Paul Ferraresi

Where have you come from this past year? What have you accomplished? Don’t like the answers? Wish you had better ones, more fulfilling ones? You can – just one year from now!

You have within yourself the power to decide that when someone asks you just one year from now, “What did you accomplish in the last year?” you will respond, “Let me tell you – I was on fire!”

You aren’t getting any younger, and neither am I. If nothing changes, next year you will be one year older and still stuck in the rut wondering when you will achieve your dreams. But you can change!

Here are some thoughts to apply so that you can take control of your world and ignite your life!

Decide what you want this year. What is it – exactly? You will never pursue it, nor get it, if you do not know what “it” is. Crystallize it in your mind. See it. Know it.

Put some sort of physical reminder where you will see it every day. Maybe you want to lose weight. Put a picture of someone who looks the way you want to, or perhaps a picture of yourself from when you weighed what you want to weigh again. This will keep it in your mind each and every day.

Increase your positive self-talk. Stop telling yourself negative things, and I include thoughts, not just verbal talk. Instead, start telling yourself positive things. “But Paul, those thoughts just run around in my head. I don’t put them there!” Well, catch them. Take them captive and throw them out! When you catch yourself thinking negative thoughts, stop and ask yourself what the exact opposite would be. Then begin to think it. Let the positive thought expand and take over the terrain of your mind the same way the negative thought would have before you ran it out of town!

Act. Yes, act. I don’t mean join a theater group. I mean, get some action going in your life. Want to get out of debt? Ask the boss for 5 hours of overtime a week. Over a year that would be 250 hours (I give you two weeks for vacation. Aren’t I nice?). If you normally make $15 an hour, you will make $30 (or something like that – go with me here). $30 multiplied by 250 is $7500. Your action will move you toward your goal. Worrying about money won’t. If you want to lose weight, go to the gym on a set schedule. Whatever you do – act! Just make the action something that will propel you toward your goal.

If you do the above – if you decide what you want, put a physical reminder of it where you will see it, increase your positive self-talk and take actions that will propel you toward your goals, you will ignite your life! And next year when someone asks how you have been your eyes will light up and you will boldly say, “Man, I have been on fire! Let me tell you about it…”

This is an election year and it would appear that one party appears to possess more energy, the Democrats. Many of them are talking about raising taxes at a time when the global economy is becoming increasingly competitive and many of our leading trading partners are slashing tax rates. Consequently, some observers are saying if a tax-hiking president were to win the White House, it would discolor their long-term outlook for U.S. equities.

This is a much more important election – or perhaps it’s important in very different ways – than many people think. It’s also much simpler that it appears, although maybe these issues will sharpen as the election gets closer. There are really only two issues that I see.

Much or most of the sustainable growth in employment and output in the decade had been attributable to the 2001 and 2003 tax cuts; one candidate will be in favor of maintaining them, and one will favor letting them expire, which will equate to a massive (and disastrous) tax increase. The latter candidate will probably also favor dealing with the looming insolvency of Social Security through increases in payroll taxes, and be more inclined to retreat into protectionism, both of which would be very deleterious to the American economy.

The other issue will be the war on Islamofascism in general, and U.S. policy in Iraq in particular. One candidate will favor continuing the fight to stabilize Iraq, and thus to thwart Iran. The other will propose an announced schedule of rapid withdrawal, effectively ceding the region to Iran, and to chaos. So the choices are going to be very clear, because the candidates – even as they move toward the center in the general election campaign – are going to be philosophically very far apart.

The economy and the markets may be the wild card in this race, because the third and fourth quarter of 2008 are likely to show very powerful resurgence in output and especially in corporate earnings. Of course, perception will be the key: Bush 41 ran for re-election on the message that the recession was over and strong growth was back. This was true, but nobody believed him. In any event, I’ll stay invested.

Is It Time to…Sellout or Buy?

While I do usually try to look at the bright side of things, my enthusiasm for the long-term prospects of undervalued stocks has a lot to do with historical precedents. We frequently mention that according to data calculated by Morningstar, equities have returned 10.4% (large-cap) to 12.7% (small-cap) per annum dating back to 1926, with stocks trading for inexpensive fundamental valuation metrics performing even better.

Adding to our arsenal of historical data, we have also been busy this year crunching equity performance figures on a going-forward 1-, 2-, 3- and 5-year basis, based on the release of various economic statistics. The fact is that stocks actually do better over the long-term when economic data points are signaling economic contraction, rising unemployment and/or recession. This is primarily because the markets have already sold off by the time the statistics turn negative, with subsequent rallies beginning before evidence of recovery emerges.

Recently, there were three main economic numbers that caused quite a bit of consternation for investors, including the Philadelphia Fed General Activity Index, which came in much worse than expected at a reading of -24.0 in February. Interestingly, history shows that when the Philly Fed index was positive, large-company stocks posted an average gain of 11.1% one year out, while small-company stocks had an average gain of 12.6%. On the other hand, when the Philly Fed number was negative, which indicates contraction in the manufacturing sector, large-company stocks had a 14.1% average gain and small-company stocks had a 23.4% average gain over the next 12 months.

Next, the Conference Board’s Index of Leading Economic Indicators (LEI) declined for the fourth straight month in January. The Conference Board said, “The leading index has continued to decline since its most recent highest value reached in July 2007, and the weakness among the leading indicators has become more widespread…The current behavior of the composite indexes suggests increasing risks for further economic weakness, and that sluggish economic growth will likely continue in the near term.”

Sounds pretty ominous until one looks at these long-term (non-annualized) equity performance numbers when the monthly change in this gauge is negative, as it is today, versus when it is positive:

Negative or Zero LEI vs. Positive LEI

1-Year Large-Cap: 11.4% vs. 11.7%
1-Year Small-Cap: 18.9% vs. 15.9%

2- Year Large-Cap: 26.7% vs. 23.9%
2- Year Small-Cap: 44.0% vs. 32.5%

3- Year Large-Cap: 40.6% vs. 38.4%
3- Year Small-Cap: 66.0% vs. 55.0%

5- Year Large-Cap: 77.1% vs. 73.2%
5- Year Small-Cap: 129.4% vs. 110.4%

Inflation was also spooking investors recently as the Labor Department reported that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5% percent in January before seasonal adjustment, with the year-over year figure climbing 4.3%. While the so-called ‘core’ rate, which includes the volatile food and energy components, rose ‘only’ 2.5% on an annual basis, inflation is certainly higher than the Federal Reserve would like, although Ben Bernanke & Co. are still widely expected to continue to lower interest rates when they get together next month.

Interestingly, once again, long-term-oriented investors are likely to see better returns when the CPI-U is high than when it is low. Using the current 4.3% reading as the inflection point, take a look at the following (non-annualized) performance figures:

CPI-U 4.3% or Higher vs. CPI-U Less than 4.3%

1-Year Large-Cap: 11.5% vs. 13.1%
1-Year Small-Cap: 19.2% vs. 17.5%

2-Year Large-Cap: 28.4% vs. 25.6%
2-Year Small-Cap: 49.0% vs. 33.2%

3-Year Large-Cap: 47.1% vs. 38.3%
3-Year Small-Cap: 70.8% vs. 48.3%

5-Year Large-Cap: 88.2% vs. 67.9%
5-Year Small-Cap: 156.7% vs. 100.2%

Obviously, there remain numerous issues about which we might fret, including the impact of the slowdown in the U.S. economy on corporate profits, and we certainly know we have endured turbulent market conditions on many previous occasions, including whopping 40%+ peak to trough declines in 1998 and 2002. Nevertheless, our experience has shown that equities remain the place to be for long-term-oriented investors. Staying the course in difficult times has historically been the right strategy with our value-oriented approach as recoveries have often been sharp and quick. It is very difficult for the folks who have bailed out of stocks to have the courage to step back in at just the right time.

Market Outlook:

We understand that earnings estimates will continue to come down, but valuations of equities in general remain very inexpensive, especially relative to interest rates. We’ve commented in the past on the so-called ‘Fed Model’, which compares the earnings yield (the inverse of the P/E ratio) on stocks to the yield on the 10-year U.S. Treasury. Equities are cheaper today than they were at previous market bottoms in October 2002 and March 2003.

I do think that stock prices will be higher by the end of the year and, more importantly, I believe that they will be significantly higher three-to-five years out, which is always the time frame that we work with. In addition to factors outlined above, some reasons for my continued optimism include:

1) The likelihood of additional Federal Reserve interest rate cuts
2) The tremendous amount of pessimism gripping investors
3) The $3 trillion that is sitting in money market mutual funds
4) The lack of significant insider selling (and the increase in actual buying) by corporate executives
5) The relative health (outside the financial and housing sectors) of corporate balance sheets

We have just been notified by Doug Andrew’s team at Paramount Financial Services in Utah, that Paul Ferraresi has been appointed as a Missed Fortune Associate (MFA).

MFA is a select group of elite advisors trained and certified under Doug Andrew’s Missed Fortune Program. There have been about 4,000 people trained and certified as TEAM memebers by Doug to present True Wealth Transformation Seminars, draft Missed Fortune Plans and Implement the strategies.

MFA is comprised of TEAM members that have taken extensive advanced training, passed a rigorous exam, and, had their Missed Fortune cases reviewed and graded for efficiency and maximum client benefits. There are less than 200 TEAM members that have been awarded this special recognition.

I want to share this proud annoucement with you. I know we at Founders Group, Inc. will continue “to strive to be the best to make you better”.

Congratulations to Paul Ferraresi!!!

Sincerely,

Christopher J. Morgan

If you take a rubber band in your hand, stretch it to its limits, then, watch it snap … it will hurt your fingers for sure. At the same time I have watched many investors get “stocked up” by owning too much of their company’s stock.

Sure there are many advantages to owning your company stock; many times it can be bought at a discount; the company may match your purchase; and, who knows the company’s inner workings more than you.

A safe rule of thumb is that you should never have any one security make up more than 10 % of your portfolio. I do not care what the incentives are. In years past I had
some clients that worked for Enron. Their portfolios were comprised of 80%, 90 %, and even 100% of their wealth in Enron Stock. I begged them to sell and get that position down to 10%. Most of them I had to fight with just to get them down to a 20% level. When the stock went to “0” fortunes were wiped out; retirement plans drained and families ripped apart. Why did they do such a foolish move? Greed! The stock was exploding and everyone wants a quick fix to make up for their previous lifestyle of not saving and investing.

There are two irrational investment behaviors that develop out of this “non-diversify” mentality.

• Anchoring: Analysts often underreact to new information when revising their forecasts; investors also tend to assume the current prices are about right.
• Overconfidence: Analysts and investors alike can be overly optimistic about past winners and overly pessimistic about past losers. Even when evidence shows that investors cannot beat the market on a systematic basis, they often believe they can.

Here are a few questions to ask yourself if you have “overindulged” in one stock …

• What are your spending needs, now and for the future?
• How would a drop in the value of your largest holding affect your ability to meet short-term needs, educate a child, start a business, and retire comfortably?
• Do you have the time or resources to recover from such an event?
• Do you have enough liquidity to take advantage of the next opportunity when it presents itself?
• What does this stock represent to you?
• What is your short-term and long-term view of the stock?
• Might there be a better way to maximize returns with less risk?

Many people use the excuse that if they sell now the taxes will be huge. Presently, the capital gains tax rate is 15% … the lowest ever in history. Funny, back in 2000 before the tech wreck, when cap taxes were higher I had a lady with a huge position in a tech stock. She did not want to sell for fear that it would move her into a higher bracket and would make her pay
3 % more in taxes. She held fast. The stock lost 90%. She would love to have paid the 3% more in taxes and preserved the other 87%.

Well only shaky stocks go down you say! Look at a few of the Blue Chip stocks and what happened to them.

Follow the discipline of prudent investing or live in regret.