Bank of America's Royal Screw Up -- OR -- Pray for cousin Rich...

Every so often a client asks me about adding an individual stock to his/her portfolio. Typically he has a specific company in mind that he heard about on CNBC, or via a whisper in the ear from his cousin, Rich, who's been bragging about how rich he's getting buying stocks on eTrade. By the way, cousins Rich always discover their innate stock-picking talents during bull markets.

Generally I'll offer to forward him someone else's research on the company with my translation of what it all means. While I'll definitely tell him if, based on what I see, it looks attractive to me, I'm virtually always hoping he decides not to go there. Oh, and early in the conversation I make sure to tell him "if you go there, go with money you can afford to lose a good portion of."

Now, as you may know, I am a huge believer in the long-term holding of the stocks of the companies that will produce the goods and services to a desiring world of consumers for eons to come. That---emphasis on "long-term" and the "s" after stock---is a no-brainer. "Long-term" allows for the living through of the inevitable, yet unforeseeable, periodic declines in stock prices, "s", as in many stock"s", allows for the diversification of business risk (the exposure to the unique business decisions of one particular company).

I'm throwing this out there this morning because of a case in point that emerged over the weekend. Bank of America, frankly, royally screwed up its accounting and is having to renege on a share buyback program and an increase in its dividend. As I type BofA is down a whopping -6.2% in today's trading. 

The thing is, the financial sector, by the metrics I track, is among the most attractive sectors in today's market (oh, and by the way, XLF, a financial sector etf we use---and which BofA is a component of---is only down -0.37% as I type). And of course BofA is no small player. One, cousin Rich for sure, might have concluded that BofA was among the more attractive players and, rather than diversifying away the concentrated (and potentially much larger) gains of a strong company in an attractive sector, decided to concentrate his financial sector exposure there. There's a term for that, it's called "greed". Which, by the way, is fine when we're talking about that little bit of money one is willing to risk losing a good deal of, but not fine when we're talking about the long-term money one plans to retire on.

Pray for cousin Rich...

P.s. BofA is by no means boo.com. And, therefore, I'm not suggesting, while anything's possible, that the shareholders who decide to hang on will see their position go to zero. I'm just thinking it's wiser, certainly safer, to buy the sector instead...

A few market-timing/forecasting thoughts...

A friend of mine just got back from an investment committee meeting where he listened to a mutual fund wholesaler forecast low interest rates well into 2016. I attended a presentation recently by a government pension portfolio manager who all but predicted, among other things, a 9% stock market gain for the second half of the year. I read a Seeking Alpha article yesterday that deftly dispelled any notion that the present bull market is anywhere near long in the tooth. Oh, and my investment committee friend also commented on how the fund wholesaler's company was ranked number one by Barron's for its 10 year results (as a fund family).

Pardon my skepticism, but:

As for low interest rates into 2016: They (the people who pay the young man to address investment committees)---believing it'll be good for stocks their assets under management---so want rates to stay low into 2016. So much so that they see low single-digit economic growth, troubles in emerging markets and a walking-dead bond market for many years (well, at least 3) to come. All the bias confirming data they glom onto notwithstanding, making a 3 year interest rate prediction is a very dangerous game to play with other people's money.

As for a 9% gain for the second half of this year: Bless his heart, the pension portfolio manager is so hopeful, and inexperienced---and wanting to please his audience---that he was willing to parrot what he heard that hedge fund guy say the day before on Bloomberg. God help him if that hedge fund guy is wrong!

As for the Seeking Alpha article: The author makes great points, but at the end of the day he's long stocks and needs to be right.

As for the best fund group over the past 10 years: For this one I'd ask the gentleman; "So were you the highest ranked 10 years ago?" (That would be a no btw.) "Oh, so who was the best?"  (He wouldn't know---but let's say he did.) "Oh, and where did they rank for the past 10?" (Not near number one [I'm speculating from experience] btw.) "Oh, so I guess we better stay away from you guys then." My point: 10 year mutual fund track records are almost worthless. There's absolutely no reason to believe that the number one strategy for 10 years (could've been 3 or 4 phenomenal years which produced the best average over 10) will remain such going forward. The odds of a mere human fund manager possessing the insight, and humility (after having been the best for 10 years), to know when the old strategy's luck has run out---and what to do to remain number one going forward---are, well, you tell me.

Stress less...

Dang! We just can't seem to get a good correction going. There were a couple days last week and one this week when sellers took the major averages for what felt like a steep ride lower. But, alas, the shorts (they win when stocks lose value) got cut short. The market has experienced a three-day bounce taking it roughly halfway back to its prior peak. Bummer!

Of course I'm kidding---about the bummerness---right? Well, yeah, and, well, no... Honestly, as bad as it feels, there's never a better time than now for a correction. Consider again the message in that simple stock market conversation we had during that wonderful bear market of 2008:

Investor: My gosh, the Dow was down 250 points today! What happened?
Advisor: Stock prices fell.

Investor: Why?
Advisor: Because shareholders wanted to sell their stocks and no buyers would pay yesterday’s prices.

Investor: Why wouldn’t they pay yesterday’s prices?
Advisor: Because they didn’t see value in yesterday’s prices.

Investor: Why not?
Advisor: Perhaps they felt that yesterday’s prices were based on earnings assumptions that may not materialize this year, due to the slowing economy.

Investor: Will the economy continue to slow – will we have a recession?

Advisor: What do I look like, a fortune teller?

Investor: Uh..... so, my portfolio's been dropping almost daily since the start of the year. Why?
Advisor: Because stocks are falling.

Investor: But why are they falling?
Advisor: Because no one wants to pay last year’s prices.

Investor: I know, you told me that already. But yesterday the Dow was up over 100 points. Why?
Advisor: Because investors wanted to buy and shareholders weren’t willing to sell at day before yesterday’s prices.

Investor: Why wouldn’t they sell at day before yesterday’s prices?
Advisor: Because they saw more value in their stocks than the day before yesterday’s prices represented.

Investor: Why?
Advisor: Maybe they felt that the day before yesterday’s prices didn’t fully reflect the upside earnings potential of the underlying companies.

Investor: How could their attitudes change so much in one day?
Advisor: Now that’s a good question!

Investor: Okay, but what if the market keeps dropping?
Advisor: It will keep dropping, I guarantee it.

Investor: What do you mean?
Advisor: I mean it will always keep dropping and it will also keep going up. It’s inevitable.

Investor: How could it keep dropping and keep going up?
Advisor: What I mean is, the market will always have periods when it drops and periods when it goes up. That we know for sure.

Investor: Okay, I get that, but what about my portfolio?
Advisor: Your portfolio will keep dropping and it will keep going up. If you’re a long-term investor, you’re in luck. The market has always kept going up more than it has kept going down --- over the long-term.

Investor: But I don’t like the uncertainty?
Advisor: How much do you not like it? Are you losing sleep?

Investor: Yes.
Advisor: Then get out of stocks.

Investor: But I’ve been told they’re the best investment long-term?
Advisor: You’ve been told right, the best investment long-term – not always the best investment short-term. But is it worth losing sleep over?

Investor: But if I get out of stocks, what do I do with the money?
Advisor: Buy CDs and save every penny you can. You’ll likely have to save more to reach your long-term goals, but you’ll sleep much better.

Investor: I don’t think I’d sleep well only earning what CDs pay.
Advisor: Then learn how to sleep owning stocks.

Investor: How do I do that?
Advisor: Don’t think about your stocks. Hire a money manager and stick with your program.

Investor: When do you think the market will rise again?
Advisor: After it’s done falling.

Investor: Is there anything I can do in the meantime?
Advisor: Yes. Anything but think about the stock market.

Investor: Will the Fed lower interest rates?
Advisor: Of course.

Investor: When?
Advisor: When they see fit.

Investor: Will they lower interest rates at their next meeting?
Advisor: You’d have to ask them – but I’d guess yes.

Investor: Will that help the market?
Advisor: What do you mean? Help it go up, or help it go down? Both are important.

Investor: What do you mean?
Advisor: You can’t have one without the other. Down trends are essential for the long-term survival of the market. Kind of like taking a rest every now and then. The longer the market stays up without any sleep, the harder the sleep when it finally comes. The good news is the market has always woken up.

Investor: Can’t you be a little more helpful and just give me a forecast for 2008?
Advisor: Trust me, my forecast won't help you. And does it really matter?

Investor: What do you mean, of course it matters?
Advisor: What do you want the market to do – go up or go down?

Investor: Now there’s a brilliant question – I want it to go up, of course!
Advisor: Now or later?

Investor: Huh?
Advisor: Let’s forget about up for a moment and think about down. Since the market is for sure going to go down every now and then. Would you rather it go down now or later? Are you going to need the money you have in stocks now or later?

Investor: Later.
Advisor: Okay then, since we know the market will always go down, and since you’re not selling your stocks till later – better that the market go down now rather than later, don’t you think?

Investor: Okay I get it. But I still don't like it.
Advisor: I understand. Most people don't. But it's my hope that, with a healthier perspective, you'll stress less going forward.

Doing Unto Others

So your seventh-grader comes home from school today and tells you how much she loved playing cross-fire (dodgeball to you/me) in P.E. because she hit Tyler smack in the face. Shocked at the sadistic nature of your little angel

Is The Rally Over or Is a New Bull Market Just Underway?

The October 6th issue of Business Week featured the following two headlines;

The Dollar and Today's Market

The dollar/market relationship I wrote about Monday (dollar up/market down & vice versa) is clearly playing itself out today. In spite of very good reports from Google, etc., stocks look to be giving back a little ground.

The "experts" will site the disappointing housing starts number (which shows stabilization, but not rapid growth of late), and while that may be part of it, clearly today's strengthening of the greenback is giving the market a (albeit slight) headache.

Go to Monday's commentary - "Minnie Mouse, The Market and The Dollar" for a more thorough explanation of the current state of our currency and it's short and long-term implications...

Good Grief! Where Are All The Jobs?

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