2018 First Quarter Newsletter
FIRST QUARTER, 2018
MY COMMENTS AND OPINIONS
Mr. Market is the imaginary investor devised by Columbia University Professor Benjamin Graham and introduced in his 1949 book The Intelligent Investor. In his book Mr. Market is driven by panic, euphoria and apathy on any given day. Really, not much has changed since Graham was writing and teaching in the 1930s, 40s, 50s and 60s. This scholar is considered the founder of Value Investing. Warren Buffet was one of his students. Sir John Templeton and numerous other money managers have studied and followed Graham’s teachings over the years. Benjamin Graham is still considered one of the great thinkers and leaders among investors and their advisors.
Professor Graham earned a scholarship to Columbia University after his family lost most of their money in the Great Panic of 1907. ‘Panic’ is what they called market crashes in the early years of our public stock market. After graduation he was offered a job by one of the firms then active on Wall Street. By the age of 25 he was already earning about $500,000 annually. In the Stock Market Crash of 1929 Graham lost almost all of his investments. This painful event taught him some valuable lessons about the investing world. His observations after the crash inspired him to write a research book with David Dodd, called Security Analysis, which was published in 1934. It’s still in print, many editions later, and used as a basic text for those who want to learn how to analyze securities. SOURCE: INVESTOPEDIA
Value Investing, which was Graham’s specialty, is the discipline that seeks to discover companies whose share prices are lower than their intrinsic value. Sir John Templeton often referred to “replacement book value” as a reference point in valuing a company. He asked himself and his team what it would cost to replace a given company in today’s dollars. In other words, to build it from the ground up. If he were considering a certain company to add to his holdings he would only buy it if he considered it a bargain. He often said that he would sell a stock if he found “a better bargain.” Stocks on his short list of possible buys – 1) Had a history of steady earnings growth; 2) Were in an industry that provided goods and services that people needed and wanted; 3) Were run by honorable managers; 4) Had a price to earnings ratio that was low relative to the market. Templeton also pioneered international investing for Americans in the 1940s and 1950s. He believed that he had to look all over the globe to find the best bargains. -SOURCE: THE TEMPLETON PRIZES by WILLIAM PROCTOR, 1983 Doubleday & Co.
Over many decades the popular price to earnings ratio (P/E) metric has been above or below 15 when measuring the Standard and Poor’s 500 largest US stocks. A Price/Earnings of 15 is the median over many years. In other words, half the time the S&P 500 has been above 15 times earnings and half the time it was below 15. For example – If a stock earns $1.00 profit per share per year, and if the market will pay $15.00 per share, its P/E, expressed as a whole number, is 15. Historically the higher the P/E, the riskier the stock. And conversely the lower the P/E, the less risky the stock. Again, P/E is the stock price divided by the earnings per share. SOURCE: S&P 500 DATA 1880 TO 2017
During the great DOT.COM Boom of the late 1990s, up to March, 2000, some companies were trading at anywhere from 100 to 200 times what they were earning. This was a classic BUBBLE. I managed to avoid most of these excesses, but not all, by staying with mostly large, well-established securities which were not over-priced as were so many high-flying high-tech ideas during those years. But even the high quality stocks tumbled down the hill with the goofy high tech ideas, junk bonds and companies which never even earned a dime.
Currently there’s one group of investments that’s climbing up the popularity charts – the socially responsible stocks and mutual funds. This group of investments has proven that it can perform well over time. Their theme is Doing Well by Doing Good. They follow disciplines that focus on environmental impact, strong
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performance, in-depth research, and active engagement with the management of the companies selected for inclusion in these funds. These fund managers go beyond shunning tobacco, alcohol, firearms and polluters. The corporations that embrace environmental, social and governance (ESG) best practices have discovered that it’s good business. ESG firms seem to have fewer legal problems because they avoid company behaviors that could be faulted.
“Corporations that avoid problems tend to enjoy competitive returns for their shareholders. ESG investing, which evaluates companies based in part on their environmental, social and governance policies, is a fast-growing segment of the financial landscape. Importantly, socially-responsible investing is not just a strategy to feel good about how your money is invested. Many experts argue that an ESG strategy also leads to better returns. SOURCE: FORBES INVESTING #StockWatch Aug 16, 2017
Socially Responsible Investing (SRI) in the United States can be traced back over 200 years to the money management practices of the Methodists. Their founder, John Wesley, urged his followers to avoid profiting at their neighbors’ expense. They avoided doing business with those who earned their money through alcohol, tobacco, weapons, or gambling. We can follow the development of SRI through more recent decades. The first Earth Day was celebrated in 1970. Nuclear power became a concern with the Three Mile Island partial meltdown. The Love Canal chemical dump disaster was uncovered in 1977. Also, Ralph Nader began working for consumers and against corporations who were engaged in environmental and safety practices that were objectionable. In the 1980s Socially Responsible Investing was a major force in ending Apartheid in South Africa. In 1976 Calvert Investments was the first to launch a socially responsible mutual fund that boycotted companies that did business in apartheid-era South Africa. Individuals and institutions pulled their investment dollars from companies that operated in and profited from doing business in South Africa, eventually helping to force change within the South African government. Also in the 1980s mutual funds that screened corporations for weapons, tobacco, gambling, nuclear power, pollution and employee welfare were introduced by companies such as Calvert and Domini.
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As Socially Responsible Investing grew in popularity during the 1990s, the Domini 400 Social Index, now named the MSCI KLD 400 Social Index, was established to follow the top 400 US companies with outstanding Environmental, Social, and
Corporate Governance ratings. The Index screening excludes those companies whose products have negative social or environmental impacts. Mutual funds which select environmental, social and governance best practice stocks frequently employ from three to five disciplines, often called pillars, to screen candidates for their portfolios.
Socially responsible money managers actively engage with companies that have excellent reputations: Who treat their employees, customers and suppliers honorably; who advance women and minorities at the management and Board of Directors level; who promote clean water and renewable energy; who are working to protect the public from the scourge of opioid abuse and cyber-crime.
Investing in socially/environmentally responsible securities does not mean giving up on investment returns. A number of SRI mutual funds have earned four and five star ratings from Morningstar.
At Brimmer Financial/National Securities we feel the better informed you are the more responsible your investment choices will be. Learn how your investments can reflect your values. Please call our office to set an appointment to discuss how Socially Responsible Investments may become a positive addition to your portfolio.
DISCLOSURES – The views expressed contain certain forward-looking statements. Although they are forecasts, actual results may be meaningfully different. The material represents an assessment of the market and conditions at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any security in particular. The opinions expressed here are the author’s and do not reflect any opinion of National Securities Corporation, member FINRA/SIPC, my Broker/Dealer, or any of its Affiliates. Source material for this letter include quotations from Investopedia; The Templeton Prizes by William Proctor, 1983; S&P 500 data from 1880 to 2017; Forbes Investing #Stock Watch, Aug. 16, 2017; and the Domini 400 Socially Responsible Index, now called MSCI KLD 400 Social Index.
Securities offered through National Securities, Member FINRA/SIPC – Financial Planning and Asset Management offered through National Asset Management, Inc. – Life and Health Insurance and Annuities offered through National Insurance Corp.
