December 9, 2011 (DJIA 12170.22, S&P500 1254.54)
Traditional Fixed Income currently is typically not evident in our portfolios
Traditional portfolio investing has typically, if not always, included diversification and fixed income allocation. This was evident in our portfolios from 1997 through 2010. During the crash of 2000 – 2002, fixed income allocations were one of the reasons why our portfolios did not lose money during this period.
Bond yields today are unusually low. I think that fixed income investors are entering an era of disappointing and unsatisfactory investment returns. Many of the bonds are backed by Governments that are leveraged and have excessive debt. While these nations try to correct their debt issues, interest rates could remain low. If my thesis is correct, then bonds are probably selling at inflated prices. Remember if a bond goes down in value, the yield goes up.
The 10 year US Treasury is currently yielding approximately 2%. The current headline Consumer Price Index is around 3.5%.
In the past this low interest rate conundrum was cured via inflation. Inflation is bad for bond holders. In the post war 1940’s 10-year treasuries yielded 2.5%. When interest rates started to rise, bondholders suffered capital losses. Bond investor’s returns were less than the level of inflation. What you had was inflation greater than interest rates, and followed by a depreciation of the bond, because interest rates were rising.
This is the primary reason that our portfolios are concentrated with higher quality blue chip companies, with pristine balance sheets, and a dividend yield that is appreciably greater than the 10 year treasury.
The following is a table of some of our holdings, compared with the 10 year treasury:
| Current Price | Yield | |
|---|---|---|
| 10 Year US Treasury | 100 | 1.97% |
| Conoco Phillips | 71.80 | 3.68% |
| Exelon | 43.45 | 4.83% |
| Merck | 35.82 | 4.69% |
| Microsoft | 25.79 | 3.10% |
| Pfizer | 20.55 | 3.89% |
| Public Service Group | 31.64 | 4.33% |
| Wal-Mart | 58.25 | 2.51% |
| Exxon | 81.27 | 2.31% |
| Utilities ETF (XLU) | 34.90 | 3.87% |
If interest rates start rising, we will look to allocate money to fixed income investments. I think the yield on the companies mentioned above, and others which exist in our portfolio are relatively stable. Stocks are more volatile than US bonds, and the risk levels are not similar when looking at pure guarantee of principal. Yet, I think the risk-reward ratio of owning high quality dividend paying companies are far superior to other traditional fixed income investments.
Please call me if you would like to discuss your financial situation, your portfolio or just to say hello. I hope you have a safe and happy holiday season and new year.
Regards,
Ronald R. Redfield cpa,pfs
Below are some other emails we have sent over the last several months:
October 26, 2011 (DJIA 11885.35, SPX 1242.74)
The following is an email we recently sent to some of our clients:
Here are some recent notes I have taken, and could be of interest to you.
I think our portfolios are well designed for the long term. I do think, but offer no assurances; we are positioned for some promising future gains. We typically are invested in companies with ample cash, little debt, and ability to pay dividends. The typical dividend yield for our portfolios was approximately 2.6% at September 30, 2011. There is no guarantee this will continue, but our portfolios have typically recovered quite a bit from September 30, 2011. In general, we are outperforming the S&P through 10/25/11. Past performance is not necessarily indicative of future results.
Here are a few links from our site that I think are real appropriate for today’s climate.
- An easy to read thesis on our largest investment, National Western Life Insurance (NWLI) https://www.rbcpa.com/wp-content/uploads/2016/12/NWLI_Notes-1.pdf
- An update to our investment strategy during this bear market Link
- Wisdom of Great Investors (notice how they buy when there is fear and “blood in the streets.”) https://www.rbcpa.com/wp-content/uploads/2016/12/wisdomgreatinvestors-1.pdf
Some assorted Quotes I have written down over the last month.
“When burgers drop in price, we sing the “Hallelujah Chorus.” When burgers go up, we weep.” Warren Buffett -investing should be like buying burgers.
“People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.” Warren Buffett 2001
“Maybe the recovery will falloff, but as of today, the recovery is still underway in our businesses.” Warren Buffett 10/11
“Our 5 largest businesses will set records for earnings this year. Our retailing operations are seeing same-store gains.” W. Buffett 10/11
“Our railroad carried 200K carloads last week. Highest in 3 years. Stuff is moving around the USA, supplying merchants, etc.” W. Buffett 10/11
“Rule 1- most things are cyclical. Rule 2- greatest opportunities come when people forget rule 1.” Howard Marks ‘The Most Important Thing’
“We think the risk of being out of the market may exceed the risk of being in it.” Value Line 10/7/11
“The key to making $$ in stocks is not to get scared out of them.” Peter Lynch
Please let me know if you would like to have a discussion or meeting.
Regards,
Ronald R. Redfield cpa,pfs
August 10, 2011 (DJIA 10872.14, SPX 1140.95)
Quick update and our strategy as the markets have corrected > 20%
I wanted to give you a very quick update on some of the market conditions, and our strategy. This note is in response to the extensive economic news of our economy, the world economy, the recent downgrade of USA credit by S&P (as well as one of China’s credit rating agencies), and the recent events and actions of the US Government in relation to our debt ceiling and deficit.
As you know the markets have been suffering a correction since around April 30, 2011. We have been studying the economy and our investments a great deal. Had we known the markets would correct 20%+, we would have exited our positions. Yet, even with turmoil, one can not know the markets direction over the short term. Our portfolios remain invested in companies that typically have strong balance sheets, sustainable business models, and are priced at historically low multiples. Two of our larger holdings have S&P credit ratings that are higher than the USA. Exxon and Microsoft each carry Standard and Poors ratings of AAA, whereas the USA carries a AA+ rating.
I think (but do not promise) that this is a typical correction. Fear is certainly rampant, and if you recall, we have always invested with the Buffett motto of “You want to be greedy when others are fearful.”
We think (but do not promise) that our portfolios will prosper over the long term. We liken an investor to that of a strong swimmer. When a strong swimmer is in the ocean, and a large unexpected wave comes, the swimmer does not fight and flail their arms in the wave. The swimmer waits for calmness to arrive, and goes upon their way in the water. This is what one should do in investing.
The following is a collection of some Peter Lynch quotes I found most appropriate now.
“A sharp market decline is the historical norm.”
“Market declines are great opportunities to buy stocks in companies you like.”
“Trying to predict the market direction is nearly impossible.”
“There is always something to worry about.”
“I’m more interested in how many stocks went up versus how many went down. These so-called advance/decline numbers paint a more realistic picture.”
“When you sell in desperation, you always sell cheap.”
“In spite of crashes, depressions, wars, recessions, ten different presidential administrations, and numerous changes in skirt lengths, stocks in general have paid off fifteen times as well as corporate bonds, and well over thirty times better than Treasury bills.”
“I’d love to be warned before we go into a recession, so I could adjust my portfolio. But the odds of me figuring it out are nil.” “The trouble is the bells never go off. Remember, things are never clear until it’s too late.”
The following are a few sections on our website, which could be helpful in reminding you about long term investing, and the norm of recessions and market corrections.
Wisdom of Great Investors Pdf.link
Warren Buffett Page of various articles or transcripts Link
Peter Lynch section of our site Link
Please let me know if you want to discuss any of your finances, portfolios, or anything like that.
I hope you enjoy the rest of your summer!