BANK ON IT: “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” — Benjamin Graham (Economist, investor, Securities Analysis 1934, The Intelligent Investor 1949, 1894-1976)
Since last March 2009 when both the Dow and S&P 500 sank to levels below where they were at least 10 years earlier for the first time since 1974, both have produced the steepest stock-market rally since 1933. Unfortunately, the vast majority of investors lost as much or more than the market on the way down, and they also failed to enjoy the huge rally that, thus far, is still underway.
What happened? First, as the market indices plunged into the first quarter of last year, U.S. individual investors moved several-dozen billion dollars out of equity funds and injected more than $300 billion into bond funds of all sorts – corporate, municipals and Treasuries. Treasuries suffered a terrible year in 2009, the worst 365 days in more than three decades. Their negative emotions were in control of their money.
According to quantitative analysis from Dalbar Inc., a firm that continuously monitors investor behavior, the S&P 500 garnered an annual total return of 8.35% for the 20 years ended 12/31/08. The Barclays Aggregate Bond Index gained 7.43% a year while inflation grew at 2.89%. An individual who simply bought an index fund geared to the S&P 500 on January 1, 1989 and held through all the ups and downs earned a real (after-inflation) return of 5.5% each year for two decades.
But Dalbar concluded that far too many investors tend to buy at highs (the greed emotion) and won’t or don’t buy more at the lows. When they sell, they generally do so closer to the lows (the fear emotion) than the highs. So, for those 20 years Dalbar concludes that the average mutual-fund investor earned a paltry 1.87% annually in stock funds and 0.77% in bond funds, both rates fell well under the 2.89% increase in the consumer price index.
Is it any wonder so many people question investing, especially over the longer term, when in fact it’s not so much the markets but their own emotions that do them in. If they really want to know why they do so poorly, all they need do is look in the mirror.
Quote of the Month
“I want to be very, very clear: too big to fail is one of the biggest problems we face in this country, and we must take action to eliminate too big to fail.” — Federal Reserve Board chairman Ben Bernanke in TIME, December 28, 2009 (2009 TIME Person of the Year)
On 12/16/2009 The Wall Street Journal wrote, “The top four banks have combined assets of $7.4 trillion, or 56% of the U.S. banking sector's total. A decade ago, the top four’s $2 trillion of assets accounted for 35% of the total. In the past 30 years, large banks have facilitated significant increases in leverage across the economy and stretched their own balance sheets. Financial-sector debt reached 118% of gross domestic product at the end of 2008, up from 18% in 1978.”
Our opinion: If Chairman Bernanke is so concerned about too-big-to-fail in the banking sector, he and Congress better get to work pronto. (So far they’ve done nothing but talk.) The big continue to get even bigger.
Baker’s Dozen Updates
Enterprise Products Partners (EPD), for the 22nd quarter in a row, raised the dividend. The new annual payout is $2.24 for a current yield of 7.0%. If inflation lurches substantially higher as we anticipate it will, EPD ought to be a great investment haven in a time of stress.
McDonald's (MCD) enjoyed another fine year, reporting EPS of $4.11 per share. CEO Jim Kinner commented, “Our in-demand food and beverages, unparalleled convenience and superior value at every level of our menu enabled us to serve 60 million customers per day during 2009, up 2 million per day over the prior year. In addition, McDonald’s profitability increased as we marked our sixth consecutive year of positive comparable sales in every geographic segment and generated higher global revenue, operating income and earnings per share in constant currencies – all tremendous accomplishments given the tough global economy.” For patient investors, especially on stock-price dips, this is a great company to continue accumulating.
Nucor (NUE) earned $0.18 in Q4 of 2009 compared to prior quarterly losses of $0.60, $0.43 and $0.10 in the first, second and third quarters respectively. For the year, the loss was $0.94 per share compared to a profit of $5.98 the prior year. Last year was horrible as sales dropped 53% to $11.19 billion from $23.66 billion in 2008. Despite that, the company remains strong financially with $2.24 billion cash and a $1.3 billion unused on a revolving credit line. Results for 2010 may not be much better than in 2009, but once steel demand gets at least somewhat back to normal, Nucor has tremendous operating leverage, which in turn can deliver big earnings to the bottom line.
One of the great retailing successes of all time was Sol Price, who founded the highly successful Price Clubs, the first membership warehouses after which Costco and Wal-Mart’s (WMT) Sam's Clubs are patterned. Price died on December 14, 2009, at age 93, but long before he passed away Sam Walton, the founder of Wal-Mart Stores, had thoroughly picked his brain. Sam’s Clubs, apart from the regular Wal-Mart stores, bring in close to $50 billion in sales a year. Walton once commented, “I guess I’ve stolen – I actually prefer the word ‘borrowed’ – as many ideas from Sol Price as from anybody in the business.”
Wal-Mart is successfully using all its stores to rapidly grow its online business and be a much stronger competitor against Amazon. About 40% of website sales are delivered and picked up at their “site-to-store counters” in all Wal-Mart stores, thus saving shipping that can sometimes be costly. Our oldest daughter Gracie, who lives in San Diego, purchased a number of Christmas gifts online and then picked them up here in Charlotte over the holidays. No muss. No fuss. Wal-Mart, according to one analyst we respect, is a “well-established, highly efficient distribution system which Amazon doesn't have.” As time goes on, we expect online sales to be the fastest-growing segment of the company's business.
“Write the bad things that are done to you in the sand, but write the good things that happen to you on a piece of marble.” — Arabic parable
Bill Staton, America's Money Coach®, began his investment career as a securities analyst with Interstate Securities (now part of Wachovia Securities) in 1971. In 1986, he founded The Staton Institute® Inc. (www.statoninstitute.com), helping thousands increase their wealth with a commonsense value approach to investing. A frequent speaker on investing and economic issues, Staton has been profiled or quoted in the Wall Street Journal, New York Times, U.S. News and World Report, Barron’s, BusinessWeek, and Money magazine. He is the author of five books on investing and has an MBA in finance from the Wharton School at the University of Pennsylvania.
His latest book Double Your Money in America’s Finest Companies®: The Unbeatable Power of Rising Dividends is the first installment in our new Almanac Investor book series. For the past 18 years Staton has produced his directory of America’s Finest Companies®. In Double Your Money, Bill Staton’s entire simple, do-it-yourself AFC system is revealed and explained with clear step-by-step instructions, including the entire current listing of all of America’s Finest Companies®. The 19th 2010 edition is now available electronically from Wiley at www.wiley.com/buy/9780470547960.
Mr. Staton may buy or sell at any time securities mentioned. Positions his or other accounts he manages take may change at any time. Under no circumstances does the information he provides represent a recommendation to buy or sell any security and it in no way constitutes a solicitation for any transaction. Past performance is no guarantee of future results. At press time the Hirsch Organization, its officers or employees were not clients of Staton Financial Advisors, LLC and had no positions in stocks mentioned in this article.
** 1. The Baker’s Dozen Guided Portfolio® (the “Portfolio”) is a “model” portfolio consisting of the shares of 13 different companies selected from The Staton Institute’s® annual investment directory, America’s Finest Companies® (“AFC”). 2. A theoretical initial investment of $1,000 was made on June 18, 2000 into each of 13 AFC companies. More than 30 positions have been sold and replaced since that date (roughly one-third turnover per year), but there are always and only 13 AFC companies in the Portfolio. The Portfolio is also always 100% invested in stocks. 3. The Portfolio is not indicative of any actual managed or unmanaged portfolio. It is fairly frequently altered to replace the proceeds from the sale of all shares of one company with the purchase of shares in another. 4. “Price” denotes the closing price on the principal exchange for an indicated stock as of the most recent trading date. “Shares” denotes the number of shares of each company that were purchased to establish the Portfolio’s static position in that company. “Market Value” denotes the number of shares purchased multiplied by current price. “Yield” denotes the current annual dividend per share for an indicated stock divided by the stock’s current price. “% Fair Value” denotes the percentage which the market value represents compared with The Staton Institute’s® current proprietary estimate of the intrinsic worth of each Portfolio holding. 5. Cumulative and annual total-return figures indicated above the Portfolio listing reflect appreciation or depreciation of Market Value for, respectively, the entire Portfolio since inception and as annualized. The same convention is followed regarding cumulative and annual returns for the S&P 500, Dow Jones industrial average (“DJIA”) and NASDAQ Composite Index (“NASDAQ”). Returns for these indices are shown for comparative purposes since they are believed to be representative of the broad U.S. exchange and over-the-counter markets in which shares of AFC issues are traded. Reported results are not audited. 6. Compound annualized returns reflect deductions, computed as of January 1 of each year from inception of the Model through the date of issuance of the current Newsletter, of 1% of the Model’s overall Market Value as published in the Newsletter at the date closest to or on January 1 of each year. This roughly simulates the advisory fees that an account managed by Staton Financial Advisors, LLC, The Staton Institute’s affiliate, would have borne throughout the entire performance period. This results in an understatement of performance insofar as fees for an entire year are treated as having been removed from the Model Portfolio at the beginning of each year rather than at quarterly intervals throughout the year. Compound annualized returns do not reflect deduction of asset-based fees charged by broker-dealer custodians which SFA is instructed, by its clients, to exclusively utilize when executing market trading transactions in these accounts. 7. Stated returns for the Portfolio reflect the quarterly reinvestment of dividends. Returns for the comparative market indices exclude dividends. Typically, at the end of each quarter, the theoretical dividends collected during the prior three months are used to buy additional shares of the one or two Portfolio holdings that are most underweighted, by market value, as compared with all other current Portfolio holdings. The reinvestment of dividends, the ability to direct transactions, and keeping the various holdings somewhat balanced by relative market value is the only “management” which The Institute accords to the Portfolio. 8. The Portfolio is offered as a service of The Staton Institute® for whatever use its subscribers may wish to make of it. Subscribers are cautioned to note that past performance of the Portfolio is no indication of future results. Moreover, the performance records of model portfolios are subject to additional, inherent limitations because such portfolios do not reflect the results of actual recommendations or trading, nor the impact that material economic and market factors might have had on decision-making if a client’s assets were actually being managed. 9. Under no circumstances should the reader understand that The Baker’s Dozen Guided Portfolio® is indicative of the performance that has or may be expected to be achieved from the separate account management services offered by Staton Financial Advisors, LLC (“SFA”). SFA accounts are managed in a manner which reflects significant differences from the constraints of the Portfolio. SFA accounts also bear advisory fees payable to SFA as well as fees payable to broker custodians which, especially over time, have an impact upon actual account performance.
