I recently heard a radio interview with David Korten, an author and engaged citizen, who spoke about two forms of wealth creation – phantom and real wealth. It really got me thinking.
Phantom wealth is basically money that is created out of nothing. And Wall Street was masterful at phantom wealth creation. Like pumping up financial bubbles, it was tech 8 years ago and of course, the whole mortgage debacle, which was based on the assumption that housing prices would only rise - like the stock market. And housing prices did rise, year over year, even though there was no change in the size of the home, its livability, its location or anything else. It was pure inflation. But it was treated as though inflating housing prices was actually creating real wealth. And it did create wealth right up until it did not anymore.
Real wealth is anything of real value or utility. It can be land, labor, education and ideas. And at the most basic level its healthy children and a strong family, it's a healthy environment, its capitalism when working.
Adam Smith praised in “Wealth of Nations” – a market that looks very much like a local farmers market: a place where small producers and consumers come together in a community to exchange goods and services. My firm advises clients more efficiently and competitively than the largest providers, yet it’s common to hear that bigger is better. Now what his writing has been used to justify is the consolidation and monopolization of economic power and, in fact, those who study Adam Smith's work in depth conclude that he actually wrote “Wealth of Nations” as a tirade against the concentration of corporate power.
What we need to face up to is that we are exceedingly consuming beyond what the planet can sustain. Now, we're often told that any change in our consumption level will require sacrifice – not exactly true. There are enormous opportunities to at once reduce our consumption and increase our quality of life. But it requires a reallocation of resources from those uses that are harmful, to a focus on meeting real needs and meeting the real needs of people. This requires our economy doing a 180 degree turn to focus on life needs rather than on increasing the financial assets of the already wealthy. Banks collapse our economy about every ten years (S&L crisis late 80’s, global banking crisis late 90’s and the current situation) which puts the whole economy into a condition of instability. We need banks terribly but let’s not abuse debt such that we all end up working for the banks in the end.
We need to redesign around a primary value on life, on the health of our families, the health of our communities and the health of our environment. But it requires local economic control, it requires local ownership, it requires the broadest possible participation in ownership (investing), and it means managing the economy for the long term. Now that means, using locally owned banks and local businesses when appropriate.
CBlakely 04-2009
Source: NPR interview with David Korten
Tuesday, April 21, 2009
Friday, March 20, 2009
What Goes Down Must Go Up
Confidence or Prozac
In his most recent article, Jeremy Grantham describes seemingly reasonable people, armed with terrifyingly accurate data, foretelling of the end of the world. Investors with lots of cash become inert objects, mired in cement, and too terrified to invest. Those investors who are fully invested move from fear to denial and finally to panic, at the end becoming catatonic.
Grantham encourages all investors, before rigor mortis sets in, to evaluate where they currently are, where they want to be, and how they can get there. A clear “battle plan”, developed by taking motivation from both your head and your stomach, he says, should clear the way for investors to overcome “investment paralysis”.
Elaine Garzarelli, formerly a Prudential analyst, called the market correctly in 1987, when shortly before the market crashed in October she put her clients into cash, where they stayed until the mid 1990’s, ultimately missing out on much of the rally in the stock market during the Clinton administration. She was only half right. In other words, you have to be right twice about something that no one knows with any certainty.
For those who are waiting for the tide to turn before they purchase stocks, remember that human nature is hard to overcome. For instance, you decide to invest when the market moves up 10 percent. That day comes, but you may decide, “is this rally groundless?” Therefore, you wait until the market moves up another 10 percent – just to be certain. At that point, you decide to wait for the market to pull back a bit and then buy because you’ve already missed 20 percent. As you wait for a better day the market advances another 20 percent and now with current investor psychology very bullish (a condition usually evidenced somewhere near the top of the market) you decide to jump back in having missed 40 percent of the market’s appreciation. Unfortunately, at every signpost, the future is no more predictable than it was at the last one.
What goes down must go up
“Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.” This quote by Warren Buffett from his letter to Berkshire Shareholders sums it up quite well. It is worth noting that since market records have been kept, stocks have outperformed every other investment category – including the period of the Great Depression, when they lost nearly 90 percent of their value!
If you have substantial cash you will need to (re)invest at some point. There is motivation to start now (confidence), as long as you are willing to risk the possibility of short-term declines in return for long-term profits. Remember, the future is not foreseeable and the fundamental goal of equity investing is to buy lower and sell higher. RKM has long advocated a strategy of buying into market declines, given that the biggest risk for many investors is to over-allocate to cash, missing upward movements in the market, which normally happens rapidly and abruptly.
Year of the Ox (aka Bull!) –coincidence?
We don’t know when the market will bottom. But whether it’s this month or December of this year, we are confident it will. It the meantime there is a strategy for the large cap equity portion of a portfolio that offers high current income with the potential for long-term appreciation. We suggest adding high quality equity/income funds or “dividend aristocrat stocks” to the portfolio, as this likely increases current income with appreciation potential. The S&P 500 dividend “aristocrats” are the 52 companies in the S&P 500 index that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. The current yield on several equity/income funds averages about 5 percent. That’s comparable to starting a 100 yard dash on the 50 yard mark, given that large cap stocks returned on average about 10 percent annually over the last 70 years. Investment income, whether from dividends or interest provides a cushion in down markets and many top-quality stocks have higher yields than the 30-year Treasury and better appreciation potential.
Grantham calculates the “fair value” of the S&P500 at 900, approximately 30% above where the index sits now. Although he believes that the index has a 50/50% chance of dropping below 600, many stocks and funds will have posted a double digit return per year above inflation for the next seven years. This might not be the absolute bottom of the market, but it is so close to a bottom, prudent investors are now investing.
Christopher Blakely 03/2009
Sources: The Wall Street Journal; Bloomberg LP, GMO North America
In his most recent article, Jeremy Grantham describes seemingly reasonable people, armed with terrifyingly accurate data, foretelling of the end of the world. Investors with lots of cash become inert objects, mired in cement, and too terrified to invest. Those investors who are fully invested move from fear to denial and finally to panic, at the end becoming catatonic.
Grantham encourages all investors, before rigor mortis sets in, to evaluate where they currently are, where they want to be, and how they can get there. A clear “battle plan”, developed by taking motivation from both your head and your stomach, he says, should clear the way for investors to overcome “investment paralysis”.
Elaine Garzarelli, formerly a Prudential analyst, called the market correctly in 1987, when shortly before the market crashed in October she put her clients into cash, where they stayed until the mid 1990’s, ultimately missing out on much of the rally in the stock market during the Clinton administration. She was only half right. In other words, you have to be right twice about something that no one knows with any certainty.
For those who are waiting for the tide to turn before they purchase stocks, remember that human nature is hard to overcome. For instance, you decide to invest when the market moves up 10 percent. That day comes, but you may decide, “is this rally groundless?” Therefore, you wait until the market moves up another 10 percent – just to be certain. At that point, you decide to wait for the market to pull back a bit and then buy because you’ve already missed 20 percent. As you wait for a better day the market advances another 20 percent and now with current investor psychology very bullish (a condition usually evidenced somewhere near the top of the market) you decide to jump back in having missed 40 percent of the market’s appreciation. Unfortunately, at every signpost, the future is no more predictable than it was at the last one.
What goes down must go up
“Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.” This quote by Warren Buffett from his letter to Berkshire Shareholders sums it up quite well. It is worth noting that since market records have been kept, stocks have outperformed every other investment category – including the period of the Great Depression, when they lost nearly 90 percent of their value!
If you have substantial cash you will need to (re)invest at some point. There is motivation to start now (confidence), as long as you are willing to risk the possibility of short-term declines in return for long-term profits. Remember, the future is not foreseeable and the fundamental goal of equity investing is to buy lower and sell higher. RKM has long advocated a strategy of buying into market declines, given that the biggest risk for many investors is to over-allocate to cash, missing upward movements in the market, which normally happens rapidly and abruptly.
Year of the Ox (aka Bull!) –coincidence?
We don’t know when the market will bottom. But whether it’s this month or December of this year, we are confident it will. It the meantime there is a strategy for the large cap equity portion of a portfolio that offers high current income with the potential for long-term appreciation. We suggest adding high quality equity/income funds or “dividend aristocrat stocks” to the portfolio, as this likely increases current income with appreciation potential. The S&P 500 dividend “aristocrats” are the 52 companies in the S&P 500 index that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. The current yield on several equity/income funds averages about 5 percent. That’s comparable to starting a 100 yard dash on the 50 yard mark, given that large cap stocks returned on average about 10 percent annually over the last 70 years. Investment income, whether from dividends or interest provides a cushion in down markets and many top-quality stocks have higher yields than the 30-year Treasury and better appreciation potential.
Grantham calculates the “fair value” of the S&P500 at 900, approximately 30% above where the index sits now. Although he believes that the index has a 50/50% chance of dropping below 600, many stocks and funds will have posted a double digit return per year above inflation for the next seven years. This might not be the absolute bottom of the market, but it is so close to a bottom, prudent investors are now investing.
Christopher Blakely 03/2009
Sources: The Wall Street Journal; Bloomberg LP, GMO North America
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