Each year the 4th day of July commemorates themes of independence—life, liberty, and the pursuit of happiness.
The secret to financial freedom is simple—there is no secret! Pursue lifelong learning and self-improvement, master the precepts of physical and fiscal fitness, work hard, play creatively, keep debt under control, save and invest wisely, plan for contingencies and emergencies, and live the Golden Rule.
Be willing to take a risk once in awhile. Great companies like Home Depot were started by risk-taking entrepreneurs. We see a rise in entrepreneurial creativity that we hope will not be stifled by restrictive lending policies. In the new city of Peachtree Corners, GA, Georgia Commerce Bank is opening a branch to target the needs of business owners, a vote of confidence in a vibrant future.
In investing, when it comes to stocks and bonds, most people will defer to professional managers via mutual funds or separately managed accounts. But it may not hurt to play a hunch on your own once-in-awhile, particularly, if you are a contrarian.
Regulators demand that we tell you: Past performance is no guarantee of future returns. True. It is also true that investment volatility is a hallmark of a free market, and that volatility above or below a trend line, especially a radical deviation as experienced after 9/11 or in 2008, usually turns out to be temporary—eventually.
The 18th century British aristocrat, Baron Rothschild of the Rothschild banking family, famously declared, “The time to buy is when there is blood in the streets.” Timeless wisdom…still valid.
The Dow Jones Total Market ETF, NYSE-TMW, a broad basket of U.S. stocks, closed on July 3, 2012 at $102.23 a share. Purchased on 9/27/01 at $73.20, after the 9/11 attacks depressed the market, and held through 7/3/12, the stock delivered a respectable gain, not including dividends. But note, after 9/27/01, the stock got cheaper before it got better. You will never buy at the exact bottom, nor sell at the exact top.
If you still owned TMW after the Lehman Brothers collapse, on 12/27/08 with the stock priced at $63.18, you were in a loss position. Again, the stock fell further before it turned around. But had you waded in on a hunch that extreme volatility portends reversion back to a long-term mean, and you bought TMW at $63.18 (or added to your position), on Independence Day 2012, you were looking at a long-term gain of 62%, less trading costs but not including dividends, currently at about 1.80%.
Of course, this commentary is delivered with perfect 20/20 hindsight, recognizing that there is no 20/20 foresight—only hunches. Regulators want you to know that no investment strategy can guarantee a profit or protect against loss in a period of declining values.
The language in italics is what regulators demand that investment advisors and brokers tell you in public pronouncements. You can guard against loss with FDIC or similar federal guarantees but the rub is yields that guarantee loss when adjusted for taxation and inflation. A 5-year CD at a leading Atlanta credit union yields 2.00%. After taxes at 20% on 2%, the net yield is 1.60%. Adjusted for inflation at 2.30% (CPI-U), the real yield is negative -0.70%.
Sometimes it pays to play a hunch, running counter to the herd. Professional money mangers seek bargains, recognizing that they will never buy at the bottom nor sell at the top. Winners may look foolish for a while, or even strike out.
Babe Ruth, with a lifetime batting average of .342, struck out 1,330 times, with 714 home runs. Not all investment picks or swings at the ball will be successful. In baseball, life itself, and investing, it is batting average and patience that counts!
The Investment Coachä 1994, Walker Capital Management Corp. Lewis Walker is President of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies.