Tag Archives: Dow Industrials

Buy And Hold

Posted October 29, 2014 by admin. tags:Tags: , , ,
Old Stock Certificates

I was recently reminded of how much I disagree with the “Buy and Hold” concept of investing. One of our clients, brought in several stock certificates that she inherited from her family. They were dated from 1902 to 1920. That was a period of time when mining companies were very popular with investors. She asked us to research the current value of the certificates.

Her family held several of these certificates for over 100 years. Based on the number of shares and their valuation levels it appeared that some of these stocks had been valuable at one time. Unfortunately, her family had followed the Buy and Hold investment strategy and still continued to hold them.

After some research, it turns out that one company had been sued into oblivion, one morphed into another company and then that new company collapsed, one just disappeared, one went bankrupt and another had financial fraud issues. Bottom line, all of the stocks had gone from being valuable to becoming worthless….over time. They bought and held just like the “experts” told them to.

While this may seem surprising, it really isn’t. Imagine if your relatives in 1920 had the foresight to buy the original 20 stocks that made up the Dow Industrials average and held them until today. You would be very rich, right? Your relatives had bought the largest, highest profile stocks available 94 years ago. Actually, only six stocks (out of the original 20) from the Dow Industrial Average still exist.

If you read our blog, you know that I am not a fan of the Buy and Hold approach to investing. Actually, I get annoyed when I hear financial advisors and the media espousing its virtues. Some advisors support it with such zeal that it almost seems like it is a religious experience for them. I often wonder how many of those advisors actually have their own money invested in a Buy and Hold strategy.

The truth is that Buy and Hold works best sometimes and Active Management works better other times. Different styles of management come in and out of favor over market cycles. The big problem with Buy and Hold is that everything seems great while the market is going up. However, as soon as the market starts going sideways or down, then the Buy and Hold strategy becomes very difficult to stick with. If you cannot stick with your strategy then it is likely that you will never be able to generate good long term returns. If you aren’t going to generate good long term returns, then what is the point of investing?

In both the 2000 and 2008 bear markets, investors who followed a Buy and Hold strategy and invested in the S&P 500 lost roughly 50% of their value during those bear markets. Many found it too difficult to stick with that strategy and sold out of their investments near the bottom of the decline. Many investors never recovered from their extreme losses.

John “Jack” Bogle of Vanguard is one of Buy and Hold’s biggest proponents. It is hard to take him seriously when you understand that he has personally made a fortune pitching the Buy and Hold strategy for years. He is definitely not an impartial voice in the debate.

According to a November 28, 2013, Wall Street Journal article, Jack Bogle is invested in his son’s fund. It is even more interesting when you realize that his son, John Junior, has been managing a fund since 1999 that follows a very active investment strategy that is the polar opposite of Buy and Hold. His fund uses computer models to analyze earnings surprises, relative stock valuations, corporate accounting issues, etc. His strategy is about as far away from a Buy and Hold strategy as you can get. Even more interesting is that Jack (senior), considered the unofficial spokesman of the Buy and Hold movement, is personally invested in his son’s highly “Actively Managed” fund.

If John Bogle senior does not believe in using “Active Strategies”, then why is he personally invested in a fund that follows a very active strategy? Why is he paying higher fees than his index funds charge to invest some of his own money? Interesting….

My belief and experience is that pro-active strategies, such as the ones we follow at Paragon, require a lot more work to execute but provide the highest probability for long term investment success.

As always, if your risk tolerance or investment objectives have changed, please reach out to me or one of the members of our team, and we can discuss any adjustments we need to make to your current plan. We appreciate the confidence that you put in us.

Written by Dave Young, President & Founder of Paragon Wealth Management
Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Where is the Stock Market Headed Next?

Posted December 2, 2010 by admin. tags:Tags: , , , , ,
Amazing Sunset


photo by ewen and donabel

Written by Dave Young, President and founder of Paragon

At this time of year, many people eagerly ask, “What’s next for the stock market?” To understand where it might be going, let’s look at where it’s been.

In October 2007, the Dow Industrials hit a high of 14,164. From that high we saw one of the worst bear markets in history with the Dow plunging to 6,547 in March 2009. Then, as many proclaimed the world was ending, we saw the Dow rally from that 6,547 low up to 11,205 by April 2010. Since April, we’ve spent the past six months going back and forth, only to recently hit a new high of 11,444 on Nov. 5.

So what’s next? If you follow what the media has said,  you might think the markets will never recover. Actually, it’s amazing how many people don’t realize the Dow has already rallied 75 percent off of the March lows. But some still believe the world is ending.

While there are many reasons to be concerned about the future, there are many more reasons to be optimistic:

1. The Fed wants the stock market up and interest rates low. It is taking its most aggressive action in history by buying $600 billion in Treasury bonds. A basic rule of investing is, “Don’t fight the Fed.”

2. Based on the results of the last election, politicians should be much more friendly to business than they have been. This should be good for the economy.

3. From a cyclical standpoint, the third year of a presidential term has almost always been the best year of the term for stocks. It’s known as the “sweet spot.”

4. Every time the market has lost ground over a 10-year period, like it has recently, performance the following decade has been positive.

TWO INVESTMENT RULES

I often receive subscription invitations to various investment services. Usually I ignore them, but this one was from a highly regarded firm. Its pitch was compelling. They offered eight “exclusive” stock picking services priced at $3,000 per year, per service. I told them I wanted to “look under the hood” — to see if the performance matched the hype.

I was shocked to discover that the historical performance of six of the strategies was terrible, and the other two mediocre. Surprisingly, most of the services were sold out.

What did I learn from this? Why would anyone pay $3,000 a year for a stock picking system that doesn’t add value? Apparently, many investors act on the “hype” but don’t investigate the numbers.

Rule No. 1:  Always thoroughly evaluate the numbers. Don’t rely on what sounds good. You would think a big, national firm with unlimited resources could put together a successful trading strategy. You could be wrong.

Rule No. 2:  Investing is very difficult, whether the firm is big or small. Don’t assume that the big firms have the advantage when it comes to investing. Because of their bureaucratic structure and large size, it can be harder to be nimble and creative.

Because investing is difficult, many investors become convinced that no one can beat the market. They give up trying and simply buy and hold some mutual funds hoping to at least match the performance of the broad market.

At Paragon, we believe there is a better way to invest. Our performance tells our story. From January 1, 1998 through October 31, 2010, our Top Flight growth portfolio has generated a net compound annual return of 13 percent versus 3.4 percent for the S&P 500 Index.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Any information presented is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. All opinions and estimates constitute the judgement as of the dates indicated and are subject to change without notice. Do not rely upon this information to predict future investment performance or market conditions. This information is not a substitute for consultation with a competent financial, legal, or tax advisor and should only be used in conjunction with his/her advice.

Emotions Rule in Investing

Posted July 15, 2010 by admin. tags:Tags: , , ,
Emotional Investing

photo by Shutterstock

Written by Dave Young, President of Paragon Wealth Management

It is important to understand the role of emotions in investing.

There is an entire field of study dedicated to analyzing the correlation between emotions and investing called Behavioral Finance. Emotions always play a big part in investors’ actions. In a perfect world they should not have an impact, but in real life they do. It is the human element. If investors would take their emotions out of the picture, they would be much more successful.

After going up over 70 percent in 13 months, from March 2009 to April 2010, the market turned down at the end of April. Since the end of April we have seen huge increases in volatility with the Dow Industrials posting a 12. 4 percent drop in just 42 days.

Why did the market drop so sharply and quickly?

It was not because of fundamentals. Fundamentals have not changed that much. It was because traders were very nervous. It was a case of high emotions and extreme fear. Investors and traders still have a vivid memory of the nasty bear market in 2008. Even though fundamentals have changed significantly since that bear market, they still are looking over their shoulder and fearful that we may see a return of that nasty bear market. It is interesting that from a chart perspective, the recent decline has been much shorter but the angle of the drop mirrors the angle of the drop in 2008.

As the market rallied over the previous 13 months, each day we listened to all of the reasons why the market will not recover; and how we are just setting up for a disaster.

When you consider that 70 percent of retail investors completely missed out on the sharp recovery off the bottom, you start to understand why there is so much of the negative highlighted constantly in the press. 

Obviously, the investors who missed the move completely do not want to be wrong. Their only hope is to imagine they were not wrong, and they did not miss out on a huge 74 percent upward move. They need the market to go back down so that they can be invested the next time around. In short, they hope the market will go back down. With that hope they grab onto and magnify every negative piece of news imaginable. They do not look at the big picture. They only focus on the negative that will reinforce what they subconsciously hope will happen.

There are all kinds of scary issues investors are concerned about.

It is a never ending list:

-Europe’s problems
-The oil spill in the Gulf
-A jobless recovery
-Washington’s political insanity
-The dollar
-Illegal immigration
-The flash crash
-Potential inflation
-Possible double dip recession
-And more…

We talk for days if we want to focus on the negatives. If I would have listened to them 25 years ago, I would have taken my money and buried it in the ground.

In the short-term, markets can be pushed all over the place by the emotions of extreme fear and greed. In the long-term, corporate profits drive stock prices. Where are corporate profits in the midst of all the doom and gloom? They are up about 200 percent from where they were a year ago. Estimates are correct, that puts price earnings ratios at very low levels of 13 times this year’s earnings, and 11 times next year’s earnings.

In short, corporate profits are very strong, and stock valuations are still below their long-term averages. In addition, there are very few good places for investors to put their money right now. Our interpretation of the current data is that a double dip recession will not occur, and much of the fear surrounding it will eventually fade away. However, in the mean time, who knows how far emotional investors will let their fear and greed push the market around. We’ll leave that to our investment models to determine.

WHAT SHOULD YOU DO?

For investors, the only way to keep your sanity and ultimately make money is to be invested according to your risk tolerance and keep a long-term perspective. If you are worried or stressed, you are probably invested more aggressively than you should be. The danger of investing aggressively is that you will likely want to bail out at the worst possible time, and consequently miss out on the long-term returns you seek. Our job is to help you create wealth and keep you positioned in the best way possible in order to capture those long-term returns.

What do you think? Feel free to
leave comments, questions or thoughts.

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

The Stock Market takes two Steps Forward and one Step Back

Posted July 2, 2010 by admin. tags:Tags: , , , , ,
High Rise Buildings




photo by iStock

Written by Dave Young, President of Paragon Wealth Management

Unfortunately, markets don’t move up in a straight line. If they did, it would make my job a lot easier.

The other issue that makes things difficult is that I cannot see into the future. A lot of guests on CNBC like to imagine they can, but the reality is they can’t.

That leaves us to try and make sense of where we have been, where the market currently is, and where it might be heading.

The market rallied hard off the March 2009 lows with the Dow Industrials going from a low of 6443 to a high of 11207 at the end of April.

Studies showed that about 70 percent of retail investors completely missed that rally because of overwhelming fear caused by the 2008 market meltdown. During that 13-month rally the market tried to selloff repeatedly. However, every time it started to selloff, bargain hunters would step in and buy and keep the rally going. Every time it started to selloff bearish investors (who missed the entire rally) proclaimed that this was the beginning of the end. But the market kept going up and the bears continued to get burned, and completely missed their opportunity to participate in the rally.

After the April highs, the market started selling off once again. The sixty-four-dollar question is always whether or not these sell offs are going to develop into a downward trend.

At this point everyone started spouting rules of thumb like “Sell in May and go away” or once we’ve broken the “200 day moving average” it is time to sell and run for the hills.

Rules of thumb can be useful but must be taken in context with where in the market cycle we are. Neither of these rules of thumb have been consistent when you are in the second year of recovery following a selloff.

Historically, during a recovery the market will start out strong, then ultimately selloff, but not as hard as the initial selloff, and then go through a transition period before trending back up. Second, third, and fourth year market action is usually muted compared to the first year but is still positive and usually still outperforms long-term performance averages.

Our conservative portfolio, Managed Income, is invested very conservatively and has been holding up very well through the selloff.

Our growth portfolio, Top Flight, is currently about 20 percent cash and 80 percent invested as such its performance has been dampened down somewhat. Generally speaking, it has been moving in synch with the broad market.

There are a lot of scary problems right now and most of them are directly related to the folks in Washington. If they would get out of the way, stop talking, stop scaring the investors, and let our economy recover, that would remove a lot of uncertainty, which would help the stock market immensely. 

So far this selloff is missing many elements that occurred in the 2008 selloff. For example, the VIX has not shown the same levels of fear this time, high yield bonds and preferred stock have not sold off like they did previously and volume is lower. So far, these are all divergences that make me question how severe this selloff will be.

With that said, we still don’t claim to see into the future.

For investors, the only way to keep your sanity and ultimately make money is make sure you are invested according to your risk tolerance and that you keep a long-term perspective. (If you are stressed out, then you are probably invested more aggressively than you should be). When you are not invested according to your risk tolerance, you will want to bail out (usually at the worst possible time), and you will never get the long-term returns you seek.

Have a great 4th of July holiday, and contact us if you need anything!

What do you think? Feel free to leave comments, questions or thoughts.

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

Politics are Affecting the Market Again

Posted January 22, 2010 by admin. tags:Tags: , , , , , ,
American Presidents


photo by Beverly & Pack

Written by Dave Young, President

During the second half of 2008 and the first three months of 2009, politics had more of a negative impact on investors than I have seen in 23 years of wealth management. Over the last nine months that negative impact seemed to diminish, and we saw a serious rally in the market.

As we move into earnings announcements, the market looks pretty good.

So far, about 65% of companies are beating their estimate, which is exceptional. Normally, you would expect the market to continue gaining ground. That is usually how it works, solid earnings translate into a happy stock market.

Instead, this week politics trumped earnings.

Tuesday, we saw the Dow Industrials rally 115 points in anticipation of Scott Brown, a republican, winning a Massachusetts senate seat. That was perceived as positive by investors because it broke the democratic majority in the Senate and indicated a more bipartisan approach to government going forward.

Wednesday, politicians in China decided that their economy was growing too fast. (In the big picture, that seems like a good problem.) They announced some steps they were going to take to slow down their economy. That caused world markets to sell off, with the Dow losing 122 points.

Thursday, the Dow dropped 213 points after Obama announced they were going to regulate the size of banks and impose a 100 billion dollar tax on them.

This was viewed as a populist response by the administration. The market did not like the tax because it was largely viewed as unfair. Fannie Mae, Freddie Mac and the automakers who were  all large contributors to the economic mess of the last two years, were exempt from the tax. Meanwhile, many of the banks that did not want government money and/or have since paid it back are going to be taxed punitively. Markets did not see that as a good idea and sold off significantly.

Today, Friday, word leaked out that both Republicans and Democrats are potentially blocking Fed chief, Ben Bernanke’s confirmation to a second term. Most investors believe that Bernanke, not perfect, is the best choice to lead the Fed in this environment. Politicians need someone to throw under the bus and blame for their economic mess so Bernanke seems to be the likely candidate. Investors, once again, see this as another bad decision and sell their stocks with the Dow losing another 216 points.

All in all it was a rough week for the market. Will politicians ever get it right?

Regardless, we’ll continue to follow our models and adjust our investment portfolios accordingly.

What do you think? Feel free to leave comments.

 

Paragon Wealth Management
is a provider of managed portfolios for individuals and institutions.
Although the information included in this report has been obtained from
sources Paragon believes to be reliable, we do not guarantee its
accuracy.  All opinions and estimates included in this report
constitute the judgment as of the dates indicated and are subject to
change without notice.  This report is for informational purposes only
and is not intended as an offer or solicitation with respect to the
purchase or sale of any security.  Past performance is not a guarantee
of future results.

The Stock Market Drama Continues… Part 1

Posted April 23, 2009 by admin. tags:Tags: , , ,
Lightening Storm

As seen in Paragon’s 1 Quarter 2009 Print Newsletter
Written by Dave Young, President of Paragon Wealth Management

 photo by D-32

The drama in the stock market continued during the first quarter of 2009. Even though the quarter was negative, it ended on a positive note. For the month of March, the S&P 500 gained 8.9%. The NASDAQ had its best March with an 11% gain.

THE CAUSE

The 2008 bear market was caused by the credit crisis with additional negative input from politics and the media.

On the other hand, the continuation of the decline into 2009 was primarily caused by politics. Uncertainty soared, and the new faces in Washington scared investors when they announced new government programs daily. When investors are scared, their confidence is destroyed, and they sell.

The Dow Jones Industrial Average lost -8.8% in January and then an additional
-11.7% in February. By March 9, the Dow lost another -7.7% and hit a 12 1/2 year low landing at an unbelievable level of 6516. This put the Dow Industrials back at the same level it was in November 1996.

With almost 13 years of gains wiped out, and the Dow industrials down 54% from its high, the market began to rally. From the lows on March 9 until the end of the month, the Dow rallied almost 1100 points to 7600. From the low point, the market rallied almost 17% by the end of the month. That rally was the fastest and steepest one since 1938.

Where does this leave us?

The Dow Industrials hit 7552 on November 20 of last year. As of March 31, 2009 the market closed at 7608, up slightly from the November 2008 level. Even though it feels like the market only goes down, it is actually back to where it was four months ago.

While no one knows for certain where the market will go next, we can compare this market’s path to previous bear markets. First, in October we saw a waterfall style decline as the market hit a low as the result of panic selling. In November the market hit a lower low, but on less volume. After backing and filling for a couple months, it hit another low in March, again on less volume. The initial October low was the result of massive amounts of selling. The next two lows were the result of lack of buyers.

While there are no guarantees that this is the bottom, this pattern of lower lows on less volume has often marked a bottom in previous bear markets.

To be continued… The Stock Market Drama Continues…Part 2

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