MANSFIELD, MA: As I write this blog entry, the June 30 investment statements are starting to come across my desk. I imagine that the US Postal Service has already delivered yours to you too. You’ll see that the first half of the year has produced modest single-digit gains for most assets classes.
Market Performance in the First Half
The first quarter of the year showed the markets registering solid gains, despite the effects of Japan’s terrible earthquake and tsunami.
The second quarter was a different story, with concerns arising from growing inflation threats in emerging markets, debt worries in Europe and a downgrading of growth forecasts for the global economy. Below are the first-half results for some key markets.
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| Source: MSCI Note: Results are in local currencies; the effect of swings in the dollar is not reflected |
Here at home, we saw U.S. stocks fall for the first time in four quarters. The S&P 500 lost 0.39% in the second quarter, a period marked by worries over high gas prices and indications that the recovery was stalling. Given the above, I want to share a few quotes which I think help us see things in perspective.
Quote #1
-- Warren Buffett, letter to investors published February 2011
“Money will always flow toward opportunity, and there is an abundance of that in America.”
In November of 2009, Berkshire Hathaway spent $26 billion to buy the 77% of rail giant Burlington Northern that it didn't already own. In interviews, Warren Buffett referred to this as "betting on America." Buffett has been consistent in his positive outlook for the U.S. economy, looking past short-term events to focus on America's ingenuity and resolve and its ability to attract the best and the brightest from around the world.
Buffett is consistently voted the greatest investor of all time. In the 46 years he's run Berkshire Hathaway, annual growth in book value has exceeded 20%, more than twice the gains for the U.S. stock market index. Even more remarkable, Buffett's numbers are after tax, while the index's gains are pretax. And while he had lagged in individual years, in his last letter to shareholders, Buffett pointed out that there has never been a five-year period where Berkshire Hathaway underperformed the S&P.
To put his record into dollar terms, $1,000 invested in the Standard & Poor’s index of U.S. stocks at the start of 1965 would have risen by the end of 2010 to $62,620. By contrast, that same $1,000 under Buffett's stewardship would have grown to over $4 million.
Quote #2
-- Bill Gross, Morningstar Fixed Income Manager of the Decade; June 7, 2011
“In terms of the stock market, there are amazing 0pportunities [compared to U.S. government bonds]; there’s a huge gap and a huge differential.”
As manager of PIMCO Total Return Fund, the world's largest bond fund, Bill Gross turned in a track record matched by few others and was named Morningstar Fixed Income Manager of the Decade. In part, this stems from his willingness to take contrarian views: in 2010, he went on record talking about the "new normal" of lower growth, higher inflation, and increased risk in holding debt of governments around the world.
In a June 7 interview on CNBC, he spoke about stocks and said, “Corporations are in the catbird seat. They've got cheap financing, cheap leverage. They've got cheap labor and the ability to move from one country to another at their will. And so corporations basically have done very well, and will probably continue to do very well.”
What this Means to Investors
In today's low-interest-rate environment, it's hard to make a compelling case for cash except as a portfolio diversifier and a source of liquidity. As for bonds, Bill Gross represents the growing sentiment that the risk in bonds is rising as economies recover and interest rates start to rise.
This leaves stocks. Whether you adopt the "lesser of two evils" view of stocks as opposed to bonds, like Bill Gross, or join Warren Buffett in embracing stocks more enthusiastically, there are clear values in high-quality stock market investing.
In Buffett’s annual letter, he encouraged his shareholders to see through the haze. He wrote, “Commentators often talk of ‘great uncertainty.’ Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Human potential is far from exhausted, and the American system for unleashing that potential remains alive and effective.”
Here’s what I wrote last quarter, and I continue to believe this is the way forward: We've always had unexpected events and always will. And despite these unforeseen events, economies have grown, companies have prospered, and stock markets have generated positive returns. The key to benefiting from this long-term growth has been to diversify so that no single event can create permanent damage to your portfolio.
I believe that investors with a balanced approach and a long-term view will be well rewarded. The approach to risk management I recommend may not be fun or sexy in the short term, but all the evidence at hand suggests that over time it will serve you well, getting you to your goals with the least amount of stress and distress along the way.
