Dear clients and friends:
In this difficult financial market, I’ve spoken to many investors near and far. The interesting thing about all of the musings and opinions out there, is the amount of mis-information and ill-fated strategies that I hear from folks. The differentiation between prudence, fact and opinion is a huge gapping hole. I am not denying anyone their say – the 1st amendment is still on the books last time I checked.
One popular myth: "If I own this good, quality, blue chip company, the stock price will recover so I will continue to hold it". Fact: Sure many firms are strong and cyclical whose shares do follow the general market, but many do not. We all remember the mess of 2000-2002 better dubbed the “tech wreck” where the Internet and computer stocks soared then plummeted due to excess speculation and, in hindsight, faulty business models. In just 13 months the 2000's will end, and it's not been a great decade so far for investors of most stripes either. Meanwhile, inflation is at least 25% higher so far this century.
Consider this update ...here are some household names that have experienced serious trouble this decade for stock portfolios. Their current status: Oracle - $45 in 2000, today, $17, a loss of 62%. Citigroup - $57 in 2006, today $6, a loss of 89%. Bank of America - $52 in 2007, today $15, a loss of 71%. Home Depot - $70 in 1999, today $21, a loss of 70%. SunTrust Bank, - $94 in 2007, today $28, a loss of 70%. Motorola - $26 in 2006, today $4, loss of 85%. I'll stop here.
I purposely picked on the banks, due to their implosion this past year and my friend's reference to Bank of America, a holding. Some no doubt will survive, many have not and will not. As I told my friend this week, even if you can offer up a solid story for a turnaround, whose to say your bank won’t merge with another bank at a low price. It’s happened this year – then your chance for price recovery is thwarted. Losses of 60% - 90% are tough to recover from; you need doubles, triples or more just to get back to even. That's very unlikely to happen, and if it does, can take years, during which your money could be working harder for you in other areas.
In this vein, William O’Neil, founder and publisher of Investor’s Business Daily, conducted a study of stock market leaders covering over 100 years, and found that just 12% of stocks that were big winners in the last bull market continue to lead in the subsequent bull market. The Motorola’s, Cisco’s, Dells, Citigroup’s of the world – those dogs most likely have seen their day. Sure, many can continue to employ workers and crank out their widgets or services, but they have grown (or shrunk) to the point of mediocrity – their widgets are now a commodity, or their balance sheets are wrecked beyond repair.
The stock market has just rallied for the third time over 1,000 points within this bear market in the Dow Jones Industrials since the end of August. I did not think the October 10th low would be breached, but it did, so I was wrong, and has now bounced off Dow 8,000 again. The Wall Street adage, "the market will prove you wrong by 10% of your worst case forecast" came true for a short period of time. The markets dislike uncertainty, and there’s still much out there both economically and politically.
What to do now; if you still cannot sleep well, use these stock rallies to move some funds from stocks into safer bonds or indexed annuities; lessening your level of risk. Consider bond swaps to upgrade your credits in fixed income. That should increase your income also as rates have been rising in bonds of late.
Lastly, a new BULL market will emerge from all of this, so keep watching for opportunities from your advisor or your own research – better times usually emerge when you least expect it. Bill O'Neil's book, "24 Essential Lessons for Investment Success" is a good read from whom I often borrow facts. It's $10.95 retail, but I've seen it under $9 on Amazon.com. Consider it between the leftover turkey and football games.
Have a great Thanksgiving Holiday.
Barry Unterbrink (954) 719-1151