July 2011 Peak View Newsletter
from Jim Onorato
So far in 2011 the stock market is behaving very similarly as it did in 2010. If you remember 2010 began the years with solid gains. Then from April to July the S&P 500 dropped 16%, rebounded 9% in the month of September alone and finished the year +13%. Most investors have fairly short memories, only remembering that 2010 was a "good" year for the stock market. This year the market is also experiencing big swings as it reacts to events like the debt crisis in Europe and the uncertainty surrounding the democrats and republicans impasse in dealing with the U.S. debt.
Despite the large swings in the market, in our view stocks still appear to be somewhat undervalued. Stocks in the S&P 500 are currently selling at around 13 times earnings. Ultimately the performance of the stock market is a function of valuation rather than the day to day events that dominate the headlines. As legendary investor Ben Graham has said, "In the short run the stock market is a voting machine but in the long run it is a weighing machine." Investors are much better served staying the course while keeping an eye on the overall valuation of the market and ignoring the day to day "noise." Attempting to time the short-term swings in the stock market has always been a loser’s game.
Every year, the research firm, Dalbar, does a study that tries to quantify the impact of investor behavior on real life returns by comparing investors’ earnings to the average investment (using the S&P 500 as a proxy). The latest study looks at the 20 year period ended December 31, 2009
- Average annual investment return (S&P 500) 8.20%
- Average annual stock investor return 3.17%
If you had put money into an S&P 500 index fund and just left it there – no buying, no selling. Just investing and forgetting about it – you would have earned (minus fees) about 8%.
But unfortunately real people don’t invest that way. We trade. We watch CNBC and listen to Jim Cramer yell. Despite knowing better, we give into the genetic tendency to get more of those things that give us pleasure – buy high – and get rid of things that cause us pain – sell low. We’re just wired that way. The result – the average equity investor earned slightly over a 3% return over the last 20 years. What is really interesting is how little things seem to change over the years. When it comes to investing the tendency to invest badly is not going away.
The U.S economy is recovering, albeit very slowly. The recession of 2007–2009 was the worst economic downturn in 80 years. This recovery is going to take much longer than previous recessions. But with the average company in the S&P 500 deriving more than 50% of its revenues outside of the U.S. the affect of our economy on the earnings of U.S. corporations is much smaller than it used to be.
We are pleased to announce that Gary Friedman has joined Summit Capital as a portfolio manager and to assist with the firm’s investment research. Gary has over twenty years of investment experience and will be an outstanding addition to Summit Capital.
Should you have any questions regarding your investment portfolio or know of anyone who may benefit from our services please contact us.
Enjoy your summer.
Best Regards,
James Onorato
President
July 12, 2011