by Weston Wellington

The surge in stock prices around the world in the first quarter serves as a reminder that predicting market trends can be a frustrating business. Six months ago, the outlook for stock prices appeared to be fading from grim to grimmer: Congressional leaders were wrangling unsuccessfully to craft a deficit reduction plan, Standard & Poor’s had removed its AAA rating on US Treasury obligations, and Greece appeared one step away from defaulting on its debt. Yet just when many investors least expected it, stocks staged a powerful rally: From the low for the year on October 3, the S&P 500 Index rebounded 28.1% through March 30 while the Russell 2000 Index jumped 36.2%. As the news excerpts below suggest, it is worth recalling the Wall Street adage that “bull markets climb a wall of worry.”

• August 5, 2011—S&P downgrades US Treasury debt to AA+ from AAA; stocks plunge in the biggest selloff since 2008.
• September 3, 2011—Journalist: “The US economy slammed into a wall in August, failing to add new jobs for the first time in nearly a year.”
• September 5, 2011—Gold reaches a record high of $1,895 per oz. (London Fix).
• September 19, 2011—Wall Street chief equity strategist: “I don’t think we’ve seen the lows for the year by any stretch. Things have to get much worse before they get better.”
• September 23, 2011—Journalist: “The world economy once again stands on a precipice.”
• September 26, 2011—Investor: “I don’t see anything changing in the next two or three years.”
• October 1, 2011—Economist cover story: “Unless politicians act more boldly, the world economy will keep heading towards a black hole.”
• October 3, 2011—US stock prices slump to their lows of the year: 1099.23 for the S&P 500 and 609.49 for the Russell 2000 Index.
• October 13, 2011—Census Bureau reports the weakest income growth over a ten-year period since records began in 1967.
• October 20, 2011—Col. Muammar el-Qaddafi killed by Libyan rebel forces.
• November 20, 2011—Consumer goods CEO: “Consumers everywhere continue to be cautious and hesitant to spend.”
• November 21, 2011—US Congressional “supercommittee” fails to reach deficit reduction agreement.
• November 24, 2011—Market strategist: “Earnings growth is very quickly decelerating.”
• November 28, 2011—Moody’s Investors Service warns that multiple countries could default on their debt.
• November 29, 2011—AMR Corp., parent of American Airlines, files for bankruptcy.
• December 10, 2011—Detroit’s mayor predicts the city will run out of cash by April 2012.
• January 6, 2012—Gasoline prices are at the highest point ever for a new year.
• January 18, 2012—World Bank: “Developed and developing-country growth rates could fall by as much or more than in 2008–09.”
• January 18, 2012—Eastman Kodak files for bankruptcy.
• January 25, 2012—Report from Davos World Economic Forum: “Global elite fears renewed downturn.”
• February 13, 2012—Journalist: “There is still plenty that could go wrong in Europe, while U.S. economic growth remains slow and corporate earnings are looking less and less robust.”
• February 27, 2012—Money manager: “This is a business-as-usual overpriced market and you’ll get a zero return for seven years.”
• March 2, 2012—Eurostat reports that Eurozone unemployment in January reached 10.7%, the highest in fifteen years.
• March 12, 2012—Strategist: “The stock market has effectively doubled since the March ‘09 low, and we’re still in redemption territory for equity funds.”
• March 19, 2012—Journalist: “Expectations for earnings have been steadily scaled back this year, as the mood among companies has worsened.”

References

E.S. Browning, “Downgrade Ignites a Global Selloff,” Wall Street Journal, August 9, 2011.

Sudeep Reddy, “Job Growth Grinds to a Halt,” Wall Street Journal, September 3, 2011.

Quotation from Adam Parker, chief US equity strategist Morgan Stanley. Jonathan Cheng, “Wall Street’s Optimism Fades,” Wall Street Journal, September 19, 2011.

Chris Giles, “Financial Institutions Stare into the Abyss,” Financial Times, September 22, 2011.

Tom Lauricella, “Pivot Point: Investors Lose Faith in Stocks,” Wall Street Journal, September 26, 2011.

“Be Afraid,” Economist, October 1, 2011.

Phil Izzo, “Bleak News for Americans’ Income,” Wall Street Journal, October 13, 2011.

Kareem Fahim, “Qaddafi, Seized by Foes, Meets a Violent End,” New York Times, October 21, 2011.

Quotation from Jim Skinner, chief executive of McDonald’s. Jeff Sommer, “From the Mouths of Executives, Little Comfort,” New York Times, November 20, 2011.

Jonathan Cheng and Brendan Conway, “Panel’s Failure Sinks Stocks,” Wall Street Journal, November 21, 2011.

Quotation from David Rosenberg, chief market strategist, Gluskin Sheff & Associates. Tom Petruno, “Wall Street Gets Cautious on Earnings,” Los Angeles Times, November 24, 2011.

Brendan Conway and Steven Russolillo, “No Year-End Stock Surge in Sight,” Wall Street Journal, November 26, 2011.

Liz Alderman and Stephen Castle, “Dire Warnings Are Building on European Debt Crisis,” New York Times, November 29, 2011.

“Nowhere to Run—The Motor City Flirts with Fiscal Disaster,” Economist, December 10, 2011.

Ronald D. White, “Gas Prices Ring in 2012 at a High,” Los Angeles Times, January 6, 2012.

Chris Giles, “World Bank Warns on the Risk of Global Economic Meltdown,” Financial Times, January 18, 2012.

Chris Giles, “Pessimism Hangs in Mountain Air,” Financial Times, January 25, 2012.

Tom Lauricella and Jonathan Cheng, “Too Late to Jump Aboard?” Wall Street Journal, February 13, 2012.

Ajay Makan, “S&P 500 at Post-Crisis Peak but Investors Remain Wary,” Financial Times, February 25, 2012.

Quotation from Jeremy Grantham, chief investment strategist, GMO. Leslie P. Norton, “Not So fast: Coping with Slow Growth,” Barron’s, February 27, 2012.

Brian Blackstone, “Poor Economic Data Slam Europe,” Wall Street Journal, March 2, 2012.

Quotation from Liz Ann Sonders, chief investment strategist, Charles Schwab. Nikolaj Gammeltoft, Inyoun Hwang, and Whitney Kisling, “The Bull Turns Three. Where’s the Party?” BusinessWeek, March 12, 2012.

Ajay Makan, “Wall Street Braces For Hit to Soaring Markets,” Financial Times, March 19, 2012.

It takes a lot of courage to stand up for what you believe in and it is especially difficult if the result is considered a ”career killer” in an extremely lucrative field.  In an Op-ed piece in yesterday’s New York Times “Why I Am Leaving Goldman Sachs” (click here for article) Greg Smith a Goldman Sachs executive director did exactly that.

In his article he describes how the “interests of the client continue to be sidelined in the way the firm operates and thinks about making money”,  evidenced by how “people push the envelope and pitch lucrative and complicated products to clients even if they are not the ones most directly aligned with client’s goals” and how the culture has deteriorated over his 12 year career to a point where as a college recruiter for the firm he realized he could “no longer look students in the eye and tell them what a great place this was to work”.

As former employees of a “wirehouse” brokerage competitor of Goldman Sachs, we can simply say that from our own experience we totally get where Mr. Smith is coming from and wish him our best.  As owners of a fee-only Registered Investment Advisor (RIA) firm which puts clients first, without conflicts of interest and with full disclosure we thank him for giving us the opportunity to bring attention to what makes us different from what has been the status quo for too long.  Please see “Why Peak Wealth” for more information.

by Weston Wellington

Over the course of a lengthy and illustrious business career, Warren Buffett has offered thoughtful opinions on a wide variety of investment-related issues—executive compensation, accounting standards, high-yield bonds, derivatives, stock options, and so on.

In regard to gold and its investment merits, however, Buffett has had little to say—at least in the pages of his annual shareholder letter. We searched through 34 years’ worth of Berkshire Hathaway annual reports and were hard-pressed to find any mention of the subject whatsoever. The closest we came was a rueful acknowledgement from Buffett in early 1980 that Berkshire’s book value, when expressed in gold bullion terms, had shown no increase from year-end 1964 to year-end 1979.

Buffett appeared vexed that his diligent efforts to grow Berkshire’s business value over a fifteen-year period had been matched stride for stride by a lump of shiny metal requiring no business acumen at all. He promised his shareholders he would continue to do his best but warned, “You should understand that external conditions affecting the stability of currency may very well be the most important factor in determining whether there are any real rewards from your investment in Berkshire Hathaway.”

As it turned out, the ink was barely dry on this gloomy assessment when gold began a lengthy period of decline that tested the conviction of even its most fervent devotees. Fifteen years later, gold prices were 25% lower, and even after thirty-one years (1980–2010), had failed to keep pace with rising consumer prices. By year-end 2011, gold’s appreciation over thirty-two years finally exceeded the rate of inflation (205% vs. 195%) but still trailed well behind the total return on one-month Treasury bills (398%).

Perhaps to compensate for his past reticence on the subject, Buffett has devoted a considerable portion of his forthcoming shareholder letter (usually released in mid-March) to the merits of gold.

With his customary gift for explaining complex issues in the simplest manner, Buffett deftly presents a two-pronged argument. Like a sympathetic talk show host, he quickly acknowledges the darkest fears among gold enthusiasts—the prospect of currency manipulation and persistent inflation. He points out that the US dollar has lost 86% of its value since he took control of Berkshire Hathaway in 1965 and states unequivocally, “I do not like currency-based investments.”

But where gold advocates see a safe harbor, Buffett sees just a different set of rocks to crash into. Since gold generates no return, the only source of appreciation for today’s anxious purchaser is the buyer of tomorrow who is even more fearful.

Buffett completes the argument by asking the reader to compare the long-run potential of two portfolios. The first holds all the gold in the world (worth roughly $9.6 trillion) while the second owns all the cropland in America plus the equivalent of sixteen ExxonMobils plus $1 trillion for “walking around money.” Brushing aside the squabbles over monetary theory, Buffett calmly points out that the first portfolio will produce absolutely nothing over the next century while the second will generate a river of corn, cotton, and petroleum products. People will exchange their labor for these goods regardless of whether the currency is “gold, seashells, or shark’s teeth.” (Nobel laureate Milton Friedman has pointed out that Yap Islanders got along very well with a currency consisting of enormous stone wheels that were rarely moved.)

When Buffett assumed control of Berkshire Hathaway in 1965, the book value was $19 per share, or roughly half an ounce of gold. Using the cash flow from existing businesses and reinvesting in new ones, Berkshire has grown into a substantial enterprise with a book value at year-end 2010 of $95,453 per share. The half-ounce of gold is still a half-ounce and has never generated a dime that could have been invested in more gold.

Few of us can hope to duplicate Buffett’s record of business success, but the underlying principles of reinvestment and compound interest require no special knowledge. Every financial professional can point to individuals who have accumulated substantial real wealth from investment in farms, businesses, or real estate, and sometimes the success stories turn up in unlikely places. (See “The Millionaire Next Door.”)

Where are the fortunes created from gold?

The Net Price Calculator – A Helpful College Planning Tool

In our work as Certified Financial Planner™ professionals we assist clients with college planning for their children and grandchildren. While there are many variables that go into a college plan, having a good estimate of what the total annual cost (tuition, books, room & board etc.) of a prospective college is one of the most important. While this information we call the “sticker price” is not all that hard to obtain, the problem is that not everyone pays retail. There are many students that earn scholarships (academic or needs based) or are eligible for various grants and loans. These scholarships, grants and loans should be subtracted from the sticker price to come up with a more accurate “net price”. The net price will vary depending on a family’s financial circumstances, how many children in a household are currently attending college and various other factors – and each college will use this information to come up with its own formula for granting assistance packages.

Trying to estimate the net price for any given college is callenging, so we were pleased when theHigher Education Opportunity Act included a provision that required each postsecondary institution that participates in the Title IV federal student aid program to post a net price calculator on their website by October 29, 2011.  We have used net price calculators on a number of college websites and found that they are generally helpful but that not all net price calculators provide the same level of detail. The Higher Education Opportunity Act included minimum requirements that must be met and the Department of Education provided a generic calculator template that many colleges adopted. Other institutions, primarily private, have developed customized calculators which are more robust and do a better job reflecting an individual’s unique circumstance. It makes sense for private colleges who risk losing candidates based on initial “sticker shock” to provide a clear picture of their net price, which in many cases is less than the candidate expected. While not perfect in every case, the net price calculator is a much welcomed step toward making college costs more transparent.

Below are links to net price calculators on some California public and private college websites. Take a look and let us know what you think, also feel free to give us a call if you have any questions regarding college planning.

Cal Poly (and other Cal State schools), USC, Stanford, UCLA, UC Santa Barbara, UC Berkeley, Westmont, Claremont Mckenna

The past year reminded investors that they should hope for the best, prepare for the worst, and be thankful when reality does not match their fears. Investors entered 2011 with hopes that the world economy would   continue recovering from a long and painful deleveraging process. Equity markets had posted two straight years of positive performance, central banks remained committed to pro-growth monetary policy, and major developed nations were focused on reducing debt.

By mid-year, however, optimism faded as troubling events around the world dominated headlines. The devastating earthquake and tsunami in Japan, political unrest in the Middle East, rising oil prices, a US credit downgrade, the threat of another global recession, and an escalating debt crisis in Europe weighed heavily on markets. As stock market volatility returned to global financial crisis levels, investors faced a major test to their discipline and staying power.

Although US stocks experienced some of the highest volatility in years, the broad US market delivered flat performance in 2011. Developed markets logged negative returns, and emerging markets had mixed performance, with most countries also underperforming the US. The bright spots were in the fixed income arena, where a flight to quality triggered by the euro debt crisis and US credit downgrade boosted returns on US government securities, inflation-protected securities, and municipal bonds.

The above headliner graph features some of the year’s most highly publicized events in the context of the Russell 3000 Index, a broad indicator of US stock market performance. These events are not offered as an explanation of market performance, but as an illustration that a volatile news environment can challenge even the most disciplined long-term investors. read more…

By Weston Wellington

Vice President -Dimensional

He is no longer with us, and the world is poorer for it.

A restless college dropout, he founded a wildly successful company whose innovative products touched millions of lives. He was a brilliant, dictatorial, and cantankerous leader, relentlessly pushing his staff to solve one impossible problem after another. He had no use for conventional market research, and trusted his own vision to create products with little detectable demand that flew off the shelves upon introduction. He zealously guarded his personal privacy but reveled in his role as a master magician on stage when introducing his firm’s latest innovations to eager crowds of industry followers. Stockholders wore big smiles as the shares vaulted to one new high after another. In many ways, he was the antithesis of the conventional corporate chieftain, and despite his demanding persona, he was revered by employees, customers, and even competitors to a greater extent than almost any other chief executive in recent memory. read more…

In our current volatile financial market it can be tempting for an investor to loose site of their financial plan and let emotional decisions replace their disciplined investment approach.  This behavior can be detrimental to financial goals as it often leads to scenarios where investors end up buying when the market is high and selling when the market is low (the opposite of what they are shooting for).  The financial media can exasperate this situation with their attention grabbing headlines and stable of talking heads who’s opinions should be kept in perspective – after all they are in the entertainment business and are driven by TV ratings or internet clicks. read more…

Since the onset of the financial crisis in late 2007, the Federal Reserve has used interest-rate cuts and other policy tools in an effort to fuel economic growth. Economists can debate the effectiveness of these policies, but everyone can agree that today’s low interest rates are a two-sided coin.
 

Consumers, businesses, and government all benefit from low borrowing costs. But on the other side, savers and investors earn almost nothing on their cash balances. This has been the case in most months since 2008, when the Fed cut short-term interest rates to near zero. Worse yet, investors are actually losing wealth in real terms. The inflation-adjusted yields on short-term Treasury securities have been negative in most months since October 2010. (Nominal yields reflect the stated interest rate, while real yields are adjusted for inflation.)
  read more…

Welcome to our blog! This is where we will post our insights into the world of financial planning, asset management and corporate retirement plans. We will also provide links to articles and resources that can benefit our readers. We hope you enjoy our posts and will provide us with your feedback.

The Peak Wealth Team