As we approach the end of 2013, it seems a good time to share some insights on the investment climate. Freshly back from a conference and meetings with some professional money managers, I can share how they are positioning portfolios, and making their buy/sell decisions.
Stock Markets
It has been a good year for stock markets generally, with most major stock indices of the world moving up as investors gradually gain confidence again. Europe is slowly easing out of recession. Asia, although slowing, is moving from an export economy to a more domestically driven economy, and is still growing at double the rate of mature markets. The U.S. in particular has provided some terrific growth opportunities, the S&P500 returning over 35% year to date, as of this writing. We will always have volatility in the markets, and at some point we will get a midterm correction, but this just provides some much needed buying opportunities. Analysts are cautiously optimistic moving forward.
Bond Markets
Bonds markets are the place to be cautious at present. Bonds have provided decent returns in the past ten years as interest rates dropped, but some types of bonds pose interest rate risk. Some bonds in a portfolio are still warranted (depending on one’s goals, time of life, and risk tolerance) and the bond managers are repositioning for this new reality. Balanced portfolios are overweight stocks and underweight bonds at present.
Now let’s talk about what investing is really about. That is, how are the companies you own in your portfolios doing? There are so many things that professional managers look at when they buy (or sell) a company. I am still surprised sometimes by the thesis behind various decisions that they make. There are the obvious things like P/E ratios, balance sheets, income statements, debt levels, free cash flow, and other accounting reports. But it also involves knowing intimately the company’s innovations, culture, market, and competition. Are they leaders in their industry, or perhaps the new emerging leaders? Most investors overlook these gems because they aren’t covered by mainstream analysts. Who is running the company—are they visionaries with sound business plans? Portfolio Managers can only know this by meeting with these executives on an ongoing basis. How does the company fit in with how the world and its consumers’ trends are unfolding? Where will the next growth story come from?
This is what real investing is all about. True investing involves having intimate knowledge of the companies you own, and keeping up that level of knowledge on an ongoing basis. Examining a balance sheet or cash flow statement does not tell the whole story about a company. Many things can change the outlook for a company. What is not real investing is playing the market as if it is a casino game.
We continue to review the performance of the Portfolio Managers we trust to manage our clients and our own money. Just as they constantly review their choices of investments, we do our due diligence to be sure they still deserve a place in your portfolio. We approach 2014 with a sense of cautious optimism and look forward to the opportunities that some volatility will present us.