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Evaluate the Forest, not each Tree

Warren Buffett has a way of communicating financial principles in ways that hit home, and this year’s annual letter to shareholders is no exception. He’s managed Berkshire Hathaway since 1965, growing the company into a $500 billion conglomerate that owns and operates 66 different businesses generating $225 billion in sales.

Warren Buffett, CEO of Berkshire Hathaway. Photo credit-https://www.fool.com

Stock market volatility recently returned to normal levels after a few years of abnormally low volatility. It’s a good time to remind ourselves how to take advantage of this very natural dynamic of investing rather than be deceived by it.

Here are five important reminders:

1.   Volatility is your friend.

Exhibit 1: Long-term View by Asset Class

The very reason equity markets offer the possibility of higher returns than saving or investment vehicles with less perceived risk, such as U.S. Treasury Bonds or Certificates of Deposits (CDs), is the higher risk and greater volatility associated with such holdings.

This is called the risk premium, something investors as a whole build into liquid, open, transparent financial markets every business day of the year around the world.

For instance, the S&P 500, over the last 90 years returned about 10% per year.* However, there were very few individual years it actually returned that amount. The reality is that in 40 of the 90 years, the index was up more than 20% or down more than 20%.

So, remember, the premium (return over less risky assets) you are seeking to receive in risk assets is precisely for accepting the bumpy ride associated with the investment vehicle.

So long as you genuinely are a long-term investor who can ride out the bumps to the level you have accepted, history demonstrates you can be fine. Exhibit 1 illustrates the long-term historic view of what broad asset classes look like: **

 

 

1.   We find little evidence of excess in the economy that usually results in a recession, and this gives us reason to think the next recession is still some time away.

 

2.   The investment markets are re-pricing for a slowdown in economic growth, but absent a recession, the bull market is likely to resume.

 

3.   Non-U.S. stocks and value stocks offer some attractive opportunities given their respective cycles.

January High-5 from Janiczek

A  monthly recap of articles designed to inform and inspire on a variety of topics related to investing and wealth management. 

In this edition:

  • 2019 Outlook / 2018 Top Takeaways and Market Review
  • Investing in Volatile Markets
  • Wealth & Health in 2019
  • More Freedom in 2019
  • All for One, One for All

Value Investing

The value investing approach and methodology Warren Buffett and Charlie Munger speak about in their annual letter is, with certain nuances in how we capture it, the value premium a significant portion of our portfolios are seeking to capture.

And More

As always, there are other nuggets of wisdom in this year’s letter to shareholders.


Here are the biggest takeaways from Warren Buffett’s annual letter
–Rebecca Ungarino for Business Insider–

Warren Buffett, the chairman and CEO of Berkshire Hathaway, released his annual letter to shareholders on Saturday. Buffett discussed items like his plans to repurchase the company’s stock and how a new accounting rule impacts Berkshire Hathaway’s bottom line. The 88-year old investor made no explicit statements about plans for succession at the company. Each year, Berkshire Hathaway investors and the broader investment community look to chairman and CEO Warren Buffett’s annual letter for Read the full story

 

Related links:
Exceptional Investing in Volatile Markets
Investing from a Position of Strength
Evidence-Based Investing

 

 

  1. Ten years after the 2008 market meltdown, U.S. equities are up over 200% and posting fresh new all-time highs.
  2. Higher interest rates during the quarter presented some headwind for bond investors, but bonds can still generate decent returns within a long-term trend of higher interest rates.
  3. The underlying economy boasts plenty of strength, with economic growth during the rest of 2018 expected to remain above 3%.

READ REPORT»

WATCH VIDEO (04:35)»

 

The Art and Science of Getting and Staying “On a Roll”

 I love adapting engineering and physics concepts to solve common financial problems many people, even financially savvy people, encounter all the time. That’s why I’m so excited about my latest invention, the Wealth Allocation Wheel.

Illustration 1

The challenge, in simple terms, is “staying on a roll.” There is an art and science to staying on a roll with your wealth. This means having enough inertia with your wealth to successfully navigate the Stages of Financial Freedom (see Illustration 1). The clear aim I have written about extensively is how to achieve controlled growth while avoiding short or long periods of stagnation or depletion.

MLPs May Increase Portfolio Performance

Owning oil and gas pipelines can add octane to a portfolio’s performance, particularly in today’s energy and economic backdrop.

It’s our job to help clients gain the proper exposure to safety, market and aspirational asset categories. It’s also our job to identify pockets of the market that, when available, have attractive fundamentals and/or characteristics worth considering. Oil & Gas MLPs in the midstream space (storing and transporting energy) has caught our interest for years and remain an asset class of interest. While we take care of researching and handling the details for our clients, it doesn’t hurt for you to pipe into the conversation. Here’s a quick primer on the space.

One asset class has rebounded to new all-time highs — U.S. small cap stocks.
Comparison of S&P 500, Russell 2000, Emerging Markets and Int'l Developed Indices

After a bullish 2017 and hopes of a continued global equity melt up, 2018 has instead reintroduced market volatility. Despite global market volatility, U.S. small cap stocks have rebounded to new all-time highs.

Factors influencing the success of U.S. small cap stocks

So what factors has caused this success versus larger capitalization stocks?

I’m not sure Yogi Berra is big source of investment knowledge for most investors. But, that doesn’t mean his words of wisdom, “déjà vu all over again,” don’t apply.

Today’s Wall Street Journal included an article titled, “Value Investors Face Existential Crisis After Long Market Rally.” It discussed the “rut” that value investing has experienced since 2009.  No arguments there. Value stocks are down about 1% year-to-date while growth stocks are up nearly 8%.  The tech-heavy NASDAQ Composite Index, which holds many of the favorite tech names among growth investors, is at its all-time high.

A Familiar Scenario

But as I sipped my morning coffee and read further, I didn’t ask myself how we should change our current value approach (for the portion of our portfolios dedicated to value investing) to match the current environment.  Instead, I found myself thinking about earlier in my career, the late 1990s.  Tech ruled the day from 1995 through 1999, and value investors lagged back then too.


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* Joseph J. Janiczek, named among the top, best and most exclusive wealth advisors in the nation, see Awards & Recognition, Award Selection Criteria, and Sources of Recognition disclosures. Read More Here