We are now well into the most volatile 90 day cycle of the calendar year with August and September behind us. While August delivered to the upside for stock investors, September was pretty much a wash in terms of returns. During September, the stock market moved within a narrow two percentage point "band" during this 30 day cycle and basically never was more than 1% up and no further than 1% down. As the month closed, the S&P 500 ended almost exactly where it started at the beginning of September.
Back in July we asked the question, "Is this the time to add risk?" For the month of September some might say if someone added risk to their holdings it didn't matter since the market went nowhere. From an investment management standpoint, it seems anytime risk is present or added to, even if the market acted like it did in September and nothing really changed, this is when risk matters most Basically this comes down to if there is a day or a week or a month or a year of risk an investor takes, there needs to be some degree of likely benefit of getting paid for that risk. In September, stocks overall went nowhere and risk still was very present. It was once said, "For small risk, the human mind tends to over inflate the small risk(s) happening and for large risk(s), the human mind tends to under estimate their occurrence and potential damage."
As of Late.
With the ending of the third quarter (3Q) of 2018 passed us, it is interesting to note that during the entire 90 days of the 3Q, the S&P 500 never had a day where it moved more than 1% in either direction. The full quarter echoed the constrained movements of September. A very calm market in the midst of some of the domestic and global influences swirling around. Remember all the "tariff talks", how the end was upon us, how America was getting ready to get into a battle it could not win? Well, while the tariff talks are not completely done, during all of the discussions that the media was almost worried sick to the point of the economy would be derailed, no big dips or dives happened. Not even a daily move of 1% or more over the last ninety days. Has the media lost it's touch or were they just trying to sell papers and air time?
There are significant issues we see, some of which are continuing to move in the wrong direction and this raises ongoing concerns about the status of these rising stock prices. Across the board, we have not seen any true breaks in the broad markets here in the U.S. Though as we noted two months ago some of the leadership stocks have fallen from their lofty perches and quite significantly so.
As we step into the 4Q now, while we have our views and perspectives, a few new elements are coming to the forefront. Of the 98 companies which have given guidance to the markets about their own sales, profit margins and ongoing revenue streams, 73% of them have given lower guidance. This "lower guidance" by corporate leadership is not a popular thing to do. When stock prices seem to want to continually rise, being one of the first companies to step out and guide to lower sales or profits, you certainly won't be known as a corporate "cool kid", break the current "ice" and go against the flow. Some realize they are accountable to correcting previous given information in the market place.
The Long-Term View.
Many of you may or may not know/recall the name Peter Lynch. Lynch at one point in time ran the worlds largest mutual fund. He retired long ago but many knew him as a man who was quite humble about his successes in life. In an interview about his investment prowess, Lynch was asked about what was the most important element to risk management. He smilingly said, "The stomach". He went on to elaborate that if you do research, your brain sees the data and knows it is right but your mind can play tricks on you, make you question your work, question the past outcome of your work, your tried and tested thesis. But in the end, it is whether you can stomach what your brain knows and what your mind is telling you.
While Lynch was known not only for the behemoth size of the fund he ran, he was also known for his returns. During his thirteen years of running the fund the returns averaged just over 29% per year. Sadly he would note when discussing the returns of his average investor, their returns for the time they held his fund were approximately 7% per year he estimated. How could the fund average 29% + and the investor only get about 7%? How could that be?
The stomach. People just could not stomach the waiting game his fund required of them to make such returns. Yes, their mind played tricks on them even though their brain saw his year after year returns. When he had a soft or bad year, they would bolt out of the fund, forgoing his great record and creating a poor record of their own.
Early on in my career, I attended a meeting where Lynch was there explaining what he looked for in a great company. He held up a white plastic egg and began discussing the genius of this as a marketing tool for the product inside. He said he was home one day and his wife brought the groceries in. As she did, a bag fell over and a white plastic egg fell to the floor. His wife quipped something along the lines of, "Well, at least they didn't get ruined." He asked what "they" were. It was relatively new to the market product and his wife saw merit in buying hose in plastic white eggs called Leggs. Peter did his homework and invested in Leggs early on. While the investment in Leggs did not take off running right away, Peter watched and measured the financials of the company, stuck with the investment and the fund yielded a 30 fold return on that initial investment.
As Lynch practiced and taught, we learned that investing takes discipline. Just this week, I was speaking to a relatively young investor who though they started with a nice nest egg into their first account, they invest every month. The amount they invest takes serious commitment on their part as they have a young and growing family. He reminded me that they are serious about being in great shape financially 30 years down the road so that is why they are so very disciplined.
Beyond that discipline of continually adding money to one's account, one needs to use a disciplined approach to how they are invested. Literally, exactly ten years ago today, many were wondering if investing was something they should forget about doing, something to throw in the towel on and never do again. During 2008, by the end of September, the S&P 500 was down a full -20% and the market had only been positive for about 10 days for all of 2008. Some were watching their retirement savings being drained heavily. They had been disciplined about saving for many, many years but some were wondering if the whole notion of "buying and holding" (holding on tight) was such a good idea. If they did hold on tight, yes it took them almost six years just to get back to break even but they could have.
According to Peter Lynch, most just don't have the stomach to stick to the plan.
We currently have holdings based on the following in the six models we use most;
Small Cap Index/Russell 2000 This has been sold and this model is 100% in money market.
S&P 500 Index
SMid Cap Growth Index
Electronics Sector Index This has been sold and is 100% in money market.
Real Estate Sector Index
Utilities - Our newest Position
Japan Nikkei 225 Index
Long U.S. Dollar
High Yield Bond Index
Long-Term U.S. Government Bond Index
Tax-Free High Yield Index
U. S. Government Long Term Bond Index
We remain watchful.
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Peter Lynch (born January 19, 1944)] is an American investor, mutual fund manager, and philanthropist. As the manager of the Magellan Fund[at Fidelity Investments between 1977 and 1990, Lynch averaged a 29.2% annual return, consistently more than doubling the S&P 500 market index and making it the best performing mutual fund in the world. .During his tenure, assets under management increased from $18 million to $14 billion.
He also co-authored a number of books and papers on investing and coined a number of well known mantras of modern individual investing strategies, such as Invest in what you know and ten bagger. Lynch is consistently described as a "legend" by the financial media for his performance record, and was called "legendary" by Jason Zweig in his 2003 update of Benjamin Graham's book, The Intelligent Investor.
Early life and education
Peter Lynch was born on January 19, 1944 in Newton, Massachusetts. In 1951, when Lynch was seven, his father was diagnosed with cancer. He died three years later, and Lynch's mother had to work to support the family. During Lynch's time as a sophomore at Boston College, he used his savings to buy 100 shares of Flying Tiger Airlines at $8 USD per share. The stock would later rise to $80 per share.
In 1965, Lynch graduated from Boston College where he studied history, psychology and philosophy, and earned a Master of Business Administration from the Wharton School of the University of Pennsylvania in 1968.
Lynch has written (with co-author John Rothchild) three texts on investing, including One Up on Wall Street (
ISBN 0671661035), Beating the Street (
ISBN 0671759159), and Learn to Earn. The last-named book was written for beginning investors of all ages, mainly teenagers. In essence, One Up served as theory while Beating the Street is application. One Up lays out Lynch’s investment technique including chapters devoted to stock classifications, the two-minute drill, famous numbers, and designing a portfolio. Most of Beating the Street consists of an extensive stock by stock discussion of Lynch’s 1992 Barron's Magazine selections, essentially providing an illustration of the concepts previously discussed. As such, both books represent study material for investors of any knowledge level or ability.
Lynch also wrote a series of investment articles for Worth magazine that expand on many of the concepts and companies mentioned in the books.
||I’ve found that when the market’s going down and you buy funds wisely, at some point in the future you will be happy. You won’t get there by reading ‘Now is the time to buy.'
|— Lynch on market movements
Lynch coined some of the best known mantras of modern individual investing strategies.
His most famous investment principle is simply, "Invest in what you know," popularizing the economic concept of "local knowledge". Since most people tend to become expert in certain fields, applying this basic "invest in what you know" principle helps individual investors find good undervalued stocks.
Lynch uses this principle as a starting point for investors. He has also often said that the individual investor is more capable of making money from stocks than a fund manager, because they are able to spot good investments in their day-to-day lives before Wall Street. Throughout his two classic investment primers, he has outlined many of the investments he found when not in his office - he found them when he was out with his family, driving around or making a purchase at the mall. Lynch believes the individual investor is able to do this, too.
Lynch popularized the stock investment strategy “GARP” (Growth At A Reasonable Price), which is a hybrid stock-picking approach that balances Growth investing potential with the discipline of Value investing. Many well-known funds now follow the GARP model, ranging from equity funds such as Fidelity Investments Fidelity Contrafund (FCNTX) and Lemma Senbet Fund to index funds such as Russell Indexes iShares Russell 1000 Growth Index.
All from Wikipedia
He also coined the phrase "ten bagger" in a financial context. This refers to an investment which is worth ten times its original purchase price and comes from baseball where "bags" or "bases" that a runner reaches are the measure of the success of a play. A player who hits a home run with bases loaded (all three bases occupied by runners) will bring in four "bags" and is called a four-bagger.
All the information in our newsletter is believed to be reliable and much of it is based on the proprietary research of Capital Research Advisors, LLC itself. However, because of the volume of information, we review and the frequency with which it changes the information can only be provided as is on a best efforts basis. The information is not intended to be actionable investment research and therefore should not be used as such. Sources for this information include, but are not limited to, CBS MarketWatch, Big Charts, Bloomberg, DQYDJ.com, Streetscape, MarketGrader.com, Money/CNN, Futuresource, Stock Chart, Yahoo Finance, AmiBroker, and http://www.newyorkfed.org/ *This information was obtained from Capital Research and our internal research.
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