JR Snell Capital Management, LLC

If you’ve “subscribed” to get web site updates to keep one eye on the market while you do other things… this post is for you.

In my post “Market Timing for Dummies” I describe a methodology that I use to help us decide if we want to be generally in, or generally out of stocks. It’s not necessary to go into detail about the methodology of the indicator we use, as I go into it in detail here.

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Also, as a “bribe” for subscribing, you would have received a free report that describes how we use this indicator, how to calculate it and how to get it on your computer desktop for free.

If you’ve subscribed in the past and no longer have the report, please email us and we’ll send a copy. Use the Contact Us form and put in the comments that you are a subscriber to my blog and you’d like to receive a copy of the Market Timing Report.

…and if you haven’t subscribed to receive blog updates, then go here to subscribe and you’ll get a copy of the report for free.

Oh yeah… Why am I mentioning this now? Because as of Friday July 2nd, 2010, we kicked into a Bear Market according to this indicator.

Will the market crash? Will the indicator show a “false negative”? Hard to say, but rules is rules and if you’re following this indicator for some of your long term stock investments… well, it’s time to exit them for right now.

investments, Market Comments, market timing, markets, s&p 500, stocks, strategy, timing

“…random.”

Not what you were expecting?  Most folks would have finished the sentence “…not an indicator of future outcomes.” Or something similar.

It’s interesting to note that nearly every investor has been so brainwashed to this statement that they don’t really ”hear” it anymore. It’s in one ear and out the other and despite the warning, most investors and advisers demonstrate their conviction that the past performance of a mutual fund DOES matter by continuing to construct financial plans, asset allocation targets and efficient frontiers around the practice of analyzing the past to predict the future.

Actually, past performance may say something about the future of a mutual fund, but not in the way one would expect. A recent Standard & Poor’s research paper titled, “Does Past Performance Matter?” points out that the bottom quartile of mutual funds by performance are consistently the most likely to go out of business, be shut down, or be bought up and merged. Logically, I can understand this. Since investors continue to focus on past performance when a fund performs poorly they are more likely to extract their money from that fund. When a fund’s outflows drain it to a certain point, it is no longer profitable to keep running the fund. Close it, sell it, merge it.

What about the best of the rest?  Here are some facts from S&P’s recent report:

1. 1.7% of large-cap funds, 2.2% of mid-cap funds, and 4.6% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods. Random expectations would suggest a rate of 6.25%.
2. 18.5% of large-cap funds with a top quartile ranking over the five years ending March 2005 maintained a top quartile ranking over the next five years. Only 12.7% of mid-cap funds and 25.0% of small-cap funds maintained a top quartile performance over the same period. Random expectations would suggest a repeat rate of 25%.

The report looks at a number of different time frames and durations and IN EVERY EXAMPLE one would have achieved better investment results by randomly selecting a mutual fund.

If you turn this analysis around, the conclusion is that selecting a mutual fund to invest in by researching and ranking historical returns will actually encourage a less successful investment experience going forward than simply throwing a dart.

We’ve always avoided mutual funds for our clients because of the costs of them, now we have another reason.

buy and hope, investing strategies, investments, strategy

The latest market meltdown has gotten folks asking me about our performance as compared to the stock market (again). But I’ve always thought a little differently about comparing our management of client accounts against various indices. (The industry calls this “benchmarking”.)

I find it interesting that investors would want to compare whole portfolio returns to the stock market. It’s funny how consumers of financial products maintain this decision bias by wanting to compare all returns “against the market” to decide if they’re getting good advice or not.

I don’t think investors are necessarily to blame for this bias… I think our industry might have brainwashed people to think this way. After being subjected to the stream of advertisements on TV and in magazines comparing “this fund” and “that fund” against the market, what can we expect investors to do when looking for intelligent ways to discern between copius financial choices?

To get market returns… or a reasonable comparison between what you’re doing versus what the market has done, you have to accept “market risk”. Yet, what I know from innumerable conversations with real people who have real concerns, investors do not want to accept “market risk” for the entirety of their investments.

I think a better “benchmark” to judge portfolio performance would be to compare your performance to what you set out to do. I call this “Personal Benchmarking”. Once you’ve released your portfolio from the chains of relative performance and embraced the concept of absolute performance (Personal Benchmarking) all investment decisions become significantly easier to make and to manage.

If you’ve planned that you’ll need a certain average annual rate of return to make your retirement work, what relevance is the stock market to you personally? It’s one of the hardest concepts to get your head around… but it’s worth it when you do… kind of Zen-like if you will.

So, we try to use the stock market as simply a tool to help us to reach your objectives. To do this, we have to first define your objectives, then we have to have the courage to “walk away” from the market when necessary and to exploit it when possible. (Hint: Get this report.)

If you REALLY think about doing things this way, you are naturally going to under perform when the market is “hot” and “risky”… and you’re going to outperform (sometimes significantly) when the market craters. But then again, who cares? The goal isn’t to “beat the market”, the goal is to continue on a track to meet your personal objectives?

beginner, investing, investing strategies, investments, market timing, rules, strategy, timing

For those of you wondering, I’m still here and still active. There are a few reasons that I haven’t written a lot here recently and a few reasons why I am ready to be a little more active poster these days.

Ahh priorities… Clients always get first whack at my time. I might be on the more  “public” tasks of preparing annual reports, quarterly reports, talking to accountants, compiling year-end numbers, or working on each client’s annual Roadmap planning updates.

Or, I might be on the more “in house” tasks of balancing or rebalancing client accounts, analyzing stock positions, considering stock positions, research, trading into or out of something that I like or don’t like, etc.

These two priorities have kept me pretty busy… end of year and most recently end of quarter stuff… But, I’ve also been busy with my second course of action, which is helping new people to become new clients. Since I really take my time with their stuff and all new clients go through the process of figuring out where they are and where they want to be, this can take a lot of time.

After all of this, comes time for blatant self promotion and article-writing… which includes sitting back (a little… not enough to tip over my chair) and observing the world of the markets with a fresh enough eye to comment on them.

While I have had some difficulties getting far enough down the list to get pen to paper (figuratively, of course), there’s the OTHER reason: Any pearl of wisdom starts with a grain of sand that aggravates enough to impel one to action.

Frankly, every time that I look back to my late November post, I observe that what I recommend is what I’m still doing… this is what I’m still thinking… this is how I’m still positioning client accounts. And you know what? The market is still where it was when I wrote the post in November, about 1100 on the S&P 500.

So what’s changed? What’s the “sand in my mussel”?

Complacency. I can feel it creeping in again. I feel it when I talk to clients and prospects and I even feel it in my casual conversations. It is just these times that the general public seems to get a wake up call. Are you going to answer it?

Market Comments, s&p 500, safety, stocks, strategy

Looking back over the last couple of months worth of posts, I’m thinking that it might appear that I’m a little opaque as to what areas of what markets you should be focusing on.

I’m not, so I’ll clear things up before I go AWOL for the week. First, understand that anything can happen over the short-term. What we always work on here in our laboratory is more macro-type thoughts for overall “big picture” positioning for ourselves and our clients. That’s what this is about.

[Sidebar... I think I might have mentioned that we are all about the "return of thought" when managing investments... That is, come up with a prospective course that we believe things will take and position for it. A little more active than reactive, and certainly not passive.]

If there’s no magic bullet or secret formula to this investing thing, the elephant in the room says that those investors who wish to survive (and thrive) in tomorrow’s markets might have to think for themselves (gasp)… or (at the very least) think for themselves enough to know they should hire those people who think for themselves.  – From “How We’re Fixing It”

First, the average inflation rate for the last 100 years or so is about 3.0%. The TIPS market (Treasury Inflation-Protected Securities) is showing the breakeven inflation rate at 1.9%… significantly lower than the 3.0% average. Translation: The market says that economic stimulus and other Fed stimulators (very low interest rates) will not work as planned… Translation: Extended period of very slow or non-growth. Translation: Buy TIPS because the treasury structured them to provide downside protection against deflation (which, of course the Feds assumed would never happen)… and this is really one of the very, very few investments that I can think of that offers this.

We’ve been buying the individual bonds for clients and mixing it up between 7 and 14 year maturities. If you can’t buy the individual things, you can consider the ETF (TIP)… This ETF makes sense for smaller accounts, but they have some additional internal management fees which is why we shy away from them in larger accounts

Following this premise, it wouldn’t hurt to accumulate some longer treasuries… like in the 20 year (give or take 5) range. I hear people whining about only getting 4.20% on a 20 year treasury… but I think if a person accepts what might be the ”new normal”… 4.20% might not look that bad, in hindsight.

We’re not married to holding on to the things for 20 years though. If we were presented with some outsized gains on our treasuries over the next year or two, we wouldn’t be afraid to take the profits and find a new home for the proceeds.

Dividend-spewing, old-line, consumer staples stocks look tasty for a couple of long-term reasons. First, we can get between 3 and 4% on many of these stocks (i.e. HNZ) and their business model isn’t so sensitive to the economic cycle.

Don’t get me wrong… anything and everything will go in the tank if the economy falls off a cliff again (people will even go without ketchup if things get bad). But generally, if our extended-malaise scenario becomes fact, then these consumer staples companies will still be chugging along same as always.

Just be sure to do your homework and feel comfortable that the stocks you’re choosing have low debt and decent enough margins to keep coughing up the dividend if things stay marginal for a long time. Email us if you need some help in this area.

Technically, in the stock market we’re acting a little short-term “toppy”… meaning it’s not a good time to be going after your favorite growth stock. Long-term? At the moment, none of the classic, fundamental, long-term stock market indicators are suggesting that now is a good spot to become a new “buy-and-hold” type of investor. Sorry. Be patient.

The upside to the “new normal” is that we can afford to be patient in the stock market. These days, nothing is going to run away from us for very long. No matter what the economy does, we still believe in volatility. Since volatility is how we’ve always made our money in the stock market, we still believe that there is money to be made in stocks.

As far as the thoughts of chasing stocks for fear of being left behind? We’re content to let everyone else risk heartburn while we just pick at the turkey.

buy and hope, deflation, fed, interest rates, investing, investing strategies, investments, Market Comments, safety, strategy, timing, treasuries, treasury

Utility Stocks (as a group) have forsaken me this year by advancing only about one-fifth of the amount of the S&P 500… which can act as a real short-term boat anchor in your portfolio if you own any quantity at all. Yet, my passion for the sometimes stodgy “dividend machines” still burns hot.

Why?  First, there’s the cash flow.  My favorite utilities ETF, the Utilities Select Portfolio (XLU) is spinning off a 4.31% dividend yield in an environment where a half a percent is doin’ good on your money market. That’s worth taking a little bit of market risk.

Then there’s long term performance. The Dow Jones Utility Index has outperformed the S&P 500 by 4.4% PER YEAR over the last 10 years. This puts the DJUI in positive territory for the last 10 years, whereas the S&P 500 is down almost 20% for the same period. And we are supposed to be long term investors, right?

Then… What’s the problem? Why the dismal performance?

To answer the questions, I think we have to look at it in context of what utility stock underperformance might be saying about the economy in general. The last time we emerged from a recession, the utility averages advanced about 25% in the first year of the recovery (2003). This time, they have only advanced about 4%. My opinion is that there’s nothing wrong with utility stocks per se, but they might be telling us that there is still something wrong with the economy.

Mix this in with the failing dollar, gold hitting all-time price highs, and oil’s recent jump back to the $78 per barrel neighborhood and there’s plenty of evidence afoot to suggest that all is not “right” in the realm.

There are so many variables out there that even Helicopter Ben doesn’t have a real clue. Bernanke (at the moment) must be contented to just dump cash on the U.S. economy and hope for the best… while walking the tightrope.

We have the early indicators of inflation that gold, oil and utility stocks might be showing us on the one hand while we have the deflationary pressures that come with collapsing employment, a housing value slam with a possible double-dip and consumer spending that has all but evaporated.

So, I think utility stocks really ain’t misbehavin’… I think they’re trying to tell us something about the economy. And if I’m hearing them correctly, I think I’d rather lie with my lovable dogs (of late), than to be all loaded up on or still chasing after “recovery” stocks.

deflation, interest rates, investments, Market Comments, s&p 500, safety, strategy

I’ve gotten a fair number of questions about this Roth IRA conversion that’s going to be available to all IRA owners next year.

The basics are that you will be able to convert all of your regular IRA-type accounts over to Roth IRAs during 2010, regardless of your income level. The million dollar questions is, “Is it a good idea?” … and I can’t provide an answer to that question.

So, what good am I? Well, I brought it up didn’t I? Ok… actually, I’m willing to be the “go-fer” between my clients and their accountants… but they and their accountants have the ultimate say  whether it’s a right thing to consider… that’s what good I am.

Just to get the ball rolling, I stole an article that’s got way too much detail about the whole issue… It might be confusing to us mere mortals, but your accountant will probably be interested in it. So, read – copy – print the attached article and then pass it on to your accountant.

401-k, cash, investing strategies, IRAs, rules, strategy

The ending of my last post went something like this:

If that’s the case, I wouldn’t want to be a “buy and hold” investor, but if you’re willing to be nimble and cynical, there’s a lot of money to be made during this whole period of economic malaise. If you need an historical precedent, go back and look at a chart of the market during the Great Depression after the initial, monster selloff. What a great time to be an investor with actual cash!

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All we have to do is have some cash left at the end of the monster selloff that we find ourselves in today.

And… of course, I didn’t show a chart of the stock market during the Great Depression. I can’t believe I’m so lazy as to make a reader look it up for himself! So, you bum… here it is… Now, get back to selling pencils already!

bummer, great depression, stock market, strategy