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The Sandy Spring Way

March Observations

March 4th, 2014 | By Beau Mercer

FredericBurkeHe’s an old hippie and he don’t know what to do; should he hang onto the old; should he grab for the new. He’s an old hippie…this new life is just a bust; He ain’t trying to change nobody; He’s just trying real hard to adjust.”

—THE OLD HIPPIE by the Bellamy Brothers.

Baseball spring training started in Florida and Arizona and the warm weather continues to entice snowbirds seeking safe havens.  The North American cold wave is impacting economic activity but the losses will be recouped once the season starts. Some of the teams appear set and know who and how they are going to track to the pennant…some are lost! The purpose of spring training is to allow new players to try out for spots on the team, while existing team members practice in order to get back into shape for the coming season. Baseball analysts, professional and amateur, are given free rein to observe, interview and to prognosticate. Everyone has an opinion on the past and the future-as they do with the investment markets. If a consensus could be reached, many analysts would cite Ted Williams as the greatest baseball player of all time. His batting average is the highest of any Major League Baseball player with 500 or more homeruns. Ted Williams said about spring training in his memoir “My Turn at Bat: The Story of my Life”; “You start seeing the ball, really ripping it, within 2-3 weeks, but you may need 4-5 weeks to be really sharp”. To Ted Williams preparation and an understanding of the game provided the underpinnings for his confidence…there were no shortcuts and hitting is not a team sport. Baseball players and investors can’t substitute media chatter for the work necessary to reach the goal. Recognizing personal limitations and occasionally not swinging for the fences, differentiates the amateur from the professional in baseball and investment. Warren Buffett stated in his Berkshire Hathaway annual report that ‘games are won by players on the playing field-not by those whose eyes are glued on the scoreboard’.

The flashing scoreboard is sending some confusing messages to individuals participating in the investment markets. The economic momentum of the U.S. economy grew at a seasonally adjusted annual rate of 2.4% in the final quarter of 2013, down from an initial reading of 3.2%. Measures of consumer spending, job creation, factory output and the housing market have come in below expectations. Nevertheless, on February 28, the broad gauge of the U.S. stock market hit a fresh record, despite the jitters over the situation in the Ukraine.  The new record capped a 4.3% gain in February, the S&P Index’s best monthly performance since October. There is a lot of good news currently priced into the market. Corporate earnings projections signal improvement but not a significant expansion. The Wall Street Journal lists the current forward price earnings multiple as 16, which is slightly richer than last year, but not ‘overvalued’ on an historical basis. Companies continue to sit on piles of cash (Apple and Microsoft) and avoid replacing capital stock. The real question in the current economic recovery is whether or how earnings will catch up to stock prices in 2014. Now is the time to keep things simple. Stock prices are nothing more than a means of sharing the earnings that companies create. Stay away from fortune tellers!

Measuring performance presents a perennial conundrum-changing the risk parameters on a quarter by quarter basis make it difficult to measure progress. At the same time, relying too much on financial targets negates the value of a long term strategy. Over the short term, there is little certainty that the investment markets will behave in a rational way. There is, however, some rationality in a long term investment strategy. The fact is that when an investor does not focus on a goal and give it a reasonable amount of time, performance declines. If you are saving money for a specific goal such as retirement, you need patience and a long accumulation period. The long view is a determinant of how many years you will need to accumulate the necessary sum and that calculation is subject to change. The long view may mean much longer than five years-the standard period of a long term investment. Statistical anomalies can arise for numerous reasons when evaluating performance and a time reference. For example, the five year annualized returns of the stock market have undergone an astonishing improvement over the course of the past calendar year, from a dismal loss in the five years ending in 2012 to a double digit annualized gain in the five years ended in 2013. The view backward at the end of 2012 clearly recognized the risk of the stock market. The view forward established the rewards of risk taking. Long term investing requires an extended time horizon, a broadly diversified portfolio, and an understanding of the nuances of goal setting. What goes around comes around.

Someone once said:  Work like you don’t need the money. Love like you’ve never been hurt. Dance like nobody’s watching. Sing like nobody’s listening. Live life like it’s heaven on earth. 2014—AN IRISH BLESSING.

Happy Saint Patrick’s Day

—Fred