Asset Management Letter

Q3 2018 Asset Management Letter

October 8, 2018   ·   By   ·   No Comments   ·   Posted in Asset Management Letter, News, Newsletters

Ten Years After

We bring up the rock band “Ten Years After” famous for its performance of “I’m Going Home” at Woodstock not to show off our vast historical knowledge base, but as a framing technique for our quarterly letter. As much as many financial journals would like to forget it, 2008 did happen. Soon ten year returns will omit the fact that from September 17th, 2008 the S&P 500i fell 46% over the next six months. Of course, that also means the best time to invest in the broad market in the past twenty years was arguably March 2009. Now think back to how it felt to invest then. Many wanted to take their figurative ball and “go home” during that time period. Warren Buffett wrote an article, “Buy America. I am” in November 2008 and many didn’t care because we were told he was different and not comparable to their situation. Jeremy Grantham wrote a similar article March 2009 called “Reinvesting when terrified” which by his own admission was to encourage him to invest when it was most bleak. His timing turned out to be spot on, but no one knew for certain and many didn’t heed his advice. With the gift of hindsight many reference how great the S&P 500i returns are. To us, this is like driving a boat while looking at the wake behind you.

What we are emphasizing is that there is a behavioral side to investing and oftentimes the safety of “groupthink” is a falsehood. Many times when sentiment is the most positive and all looks rosy, the tide is beginning to turn and you may not know it because you are looking back at your wake and checking who is in the boat with you, instead of looking at the horizon. We remember articles in 1999 like the New York Times “What’s killing value Managers” or “Value Investing: Can it rise from the Ashes” and how well value outperformed for the next 8 years. We also know that value has outperformed growth 3% annually since 1926. However, because of the recent outperformance of growth, the price to sales ratio of growth stocks is as high as it has been since 1999. Said another way, growth stocks are as expensive as they were in 1999. By the way, in this same “diversified” Russell 1000 Growthi index 27% of capitalization is tied up in five stocks. We continue to mention these stats and hearken back to ‘99 and ‘08 because recency bias is a very strong human tendency. It was an important trait when we were cave-dwellers as it allowed us to live longer than our less inclined “cave-mates” but, when it comes to investing, it causes us to overemphasize recent data and oftentimes make incorrect assumptions about the future. Behavioral finance justifiably pinpoints recency bias as a significant factor that contributes to poor financial decision making. Couple it with herd mentality and, in our mind, you are delving into one of the greatest arguments against efficient market theory and passive investing available. Jeremy Grantham and Warren Buffet’s articles in 2008/2009 would be exhibit “A” in the case supporting recency bias and herd mentality, in our view.

To that end, it’s our opinion that herd mentality is currently fostering the environment where momentum stocks are outperforming diversified portfolios.  International and emerging markets are down even though, at current estimates, tariff talks may impact gross domestic product (GDP) by .2%. Value stocks have significantly underperformed growth stocks but are still positive for the year while being arguably cheaper on a historical basis. The Barclays Aggregate Bond Indexi, or the proxy for fixed income investing, is down 1.64% YTD but our bond funds have drastically outperformed that number. However, when you look at Morningstari Moderate Target Portfolio that is only up 2.20% you might be disappointed. We, of course, focus on the Morningstar Moderate portfolio because it is most similar to our client base. Our clients are not 20 year olds who can endure 60 more years of returns to make up for a year like 2008. Thus, when the media quotes double digit rates of return we hope that you don’t fall prey to their groupthink and call up wanting to buy the hottest growth stock du jour. We instead hope you call us with a strong recollection of the past ten years gone by and a frame of reference that keeps a realistic perception of what the future holds. As a hint, we think value will start to outperform over the next ten years.

However, if you are all in on the concept of safety and groupthink, please, as a last reminder, think of Woodstock and the four hundred thousand people on Max Yasgur’s 600 acre dairy farm in the rain, sleeping on the ground and being told to not eat the brown acid. We are all for artistic expression but we are not sure the ones in the audience had as good of a time as the performers or documentary makers. In fact, we have a feeling that many wanted to “go home” with Ten Years After but didn’t have a quick and easy escape route. That being said, they were also not near retirement so they may have had a different expectation regarding risk tolerance and therefore, may have had a different recollection of their experience. Sometimes it is all about the level of expectation and we want to make sure we set the proper level moving forward with liquidity being removed by the Federal Reserve and an expensive bull market that is 9 years old and counting.

 

General Compliance Disclosures

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