Having the Right Strategy

We have adhered to the same investment strategy since we formed our firm in 2003. We take great pride in this consistency, as our philosophy has been proven over time.

As we observe the investment world, we only gain more confidence that our strategy is right for the long term.

Wednesday morning before leaving for work I glanced at an interview with the CEO of Wal-Mart on CNBC, who talked about their plans for the future. He was positive about their prospects and the economy in general. A few hours later, Wal-Mart released a completely different picture. They said earnings would decline 8-12% in their next fiscal year, as greater turnaround efforts were needed in the face of stiff competition and employee wage increases.

The Wal-Mart headlines and news about further restructuring at GE lead me to do some research about their long term stock performances. The data is shocking. It shows that what you may perceive as a great company, or what was once a great company 5, 10, or 20 years ago, may not be such great stock investments.

The information below should reinforce to you that no one can predict how the business environment can dramatically change. The past success of a company does not guarantee its future success and the company’s stock market returns for the future. This is why we do not recommend investing in individual stocks.

Wal-Mart has grown to be the largest retailer in the world. How has Wal-Mart’s stock done? It has trailed the S & P 500** over the past 1, 3, 5, 10 and 15 years. In more recent years, the underperformance is very significant. In the past 3 years, it has underperformed the S & P 500 by over 15% per year. So far this year, after the huge earnings decline announcement on Wednesday, the stock is down 30%.

GE was a great company and had a terrific investment reputation for many decades. How has GE’s stock performed in the past 10 or 15 years? If you had invested $1 million in GE 10 years ago, you would have just over $1 million today. No growth at all. Had you invested in the diversified S & P 500, your investment would have doubled to over $2.1 million.

GE stock returned an average of -2.32% annually over the last 15 years. During the same 15 year period, the S & P 500 earned 4.57% per year, or 6.89% per year greater than GE. Over the past 10 years, GE’s stock averaged .65% per year while the S &P 500 returned 7.72%.  IBM is another great company which has trailed the S & P 500 over the past 15 years. In the past 3 years, it has underperformed the S & P 500 by over 22% per year and in the past 5 years it has underperformed the S & P 500 by 10% per year.

These stocks are examples of three companies which have underperformed the broader S & P 500. There are obviously many companies which have outperformed the S & P 500. This information, while a limited sample, should confirm some of our core investment beliefs:

  • It is difficult or impossible to predict the future.
  • It is difficult or impossible to accurately predict the future of specific companies over long term periods of time.
  • Diversification is key.
  • Concentrating your assets in a few stocks can be very hazardous to your financial future.  You may do OK, but you will likely do much better by being more broadly diversified.  We don’t think the risk of owning 5-10 stocks is worth the benefit of being diversified.
  • Owning broad, globally diversified mutual funds (as we recommend) is the best strategy for long term financial success in the stock market.  These mutual funds should be very low cost.
  • These mutual funds should not be trying to pick the top stocks (“actively managed”), as these type of funds generally underperform their respective benchmarks over the long term.

We recognize that we cannot identify which companies will be the most successful stocks over the next 5, 10 or 15 years. Who would have predicted that Apple would be this successful 15 years ago? Who would have thought GE and Wal-Mart would be significantly underperforming stocks over the past 15 years? Fifteen years ago, the iPhone was 7 years from introduction. While Apple stock has been wildly successful over the past 5-15 years, even after selling 65 million iPhones in its last fiscal quarter, Apple stock has also underperformed the S & P 500 over the last three years.

As our goal is to provide you with a secure financial future, we have adopted the long term investment strategies which will give you and your family the most likely opportunity for financial success.

**The S &P 500 is a broad unmanaged index of 500 large US based companies.

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