5 AAA rated U.S. Companies remain

Can you guess which five U.S. companies currently have a "AAA" credit rating? If you have been following my thoughts I am sure you will know at least one:

Automatic Data Processing

Berkshire Hathaway 

Exxon Mobil

Johnson & Johnson

Microsoft

Pfizer

The list included GE yesterday. Today GE's credit rating was downgraded by S&P. It is about time, the bonds have traded below AAA levels for at least a year. Once again the ratings agencies finally caught up to the market and announced what was already known to be fact. It seems like S&P finally capitulated along with everyone else. 

The capitulation is a bullish sign. The market could retest the lows and perhaps go lower but I think this was another example of addressing a known issue and allowing the market to move forward. 

HOW BAD IS IT? How did Buffett do?

How bad is it? How bad was it? How bad is it going to be? These were the questions that were on my mind last night and well into the morning. I couldn't wait to find out what Warren Buffett would say and how he would say it. I got the coffee ready. I went to Berkshire's site awaiting 8:00 when the letter to shareholders would finally arrive. The moment finally came and I poured over the document.

It is bad. It was bad. It will be bad. Mr. Buffetts cash generating machine had its worst year since the Master has run the company.  The interesting thing is that he takes full responsibility for his actions notably some early purchases which are currently underwater. He is 2 billion lighter on his ConocoPhillips bet. He admits making a "major mistake" and that mistake will cost shareholders billions he believes.  He made some very good moves that will likely increase shareholder values as well. The poor timing was just that timing. Berkshire has the time and willingness to hold the investments made. This practice will most likely lead to profits and benefits most will not be able to realize. I understand that some of his large investments were made early. Had he waited 6 months he would have been able to buy things much cheaper. These facts will not be improved at this point. Now all we can do is sit and wait for him to deploy more cash and allow his insurance companies to continue to build market share and float. This float will enable him to buy more business which will create even more cash that will be used to buy more business and so on.  

The declining values in his equity and bond holdings present an opportunity to add more money to his investments and does not bother him as much because he is looking for growth long term. His operating companies certainly have taken a hit as several are involved in retail or construction but they will continue to thrive, grow and build their moats because of the strength of their parent. While the competition shrinks or struggles to stay alive Berkshire will be redeploying resources to take advantage of the market cycle we are in. Sure his businesses will be affected by the economy. Sure profitability is sure to decline and losses may occur. These events are unwelcome but I doubt come as a surprise to Mr. Buffett. While others will shut down I think his business will thrive and will continue to lead and build with larger and larger "tuck in" acquisitions. These acquisitions will only increase the companies strength and lead to future growth.

The insurance business is amazingly profitable and his brands will get stronger as the crisis continues. He has a rock solid balance sheet and is one of only 7 AAA companies based in the United States. People find him he no longer has to ask. His recent foray into the municipal bond business is also amazingly profitable and another brilliant move by the master. This business will continue to grow and lead to increased cash which will then be invested by Mr. Buffett.

Let's talk derivatives. He talks about them and at length. People fear what they do not understand. He understands and explains what he has done and how he has done it. He brought in in almost 5 billion in cash and in 10 years will have to pay out some cash if the indexes are below where they were when he wrote the contract. Then for the next 10 years he will have to do the same. If in 2029 all stocks that make up the largest index's in the world have all gone to zero then he will have to pay 37 billion out in cash. Of course Berkshire would also have to be zero and I don't see that happening. 

Others I am sure will have a different view but I came away from this thinking that all will be good. I think the economy will rebound and I think Berkshire will benefit more then most when it does. Even if the economy does not rebound I think Berkshire will benefit from the cash it generates. The longer the downturn the longer his operating companies will struggle and his equity investments will be down. I see this as an opportunity. I believe the longer and deeper the economy stalls the greater the benefit for Berkshire. He will still generate tons of cash from his insurance business. He will continue to buy new business while others are struggling so the prices should be discounted. He will also be able to add to his existing equity positions at reduced prices.  Buffett is letting us know that things are bad, have been bad and will be bad but he will be around to take advantage and benefit from whatever happens. Berkshire will be standing while other fall around him. 

Please take the time to read his letters to shareholders. The best way to read his shareholder letters in to start at the beginning. Start reading his 1977 shareholder letter. I know it is a lot to ask but think of how much you have to gain my learning directly from the master vs. the risk. It will be time well spent. I am not suggesting in any way to run out and buy shares in Berkshire Hathaway. I am suggesting that everyone is a student and Mr. Buffett is the best professor who has ever lived. I think we should all learn from him. 

I do hold shares in this company. I am not suggesting you purchase shares in this company. I suggest you go to the website and learn at no cost what Warren Buffett has accomplished and how he thinks. 

Should you Rebalance???

If your current  asset allocation is significantly different from last year you are not alone. Many investors who may have started out last year with 70% stocks and 30% bonds as their asset allocation currently find themselves allocated closer to a 50/50 allocation without making a single trade. Obviously, investors who believed that a 70/30 mix was appropriate for them were comfortable with the risk. Let's assume for this example that the investors comfort level has not changed. Should they reallocate their current allocation to align with their comfort level and risk tolerance? 

Many will site the long term record of equity markets and suggest that they will earn more money keeping a greater percentage of their assets in equities.  They will drag out charts using the Efficient Frontier and the history of the Dow Jones or S&P 500 to support the decision to move back to the allocation they had before the downturn in the market. Some will also expect the market to "rebound" and do not want to miss the growth. 

The Vanguard 500 index fund since inception (8/31/1976) has averaged  9.7% as of 1/31/2009.  This is the reason so many people believe that over the long term they should be allocated heavier in equities. Also, investors have lost so much and want to regain their losses. They may believe what caused them to lose money will be the same investments that will grow their wealth back for them. 

The common wisdom is to reinvest in what is down and wait for it to rise again.  This seems logical until you look at the last 10 years ending 1/31/2009 and realize the Vanguard 500 index fund has returned  -2.73%.  The index has lost 4.34% over the last 5 years.  What if you started to invest your wealth in 2000? Your return would be a loss of 14.3% as of 12/31/08.  It is tough to make your money back.  Losing 14.3% from Jan. 2000 to Dec. 31st 2008 is quite different from the positive 9.7% returns achieved since 1976 the market provided.

Is time the answer? Should you be more risky the more time you have? I don't like that concept. Why lose money this year only because you have 10 years to recover. I can't see that making sense. I would rather earn a decent return year in and year out and reduce the amount of loss.  The less you lose the more money you will have available to work for you. I think your needs and comfort level should play a greater role then time in the investment process.

I believe time is the investors ally and should be used as such. Rather then rebalance a portfolio to become more growth oriented, allow time to work for you. Perhaps change your investments if they are no longer suitable but keep the allocation the same. If the market goes up your equities will rise and the result will eventually be your original allocation. Why take the extra risk? Sure the returns may develop faster by rebalancing and taking more risk. With time as your leverage you do not need to take the extra risk.  Your money will grow either way if the market rises. Your neighbor may grow their wealth faster during some cycles but will also lose more during the downtimes. In

If people rebalanced at the beginning of this year they would have taken money out of bonds and moved them into an asset class currently down an additional 16% this year. 

Either way ask "what if?" Seek to protect yourself while you build or maintain your wealth. If you are comfortable rebalancing and adding more to equities understand that you may increase your gains or losses. Nothing is certain. Over time I believe the equity markets will rise. I believe the equity markets will be much higher in 5 years then they are today but I am not smart enough to know the bottom or when the market will run up again. I do think investors should reset their expectations regarding returns and focus on risk avoidance. 

Trust Warren Buffett and Believe in Berkshire Hathaway

Trust Warren Buffett. Believe in Berkshire Hathaway. Why are we hearing a lot of  chatter saying the opposite? We have heard these preposterous accusations before by journalists and money managers attempting to make a name for themselves. Warren Buffett hasn't lost his touch. In fact he has made many impressive and envious moves lately. Folks could cry about him being early investing in GE and Goldman. That is dead wrong. He is now earning 10% on his money. The warrants he has may be a bonus for him. He could buy their stock right now on the open market and get a steep discount to the prices he is promised in the future. He wasn't early getting a 10% yield was he?  The man has been sitting in cash for so long he was being yelled at to invest.  Now that he has, people are saying he has lost his touch. Please. They should calm themselves down, read  his annual reports or his authorized biography "Snowball" and learn something. Berkshire is now generating a little over 10% on about $15 billion. Too early to make 10% on $15 Billion? I guess that depends on your time frame. His time frame is 10 to 20 years. 

The company is a cash generating machine with the worlds greatest investor at the helm investing that cash. Buffett made a decision to invest without worrying about next week, next month or next year. He understands the cycles of the economy and has not become stupid overnight. He invested in the U.S. and the belief that the economy will survive and the U.S. will still be standing when this crisis is over. He is not early he is correct in his thinking. He better be or we are all in a world of trouble and better start learning new languages.

Trust is hard for some people. I think you should trust his thought process and methodology. I think you should believe in the companies that follows his discipline and conduct themselves accordingly. I am not saying profits will come quickly and all his investments are good. I am saying that we are in a crisis of confidence and he is a man we all should learn from and believe in. I think you should look at his record and understand what he is doing so you can emulate his thought process and discipline. 

Buffett does not place blame on anyone else for his decisions and I think the American people should do the same. He does not point fingers and cry about what has happened to him and look for a scapegoat. He is not short sighted nor is he in need of people telling him he is right. 

Believe in Berkshire Hathaway. I think if you look at what the company has done recently, it would provide a model of behavior for us all. He has found intelligent places for his cash with attractive terms for his shareholders.  Buffett's weighing machine doesn't pay attention to the daily grind of the market.  He thinks long term. Don't give up. Take the long view in making your investment decisions. Think ahead and choose to understand what you are investing in so when the price drops you can still believe in your investment paying dividends for you.

Buffett hoarded cash for years because he was unable to find a decent investment. Why don't you try that. Maybe consumers should save more and spend a lot less. I think if you are a consumer  you should try your best to STOP CONSUMING. Now is the time to SAVE and INVEST in  your future. Now is the time to hunker down and realize it is not your patriotic duty to get the country out of this mess alone by spending all  your money. I would rather we as a society take back our wealth and become a nation of savers and stop spending. Spend less save more no debt is good debt. Mortgage debt is still debt.  If you don't have to owe someone then don't. Sure you may be able to make more money but you may not.

Try not to lose money. Try not to spend money. Trust Warren Buffett and Believe in Berkshire Hathaway.

Hope is not an investment strategy

Hope is not an investment strategy. I have been reading a lot of articles suggesting that investors rebalance their portfolios to the allocation they had before the markets went down. For example, if an investor had an allocation of 70% stocks and 30% bonds in 2008, that allocation may look closer to 55% bonds and 45% stocks today. Some articles I have read suggest investors should move their portfolios back to 70/30, which is their original allocation. Why take the risk? Why forget about last year? Learn from it. Learn from the last 10 years, learn from the 1930's and 70's and make informed decisions.  

Many will suggest purchasing more equities so that a rebalanced portfolio will provide an increased chance of growth.  I disagree, perhaps allocations should be left alone. The current allocation still has equities will rise with the market. 

The markets barely moved from 1928 to 1953. In fact the Dow Jones Industrial Average was 300 in 1928 and was slightly below that in 1953. Investors felt pain again from 1970 to 1979. when the same story unfolded.  Rebalancing may not be the most efficient way to improve your odds of success.  Most investors could have been out of the market the last 10 years and been better off.  If you leave the allocation alone shouldn't it rise along with the market to return you to your original allocation?

Be careful. Be afraid. Be smart. Reduce risk. Increase knowledge. Believe in yourself and you won't need to hope.

 

Ask why? Ask What if?

Why stay the course? What if you are on the wrong course? Why buy and hold your investments? Maybe your holdings won't perform as well as you think. Why diversify? Maybe you are pouring your wealth into several bad ideas rather then just one bad idea?

Why pay 1% while losing money? Maybe you could do better and pay less? Why be a number? Shouldn't you be important to the one handling your wealth? Why pay a computer to manage your money? Why not buy a basket of ETF's instead? What if you invest based on your comfort level? What do the numbers 1-10 have to do with an analytical approach to managing your wealth? Why invest your money the same way as everyone else? What if you could have your wealth managed based on your needs, goals and time horizon? Why increase an investments firms scale? Why not have your wealth managed by someone who is your advocate? 

What if you ask Why? 

Change is good

"Change is good. Change is right. Change works. Change clarifies, cuts through, and captures the essence of the evolutionary spirit. Change, In all of its forms --Change for life, for money, for love, knowledge--has marked the upward surge of mankind. And change-- you mark my words--will not only save you but that malfunctioning corporation called the USA."  (GG)

January 20, 2009 the world will watch the historic inauguration of the 44th President of the United Sates of America, Barack Obama. Everyone will be looking for a glimpse into how the world will be transformed and their lives altered. The incoming president will surely provide his agenda and goals for his Presidency during the inaugural address. The address will be hopeful, inspiring and upbeat. He will also offer a cautious assessment of the difficulties he will be facing during his first term while he lays out his plan to rebuild and repair the economy. 

The economy is in a deeper recession then most will acknowledge and unemployment could easily reach ten to twelve percent during 2009. The issue is not only the economy but how you will position yourself to endure. 

Regardless of economic conditions or elected officials you should focus inward. Take control of your investments. Truly understand what you or those you are currently paying are investing in. This will lead to decisions based on your needs and goals rather then assumptions of policies, agenda's and the initiatives of others. Success will be determined by your ability to create and manage a plan you feel comfortable maintaining along with your ability to execute efficiently. You can influence the outcome.

Everyone has brilliant ideas of how to invest and are happy to charge you for their brilliance. Cookie cutter solutions are not brilliant. Model portfolios are often expensive and perform below average. Most managed accounts are designed to provide scale to the asset manager rather then provide efficient results to the investor. Index investing is a popular way to go but I think we have witnessed what happens when you attempt to be average by taking average risk. Pain. I would rather clients invest in holdings that attempt to provide average returns while taking below average risk. The downside is you may under perform during the go go times. 

Change needs to start within each one of us. Change your expectation. Change your investments to align with your comfort level, risk tolerance and need. Change to protect yourself.