Long Term Wealth Management Results and Todays Headlines

Are today’s headlines distracting to investment decisions and insignificant to long-term investment results? Looking back on headlines of old, it seems to be true. For example, remember Y2K? How about the hyperinflation of the late 1970s/early 1980s? The crash of October 1987? The “Nifty Fifty” of the 1960s and the subsequent 50% crash of 1973-1974? $800 gold in 1980? $150/barrel oil? Ayatollah Khomeini? Saddam Hussein? Manuel Noriega? Tiananmen Square? September 11? All of these were reasons to “freak out” about one’s investments, yet none caused long-term or permanent damage to capitalism or investing success or wealth management. Inflation, deflation and devaluation are all normal phases of economic cycles. We have experienced periods of all three (as well as events like those noted above) over and over again throughout history, and frankly this (current) environment is not particularly unique. Skilled investing requires the ability to see the world for what it is. Investors must separate emotion from logic, or perception from reality, and identify opportunities and risks in order to take thoughtful, wise and seemingly brave action. Each of these conditions created opportunities for those able to identify and willing to capture them. In the words of Sir John Templeton, one of FIM Group’s frequently quoted mentors, “People are always asking me where the outlook is good, but that’s the wrong question. The right question is, ‘Where is the outlook most miserable?’” The opportunities that currently exist in Europe are a great example. The headlines tell us several euro zone countries are in terrible shape. This is indeed true – there is rioting, countries are pointing fingers at each other and the euro is in an apparent free fall. In Templeton’s words, the outlook indeed seems miserable. By contrast, China is growing at nearly double-digit annual rates and has no debt problem, no banking problem and no currency problem. Which makes the better investment? I am quite sure if he were still alive, Templeton would be looking very closely at Europe. FIM Group is, and has been. Granted there will likely be extreme volatility in European investments until a comprehensive solution to the weaker countries’ debt crises can be constructed. There will have to be deep cuts and compromises made, and it will cause social unrest. So for these reasons we feel the euro is at further risk of devaluation and, therefore, at their current low yields, euro-denominated sovereign bonds are not appealing. But buried under the gloom and doom are significant strengths and opportunities in Europe. Product (GDP) or output of goods and services in the U.K., France, Germany, Austria, Spain, the Netherlands, Switzerland, Denmark, Sweden, Portugal and even Ireland are lower than in the U.S. or Japan. The structural debt to GDP is lower in France, Spain, Portugal, Germany, Austria, the Netherlands, Switzerland, Demark, Sweden and even Ireland than in the U.S. Household debt in the U.S. is higher than in the U.K., Germany, France, Spain or Italy. So their consumers are presumably in better shape than ours. European area banks’ total loan losses are projected to be less than 2.9% of loans and securities, compared to 7% for U.S. banks, so their banks are in better shape than ours. As of October, the earnings yield (inverse of the P/E ratio) of the stocks in the MSCI Europe Index was 8.6% versus 7.0% for the stocks in the S&P 500, so European stocks as a group are priced at lower valuations than U.S. stocks. As of October 31, the average stock in China was selling for 250% of book value and in the U.S. 210% of book value. By comparison, German stocks were priced at about 130%, and French stocks at less than 120% of book value. Areas FIM Group favors include so-called “defensive” stocks. Those include health care, utilities, telecommunications and consumer staples. In the U.S., the composite of all companies in those sectors sell at prices where their dividend yields are less than 1% above the yields of 10-year Treasuries. By contrast, those same sectors pay dividends of approximately 2% above the 10-year U.S. Treasury yield. This differential, or spread, is back up to the top of its 15-year range. In other words, defensive stocks in Europe present great value. This, of course, makes sense, because as investors sell in panic, opportunity is created. Rest assured when you look at the composition of your wealth management portfolio that FIM Group investors are not just fully conscious of all the developments in Europe and the rest of the world, but our job is to actively exploit the opportunities created by them. As long-term investors, rather than overreacting to the day-to-day events of the world, we look across the canyon to the other side. That is, we invest based on our expected long-term outcome of each investment; fully accepting that path to that outcome may be paved with potholes and canyons.