Time! Our clients give us the responsibility to grow those funds. The problem is that a
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1 Time! January 27, 2015 It takes time to grow an investment portfolio. Most of our clients need to build and maintain an investment portfolio that, when combined with Social Security, pensions, and potential inheritances, comprise a safely achievable value to ensure their retirement income and other financial objectives for the rest of their lives! Our clients give us the responsibility to grow those funds. The problem is that a significant drop in bond or stock market values requires time to recover. The financial press shouts out how much the market ( ) has climbed, while ignoring the fact that the growth followed a 54% drop in S&P index! The result of the volatility since March of 2000 to October 2014: the market value of the DOW, S&P 500, and NASDAQ, if equally weighted, has grown at about 2%/year less than a money market fund would have done over the same time period. While dividends would have added 2%/year, inflation would have completely offset that return. Most importantly, the process has swallowed up 15 years. People who have seen their 401(k) plans grow at a greater rate are often overlooking the 15 years of ongoing contributions they have made.
2 Harvest s mandate is, and has always been, to avoid, as much as prudently possible, losing money. When, from time to time, the market grows more rapidly, the risk of a pull-back grows in direct proportion. Some clients want their funds invested more aggressively, perhaps to make up for not saving enough, or to fund a hoped-for improvement in their standard of living. At that point in time, we ask for specifics, namely, please define aggressive, remembering it usually involves one or more of these characteristics: 1. Buying a new, unproven company such as Facebook or Groupon. 2. Keeping a higher % in equities, regardless of the economy s stability and potential to sustain an inflated Price to current Earnings (P/E) ratio. 3. Knowing that a rapidly growing stock price may, at some point, over reach the company s earnings growth or financial ability to create that growth. Then, the rising price becomes a momentum play. That is a game of musical chairs. Who will get out in time? Example: In 2007 Citigroup, the largest US bank, reach a price of $538/share. In March of 2009, the stock price was $ That represents a 98% drop! While it is likely that most people sold their share long before they hit bottom, someone had to buy it (!), such that if the original investor sold at $250, he lost 50%. If the buyer gave up at $125, he lost 50%, and so on. This is the opposite of sharing the rewards. To add insult, the press celebrates that Citi shares are up from $11 to $50! So if you stayed aboard for the whole ride, you have only lost 90%. 4. Looking at the big picture, the market run-up since March 2009 has only in the past year reached the level it sat at in March, And the way it accomplished that growth was through Federal Reserve Bank purchases of $3.5 trillion in treasury bonds and government-backed
3 mortgages. To add further impetus, US corporations have bought back 1.8 trillion dollars. We have spent literally decades identifying and learning how to define and execute consistent investment management styles, and then shadowing these managers, watching how they performed over time, a long time. The consistent differentiators are that these managers have at least three common behaviors: 1. Closing funds to new investment money when prices get silly. 2. Keeping funds in cash when prices are too rich to buy, or even hold. 3. Taking the opportunity to harvest successful investments and set the funds aside. 4. In the case of some of the better hedge funds, returning money to clients, saving their clients the 2% annual base fee on money they cannot make a case to invest. We also pay close attention to black swans, seemingly unrelated events such as: ISIS, Crimea, the sagging prices of oil, and the resulting damage to the economies of oil-producing countries. Currency collapses driven by deflation of the ruble and Euro. An oil glut, followed by a massive price drop, rendering many of the new wells unprofitable. At current prices, estimates are a drop of one trillion dollars in future investment of new energy exploration and that translates to a chill in labor markets and government tax revenues. Central banks devaluing their currencies to make exports more competitive. Resource link:
4 At the end of the day: We try very carefully to buy only healthy and growing companies at a price below what they are worth: A long-term track record of consistent and growing earnings. Insulation from competition. Conservatively managed debt. Relevance in the fabric of the world s underlying economies. Then, if a client approaches us to invest his money more aggressively, our response will always be: What percentage of your savings would you take on a trip to Las Vegas? Take that amount and do some research and buy what you like. Find out how good your decisions are. Leave us with the investments you cannot afford to lose. For clients who insist we take risks beyond our ability to understand and manage, we will always elect losing those clients rather than losing their money. Finally, here is the thought process of one of the investment firms we closely track Grantham, Meyer, & Otterloo (GMO), a Boston investment firm with 550 staff around the world. They manage $120+ billion of investments for pensions, institutions and endowments. Their minimum account size is $50 million. They are hired by, and answer to, the boards of directors of established, well-funded organizations, including Yale, the New York Metropolitan Museum of Art and the California Public Employees Retirement System (CALPERS) purported to be the largest single portfolio in the country. These boards all have highly seasoned and financially VERY successful members. GMO s 35 year annual return target is a 5% annual distribution coupled with a 2.5% growth rate of principal, net of inflation, which has averaged 2.5% over the
5 average 35 year cycle over the past 130 years, and their fees. That sounds like a low target, but an examination of each 35 year time span since 1885 prove those assumptions correct. And the cost of missing their targets is unacceptable. Of great importance is the cash flow model we build and maintain for you. It has assumed 4.5% on fixed income and a 2.5% dividend and 4.5% growth of equities. A 2% inflation rate reduction gives us the same rates of return that GMO uses. Finally, our retirement models assume age 65 to age 100 the same 35 year length of time GMO uses. We are not trying to make you wealthier that s your job via your career & savings habits. Our mission is to keep your assets growing and to never lose them. We ve sustained our clients through both the and the market implosions, and there will be more large corrections in the future. Your equity allocation is comprised of % each. When we cannot find enough stocks to fill that goal, we keep the remaining funds in shortterm bonds at a yield that is higher than money-markets or CDs. This ensures your cash flow needs for the next 5-15 years and provides availability for future equity investments when the prices are rational. Will some stocks we buy fail to reach our expectations? Of course. Market sentiment and competition ensure that some will fail to make the grade. That s reality. Some will simply be victims of an investing public which is insensitive to the firm s long-term opportunities. Their focus is the next day, week or month. They are traders, we invest! We will rarely be fully invested and very likely never be fully out of the market. That s chasing irrational behavior. There will always be some companies that the market has overlooked. We hunt for and research them every day, just as we keep a close eye on each business that we do own.
6 What do we think is crucial? Having cash at the market peak so that when it drops (that s why it s called a peak), which it always will, we have funds to buy companies, often ones we have owned in the past. We don t buy stocks, we buy companies that: 1. Are well managed. 2. Are well financed. 3. Have exemplary products/services 4. Have a convincing track record. (No guesses!) 5. Have a great story to tell about the future. We also step back when the economy (and stock prices) are being unduly manipulated by debt, government intervention (TARP, QE 1, 2, & 3), and stock buybacks. Resource link: companies-spend-almost-all-profits-on-buybacks-payouts.html These are all simple, common-sense rules at Harvest. The information we develop is not only important for your consideration and awareness but also crucial to our management of your investments. Ways to stay informed: You will be receiving more robust information from Harvest. Remember for everything you read, we have read and researched a thousand pages more. We kicked off January with one of our new education series, Harvest Unplugged. This series focuses on INVESTMENTS with an informal discussion format. You can think of it as an extension of your time with Rob during your regular investment review meetings. Harvest Unplugged will happen about every other month.
7 On February 18 th, another new education series will begin, Advocacy 101. This series focuses on ADVOCACY topics: Financial Planning: Wills, Trusts, Charitable Giving Retirement Planning: Business Succession, Investments, 40(K) Plans, Pensions, IRA Income Protection: Insurance- death, disability, life, home, auto Assisting Children: College, Housing, Disabilities Assisting Parents: Retirement, Medical Care, Long-Term Care Your invitation to Advocacy 101 will be sent out later this week with additional event information and a link to RSVP. We will also continue to send you the quarterly Harvest Insider which gives you a closer look into Harvest events, holidays and upcoming financial matters to have on your calendar radar. We hope you are using your ModestSpark resource to get an overview snapshot of your managed assets with Harvest. ModestSpark provides you interactive graphs and charts to keep you informed on how your portfolio is invested. If you haven t completed your invitation log on, and/or need assistance or a new invitation, please contact Pattie Hart at: pattie@harvestcapitaladvisors.net So, stay tuned! And HAPPY NEW YEAR! Rob and the Harvest Investment Team
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