Sept 2011 – Mr. Market

Sept 2011 – Mr. Market

Meet: Mr. Market- Your Business Partner?

Mr. Market?

 

Is it all happening again?

 

Where We Are:
Tales from Warren Buffett, Peter Lynch and DALBAR, and the Winning Points Options Trading Desk!

One day all this bad “news” will stop and what will we talk about then?! Wait- I know the answer…politics! The 2012 election is coming and it promises to be one heck of a show.

But before we get to politics let’s look at where we are now and what’s likely going on. I want to sum it up for you in a story or two, from Warren Buffett and his friends.

Here’s one of Warren’s favorite stories that he got from his mentor, Benjamin Graham:

Imagine there is some private business you own a share of that cost you $1000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore, he offers to buy you out or to sell you a substantial interest on that basis. Sometimes his idea of value seems plausible. On the other hand, Mr. Market often lets his enthusiasm or his fears run away with him and the value he proposes seems to you to be little sort of silly.

That one quote basically sums up where we are. Every day the news media is trying to explain what happened yesterday, and why things are bad today and likely to get worse tomorrow. They have been doing this since the market bottomed back in March of 2009. They do this because you won’t listen to good news; it’s simply human nature to be more intrigued by bad news. And since the media need to sell advertising to survive, they need to say something that gets you to listen!

Buffett used with the Mr. Market story many, many years ago to explain in simple terms how the “stock market” focuses on the news of the day, while good investors focus on the earnings of the companies they own. Could it be any simpler that that? Trouble is, emotions are hard to ignore.

Another great investor said it another way. I quote him twice here:

“The key to making money in stocks is not to get scared out of them.”
-Peter Lynch

That’s akin to Mr. Market, as some mornings when you come to work in Mr. Buffett’s hypothetical business and meet with Mr. Market, your partner, he has just finished reading the Wall Street Journal and is ready to shoot himself. He then offers to sell you his share of your growing successful business at a steal. Do you take it?

Here’s another quote from Peter Lynch:

“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.”
-Peter Lynch

Here’s one of the smartest guys around, and he’s telling us it’s not about brains, but stamina, or the ability to put up with the pain.

By the way, a large part of our job is to do exactly what he is saying. That is, not letting you “sell everything in a panic.” Please let us do our job.

I have one more “proof” of the same point:

Dalbar, which is a research firm, does an often-quoted study of private investors, or those who are not professionals like us. Each and every time that study comes out, it tells the same tale.

Most private investors do a lot worse that the professionals, even though they own the same things and sometimes in the same proportions. Why is that?

It’s because the private investors let themselves get scared out of them, or they buy them at the top, or worse- they buy whatever it is that everyone says can only go up.

Who can’t forget the mantra in 1999: “Put all your money in Cisco and forget about it.” If you don’t recall, Cisco is the computer networking firm that was so hot back then, with the dot.coms and the Y2K thing going on. Note: It hasn’t done well since then.

Another one that is commonly heard: “Buy real estate; you can’t lose money in real estate.” I won’t expand on that further; I think you get the point.

So what’s the next bubble?

Well, it probably won’t be the stock market for a while; a lot of people are still convinced that it’s an unsafe place for their money. When “everyone” (that is, all the Mr. Markets running around like the world is coming to an end) is convinced that you shouldn’t invest, that’s usually a good time.

I spent some time researching this very short piece, and found this quote from Peter Lynch that I had not heard before. It’s speaks to me, in that it suggests that following the bad news (economics) and market prognostication (opinions on the news channels) might not be worth your time. I will let you decide.

“I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the market is going.
-Peter Lynch

And I bet he doesn’t have the news channels on in the background!

It’s been a while since I wrote one of these letters, but the time now is right, because there is a lot of good news for us out there. Here’s how we see it: There is more on our new website, including the rollout of the “Your 401(k) Cash Machine” program, a new book, The 8 Great Lies of Fixed Indexed Annuities, and our “Highly Appreciated Securities Program”, along with some special stuff for you corporate insiders (we have been busy!) Also check out the website to see the guy’s head turn around like the crazy person Mr. Market is. Visit the website at www.thewinningpoints.com.

In a capsule, here is how we see things:

  1. Other than the US and the UK, the world is growing, a lot. It will be hard to stop. When will employment pick up here in the USA? Not likely anytime soon, as there is little growth and a lot of reasons for anyone who needs employees to work on the phone or computer to hire them much more cheaply outside our borders. (Note: I don’t want this to happen; I think it was Al Gore who inventing the Internet that is causing this phenomenon.)
  2. The stocks we own or are buying are yielding dividends of better than 3% or 4%. This compares to a money fund of, well, nothing. As soon as Mr. Market takes a rest, things may get a lot better on your statements. Once people are not scared of the sky falling on them they start thinking about the return they are, or in this case are not, getting on their money. That should mean they look for income, and in doing so, will likely buy the stocks we think we are buying on the cheap now. (Yippie!)
  3.  Our option writing program is doing well, we are raising cash (thereby creating a hedge) for our clients. We have confidence that we can continue to do this even if the market decides to move higher. If the market just wanders around down here, well, we will likely just continue to collect the option money to generate some increased yield.
  4. We are continuing to move out of bonds, a move we started a couple of years ago. We started using fixed indexed annuities to replace our bonds and that move has been, in our eyes, a wonderful success. We have the stability of the insurance company guarantees and perhaps higher interest, but the principal seems to be very safe. This move has kept a couple of people from listening to “Mr. Market”.
  5. We are still not with that former firm that shall remain nameless, and are very excited about that. My sense of humor is back, so thanks for putting up with it!

That’s it. There has never been a better time to be alive and be a capitalist. There are somewhat fewer of us, but we shall prevail!

Lets us know your questions and comments.


and John and Bob, too
Your Winning Points Team

Ok, one last quote:

Someone’s sitting in the shade today because someone planted a tree a long time ago.”
-Warren Buffett (and he should know)