“Bargain Shopping”
Do you ever feel like you are running in quicksand? 2015 was a year that felt exactly like that as the S&P 500i ended up 1.38% for the year (or down for the year if you omit the dividend). However, between that final number resides quite a few negative story lines: energy down 22.69%, high yield bonds down 4.64%, emerging markets down 16.96% and small cap down 4.88%. In fact, if you remove the top 10 performing stocks from the S&P 500i (names such as “FANG” Facebook, Amazon, Netflix and Google), the returns get even worse. Keep in mind that names such as Facebook, Amazon, Netflix and Google sport trailing P/E ratios of 1,103, 918, 285, and 33, respectively, versus the S&P 500 at 19.
All in all, 2015 was not a great year to be an investor. However, six years into a bull market rally with oil prices free falling and a flat year could be interpreted as pretty encouraging. Couple that with the fact we are coming into an election year (which is historically positive) and there are reasons to be optimistic. Of course, at the same time, with a Federal Reserve raising interest rates, unstable oil prices, and the Chicago PMIi (Purchasing Managers Index) at 2009 levels, there can be just as many reasons for caution.
Regardless, we hold out hope 2016 is a better year for equities. Historically, a flat year is followed by a positive year. However, if you look at the horizon for investing ideas it doesn’t appear clear. Of course, if investing was easy there would be a class on it, tuition would be expensive, and there would be a lengthy waiting list for it. Keep in mind, though, some of the instructors for this hypothetical class such as Warren Buffett from Berkshire Hathaway (down 11.48% in 2015), David Einhorn from Greenlight Capital (down 20% in 2015), Mason Hawkins from Southeastern Asset Management (down 18.80 in 2015) had terrible years last year as value managers struggled. We mention this to keep perspective as many value managers who attempt to buy companies on the cheap have only seen their companies get cheaper. Whereas stocks that were expensive (such as the “FANG” stocks mentioned earlier) outperformed in 2015. This type of momentum investing is akin to playing musical chairs; when the music stops things can get ugly. In effect, value stocks have a margin of safety that growth stocks do not because they are purchased at a discount to intrinsic value but you could not tell that in 2015. (The concept of “margin of safety” is one first put forth in Graham and Dodd’s book “Security Analysis” and popularized by many value managers such at Warren Buffet and Seth Klarman.)
That being said, we have exposure to growth stocks and those investments helped our portfolio returns, but it was not enough. In fact, most dividend related stocks, oftentimes considered more conservative because of their dividend, did not perform well in 2015 (Utilities and energy were both down significantly more than the S&P 500i). However, we feel much better being invested in high quality names six years into a rally with interest rate increases on the horizon. Strangely, the areas considered dangerous by many in the mainstream media are the ones that interest us currently as they appear cheap enough to provide limited downside risk. To many these areas sound esoteric but areas like emerging markets, high yield bonds, energy, master limited partnerships, and developed international appear cheap when compared to US markets in a six year rally. However, we realize that many clients are disinclined to invest in these types of names so we will be discussing these ideas individually with you.
In the meantime, we appreciate your patience this year as we know the markets have tried your tolerance as well as ours. Investing can be made complex by a myriad of different metrics but over the long haul it can be made far simpler… “Buy low and sell high.” We will continue to look for bargains we believe will pay off in the future. Please call with any questions.
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Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.
Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to
January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.
Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.
Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.
Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by National Financial Services, who acts as the custodian for your account(s). We request you contact us immediately if you do not receive these statements or if the values reflected are materially different.
Cost basis reporting
If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.
Use of Indexes
iThe investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.
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Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck