“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’” - Murray N. Rothbard, Economist Science and Economics. As hard as we try, the two don’t mix very well. Yet, over the years, there seem to be three immutable “scientific” laws that govern investing: An object in motion tends to stay in motion. Things revert to the mean. Don’t fight the Fed. Wall Street’s version of these three laws would likely be:
“It is always wise to look ahead, but difficult to look further than you can see.” - Winston Churchill We know better than to make rash predictions about the stock market. Still, part of our job at Talbot Financial is to try to see around the next corner. With this in mind, about this time last year, Talbot Financial was doing its best to look forward into 2014 with our “future glasses.” 2013 had been a good year….as had 2012….and 2011….and 2010. In fact, as we were pondering the future, the S & P had already risen from its March 2009 low of 667 to nearly 1800. And when you look at earnings improvement and balance-sheet restructuring, there was good reason for the rise. Still, we wondered:
“Sometimes it's the things that are all around us that are hardest to see….” - Tonya Hurley, Novelist We believe Ms. Hurley was talking about love when she made the above quote—and while we at Talbot Financial are sentimentalists at heart, we thought the quote aptly applied to oil and the US energy complex as well.
“Strange isn’t it? Each man’s life touches so many other lives.” - Clarence Odbody in the 1946 movie, It’s a Wonderful Life. Many of us grew up having seen Jimmy Stewart play George Baily in, It’s a Wonderful Life. The movie peaks during the climactic “bank run scene” when George calms the panicked crowd by explaining how depression-era banking worked. Times have changed a lot since then.
“Money is like manure. You have to spread it around or it smells.” - J. Paul Getty A little over 100 years ago, manure helped change America. Cities were growing fast, and horses were ubiquitous. Not coincidentally, the “manure problem” was making downtown areas rather odious. Civic leaders were eager for cleaner streets and the automobile was hailed has the perfect environmental solution. Private firms built the cars and the public sector built the roads. Nothing would ever be the same.
“If not now, when?” - Hillel the Elder, 110-BCE-10 CE Hillel the Elder doesn’t come up much in conversation these days—and 2000 years ago his quote had absolutely nothing to do with investing. Still, we thought it fitting today because it goes to a key investing point….when do we sell? If not now, (as we enter another correction after a recent high) when? And conversely, when should we buy back into the market?—otherwise known as market timing.
“If you think you are too small to make a difference, try sleeping with a mosquito.” - Dali Lama Like the mosquito, fracking started out as a small thing. A few pesky oil men were believers in hydraulic fracturing, or fracking as far back as the 1940’s to extract otherwise inaccessible pockets of oil—but with conventional oil fields plentiful in the US and especially in the Middle East, there was little need for fracking. Fracking adherents buzzed around, but were mostly seen as irrelevant noise at best… and kind of quirky at worst. Times have certainly changed.
“Because that’s where the money is.” - Bank robber, Willie Sutton, when asked why he robbed banks. Okay, so to be clear, we do not support robbery. We do, however, support investing where the money (read: return) is. Long-time readers are very familiar with our three-year (and current) strategy of investing in large cap, dividend paying, multi-national equities sporting strong balance sheets. We have stressed broad diversification, but in only a few asset classes. And while over the long-term we want solid, reliable returns, we also want some assurance that “we will get our money back” before committing investor funds.
“Reach for the moon, 'cause even if you miss you land among the stars.” -Author Unknown It is graduation time in America, and on high school and college campuses across the nation, audiences are hearing inspirational quotes, like the one above. We at Talbot Financial like graduations. We like graduates even better. Graduates and investors, however, should not reach for the same things. Reaching for the moon...perfect. Reaching for yield...probably not a great idea. The problems occur when investors desiring better returns tend to forget basic risk/reward analysis that is so important in the long run. Let’s look at some of the sectors that look like a “reach for return” not worthy of the risk.
“In 37 trading days, the ongoing bull market would be 1,311 trading days old, says Jim Paulsen of Wells Capital Management. That is a scary date because it was on the 1,311 trading day after the start of the 1982 bull market that the Standard & Poor’s 500 suffered its biggest one-day crash in history on Oct. 19, 1987.” Seriously?! The market moves on a 1311 day calendar? Is that a lunar calendar or solar calendar? All joking aside, Mr. Paulson’s anxiety is evidence of bubble-thinking....and not so coincidentally this month’s blog is dedicated to bubbles. During the short lifetime of a bubble, they seem to be wonderful things. They float effortlessly, look pretty, and make us smile. And then they pop....and nothing is left.