We usually try to avoid over-quoting Warren Buffett. It seems to us that almost anyone who wants to sell you some kind of financial product finds a Buffet quote that vaguely applies to their theme and then goes on to describe the product they want to sell you with the tacit implication that ol’ Warren approves of it.
We don’t have anything to sell you but we wanted to point out this passage from the 1989 Berkshire Hathaway Letter to Shareholders. In it, Buffett spends some time discussing the worst mistakes he had made in the previous 25 years (emphasis ours):
“I could give you other personal examples of “bargain- purchase” folly but I’m sure you get the picture: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first- class managements.”
We don’t see the great bargains we saw 5 years ago but that doesn’t mean we’re in a bubble or that there are no decent places to invest. The highest quality companies are still worth our investment dollars and we feel they’ll continue to benefit from an economy that continues to improve.
Of course, we’re certainly not wild-eyed optimists. We recently saw a downward revision of Q1 GDP from and expected number of -1.8% to an actual number of -2.9%. This surprised a lot of people. Many in the media are explaining this result away as an anomaly caused by the terrible weather we had earlier in the year but we remain cautious. If anything, this number shows us that our economic recovery may still be a bit fragile.
In our opinion, most domestic markets are not cheap but we don’t think we’re in bubble territory yet. The thing we need to be careful to avoid are the “value traps” that may be out there. A value trap is a situation where low quality looks appealing just because it’s inexpensive. A cheap high-quality asset can be a great investment but a cheap low-quality investment can be a disaster.
Source: dshort.com
Currently, the market P/E ratio is around 17. A price/earnings (P/E) ratio is in no way a perfect measurement of market valuation but it does serve as a decent indicator. You’ll notice in the graphic below that while the ratio is elevated, we are basically close to the 10-year average.
Source: Bespoke Investment Group
If you take a look at the chart below, we think we’re somewhere above the “Enthusiasm” range. We’re not delusional yet but we’re getting there.
For many of us, this is a psychologically challenging time to invest. If we were smart enough to buy when the market was lower, we can be reluctant to pay a higher price for stocks now. Conversely, if we missed the upward move while sitting on the sidelines, we tend to focus on the amount of gains we have already missed.
So how do we handle this? Our discipline remains the same- we focus on the highest quality investments and managers and stick to our carefully designed investment plan rather than following the emotional roller coaster of the CNBC crowd. We diversify. We use trailing stop-loss orders and we regularly evaluate each security we hold in client portfolios.
It looks to us like interest rates will continue to be low for some time so any portfolio gains will most likely come from stocks rather than bonds. One thing we can do (and have been doing) is to change our weighting s a little more toward the international equity markets. We feel like values are better in places like developed Europe and in a few cautiously chosen emerging markets.
It’s always good to remember that we’ll probably need to change our investment plan as the world changes around us. At present, we’re in a pretty flat market but this won’t last forever.
The Takeaways:
• Markets are not as cheap as they’ve been but an improving global economy means there are still plenty of excellent companies to invest in. Just be careful of the value traps when looking for underpriced assets.
• We still need to pay careful attention to economic data and not simply believe the bullish enthusiasm of the media. After all, bad news doesn’t sell as much advertising.
• A portfolio is not a plan. Your investment strategy encompasses many different aspects specific to your needs and we need to be ready to adjust our plan as global conditions change.
About Us
We’ll finish this issue with some information about what happens under the hood in our practice and more importantly, give you a better idea of the team we have become.
Working as a team is at the heart of our approach. We choose to run our practice with International Assets because they allow our team to operate with a great deal of autonomy within the company. This doesn’t mean we have free reign over the place, but it does mean that we don’t work in a typical investment firm environment of sales goals or quotas forced upon us from above. We are not pressured to use any specific product and we have the flexibility to recommend the investment we feel is in our clients’ best interest. Nothing else is expected of us, nor should it ever be. Jeff and Ken handle investments and financial planning. They meet each week to discuss overall market conditions and whether to make any tactical changes. They also review specific investments regularly. In January 2013, Ken merged his practice into Jeff’s practice and they have worked hard since then to deliver a balanced and consistent message to all their clients. You may only deal with Jeff or Ken individually or you may work with both of them. Either way, they deliver the same recommendations and outlook. This means that you will hear the same ideas and opinions no matter which of them you speak with.
The team’s glue is Shelby Smith. Her title is Office Manager but only because “Person We Couldn’t Run Our Practice Without” takes up too much space on a business card. Shelby is the one who knows everything that is going on. She is the one you go to for any administrative issues or to schedule a meeting with Jeff or Ken.
Working with her is our newest team member, Tara Tucker. Tara is our administrative assistant. She’s the one who usually answers the phone. She also schedules appointments, opens new accounts and takes care of money movement. She is doing a great job and has quickly become a valuable asset.
The only number you need to reach us is 800-432-4402.
You may have used different phone numbers in the past but this is the only one you need to use going forward. We do everything we can to make sure a real person answers the phone between 8:30 AM and 5:30 PM Eastern time but there may be situations where we are all on the phone at the same time. Please know that if you leave a message, we will return your call as soon as humanly possible.
Finally, we do our very best to reply to emails in a timely fashion although we all know this isn’t always easy. If you want to contact us about an issue you’d like to address immediately, a phone call is the best option. Emails are encouraged for organizing meetings and relating quick updates. We prefer to have more detailed reviews and planning sessions on the phone since they allow a more thorough discussion.
Disclosure
All e-mail sent to or from this address will be received or otherwise recorded by the International Assets Advisory, LLC corporate e-mail system and is subject to archival, monitoring or review by, and/or disclosure to, someone other than the recipient. This information is obtained from sources believed to be reliable; however, its accuracy or completeness is not guaranteed. Investing in securities underlying in currencies other than the U.S. dollar involves certain considerations comprising both risk and opportunity not typically associated with investing in U.S. securities. The security may be affected either favorably or unfavorably by fluctuation in the relative rates of exchange between currencies, by exchange control regulations, or by indigenous economic and political developments. As with any investment, there is no guarantee against potential loss. Past performance is not an indication of future performance. International Assets Advisory, LLC and its affiliates, employees and/or directors may have positions in these securities, and may as principal or agent, buy from or sell to customers. All securities are subject to price and yield change and subject to availability. Mutual funds, Unit Investment Trusts and Variable Annuities are sold by prospectus only. Please read the prospectus carefully for important information about fees and risk considerations.
Member FINRA/SIPC. The information provided is based on carefully selected sources, believed to be reliable, but whose accuracy or completeness cannot be guaranteed. Any opinion herein reflects our judgment at this date and is subject to change without notice. This should not be construed as an offer or solicitation to buy or sell securities. Investors should consider the investment objective, risks, and charges and expenses before investing in an investment company product. Stocks, options, and mutual funds are subject to market volatility and the chance that they may lose value. Bonds are subject to changes in interest rates, risks of defaults by issuer, and the loss of purchasing power due to inflation, or the risk that an issuer will be unable to make interest or principal payments. Additionally, bonds and short-term investments entail greater inflation risk than stocks. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be either suitable or profitable for a client or prospective client’s wealth management investment portfolio.
This information is not intended to be legal or tax advice. Please consult a tax, legal, or financial professional with questions.
Investing in securities underlying in currencies other than the U.S. dollar involves certain considerations comprising both risk and opportunity not typically associated with investing in U.S. securities. The security may be affected either favorably or unfavorably by fluctuation in the relative rates of exchange between currencies, by exchange control regulations, or by indigenous economic and political developments. As with any investment, there is no guarantee against potential loss. Investments in securities and insurance products are:
NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE