Perspectives

February 26, 2011

The following article is not a glowing review of the financial industry in the US. In fact, it may be a little disheartening.  However, I felt I needed to get this type of information out as it is the environment we are investing in and suggests that we need to have perspective and where we need to be cautious as investors.

Rolling Stone (link below) did an in depth review of the investigations, the evidence and what happened to the individuals at all the financial service banks and institutions involved in the financial crisis of 2008 which caused a 50% decline in stock markets.  The result, after all the congressional hearings and investigations is – absolutely nothing. Despite all the strong evidence against a number of senior CEO’s and others who created the real estate mortgage investment schemes that eventually collapsed and cause the market decline – no one has yet to go to jail.

There are a number of reasons for this – possibly that financial crimes are not seen as real crimes, or that the markets have recovered, or that many of these people hide behind high priced legal firms and have friends in high places in government or whatever…The sad fact is, no one has yet to be punished.

Fortunately, the impact of the temporary market declines from a recession or the actions of a few individuals can be mitigated and even an opportunity.  The average investor wins if they (with the help of a trusted advisor!) recognize that market “events” are short in duration and have never caused permanent declines and if investment continues while waiting the market volitility out. 

Since markets move based not only on proftis, interest rates, sentiment and greed, investors need to always consider the following:

First, recognize that investor greed and sentiment is reality – the capitalist system is the worst system in the world, except for all the others.  Greed and sentiment drive markets. The prices of our investments will fluctuate because day to day prices are based on investor emotions and greed – and emotions are fleeting and the impact of greed temporary. Fluctuations in prices are a fact, fundamental, necessary at times and an opportunity in equity markets.

Second, the weight of historical evidence concludes that “owners” of businesses (those who buy equities or stocks held within mutual funds for example) build more wealth than “loaners”, those that loan their money for a guaranteed return (from GIC’s or bonds) Equities fluctuate around a long term mean average of 10%-14%. For many of us, being “owners” is the only realistic option given the wealth we need to fund our retirement.

Third, realize that you aren’t just buying stocks, you are investing in businesses. These businesses have assets and profits, future potential and real value – despite what the current price of their stock is. Businesses are a vital means to provide jobs and grow wealth and the best businesses will continue to do so.

Fourth, any investment approach that isn’t a pure purchase of a basket of stocks (such as a plain vanilla equity mutual or index fund) needs careful and serious scrutiny to insure it is not some scheme that creates an investment dependant on anything but the real assets and profits of the underlying investment. Bernie Madoff was the manager of a sophisticated hedge fund that promised returns better than average but turned out to be nothing more than a ponzi scheme,

Fifth, insure the managers of the active fund investments you own have the experience and are stock pickers and a policy of serious analysis of the stocks they do buy and invest in their own fund. They may still get fooled every once in awhile – but not often.

Lastly – always have just enough cash (or fixed income investments) to ride through the inevitable down cycles or surprises equity markets offer.

If you want to know the gritty detail, read the article, but be warned, it’s long and painful to read. These guys should be paying for what they did.

http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?print=true

 

Personal

Just got back from a last minute vacation in Cuba with my t-shirt, souvenir cigar and bottle of Havana Club. The week off was nice and warm and relaxing. Cuba is a 3 ½ hour direct flight and you cannot beat the beaches, people and interesting history. The one major difference with Cuba from most of the other Caribbean destinations is that all of its citizens get free healthcare, education, shelter and a basic amount of food. So crime is almost non-existent and begging is not a huge issue. (But you will run into Cuban bands playing for you and then trying to sell you one of their CD’s). Cubans love Canadians – I was told when a Canadian gets drunk in Cuba, he or she starts hugging everyone. Most of who I met were other Canadians of course so it was kind of a strange Canadian holiday. Wonderful to be back in Canada and despite the weather, glad I live here.
 
 

 

Richard WR Yasinski CFP