Late Summer Thoughts

With all of the stock market volatility this summer, we've been spending a lot of time thinking about how to best adopt our long-term strategies to the current economic situation. Obviously, nobody likes to adjust things too often, as that can quickly unravel any sound investment approach.  But certain characteristics of the U.S. economy deserve some attention, such as:

• The return of inflation.  We are glad we started factoring in a significantly higher rate into our projections at the beginning of 2007.  It didn't really feel right at the time, but we felt that higher energy costs would start to affect both businesses and consumers at some point in the near future.  Sorry to say that we were right, but we're glad we took a more conservative approach.
• A significant credit crisis.  The bursting of the housing bubble and the unraveling of various creative and unsound credit vehicles will have a long-term impact on the world economy.  This period feels a lot like the S&L crisis of the 1980's.  We hope it won't get much worse than that.
• Another round of excess brought on by Wall Street "rocket scientists".  It seems that the geniuses responsible for cooking up ever more creative ways to offload risks to the next sucker in line have succeeded again.  The drive for higher and higher profits by publicly-traded investment firms and banks continually create unsound and risky investment vehicles for the public AND institutions.  It's too bad that the average guy and gal on Main Street are going to pick up the tab for this one.  This will create added pressure on our tax system and will probably make for an interesting election year.  
• Significant pressure on our domestic economy brought on by defense, healthcare, rationalizing of certain industries (i.e. automobile manufacturing) and infrastructure demands.  The citizens of the U.S. will have to pay this tab some day, and maybe pretty soon.

On the upside, stocks are now possibly reaching bargain levels, not every company is having a difficult time, gasoline prices are declining, and some of what we are experiencing is the necessary side effect of asset overvaluations (what goes up, must come down).  

As investors, we preach balance in portfolios at all times, and we constantly search for areas of opportunity, whether it's in bonds, real estate, commodities, hedged instruments or equities.  A certain degree of "stay the course" is prudent in times like this, and a more focused approach to investments is in order (in our opinion).  While we like the cost efficiencies of indexed investments, we don't think that you should willy-nilly spread your holdings over very broad markets.  That is certainly a prescription for mediocrity at best, and possibly could lead to significant underperformance due to over-exposure to specific stocks or asset-classes.  

We think that now is a good time to "get back to basics" and adjust your approach to high-quality companies that are well managed and possibly have international exposure.  We favor investment managers who have a long-term track record and who focus on fundamentals.  

Think about companies like McDonald's, arguably the world-leader in fast food and a company that had many operational problems a few years ago, but now appears to have gotten a handle on their problems and are doing quite well.  

Other companies that are well-managed and are quality names:  

• Johnson & Johnson
• Apple Computer
• IBM
• Celgene
• Disney
• GE
• Procter & Gamble
• Kinder Morgan Energy, LP
• United Technologies

You get the picture.  These are companies that have been around for a while, will probably be here for many years, and are good at what they do.  We like to see these companies held by mutual funds and where appropriate, in our portfolios.  We like stocks like these even more if they pay a dividend, but that's a topic for another time.