Market Comment Q4 2013

Originally Published on January 12, 2014

Blessing Counting Family : All in the Shink Clan are well and wish the best for all of our friends and clients First World : We all live in a top rate first world country – I would say USA is #1 by a huge margin, but let’s try to stay humble Food : We all like to eat, right? Make sure you eat right though Heat : Energy supplies are growing and we can all stay warm this chilly winter for less$$ Portfolio Results : Huge market in 2013 that continues the process of recovery from financial crisis of 2007-2009; major market indexes up 25-30% or more! See a great recap of the 2013 market here http://dealbook.nytimes.com/2013/12/31/for-stocks-an-amazingly-good-year/?_r=0 The Wall Street Journal declares, “Winners of 2013: Boring Investors” http://online.wsj.com/news/articles/SB10001424052702304361604579290852454740162?mod=ITP_pageone_0 From the article; “So-called dumb-money strategies, which involve buying and holding a plain-vanilla portfolio of US Stocks, did much better than the more complex approaches employed by hedge funds and other professional investors.” (It should be noted that if you were not exposed to stock outside the US, you actually did better than globally diversified portfolios). That begs the question, since when?? The way I see it, the long-term steady mentality is always the way that rational, intelligent investors need to see the investment world. The ownership of broadly diversified, dividend paying stocks has been one of the best ways to create financial strength ever. Call it boring, old fashioned, simplistic, or whatever you like…its really working short and long term! This market and economic environment has changed completely from the dark days of 2009. It has shrugged off toxic political bickering, fiscal crises and “cliffs” in the US. Dark clouds in Europe are also beginning to become a little less bleak (Europe may provide the next leg of this rally). The growth of optimism and positive investor sentiment is quite striking. The voices of doom are being set aside for now. It seems a long time ago when 2012 ended with a last minute deal that addressed a so called “Fiscal Cliff”. As noted in the New York Times, “The average prediction of strategists at the big banks was that the S&P 500 would rise a modest 7.3 percent in 2013”. Once again a dramatic example of the sheer uselessness of predicting the future. Looking back at long stretches of historical market returns is very important for investors that are striving for success. There are of course many examples of setback and correction. The financial crisis of 2007-2009 is in a different category that is fortunately much rarer. When you study the long term returns of the markets http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=%5Egspc;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; you find a long march of higher values. Why is this growth the outcome that we witness when looking back at economic history? It seems that the explanation may have to reflect that hard work and invention of the past often becomes more valuable as time passes. When Walgreens (WAG) builds a store, they only have to pay the building costs once. Then the store can become a machine that produces cash flow for many years. When Apple (appl) invents the IPAD, it may profit from that innovation for many years. Winning with our portfolios takes time of course, lots of time. It is not difficult to find big positives in today’s global economy. A recent piece from Bloomberg http://www.bloomberg.com/news/2013-12-16/north-america-to-drown-in-oil-as-mexico-ends-monopoly.html provides an interesting example of significant change that happens quietly. The end of an era of inefficient state energy monopoly in Mexico may turn out to be one of these items. Hopefully the population of Mexico will benefit from the opportunities that arise when governments open markets to free market competition. The ramifications for the North American energy markets could be even more supply on top of what is now being produced in the USA. Those that have predicted the exhaustion of the Earth’s energy resources are looking like another group of pessimists proven wrong. Innovation is the big one. The big world changing inventions that improve lives, create jobs and enhance economic activity. The world is being digitized. http://www.nytimes.com/2013/12/15/magazine/googles-plan-for-global-domination-dont-ask-why-ask-where.html?_r=0 The consequences of every inch of the globe being photographed and precisely mapped will be gigantic. The impacts will touch agriculture, travel, logistics, real estate development and most other areas of life and economic activity. The USA is a leader in the race to produce patents and technologies that raise our standards of living. The possibility of plant energy is an interesting case in point.  http://www.nytimes.com/2013/12/25/business/energy-environment/start-up-makes-gains-turning-jatropha-bush-into-biofuel.html?pagewanted=1&ref=business So many smart people working hard with powerful technology will likely yield huge breakthroughs that we cannot even dream of today. Back here on earth there are many terrible problems. Horrific wars are raging in Syria and Sudan. Pollution and smog are crippling major cities in China. The Iranian Nuclear development effort is a very difficult and dangerous situation. The divergent growth rates in Germany versus France, Spain and Italy are causing big problems for the European Union and the EURO. In the US, politicians continue to put off any significant budget solutions. The fiscal problems in the US and Europe have not gone away, although they will be paid in devalued money. The question is how far can devaluations take us? Low interest rates are difficult for savers and future inflation hurts people at the lower end of the income scale. If growth overheats, inflation could arrive quickly and cause major damage. The next big problem is hard to predict, but I passionately believe that there will somehow be solutions. Humans are quite the resourceful force. Focus on the threats and problems is something that we need to avoid as long term investors, because over time, solutions seem to always be found. Fear is a constant that is never going to abate. A great quote illustrating this endless worry from the above referenced NYT piece, “It’s really great, but you just don’t feel entirely comfortable with it”, “said Dan Morris, the global chief investment strategist at the asset manager TIAA-CREF”. He was speaking to the recent big returns in equities. I am baffled by what “entirely comfortable” looks like. As investors, we need to always, ALWAYS remember that the day of clarity is never going to arrive. The corrections to this market rally are coming. It is impossible to predict how far this leg of the economic cycle will go. My philosophy remains unchanged. I intend to ignore the corrections so that I can be invested in the future that is almost certain to bring growth. I want to begin 2014 with best wishes for a wonderful year for all of my clients and friends. I also want to share a personal note. I am the luckiest David Shink that there ever could have been. I have been blessed with a wonderful wife and two beautiful daughters that I love so very, very much. I also speak often about my Father, Ronald Steven Shink, from who I learned so much about how to think and make decisions in this complex world. Below I want to share something that I was able to write from my heart about my Mom. She is one of the greatest influences in my life. Her voice is here in everything that I write and it carries me forward with strength. Below is a poem that I wrote for her recent birthday.

A Line To A Sun

Warm and Bright

Patient and Ever Persistent

Like a Sun in the Brilliant Blue Sky

You Shine

You Shine

You Shine

Your energy and love for life is so very powerful; you give those you touch a special gift

A unique and precious example of life lived at the highest level

A passion for life that we would not have without you

I saw the clouds in the sky of my life yield to beautiful blue because of you

I absorbed your intelligence, your golden heart and your warmth

For me, there is nothing without my Sun

Every day of my life, truly burning bright

My Patricia, My Sun

My Light, My Energy

Our bond is eternal

I love you like life itself.

DS  12/29/2013