Paul Ferraresi

The average investor who tries to time the market habitually makes the wrong moves. Caught by the emotions of greed and fear, motivated by the media that constantly sells the “crisis du jour,” and not having a disciplined approach, they turn out to be the loser.

Look at today’s stock market. After skyrocketing from a market low in March 2009, the stock market (S&P 500) is up by over 40 percent, yet the main street investor is still disengaged and skeptical.

Looking back into the late 1990’s, most investors were confident that stocks were wealth-building perpetual-motion machines. Also the “buy and hold” disciples got religion around the top of the tech bubble in early 2000. At this point, the annualized trailing 10-year S&P 500 returns exceeded 15 percent, so the average investor poured into the market at the top. Bad move.
Today (October 2009), the trailing 10-year return is negative 2 percent (excluding dividends). It will stay weak until we absorb the melt-up returns of late 1999 and early 2000. Keep in mind the average rate of return for the S&P 500, since 1926, has been around 13 percent.

So, if the tremendous historical returns were a signal that was best left unheeded in 2000, then, do the lousy 10-year trailing numbers of today imply that … “the direction of mean reversion for asset classes will favor stocks again in the near future?”
Funny how the widespread acceptance of “buy and hold” was the mantra ten years ago, at the top, is being cast aside at the bottom. (Look back in history and you will see the same attitude every time the market drops.)

Research shows … over the previous period of negative decades, since 1900, the market was higher 70 percent of the time over the next one, three and five years. In fact, it was higher 100 percent of the time over the following decade. Also, the market returns over theses periods were, in general, better than average.

Keep in mind there are no guarantees for the future. At the same token, I have seen too many times over my career, how the markets always bounce back after severe setbacks (1973-74, 1981, 1987, 2000) and I believe the same will take place again. It will not be straight up, but I believe in America, the American people, the great companies of America and American ingenuity. Yet, I see people sitting on the sidelines until the market fully recovers and then they will invest at the top of the market … and … ride it down to a loss. They do it over and over again. Remember the definition of insanity?

Stay disciplined now … or experience regret later on …

Over the past 10 years, we have experienced two major bubbles and subsequent crashes. The easy monetary policies of the late 1990s led to the “tech wreck” bubble and crash. Subsequent to that many people ran from the stock market, and with even easier money conditions in place by The Fed, put all their money into the real estate market. The 2006 to present housing crisis is the outcome.

Well, with wounds on both of their knees people ran away from stocks and real estate into “safe” U.S. Treasuries. Because so many people wanted safety, these securities have been bid up. They are overvalued. Their prices make no sense relative to fundamentals.

Let’s look backward – in 1999, did the price of Pets.com make sense relative to the fundamentals? In 2003, did the price of a house in San Francisco make sense relative to fundamentals? No, in any case.

The price of Treasuries has no place to go but down based on the economic environment, the threat of future inflation and the probability of rising interest rates.

You know the sad thing is those same people who bought tech stocks in 1999, houses in 2003 and oil in 2007 are the one buying Treasuries now. They are like a fighter with a “glass jaw” getting ready to be hit by a “heavyweight champion.” Get out of Treasuries before it crashes!!

Many people were given savings bonds from family members many years ago and may have lost track of them. They may not even remember receiving them, or, they bought some on their own.

There are more than $16 billion worth of matured bonds that have not been redeemed. This is the final year Series E bonds earn interest. Thus, a $100 bond from 1960 is now with 700.

You can visit a website to see if you have an unclaimed bond. You could have substantial cash that will stop earning interest. I found a few that I had previously bought. Check out the website: www.treasurydirect.gov/indiv/tools/tools_treasuryhunt.htm.

Good luck and good hunting.

As a prudent investment allocation strategy I have dictated the importance of having gold as one of your asset classes.

Gold is used as an insurance policy on your portfolio, i.e, a form of hedging. In a long term strategy gold will move counter-cyclical to other asset classes. In essence, when certain asset classes drop in value…gold will rise and vice versa. Like any “insurance policy” do not expect to make money in gold, rather, it will balance or offset any undue risks.

Your holding of gold can be done via stocks, mutual funds, exchange traded funds (ETF) and ownership of the buillion (no this is not an excuse to buy gold jewelry).

There are benefits to owning the paper derivatives, namely, stocks, mutual funds and ETFs. With the present administration’s excessive mounting of debt and printing of money it is evident that inflation will be on the rise. Gold is a great hedging mechanism against inflation, war, financial crisis and just plain fear.

Although you may own the paper derivative ownership of gold I highly suggest you also purchase the buillion. But, in purchasing the buillion be careful which items you buy. The present administration is acting much like the FDR administration of the 1930’s and 1940’s. During that period FDR confiscated all the gold buillion from American citizens (see the attached Executive Order).

Executive Order Page 1 (jpg)
Executive Order Page 2 (jpg)

I would not be surprised at all if the present administration does the same as the dollar weakens and Americans collect gold. Get assistance in this area by purchasing the correct items of gold.

If you need help in this area please contact our office. We would be glad to assist you.
Email: paul@fgmci.com or phone: (713) 871-5919

Following up on Part I…what are some of my core beliefs on investing?
First of all, and I include myself in this, people tend to be impatient. Good investing, especially from an individual standpoint, is where you have the luxury of not having to participate in the market at all times. You can pick and choose the most appropriate times when the odds and probabilities of success are highly in your favor. I try to keep that in mind as a professional investor as well.
It’s only through time and patience that you actually tend to build wealth through the power of compounding of returns. But doing that requires perseverance and saving, which involves sacrifice. One of the things I was most influenced by is the writing of Charles Ellis, who said you win by not losing and your primary objective in investment management is to control risk.
A successful investment requires a great deal of courage. And it requires steady nerves to invest in those areas where the greater opportunities are, even though that’s not where the consensus is, and it’s very lonely. The best opportunities to buy stocks occur when it’s been very hard to pull the trigger and buy, yet, all your disciplines would suggest that is exactly the right thing to do.
With the markets in wild disarray it reminds me of a quote I have been keeping in front of me lately. As Warren Buffett said: “Be fearful when people are greedy and greedy when people are fearful.” We have gotten to the point where it pays to be a bit greedy, because there are some unusual opportunities being created right now.
So when markets are either frothing, or, in a deep trough, keep in mind you can be out in the middle of the ocean and not know what’s ahead, so you need to be prepared for stormy seas. It just provides better ballast to a portfolio in case there are surprises. As much as you think you’ve got it all right at various points in time, you always want to protect yourself.