As IMS completes its 23rd year in business, it is with great reflection that we sit down to carefully craft our quarterly newsletter. So much has changed, yet the goal remains the same.
As an independent, registered investment advisor, we are blessed with the freedom to express our views on the markets and provide our unbiased investment counsel. It’s important to remember that we get paid the samewhether our clients are invested in stocks, bonds or cash (money market fund). So if we think it’s time to be more conservative and hold cash or bonds, we have every incentive to do so. We try to make sure our advice is balanced and clear, so that we add value and take a stand, even if it’s controversial. Some of you may remember back when our newsletter used to be known as “The Contrarian Viewpoint”.
Each quarter’s goal is complex. We want to inform, educate, entertain, provoke thought, spur action and above all “enrich”. We want to impart profitable advice that will benefit our clients. We seek to provide a balanced outlook, be candid and give clients our heartfelt assessment of what we believe is ahead and how to profit from it.
As IMS’s chief investment officer, I help determine and oversee all of our firm’s investment strategies, so it is important that our newsletter reflect my views and my outlook on the markets. Clients and shareholders need to know what they should and can expect from us.
What we don’t want to do is write another boring recap of the stock and bond markets, interest rates, the economy and major headlines over the last quarter or year. Clients already get inundated with information about the markets and the economy.
We want to provide something different. Beyond the overview of our performance, the markets and our outlook, we strive to deliver advice that is actionable. We also want to provide some accountability in terms of previous directives, whether that is taking credit for good advice or owning up to predictions that did not pan out.
There is very little accountability in the media. When you hear or read an interview with a stock picker or market analyst, rarely do you hear about the results of their last picks or the accuracy of their predictions from a year ago. The media simply rotates through a stable of talking heads, usually gravitating to those who are the most entertaining or evoke the most fear or optimism, as they tend to boost ratings and readers.
So here’s some accountability. Let’s look back at the last 3 years of quarterly newsletters. Over that time, the market experienced two wild swings. An 18-month bear market from October 8, 2007 to March 9, 2009 (S&P 500 index dropped -56%) followed by the current bull market that is still in place today (S&P 500 index gained +85% March 9, 2009 to Dec. 31, 2010). Keep in mind that an 85% gain after 56% drop means the market is still well below its October 8, 2007 highs, which is why most investors are still not quite back to their account’s “high water mark” yet.
March 31, 2008 Stocks down -15% from the High
Building Wealth Wisely
We were too bullish. The bear market, which no one saw coming, had already begun. It started when stocks were still fairly cheap, which is very uncommon. Signs of a housing crash were starting to develop.
June 30, 2008 Stocks down -18% from the High
Putting the Housing Slump in Perspective
We turned cautious, but we underestimated the impact of the housing crash, which took down the banks, spooked investors out of both stocks and bonds, and spurred a recession.
Sept. 30, 2008 Stocks down -25% from the High
A History-Making Quarter
We urged caution towards the market, warned that TARP (Trouble Asset Relief Program) would take time to have an impact, urged investors not to panic, to stay put and to ride the market out. We were adamant that a rally would eventually take hold and eclipse the decline.
Dec. 31, 2008 Stocks down -42% from the High
Market Timing & Market Recoveries
We urged investors not to panic out of the market or attempt to time it. We stated that a strong recovery could be near and sited historical examples and other data to support the timing. As it turned out, a strong bull market recovery began just 2 months later.
March 31 2009 Stocks down -48% from the High
Light at the End of the Tunnel
We correctly called the market bottom and firmly urged investors to buy stocks. We warned the gains could be swift and impressive given the severity of the 18-month decline.
|Date of Release||Newsletter Title|
|June 30, 2009||A Familiar Ring|
|Sept. 30, 2009||Tell it Like it Is|
|Dec. 31, 2009||Impressive Rebound|
|March 31, 2010||Are You Convinced Yet?|
|June 30, 2010||A Realistic Perspective|
|Sept. 30, 2010||Keeping the Faith|
|Dec. 31, 2010||Something Different|
Over the course of the 7 newsletters above, which were all firmly bullish, the market rose 77%. In the final analysis, the first thing that jumps out is that no one gets it right all the time and we were no exception. We were too slow to recognize the early stages of the bear market in stocks as it developed. Normally, bear markets beginwhen stocks are trading at rich multiples and investor euphoria is high. Neither was true when the bear market began on October 8, 2007. The prior bull market was weak and stocks had not risen all that much by historical bull market standards. Valuations were not historically high either. The market’s P/E ratio was below its long-term market average. The P/E ratio is the market’s price per share divided by its earnings per share. It is a common measure for how cheap or expensive stocks are.
We did not correctly predict the severity of the housing decline or the impact it would have on banks and financial markets. We did not know the extent to which fraud was being committed by both borrowers and lenders who used inflated incomes and inflated appraisals to speculate on real estate. Loans were pushed through the system that never should have been approved and the rampant speculation inflated real estate values to artificially high and unsustainable levels. We did not foresee the severity of the housing crash or its impact on the banks, nor did we predict it would lead to a deep recession.
The good news is that after a few negative quarters, we did finally turn cautious. We did not encourage investors to commit new money to stocks. We also did a good job of keeping our clients from selling out of stocks they already owned, near the lows. We advised them to hang in there and ride it out. That did turn out to be good advice.
Also, on the positive side, 2 months before the market finally hit rock bottom, we encouraged investors to be prepared for a strong rally, possibly very soon. We spoke of the strength of past rebounds and talked about the market signals flashed and the similarities to the current data. And once it turned, we advised clients, in this newsletter, to jump back in with both feet and not to wait for more confirming data. This turned out to be excellent advice, as the markets went on to rally +85% over the next 22 months.
Finally, we have remained incredibly and consistently bullish for nearly 2 years since the bottom, even as many advisors and market forecasters flip flopped and wavered in their advice. They warned of possible double dip recessions, fallout from record levels of government debt and a host of other potential disasters that caused many of the weak players to fold their hands unnecessarily. We have stayed bullish and fully invested in this recovery and will continue to do so until there is sufficient evidence to warrant making a change.
We hope you appreciate our accountability over the past 3 years. We were not always right, but at least you have a feel for where we got it right, where we got itwrong and thus have a little more insight on both. Now let’s talk about the future.
Now that we have this powerful bull market by the horns, the key is to make sure we don’t let go too early. Here’s why: historically, the deeper the recession, the stronger the recovery. Since 1942, according to S & P data, the average length of a bull market is 4.7 years or 56 months. We are only 22 months into this one and we are not even back to the highs we hit in October of 2007 yet.
In fact, the market is still well below the highs we hit in March of 2000, over a DECADE ago. We believe the current bull market still has plenty of potential gains ahead of it. Yes, there will be corrections along the way, it will take breathers, suffer pull backs now and then, just like the 13.9% correction we experienced last summer (April 23 to August 26, 2010). Never-the-less, history suggests the current long-term “up” trend will probably stay in place for several more years.
Our job is to carefully follow the market and the economy’s signals, be prudent and smart about choosing the companies that will benefit most from this recovering economy, and to make sure we don’t get spooked out of the market too early. We have to be willing to endure a few corrections along the way, but careful not to ignore conclusive evidence that is signaling a lasting change in the long-term “up” trend. As the evidence of the next market top materializes, we will do our best to recognize and interpret the data, with a goal of gradually reducing stock exposure and shifting part of our weightings towards the types of investments we hold in the IMS Strategic Income Fund. This fund represents our most conservative or defensive approach. It currently holds about two third’s of its assets in various types of bonds that have been chosen to provide at least some insulation against the effect of rising interest rates.
A Review of 2010
For the year, U.S. stocks and bonds were up across the board, the Dow Jones Industrial Average was up 14.0% and the Barclays U.S. Credit Index (AA-Rated Bonds) was up 7.1%. Once again, small and mid-cap stocks did better than large-cap stocks. The Lipper International
Fund Index was up 11.0%. Gold and other precious metals may have enjoyed their last strong year for a while, as the “fear trade” began to show signs of weakness by year end.
The IMS Capital Value Fund, which favors mid-cap stocks yet holds small and large-cap stocks as well, posted a +16.8% return for the year. The IMS Dividend Growth Fund was up +13.5% and the IMS Strategic
Income Fund was up +13.0%, which was a strong showing for a fund that was up +32.5% in 2009 and held about 2/3’s of its assets in bonds during 2010.
Interest rates have been a concern for many investors as a small rise in December caused bond prices to suffer. We do see rates rising eventually as the economy heats up, but so far we are in a very slow, virtually jobless recovery. We are watching rates closely and have already done some re-positioning into some bonds that are better suited for a “rising rate/ stronger growth” environment.
We had a solid year in terms of building wealth wisely for our clients and shareholders, with a heavy emphasis on the “wisely” part. We did not take big risks, did not try to time the market, did not speculate on gold or emerging markets – we stuck to the sweet spots of investing, undervalued seasoned stocks, dividend paying stocks, undervalued bonds and other undervalued income producing securities that passed the riggers of our proven, repeatable selection process. We did it the old-fashioned way, using our proprietary research methods and plenty of diversification.
We used a diverse mix of mid-cap, small-cap, large-cap and international stocks along with high yield, investment grade, reverse convertible and international bonds, REITs and cash equivalents.
We thank you for the trust you have placed in IMS. We appreciate your business and feel that it is important for you to know that we have ten truly dedicated employees investing right along side our clients and shareholders in partnership, as we own the same stocks, bonds and mutual funds that you do. Let us count our blessings from 2010 and here’s to a prosperous and