Wealth Talk

Don’t worry about the S&P downgrade of U.S. treasury securities. Focus instead on your long-term plan.

News organizations are in the business of selling papers and magazines. Sometimes I think they love to run headlines like, “Downgrade Ignites a Global Selloff.” That was the headline on the front page of my print edition of The Wall Street Journal on Tuesday, August 9, 2011.

Of course, the stock market lost a lot of value on the previous day. The Dow Jones Industrial Average plunged 634.76 points over worries, the Journal reported, about the downgrade by Standard & Poors of the U.S.’s credit worthiness. Even so, is it accurate to say that the August 5 downgrade ignited a selloff on August 8?

I disagree with the assessment by the financial press. I don’t think the markets are worried about a U.S. treasury default. The two other major ratings agencies, Moody and Fitch, have maintained their AAA treasury ratings. I agree with the Journal’s Monday, August 8, 2011, “Review & Outlook” editorial on page A14, which said “Despite S&P’s opinion, there is no chance that America will default on its debts.”

SOME GOOD ADVICE

I regularly read and collect quotes by famous, intelligent people, who have a knack for accurate, succinct statements that keep things in context. Listen to what others say about investing in tumultuous times . . .

Benjamin Graham—Warren Buffett’s instructor at Columbia Business School and mentor. Here are three quotes from Graham’s book, The Intelligent Investor: A Book of Practical Counsel,  which Buffet once said was “By far the best book on investing ever written.”

• “The investor’s chief problem – and even his worst enemy – is likely to be himself.”
• “The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.”
• “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

Warren Buffett—American investor, industrialist and philanthropist. He is widely regarded as one of the most successful investors in the world.

• “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
• “For investors as a whole, returns decrease as motion increases.”
• “Our favorite holding period is forever.”
• “If a business does well, the stock eventually follows.”
• “Lethargy bordering on sloth remains the cornerstone of our investment style.”
• “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
• “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”
• “We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’”
• “The lower things go, the more I buy. We are in the business of buying.”
• “Business has been coming back steadily, even more than the mood of the public.”

Peter Lynch—The famed Fidelity Magellan mutual fund manager from his book, Beating the Street.

• “Everyone has the brainpower to make money in stocks.  Not everyone has the stomach.  If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.”
• “A stock-market decline is as routine as a January blizzard in Colorado.  If you’re prepared, it can’t hurt you.  A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.”

And, let’s not forget some of the thinking behind the success of the three largest mutual fund companies in the U.S.: American Funds, Fidelity and Vanguard. Collectively, they manage over $2.5 trillion dollars. I would summarize their investment advice to their shareholders as follows:

1. Have the right asset mix.
2. Use time to compound your money.
3. Stick with your plan.
4. Panic is not a strategy.

STOCK INVESTING MAKES SENSE LONG-TERM

In June, I wrote an article entitled, “Market Jitters? Just Keep Investing.” In it I gave several reasons to keep investing in stocks, all of which still hold true.

1. Stocks have done well in the past. Roger Ibbotson of Ibbotson Associates, which publishes the Ibbotson SBBI Classic Yearbook, says, “Stocks are going to outperform bonds long-term. That’s almost assured.”
2. U.S. company profits are good. I can add a further point to what I wrote in my “Market Jitters?” article by noting that many companies have done well by expanding globally into markets such as Brazil, India and China. In his piece, “Don’t Panic About the Stock Market” (The Wall Street Journal print edition, August 8, 2011, p. A15), Burton G. Malkiel, professor emeritus at Princeton University, says that “the structure of corporate earnings increasingly reflects economic activity abroad—including rapidly growing emerging markets—rather than activity in the U.S. This is why corporate earnings have been growing so rapidly even though U.S. economic growth has been so tepid.”
3. The Price/Earnings ratios for some stocks are relatively low. This continues to hold true in my opinion. In fact, whereas I reported P/E ratio figures in the 15s and 16s, some market observers calculate P/Es in the 14s. Forward P/E multiples, using forecasted earnings, are less than 12.
4. Dividend yields are good. Again, I hold to what I have already written: “Some companies appear to be increasing their dividend payouts.”
5. Buy and hold can work—if you have an investment plan that fits your needs and goals. I like this quote from Ibbotson: “People need to step back, calm down and look at the market from a longer-term perspective. […] Psychologically, that’s very difficult to do. People do panic, or run into one bad year or one bad market cycle and over-react; people get comfortable with the idea of long-term investing until the next bad event happens, when they panic again. But if they don’t panic, the market rewards them for their patience.”

Of course, in saying all of this I’m not taking your situation lightly. I have just seen that investors who get into a panic and sell in the heat of emotion later regret that decision. I’d rather you have a good game plan, understand your game plan and move forward in executing it. Long-term, I think that the stock market’s performance depends more on the economy and jobs growth than on one rating agency’s specific views.

HAVE A GAME PLAN

In summary, then, I believe that stock market corrections are not a time to act on emotion. While your life situation and goals are unique, selling stocks just because they are down in value, in and of itself, is wrong in my opinion. While no one can predict the stock market’s daily ups and downs, long-term I think stocks are a good value. Please call me if you want to discuss your investment program.

Joe Bonnett
(402) 556-8858

This release is intended for general informational purposes only. Nothing provided herein should be considered a recommendation to buy or sell any security or provide a specific investment strategy. Securities America and its representatives do not provide tax or legal advice. Readers are directed to consult their tax advisor, or legal counsel, for advice concerning their particular situation.