Try it! Try it! Try to be long-term investors!
DIS and DAT- Try it! Try it! Try to be long-term investors!- October 2011
“I would not eat them here or there. I would not eat them anywhere. I would not eat green eggs and ham. I do not like them, Sam-I-am.~ Dr. Seuss
We believe the market participants often misprice investments. Market participants from time to time focus on one specific news item and its eventual future outcome. We believe that when these participants become largely focused on one item prices trends can turn into bubbles, mania’s, crashes and panics. Yet over time, these focused trends have tended to lose their effect on prices.
In reality, long-term prices are driven by many factors, hardly possible for one to conceive of, much less predict them all. That is why investing requires some concept or understanding of error! We have heard in the past that pilots have been advised to “fly three mistakes high” . E. Hamilton Lee once stated “Don’t be a show-off. Never be too proud to turn back. There are old pilots and bold pilots, but no old, bold pilots.”
With that in mind, we will share one way for demonstration purposes only of a “margin of error” using an investment vehicle called closed-end funds. Closed- end funds have a net asset value (NAV). This NAV represents the total per share market price of each underlying positions. In theory, a manager could liquidate the positions and distribute this NAV to all the shareholders. However the closed end funds also have a market price that is determined by Supply and Demand. From time to time these closed end funds are priced above the net asset value, called a “premium”. We believe that one buying at that price point, better be , a perfect pilot, with perfect flying conditions. We know and try to remember that we are not perfect all seeing investment analysts. Therefore we would rather buy into these investments when the market price is below the NAV, giving us some margin, or room for error.
In a similar vein, your investment allocation can also provide some room for error. Generally we have broken portfolios into short-term, mid-term and long-term categories. Our thought is that one would rather not rely on them having perfectly selected a point in the market price of equities, in which it never goes lower. Instead we use money markets, short term cd’s, treasuries or other fixed maturity bonds for short term cash needs. As we have discussed, bubbles, mania’s, crashes and panics do occur in the market price of these investments. If the panic occurs at the time you need to withdraw funds, it could be painful, if you did not allow some room for error.
For demonstration purposes only we thought that we would share some data we compiled to look at two different time periods, late 1999 and September 2011. We believe this demonstrates how market prices can change from bubbles; mania’s, crashes and panics. A significant question in long term investment analysis is where is the best value for that portion of my portfolio?
1999 September 2011
Price of Gold 279 1611
Yield on Money Market 5.89 0.01
10 Year Treasury yield 6.03 1.987
1 Year Inflation 2.7 3.74
SP500 dividend yield 1.16 2.25
SP500Forward EarningYld 3.52 9.13
At the turn of the century it appears the average investors were pricing gold and money markets as “Green Eggs and Ham.” Now in 2011 it seems equities (stocks) as represented by SP500 are being priced as the “Green Eggs and Ham.”
BOY!!! SAM I AM!
Here are some interesting graphs from J.P. Morgan
See you next time.
Data in chart compiled from the following: Bigcharts; www. Infoplease.com/ipa/A0908373.htm ; http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm; www.multpl.com/s-p-500-dividend-yield/table; www. Publicdebt.treas.gov ; www.spdrs.com/product/fundFullPage.seam?ticker=SPY; www.Haysadvisory.com
SP500 represents an index and you can not invest directly into an index.
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