About a month ago, I started a series on the 4 seasons of a business cycle and stated that we were in the spring season. A few events happened that needed to be covered so I put the series on hold and today I am continuing the series and am discussing summer. At the end you will find 2 paragraphs from Warren Buffet's, Berkshire Hathaway, Annual Report, February 2010 that state investing principles concerning understanding valuations and emotion.
The summer season is when the economy is growing in a fairly normal fashion and jobs are being created. Our economy is growing now with little job creation which means that we are currently in spring. The signs of summer can be seen by:
1) The Federal Reserve says the economy is normal or growing at about a 3% sustainable rate.
2) Jobs are being created.
3) CD and Money Market interest rates are rising as the Federal Reserve raises interest rates.
4) The economic mood is very good and people are willing to spend.
5) The Federal Reserve will increase short term interest rates incrementally at each meeting going over 3%.
6) The US Tressury yield curve will flatten out such that the spread between long and short term rates shrink.
7) Business inventories will return to a normal level.
The key shift in investments that needs to occur is money that is viewed as low risk should shift into money market funds. So money that today is invested in mortgage backed securites needs to be moved. The stock market does well as companies are growing normally once again. I am looking forward to it.
Excerpt from Warren Buffet's, Berkshire Hathaway, Annual Report, February 2010
We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.
We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings of $17 billion. Nevertheless, at yearend 2009, our cash was down to $30.6 billion (with $8 billion earmarked for the BNSF acquisition). We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.
Showing posts with label Business Cycle Investing. Show all posts
Showing posts with label Business Cycle Investing. Show all posts
Sunday, February 28, 2010
Friday, May 29, 2009
Things are Acting Fairly Nornally
This week was another interesting week and in the world of investing things are acting fairly normally. In particular, the stock market had the best return during a 3 month period since 2007 and the treasury yield curve set a record. These are 2 good signs that the economic business cycle and investments are acting fairly normally and this is very good.
The stock market is increasing in a fairly choppy manner as it should for an economy that is coming out of a bottom. It should increase as interest rates increase which leads to the 2nd point. The difference in the interest rate of a 10 year treasury bond relative to a 2 year treasury bond reached an all-time record high. The 10 year bond rate increased while the 2 year bond rate has held fairly flat. Since this time, the 10 year bond rate has come down which means that the record was reached due to short term traders rather than investors. The important thing is that the treasury bond yield curve is acting fairly normally.
The bottom line is that we have to persevere and keep things in perspective and in priority. This week some wonderful things happened in my family which was a real blessing and more important than a treasury yield curve or stock market record. It is also good to see account balances grow.
The stock market is increasing in a fairly choppy manner as it should for an economy that is coming out of a bottom. It should increase as interest rates increase which leads to the 2nd point. The difference in the interest rate of a 10 year treasury bond relative to a 2 year treasury bond reached an all-time record high. The 10 year bond rate increased while the 2 year bond rate has held fairly flat. Since this time, the 10 year bond rate has come down which means that the record was reached due to short term traders rather than investors. The important thing is that the treasury bond yield curve is acting fairly normally.
The bottom line is that we have to persevere and keep things in perspective and in priority. This week some wonderful things happened in my family which was a real blessing and more important than a treasury yield curve or stock market record. It is also good to see account balances grow.
Saturday, May 9, 2009
Business Cycle Investing - Long Term Investor
Articles are being written debating which investment is the best investment for a long term investor. One side of the debate extols the virtues of stocks and having an ownership position. The other side extols the virtues of bonds and having little risk exposure. If you look at Business Cycle Investing the answer is that you want to own both but at different times.
The building blocks of business cycle investing include:1) Any economy has business cycles.2) It is always good to minimize risk and make money.3) In general, the stock market goes us as the economy is growing and goes down as the economy is slowing. The change in the growth rate is also very important.4) The Federal Reserve moves interest rate to keep the economy growing at an annual inflation rate of about 3%.5) The Federal Reserve strongly influences the business cycle by changing interest rates.6) Long term bonds do well as interest rates are dropping and poorly as interest rates rise.
A business cycle has 4 segments: bottom, growing, top, and slowing. The Federal Reserve raises interest rates as the economy is growing at an inflation rate above 3% and reduces interest rates as the economy is slowing at an inflation rate below 3%.During a bottom, where we are now, interest rates are low and the economy is starting to grow. Stocks should be bought and long term bonds should be avoided. You know this phase as the Federal Reserve will publish information that the economy has bottomed and is growing.During a growth period, where we will be, interest rates are rising and the economy is growing. Stocks should be bought and long term bonds should be avoided. You know this phase by the Federal Reserve raising the interest rate.During a top, interest rates are at peak and the economy has stopped growing. Stocks should be avoided and long term bonds should be bought. You know this phase as the Federal Reserve will publish information that the economy has peaked and is slowing.During a slowing period, interest rates are dropping and the economy is slowing. Stocks should be avoided and long term bonds should be bought. You know this phase by the Federal Reserve dropping the interest rate.
An investor that would have followed Business Cycle Investing would have been out of the stock market during most of 2008 and would have been in long term bonds. During 2008 the stock market lost about 40% while long term bonds gained about 40%. An example to put this in terms of real money, a $100,000 account loses about $40,000 in the stock market and gains about $40,000 in long term bonds. You can have an account balance of $60,000 or $140,000. Obviously, it is better to have $80,000 more in your account even if you had to pay some capital gain tax.
The building blocks of business cycle investing include:1) Any economy has business cycles.2) It is always good to minimize risk and make money.3) In general, the stock market goes us as the economy is growing and goes down as the economy is slowing. The change in the growth rate is also very important.4) The Federal Reserve moves interest rate to keep the economy growing at an annual inflation rate of about 3%.5) The Federal Reserve strongly influences the business cycle by changing interest rates.6) Long term bonds do well as interest rates are dropping and poorly as interest rates rise.
A business cycle has 4 segments: bottom, growing, top, and slowing. The Federal Reserve raises interest rates as the economy is growing at an inflation rate above 3% and reduces interest rates as the economy is slowing at an inflation rate below 3%.During a bottom, where we are now, interest rates are low and the economy is starting to grow. Stocks should be bought and long term bonds should be avoided. You know this phase as the Federal Reserve will publish information that the economy has bottomed and is growing.During a growth period, where we will be, interest rates are rising and the economy is growing. Stocks should be bought and long term bonds should be avoided. You know this phase by the Federal Reserve raising the interest rate.During a top, interest rates are at peak and the economy has stopped growing. Stocks should be avoided and long term bonds should be bought. You know this phase as the Federal Reserve will publish information that the economy has peaked and is slowing.During a slowing period, interest rates are dropping and the economy is slowing. Stocks should be avoided and long term bonds should be bought. You know this phase by the Federal Reserve dropping the interest rate.
An investor that would have followed Business Cycle Investing would have been out of the stock market during most of 2008 and would have been in long term bonds. During 2008 the stock market lost about 40% while long term bonds gained about 40%. An example to put this in terms of real money, a $100,000 account loses about $40,000 in the stock market and gains about $40,000 in long term bonds. You can have an account balance of $60,000 or $140,000. Obviously, it is better to have $80,000 more in your account even if you had to pay some capital gain tax.
Sunday, April 19, 2009
Business Cycle Investing
Last year my Pastor, good friend, and client Pastor James D Ritch mentioned in a Sunday Worship Sermon that he had a dream about his sermon being broadcast to the entire world. He said that in this dream his sermon was broadcast via satellite to the rest of the world. This is now possible by using the internet and a digital video camera. I recorded portions of 2 sermons and just finished putting them on the internet at the website youtube.com.
If you are not familiar with youtube.com just ask any teenager and you will get a quick education. Go to youtube.com and type in Pastor James Ritch in the Search box and then click on the Search button. Now anyone in the world can see his sermons. For those who know Pastor James D Ritch, help him reach his dream and let others know about these videos.
Every adult has a dream and typically to achieve it takes financial planning. It really does not matter if you own a business, work at a business, are in school, are retired, etc. you want to fulfill a dream. A role of a financial planner or investment advisor is to help define and execute a financial plan, including investment strategy, to achieve your dream.
A topic in the press is what is the best investment strategy for a long term investment? Some of the strategies being discussed are Buy and Hold, Active Stock Trading, Modern Portfolio Theory or Diversification, Value Investing, Growth Investing and Avoiding Stocks. If you look at for the last 80+ years none of these strategies gave the optimum performance.
The best strategy that I found involves matching investments to the economic business cycle or Business Cycle Investing. I have yet to see this style of investing published. As an economy goes through the 4 phases of a business cycle: growth, top, decline, and bottom the economic growth rate and interest rate change in a predictable manner. Since we are at a bottom in the economic business cycle, now is a good time to avoid long term bonds and buy stocks. In fact the last 6 weeks have been fun for an investor who owns stocks.
If you are not familiar with youtube.com just ask any teenager and you will get a quick education. Go to youtube.com and type in Pastor James Ritch in the Search box and then click on the Search button. Now anyone in the world can see his sermons. For those who know Pastor James D Ritch, help him reach his dream and let others know about these videos.
Every adult has a dream and typically to achieve it takes financial planning. It really does not matter if you own a business, work at a business, are in school, are retired, etc. you want to fulfill a dream. A role of a financial planner or investment advisor is to help define and execute a financial plan, including investment strategy, to achieve your dream.
A topic in the press is what is the best investment strategy for a long term investment? Some of the strategies being discussed are Buy and Hold, Active Stock Trading, Modern Portfolio Theory or Diversification, Value Investing, Growth Investing and Avoiding Stocks. If you look at for the last 80+ years none of these strategies gave the optimum performance.
The best strategy that I found involves matching investments to the economic business cycle or Business Cycle Investing. I have yet to see this style of investing published. As an economy goes through the 4 phases of a business cycle: growth, top, decline, and bottom the economic growth rate and interest rate change in a predictable manner. Since we are at a bottom in the economic business cycle, now is a good time to avoid long term bonds and buy stocks. In fact the last 6 weeks have been fun for an investor who owns stocks.
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