• Financial & Investment Management Group
  • Tuesday, January 06, 2009

Road To Recovery

by Paul Sutherland
Posted September 12, 2008
FIM Group

Current Observations

September Edition
PDF Version

A recent article in the global edition of The New York Times discussed a report on consumer confidence about the stock market. The Conference Board found that 55 percent of the consumers surveyed in July "expected stock prices to decline over the next 12 months, while just 18 percent expected them to rise."

This is great news for investors like us. If you are a long-term investor, the cheaper an asset costs, the better. Prices on stocks have increased over time, and history shows that almost anywhere you invest, if you're patient, you'll end up a winner, though only a modest winner if you buy at high prices. If you own more investments when they are priced right, you do better; and if you're a global investor, the balance is even more to your favor. History demonstrates that selective, patient investors, who own securities that are priced right, with good value and future prospects, do even better. So today our FIM Group portfolios have four things going for them:

  • There are lots of "stocks" priced right, with many paying solid dividends while we wait for markets to recover.
  • We are global investors, and there are many stocks in other countries that are priced significantly better than U.S. stocks, especially if you consider the growth prospects of companies in emerging economies.
  • We have responded well during recoveries after bear markets.
  • We are patient, long-term investors. FIM Group was just three years old when the stock market crashed in 1987. I remember a young client called me up and said, "Because of the crash, I'm down about 17 percent from my portfolio's high value and as a result my risk tolerance has changed. Sell everything and put me into T-bills." I chatted for a long time with that client about the meaning and use of risk tolerance.

Figure 1

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At that time, I also co-managed a trust with two other managers for a trust company in California. We each managed about one-third of the assets. During the crash my portion of the trust went down much less than the others. I received a phone call from a trust officer informing me that the other two managers were fired because of their portfolios' poor performance and offered me the opportunity to manage the entire account. I accepted but was frustrated to have bits of a portfolio down significantly (if a portfolio drops 50 percent, it needs to double to get even). We immediately changed our client written investment advisory agreement/contract to reassure clients and help them understand that even though stocks, bonds and interest rates may fluctuate – even as much as they did in 1987 – it is crucial to stay the course, and remain patient and understanding. I am forever grateful for that young client and the conversation about "risk tolerance". "Risk tolerance" needs to be accurate, otherwise fear in investing – i.e., selling low and buying high – can severely damage the value of your portfolio.

Figure 2

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The current market reminds me of 1987. Last year, most investors were very complacent and held overvalued investments, especially real estate and banking shares. Most advisers and investors were bullish and expected markets to keep rising. Similarly, in the summer of 1987, just before the October crash, adviser bullishness peaked at 46 percent. Then after that crash, 39 percent forecast declining prices – just before the stock market ran up 19 percent (see figure 1).

This has been a long and arduous period for FIM Group and our clients. I cannot remember a time where we have had our conviction, patience and discipline tested so completely. History shows, however, that the seeds of profits are sown in periods like these and while others are "panic selling "we are scooping up great valued investment bargains. I have run a few marathons in my life, and in each one I wondered if I would be able to finish; you put one foot in front of the other when those thoughts come in your head, you stick it out, even though the going gets tough. Investing is like a marathon - you need to be flexible and aware, but most of all you need to be patient and disciplined, and stick with the strategy.

Our strategy embraces the facts that markets are cyclical. We are long-term investors, we manage money for clients that are retired and wish to stay retired, and people who want to accumulate their wealth for long-term goals. We are not short-term market timers, hot "idea of the day" speculators or short-term CD owners. I know that when running uphill in a marathon it feels like the top will never come, but eventually we make it there and get to relax a bit on the downhill. It has been uphill, into the wind, with horizontal rain pelting our face in the investing world over the past months. We have been in environments like this before and the chart on page 4 illustrates this fact well. It shows that in the last 10 years we have had similar periods.

Figure 3

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In my writing and speeches on investing I often chat that "volatility is the side effect to good long term performance". The chart on this page illustrates the rationale to a long-term strategy and why our clients have been well rewarded by staying the course. It is titled 'FIM Group Diversified Long-Term vs. Short-Term Strategies'. History shows that this is a time to be a longterm investor. FIM Group investments are priced to give great current and future performance from dividends, interest income and growth. The question we get most often today from clients is "When will this end?" There is only one answer; we know it will end. Nevertheless, it will end when people start looking to the future, are enticed by the great prices of investments and logic replaces emotions, as it always does eventually.

History shows investments will recover and we will forget about the uphill battle. When exactly? What date? I don't know. I do know that, for the clients who have lost sleep over this latest investing marathon, we might need to adjust the risk tolerance on their portfolios to make them more conservative for the next cycle. For those who are excited by the current opportunities, we can chat about raising your risk tolerance a bit, too. I can think of only one time when I felt as much confidence in the fact that our investments were priced for better future investment performance, we were very well rewarded then, and history shows that we will again.

 

Performance results reflect the deduction of advisory fees. Portfolios managed by the firm can experience losses, as well as profits. Therefore, the figures shown should not be considered as a guarantee of future gains or as a limitation on potential loss. The investment advisory fees are disclosed in Part II of Form ADV. The accounts used in these calculations were entered into the calculations when the account value reached $150,000. The account stayed in the calculations until the account value dropped below $125,000. Accounts reentered calculations when the value again reached $150,000. Performance returns were time-weighted monthly, and all trading commissions and management fees were deducted when calculating the returns. All portfolios had dividends and other earnings reinvested. The portfolios selected were categorized by objective based upon the risk tolerance category expressed by a client. The portfolios include all discretionary accounts. The accounts used also did not include unmanaged assets, annuities or limited partnerships in the calculations. Clients having portfolios containing tax, client imposed or other restrictions would have had higher or lower returns than those expressed above. The performance data shown above represents the past performance of the firm’s different risk tolerances. These figures have not been audited or otherwise reviewed by an accountant or third party. Also, this data presentation does not conform to the Association for Investment Management and Research Performance Presentation Standards. During the periods covered, other advisory firms have joined FIM Group. The performance of accounts brought under FIM Group’s management are included in FIM Group performance beginning in the first full quarter after which those portfolios have been fully converted to FIM Group selected securities. Any questions regarding the compilation or composition of this data may be brought to the attention of FIM Group at 800-632-5528, 888-243-8220, or 888-33-TRUST. Portfolios are managed by the FIM Group Portfolio Management Team. Paul Sutherland has been the Chief Investment Officer and Lead Portfolio Manager since 1984. FIM Group Portfolios represents a mix of global equities, global fixed income, and cash. The main difference between the portfolios can be attributed to the distribution of holdings within a portfolio based on risk tolerance.

 

Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes reinvestment of dividends and capital gains. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Performance data current to the most recent month-end may be obtained by calling: 231.929.4500.

 
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