Relax
If you judge your investments on a weekly basis, you’ll not only drive yourself insane, but you will most likely make the wrong decisions.
The prolific investor, Warren Buffet, once said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Time horizons obviously differ from person to person, but what is clear is that investing is in large part about taking a step back and waiting.
Would you try to sell your house or your condo because it may have gone down in value in one week? I certainly hope not.
It is very much the same idea with your portfolio, and it is why we take such care in creating and investing our clients’ portfolios. These are investments that you may be living with for an extended period of time. Your portfolio is tailored to your needs, risk tolerance, time horizon and your experience. Will it always go up? No, it won’t, but if you stay the course and are disciplined about saving and investing; if you don’t panic or chase the latest fad, then I am confident that you will do quite well over time.
Our next newsletter will focus solely on how we create our asset allocations (the secret sauce). So stay tuned.
End of year thoughts
I’ll begin with oil as it is catching the headlines, and it is what many of the squawking heads on television have been squawking about. US domestic production of oil has skyrocketed in the last five years. Meanwhile, OPEC has kept production levels unchanged.
Normally, a decrease in oil prices is seen as a good thing. The idea being that the less money you spend at the pump and in heating your house, the more you have to spend. The more you spend, the greater earnings companies have, which hopefully causes them to hire more people, pay more in taxes and buy more raw material to produce the stuff that you want to buy. Thus is the circle of capitalism. This is, of course, is a very simplified view of capitalism, but you get the idea.
I would argue that the benefits of lower energy prices for consumers still hold true, not only for consumers in the United States, but also across the world. There are exceptions of course. Nations such as Russia, the OPEC countries and Venezuela, whose primary export is oil, are in a tremendous amount of pain. Since I began this newsletter, the Ruble has dropped 50% in value and the Russian central bank raised interest rates to 17% to try and stop the fleecing of the Ruble. This could be the end of the Putin regime.
As I alluded to earlier, the drop in oil prices is partly tied to the supply side of the equation (US & OPEC combined are producing more oil) but it has also been pointed out that prices are seeing pressure for the demand side as well. Statistics were recently released showing production in China is slowing, which means it is using less oil. The market reacted fearfully.
The logic being that if China’s production and economy are cooling off, the rest of the world will freeze.
I do agree that China is very important to economic growth and the future of the world. They’ve been a large part of global growth for a considerable amount of time now. However, the Chinese have been rather successful in diversifying their holdings around the world away from manufacturing. This is evident in the US and Europe where many Chinese are being sent for education, shopping, investment and tourism. Furthermore, the Chinese have moved into and are competing in sectors where they were not previously (Alibaba for example, or the major movie studios being built and producing content in China).
The Chinese story is a complex and important one. A slowdown in production or a global slowdown will not deter China from continuing to aggressively position themselves on the global stage, economically, politically or culturally. As long as ties are strengthened between China and the rest of world in terms of goods, services and labor, our domestic markets will continue to benefit. If the Chinese are successful in further cultivating their middle class, there will eventually be no consumer class larger in the world. We should continue to endeavor to create products, services and technology that will be in demand when that day comes. The US technology and biotech industries are shining beacons in this regard, but the rest of the world is gaining ground on us.
What does all this mean to us in the US?
In the near and midterm, we are bolstered with lower energy costs, a very strong dollar, greater energy freedom and greater purchasing power. I predict this situation will provide many companies with some excellent end-of-year numbers, which I would imagine would help the markets. This too should spur greater tax revenue, which we should use to rebuild an absolutely crumbling infrastructure with the same gusto that we redeveloped our domestic energy program. Too much to wish for?
It’s our belief that interest rates will remain low for a considerable amount of time. The Fed just released its most recent statement, reconfirming that the Fed does not have the political will to raise rates, even when the employment data gets better (this also sent the market up over 200 points). This means that if and when rates move higher, it will be because the markets dictate it (major lack of confidence in US credit worthiness). As the US seem to be the best show in town as far as currency and credit worthiness, we don’t foresee that hand being played any time soon.
Lower rates usually point to equities going higher, something they have done since the Fed lowered interest rates to record levels in 2009. This doesn’t mean that the markets won’t be volatile.
So what shall we do in light of the volatility in the markets?
We are using some of this volatility to make small equity purchases, rebalancing some portfolios where we see opportunities and make sure that we are sticking to the plans we made with our clients when we first sat down with them. Indeed spending a considerable amount of time getting to know our clients and their goals before we invest is one of, if not the most, critical criteria in managing assets for our clients.
Specific recommendations?
If you are a glutton for pain and want to manage your portfolio on your own, here are some thoughts for you:
Emerging Markets: Remember 1998? That’s the year Russia defaulted, a hedge fund called Long-Term Capital (honest that was their name) lost $4.8 billion dollars in less than 4 months and the Fed led a consortium of sixteen investment banks to bail them out. Scary times. Countries can and do default. We could be in a similar scenario now. Unless you are skilled in investing in the emerging markets, just stay clear of them for now.
US Mortgage Bonds: Mortgage bonds have done exceedingly well since the great recession. With some select funds yielding about 4%, a strengthening economy and lower energy costs, I don’t think the party is over yet. This is a good place to put a portion of your fixed income allocation.
Select High Yield Bonds: I say “select” because you want to be careful which bond, mutual fund or ETF you invest in with high yield. I’m fairly certain that some companies with high yield debt will not survive the collapse in oil prices (think early stage oil exploration companies). You want to steer clear of these holdings. However, there are some high yield companies (retail, consumer electronics, manufacturing) that will benefit greatly from these lower energy costs and an energized consumer. Those are the companies you want to be aligned with.
Individual Stocks: We believe these lower energy prices will generally be a good thing for the US economy and thus stocks. We almost always have broad exposure to the US stock market, either through ETFs (exchange traded funds), money managers and/or hedge funds. However, we also believe that volatility provides excellent investment points into very high quality individual stocks.
In moments where there is panic, look to the big beautiful stocks that you’ve always wanted to own (think Apple, GE, Johnson & Johnson) and purchase a few. Then forget about them and come back in 5 years (or 10 years as Mr. Buffet would claim).
Conclusion
As we come to the end of the year, there is indeed plenty to be thankful for. Here at Vitreous Partners, we are extremely thankful to work with our spectacular clients, friends and colleagues. We do not take our responsibilities to you lightly.
We wish you and your families a very happy, healthy and prosperous holiday season and we look forward to working with you in 2015.
All the best,
Rob Santos
CEO, Vitreous Partners
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