The Bizarro World continued in money and finance this week with the Dow Jones Industrial Average posting another 2% gain. The Average is up 8% so for this year while Strength continued to slide. The 15-51 Indicator, a portfolio built with superior 15-51 construction and designed to produce above-average market returns, once again moved in an opposite direction as "the market" and lost another 6% in the shortened trading week. In a rare move, the 15-51 Indicator crossed under the Dow Average in a one year scaled chart. See below.
And why not?
Premium businesses continue to show signs of operating pressure. In the most recent week Apple not only reported flat growth for the holiday quarter but also announced plans of launching lower priced iPhones to compete with aggressive smart phone rival, Samsung. Margins are under pressure everywhere. And like Best Buy previously, premium handbag company Coach announced meager 1.5% growth during what they billed as a "challenging" holiday season.
The worst performing "market" component in the last year is Caterpillar, which is down 14% in the last 52 weeks. Boeing, likes its new Dreamliner, hasn’t gone anywhere in the trading year – its price hasn’t moved since the above chart began. The point here is simple: stock market strength outperforms broader market averages more times than not – but not always.
For instance, the 15-51 Indicator portfolio began on the first trading day of 1996. In the subsequent 17 year period the Dow outperformed the 15-51 Indicator six times, or 35% of the time. In those six years, the Dow’s average percentage point differential was 2.5% better than the Indicator. When the Average wins the performance year it is by a slim margin. It happens sometimes -- in up markets and down.
However, when strength wins the battle it does so in convincing fashion. In the eleven years that the 15-51 Indicator was superior, it outperformed the Dow by 18.3% points per year, on average. In upward trending markets above-average 15-51 portfolios greatly outperform. In downward markets, above-average companies generally have more room to correct because they have experienced the greatest inflation on the way up. So they do; and sometimes underperform borader market averages. Nevertheless, this point is equally clear -- strong 15-51 portfolios produce far superior results over the long term.
This can be seen in the seventeen-year returns of the major indices, which isn’t a close contest: the Dow gained a mere 156% in the long run compared to a robust 1,101% gain for the 15-51 Indicator – that’s 7 times better than average!
In a nutshell: Success does not require your stock portfolio to be better than "the market" every single year. Smarter and stronger always produces more over the long run. That should always be your focus.
As demonstrated in my book, market performance is best viewed from multiple perspectives. The last time the 15-51 Indicator failed to beat the Dow was the tumultuous year of 2008. The DJIA outpaced the Indicator by a mere .5% in ‘08. Below is a comparative chart since that time.
The tortoise beats the hare every time in investment.
That’s because investment is a long-term proposition; and while buying and selling need not occur all the time or with constant regularity – prudent rebalancing as explained in chapters 6 and 7 of my book should be performed to maximize profit.
It is important to note, however, that profit trends shown in these charts have not been maximized and are instead shown in the form of a strict buy-and-hold methodology. That’s the way market indexes are measured. Your returns should outperform them, more and more as time goes by.
To stretch this example out further, the next time before 2008 that the Dow Average out-performed stock market strength was 2006, when the Dow beat the 15-51 Indicator by a solid 5.6% points. The run-rate since then once again shows that a few strange years (in this case two: 2006 & 2008) cannot diminish superior long-term returns. See below.
Sure the Dow started this period off stronger than the 15-51 Indicator – but which one won the war? That’s the point here: Caution to investors who get caught up in anomalies like the current market dynamics of the Bizarro World of finance and economics – Markets remain under severe pressure and stock prices are inflated and vulnerable.
Several strategic investment themes continued in earnest this week, as Spain’s recession was reported to have worsened; the U.K. announced that their economy shrank in the most recent quarter; and Japan has officially joined the world’s easy money makers to increase currency supply and inflation. Sooner or later the inflation monster being fostered right now will turn into a real beast. And when inflation forces interest rates up – all hell will break loose. Investors should not only keep a keen eye on this but consider it a second immediate threat to their stock market base.
And then there is the effect of more new taxes – the great impediment of growth. As we know the U.S. Congress raised taxes on 80% of all American workers in early January 2013 in a law named the American Taxpayer Relief Act of 2012. According to Congress the bill was to avoid automatic tax increases and spending cuts labeled as the "fiscal cliff." And isn’t it ironic that although taxes have already increased the U.S. Senate is taking up yet another new tax bill while announcing that "sequester cuts" are most likely part of the deal.
But isn’t this the so called "fiscal cliff"? – and wasn’t this the "crisis" that had to be "averted" at year-end 2012 – and supposedly was with the aforementioned law?
A perennial problem with the U.S. government is that they have kept the American Market in a state of persistent "crisis" since the Bush-Gore election in 2000, where the great issue of "hanging chads" made it to the Supreme Court. Then there was September 11th (a legitimate crisis), followed by a weapons of mass destruction crisis in Iraq; then a subprime mortgage crisis that was turned into a major Market crash (another legitimate crisis), which was then followed by the manmade crisis called the "fiscal cliff", which is sure to be followed by a gun crisis, a budget crisis, only to be replaced by a debt crisis, a healthcare crisis, and/or some other crisis to be named later.
More and more the U.S. government is promulgating "crisis" to bamboozle the American populous into poor monetary and fiscal policy. This will bankrupt social welfare programs, strain business owners and seniors, and stifle an economy already struggling to survive.
This is not good for Investment, Markets, or People.
What most people don’t realize about crisis-mania is that it is used to raise taxes, prices, and the cost of capital. This lowers the value of the dollar and decreases the quality of life.
First case in point: several medical suppliers have recently warned of price increases to specialty medical devices to cover new taxes imposed by the Affordable Care Act – a law advertised to stop the "crisis" of closed health-markets and rising healthcare prices (see: Supreme Letdown). Increasing demand and not supply has no choice but to raise prices and ration care. And as explained in my book, companies do not pay taxes – they collect them. Taxes simply become part of the product’s price that consumers ultimately pay. Higher taxes raise prices, and thus cause inflation. Short supply and a weakening dollar have no chance of making healthcare "affordable."
Second case in point: taxes stop companies from doing what they do best – invest to expand markets and productivity. Much to the contrary of taxes, business investments ultimately lowers costs, prices, and unemployment. Another Wall Street Journal article entitled: Firms Keep Stockpiles of ‘Foreign’ Cash in US, reports that American companies are sitting on $1.7 trillion of idle cash residing in the accounts of "foreign" subsidiaries – even though many of those accounts reside in America or in U.S. Treasury securities. In other words, those companies don’t move that money into a "U.S." account dedicated to U.S. investment because they don’t want to pay the 35% federal income tax – not to mention state taxes that can easily add-on another 15% penalty. So this investment doesn't happen, and the cash just sits there.
There’s simply too little incentive to bring that money back into Market. Heck, in order for a company to make such a move they must be sure they can triple their money in a relatively short period of time to make it worthwhile. Otherwise, bringing the money back is a bad investment – and that’s not good for careers. Ask Jamie Dimon.
If this country is serious about growth then the government needs to encourage it. If the endeavor to invest remains so costly, growth and prosperity, above all else, will suffer most. And without robust long-term growth forecasted, the future becomes bleak and stock prices suffer.
Ask Apple. Here's their one year chart.
The worst thing you can do is fall in love with a stock market run – to feel you must stay put at all cost for the rest of time, or that you must jump in or out at an inopportune time so not to miss the next great something; or to feel that just because a certain thing reached a particular price, say $700, that it is entitled to do so again.
Reality doesn’t work that way.
Times change, things changes, Markets change – and it’s never easy to lose an icon.
Stay tuned…and let me know if you need help.