March 31, 2014 Newsletter

Willis has asked me, Keith Fevurly, to write this quarter’s newsletter and I am most pleased to do so.

It has been a rocky first quarter for the calendar year 2014! The international markets have been upset by continued unrest in Turkey, a declining growth rate in China, more uncertainty in European monetary policy, and, of course, the annexation of the Crimean peninsula by Russia, bringing about uneasy relations between Russia and the Western allies. Domestic markets have been roiled by fears that the current stock market is overvalued (some would say “a bubble” has occurred) and that interest rates have nowhere to go but up, thereby further depressing bond prices. So what are you, a knowledgeable and concerned investor, to make of all of this?

First, stay the course and remember you are in good hands. Willis, Bill, and I are “value investors”. This means that we evaluate securities and funds on the basis of their undervalued potential; specifically, we look for securities that are currently underpriced and have room to increase in value. One of the ways that we do this is by evaluating the current price-earnings (P/E) ratio of the fund to the historical market average. As I discuss in my book, The Handbook of Professionally Managed Assets, the historical P/E ratio of the overall stock market is approximately 16, therefore, we attempt to purchase funds that exhibit a P/E ratio below that number. This strategy is in contrast to a strategy focusing on growth of earnings regardless of the current price of the security (or so-called “growth investing’).

Second, continue to monitor Fed pronouncements with respect to interest rates. Earlier this week, the St. Louis Federal Reserve Bank President (and member of the Fed’s Open Market Committee) announced that he saw interest rates beginning to increase in early 2015 with the hope of gradually increasing rates to their historical average of 4-4.5 percent by sometime in 2016. These moves are good for savers but bad for borrowers! The question yet to be answered is whether economic growth will be significantly curtailed by an increase in rates. The general consensus of economists is that domestic GDP growth will fluctuate around 2.5 percent annually (plus or minus 1 percent) for the next five years regardless of interest rate fluctuations. We shall see!!       

Third and finally, a knowledgeable investor invests on the basis of real or after-inflation returns. When taking an account an approximate 2 percent annual inflation rate for the year 2013, the Standard & Poor’s Index of 500 Stocks (S&P 500) achieved a real return last year of approximately 28 percent. Do not look for this to continue! Indeed, to date, the S&P 500 is up only 1 percent on a nominal (or before inflation) basis; this makes the real return essentially zero (or even negative) to date. Nonetheless, the securities markets continue to be the only place where a knowledgeable investor can achieve a positive real return. While none of us are in the “market prediction business”, we can say with confidence that the stock market (and even the bond market, although to a lesser extent) is the primary avenue available to a knowledgeable investor to accumulate real, long-term wealth.

Please let Willis, Bill, and I know how we can be of service to you in the future and we wish you all a Happy Spring!!



Keith Fevurly, LLM, JD, CFP®

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