The Perspective of the Investor | Part 2

This week, we’ve presented excerpts from the latest client letter by Hewins Financial President Roger Hewins. In case you missed it, read Roger’s thoughts on the fiscal cliff and market returns in Part 1.

That’s why it’s called Risk

JP Morgan is kind enough to publish economic and market statistics in readable form every quarter (readily available if you would like to see the 60+ pages of charts and graphs), and these shed some interesting light on the current state of the markets. The executive summary is that corporate earnings have gone up a lot more than equity prices, so based on traditional measures of value such as price/earnings ratios, companies are cheap. They are cheap because people are afraid. There is genuine risk in the markets, and retail investors continue to pull money out of equity funds and put it into bond funds, even as interest rates hit new lows.

So you are being pretty well paid for taking some risk in equities, even after the rally of the last 12 months. If the worst case scenarios do not unfold after all, things can go pretty well. Remember, if you have been disciplined enough to stick through the bad markets in the past, you usually earned outsized returns as a reward.

On the other hand, with bonds paying very little interest, perhaps the risk there is greater than usual. Is this the time to increase your allocation to bonds? I think not. You will certainly not be well paid to do so.

What are equities anyway?

Not as dumb a question as it might sound. Remember, we are not talking about something abstract, some index which fluctuates with economic events; we are talking about real businesses. Businesses which are doing reasonably well and growing their revenues and earnings – why would that not be a good investment if the price is attractive?

For example, you might think of emerging markets as risky little companies doing simple things in small, undeveloped countries. But think instead of Samsung (full disclosure, I am looking at my 24” Samsung monitor as I write this), the world’s leader in flat screen technology and production, among many other things. South Korea, a place I visited recently, is a modern and prosperous country. Work there has not stopped because the US Government can’t get out of its own way.

Back in the US, speaking of flat screen products, Apple has during this dire period become the world’s largest company. We all know the story, but note that it is about innovation, new products and ideas, great marketing, and global business in every aspect. Good things are happening.

Some of you may know Equinix, a midcap Datacenter firm which was founded in Palo Alto in 1998 to provide physical connection points where networks could interconnect via a neutral party. Their business idea was simple, yet groundbreaking—create physical places for networks to exchange critical information. To make a long story short, they survived the technology crash of 2000-02, are now a rapidly expanding global company worth over $9 billion, and their stock almost doubled in the last year.

The lesson – the world does not stop just because we are having difficulties, and companies large and small all over the world are working hard to be successful and to create value for the investor – you. Don’t miss it.

Milton Friedman would have been 100 this year

Milton FriedmanBorn to Eastern European immigrants on July 31, 1912 in Brooklyn NY, he was one of the best minds and most influential people of the 20th century. A Nobel Prize winner who founded the “Chicago School” of Economics, he believed in free markets and free people, and in the centrality of the money supply to all things economic – a theory which became known simply as “Monetarism.” He did an enormous amount of work on the functioning of markets, governments, businesses and other institutions, and money supply.

Mistaken by some (who were not familiar with his thinking) for a conservative, he was a Libertarian with some very strong opinions, but nothing he could not represent convincingly and in a way accessible to the layman. Among other legacies he left a long string of television appearances, including several enjoyable interviews with Phil Donahue, of all people (and they are all on YouTube). He finished his days in San Francisco, at Stanford’s Hoover Institute, and I had the pleasure of seeing him and his wife Rose (a sometimes coauthor) in person. However you view his work and his opinions, we are all better off for his many contributions and he will be missed. He passed away in 2006.

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The Perspective of the Investor | Part 2

time to read: 3 min