Summer 2013 Investment Letter {Part III}

Part III of our latest investment letter:

Investors should have a long-term strategy. For our clients this strategy comes from understanding their unique risk/reward criteria and then incorporating that into our investment disciplines. Our strategies are based on our playbook which is situational analysis based on historical market results. We study money flows along with the disciplines of fundamental and valuation analysis to see how markets have responded to similar historical events. It gives us different market scenarios. We use these to formulate our game plan. The game plan is a tactical and a strategic allocation of assets based on what the playbook tells us has historically occurred. It is then further refined to the specific risk/reward parameters of our clients.  For the most part we were buyers of the weakness back in June.  Our purchases were generally made in certain market sectors that we thought were then attractive as well as certain international ETFs.  This of course is always in line with our individual client allocations, risk/reward parameters and overall cash positions.  We in general now have lower cash positions than we might at this time of year.  It is likely that we will address that issue in the near future. 

My letters to you and our posts on the Internet have indicated my positive view of equities and the overall US economy.  Let’s take that positive view and look out into the future to see what might occur.  Based on what we currently know, I think that stocks have annual growth potential on a total return basis {price appreciation + dividends} between 4-8% per year.  I’m writing this with the belief that stocks will not rise in straight line, I believe some years will be better than others and we could see a down year or two in the running.  In spite of that, I think there is a high probability that we will be surprised at how well stocks will continue to perform throughout the rest of this decade. I’m saying this aware of current valuations and also well aware that this kind of statement could look foolish near term if we see some sort of market correction. But remember I said that I think stocks could average between 4-8% on a total return basis for the rest of the decade.  That may not seem like a lot.  It is substantially lower than the “go-go” years that characterized the late 90’s.  But don’t overlook the compounding effect of this kind of return.  A portfolio that compounds at an 8% clip will roughly double in 9 years.  Compare that with the return on bonds right now and its hard not to still find stocks attractive on a longer-term basis.  As a side note you can still receive nearly all of the 10-year’s yield in the S&P 500 plus you can get that appreciation kicker.