good money in being the “boy who cried wolf” or the “blind squirrel that finds an occasional nut.”

One of the great investing books of the last 40 years was David Dreman’s, Contrarian Investment Strategy. He started it by telling of a hypothetical gaming casino with two separate, but adjoining, rooms: the red room and the green room. The red room was packed with people and excitement and almost every day someone hit a huge jackpot setting the building on fire with electricity. Every seat was packed, others waited their turn to play and the anticipation was palpable. Yet most of the players left the casino each night without their money, because the odds were stacked heavily in the house’s favor.

Someone recently asked a group of us which band we saw at our first rock concert. My answer was the Canadian band, The Guess Who, in 1975. With hits like “No Time,” “Undun” and “These Eyes,” The Guess Who hit the perfect balance between my 17-year old testosterone driven aggressiveness and my urge to romance the woman of my dreams. The key members of the band in the 1960’s and 1970’s were Burton Cummings and Randy Bachman.

Since our thinking is always dominated by owning businesses which meet our eight investment criteria in a long-duration time frame, we continue to remain vigilant of the circumstances around us. To that end, we thought it would be helpful to review a similar historical situation and glean a feel for what was wise behavior back then and what might be wise behavior as we look forward to the year 2014.

The US stock market gained 452 points from 1229 at the start of 1999 to now. This gain of slightly more than 39% is less than a 3% annualized average gain and combined with dividend payments gave investors an average annual return of 4.09%. The stock market in the US has historically returned closer to 10% with dividends reinvested and for this reason, we contend, these recent returns have been very unattractive to both institutional and individual investors. What have we learned in these last 15 years which can help us to succeed going forward?

Printable Version A journalist from Fortune magazine once asked Andy Grove, the former CEO of Intel, for the best business advice he’d ever been given. Grove provided a simple quote from a former professor at City College of New York: “When everybody knows that something

Downton Abbey is a Masterpiece Theatre show on PBS which has taken US television viewers by storm. It is the story of an aristocratic family in England which perpetuates a dynasty in a small town through the operation of a huge estate. Devotion to this estate and huge family home are accomplished by employing a small army of servants, who maintain the home and the aristocrats. We believe there are strong parallels between what goes on at Downton and what has been going on in the US stock market since 2009. We also see this as a recurring theme for the next 5 to 7 years.