At risk of disappointing those who like to hear play-by-play commentary on each market tick, we wanted to take a different angle with our mid-year commentary. If you read our weekly emails, you will already know that the second quarter was a down quarter for stocks. This is something that we predicted in our first quarter commentary. Our portfolios minimized downside much better than our bench marks which is good but we are never happy about any declines. Nevertheless, instead of talking about risk management, this quarter we want to talk about Nordstrom’s.
Those of you who know me (Robert) know that I am a loyal Nordstrom shopper. I am a big fan of high quality products, at competitive prices and complemented with exceptional customer service. These are all qualities which Nordstrom exemplifies. I never like to do business with people who act like they are doing me a favor. Nordstrom always makes it clear that the customer is number one and their employees make you feel appreciated. I find this very impressive, especially from an eleven billion dollar company. These are traits we try to replicate and improve on each day here at SureVest.
So why talk about Nordstrom (a stock that we don’t even own in our portfolios)? Well, it’s because I love analogies. I was reminded of one recently when I received a call from “my guy” at Nordstrom. He called me about the upcoming Anniversary sale, which is my favorite of the three sales Nordstrom holds each year. What separates the Anniversary sale from the other two is the type of merchandise that gets marked down. I learned the hard way about ten years ago that the Anniversary sale really represents an opportunity to buy the best merchandise at a discounted price. The other two sales are the run of the mill sale where they mark down overstocked and under loved merchandise. In other words, there is a reason this stuff is cheap. The Anniversary sale is different. This is next season’s most anticipated fashions at a discounted price. This is stuff you actually want to own. Best of all it’s not just a gimmick. They really do mark it all back up after this two week shopping nirvana.
Ten years ago, I was eying a pair of shoes that were marked down 40% during the sale. I waited, thinking they would be marked down further after the sale as I had seen at other stores so many times. I waited and waited and still a month after the sale the shoes were still at full price. I wound up paying full price for the shoes, something I vowed not to do again! This taught me the lesson that occasionally there are opportunities to buy top quality at a discounted price. Not everything stays on sale forever and if you hesitate or over think it, you usually wind up overpaying in the long run. This reminds me of today’s markets. Sure, there are a lot of junk stocks on sale right now. That’s the sale you want to pass on. However, for the first time we are seeing the highest quality merchandise on sale. For once you don’t have to search the bargain bin for some obscure company with potential. The Prada, Gucci, and Louis Vuitton (a stock we do own) are on sale and in plain sight. The world’s most respected and well run companies are paying dividends with double the yields of ten year government bonds. These companies are sitting on hordes of cash, operating at peak efficiency, and generating predictable cash flows. Yet most investors are waiting for a bigger sale. Stocks are currently one of the most unloved asset classes. This kind of reminds me of Apple stock in 1998…but that’s a different analogy.
One thing I have learned is that when you buy “value” you are not always going to be immediately rewarded. It is a counterintuitive and contrary way to invest and sometimes you have to be willing to go against the grain in the short term to do what is right for the long run. There is one thing experience has taught me that I always try and share with anyone who will listen. This is that you have to buy stocks when the pessimistic case is the most articulate and obvious. There is the election, fiscal cliff, Europe and other copious facts you can hang your hat on to support a doomsday argument. A little hint…there always is. If you wait for things to feel good before you buy stocks you will probably end up overpaying like I did with the shoes. Remember how good you felt in 2007 after watching your home value compound at 25% a year over the previous three years? I couldn’t talk enough people out of buying that fifth rental property back then. The euphoria was too strong to overcome. The stage today for stocks is the opposite. People are underinvested and highly pessimistic at a time when stocks arguably represent the single best investment of all asset classes. Another hint… It’s always that way. Look at the markets from 1970 to 1984 another 14 year period of zero returns where people lost faith.
The opportunities today are vast but unlike Nordstrom’s sale there is not a predetermined time when the sale will start and end which is why we protect our portfolios and attempt to buy additional positions when markets pull back. You also have to be careful that you don’t get stuck with last year’s hot investment which is probably headed for the sale rack. The places the herds are going right now like government bonds will assure that many retirees will run out of money before they die. Utility stocks, despite having a decent dividend are priced for double digit growth rates. We don’t see utilities growing at Apple like rates, meaning that we believe that they are overpriced. Then there is cash, which feels good now but just ensures that you lose purchasing power every day.
Sometimes the greatest risk can be playing it too safe. We feel today’s market will be tricky due to economic headwinds but our view of a bullish five year period for stocks remains intact. We will be selectively looking for opportunities and increasing exposure while maintaining our risk discipline. We truly appreciate all of you. Please feel free to call us with comments, questions or anything we can do to help more adequately secure the roadmap for your financial future.
Your Friends at SureVest,
Robert J. Luna, CIMA Jeremy A. Kisner, CFP Christina J. Mangino, CFP
Brandon Nachman Caitlin Scarry