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To the right, read excerpts from some of our quarterly newsletters highlighting key observations and insights. Clients receive our newsletter, along with our account reports, every quarter-end. |
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Newsletter Highlights
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April 2012 |
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Opportunities Ahead—But We Remain Wary |
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Clients have conveyed to us that while they desire growth, they are equally concerned with capital preservation. Two deep recessions over 12+ years served as a healthy, sober reality check. While the market has rallied, it’s useful to consider that the year is young—and it’s too early to ignore October’s lesson.
On the risk side, we have controls in place to limit losses, and we monitor client accounts daily.
On the gain side, we remain focused on year-end total return. So, we’d like you to understand this concept, which is key to our strategy and year-end goals: The high yield income from our holdings will, over time, add to your returns. For example: a 6% capital gain plus 6% yield is a 12% year-end total return. Collecting income enables us to risk less on near-term capital gains, and moderates volatility through the ups and downs to year-end.
Recently we culled underperformers and locked in profits on great performers. Both actions reduced our risk exposure and raised cash that we can deploy when other opportunities arise.
A FIVE STAR WEALTH MANAGER AGAIN
We have to admit, we’re proud of earning the honor for a second year. Especially since it recognizes the personal service we provide to our clients. The honor went to less than 7% of Puget Sound wealth managers, measured by objective client satisfaction criteria.
But we’re always happy to hear from you how we can do better!
RIDE TO STOP CHILD ABUSE
Time to ease back into the saddle. In August Larry will be riding in the Courage Classic again. This year without his son, who is away at college. The three-day biking event, our primary charitable cause, helps Mary Bridge Children’s Hospital and Children’s Trust Foundation stop child abuse and neglect. To learn more visit: www.courageclassic.org |
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Well-Positioned |
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The past year was difficult for our investment style, which emphasizes capital preservation as much as capital appreciation. We sensed risk for various reasons, and thus limited our exposure to equities. But for much of the year the market climbed up a “wall of worry” anyway.
When the market finally corrected in early fall it turned out that we had been a bit ahead of the curve. So we found ourselves in a good position. Since then the market has gone sideways with unprecedented volatility and correlation, driven largely by global economic news.
Given the situation, and concerns that deflation could be as much a risk as inflation, right now we prefer to receive a predictable income stream rather than bet on growth in the equities market.
We currently hold some cash but mostly a portfolio of quality high-income securities representing asset classes currently generating the highest yields. That allows us to take advantage of growth opportunities when they arise.
BENEFITS OF LONG-TERM PERSPECTIVE
We emphasize capital preservation, risk controls and a long-term perspective in our investing strategy as much as we do the seeking of growth opportunities.
As a result, we have sometimes underperformed the broad market in shorter timeframes. However, our approach has enabled us to outperform in longer timeframes—an important client objective. Clients with us the past 10+ years made significant progress, while the S&P 500 has barely moved.
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January 2011 |
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Five Star Wealth Manager |
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Last month we were notified that Sabin Investment Management was chosen as a 2011 FIVE STAR Wealth Manager and will appear in the April issue of Seattle Magazine. Less than 5% of all wealth managers in the Puget Sound region are receiving this honor. To make their selections a national research firm contacted 1 in 4 high net worth households.
The clients were then asked to evaluate their wealth manager in nine categories.
In addition to our high score from this evaluation, we believe we are one of very few advisers whose client’s accounts have fully recovered from the recent market decline. From October 2007 the S&P 500 is still down 20%, but the growth accounts we manage for our clients are up 20%. That’s a difference of 40% in three years!
INTRODUCING ALLEN WOODARD
We are delighted to introduce Allen Woodard as the newest member of our team. He joins us as Client Adviser and Vice President of Marketing following an award winning 31-year career in branding, marketing and investor communications—most recently as strategist and creative director of Woodard and Company.
Allen and his wife, Jan, have also been Larry Sabin’s valued clients for the past twenty years. Their business success and investment returns have allowed Allen to retire early and pursue a “second act” as a Registered Investment Adviser Representative with Sabin Investment Management. Jan was an indispensable part of Woodard and Company’s success and will assist Allen with new business development and client service support.
With the depth and breadth of his business and investing experience in hand, Allen brings an invaluable client-side perspective to our firm where he will work to help others achieve their own long-term life objectives.
Allen served as president of the National Investor Relations Institute Seattle Chapter in connection with his investor communications work for public companies ranging from micro-cap innovators to large-cap Fortune 500 leaders. He also served as president of the American Institute of Graphics Arts Seattle Chapter. Allen graduated Summa Cum Laude from the University of Montana.
MORE OPTIMISTIC
We continue to be concerned about the same things we listed in last quarter’s newsletter—low consumer spending and high levels of unemployment and debt. In spite of these domestic problems it is important to realize that in other parts of the world, such as Asia, Latin America and natural resource rich countries, there are many opportunities for growth. Recently, we’ve invested in the FBR Small Cap Financial fund, anticipating a recovery in this segment of the financial services sector. The fund is directed by a manager with an exceptional track record.
Overall, our investments continue to be focused primarily in high dividend income, inflation hedges (especially energy) and foreign equity funds. Most of them should also benefit if the value of the U.S dollar further declines. We believe this strategy offers growth potential with lower risk than being concentrated in U.S. equities. |
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July 2010 |
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Second Quarter Downer |
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Our caution has turned to pessimism. The much hoped for “V” shaped economic recovery is not materializing. Job growth is virtually non-existent. In the Wall Street Journal Allan Meltzer recently declared that “Obamanomics has failed.” Why? Unfortunately, our politicians in Washington D.C. haven’t figured out, what almost any business owner intuitively knows, that “uncertainty about taxes and regulations is the enemy of investment and economic growth.”
During a disappointing second quarter the S&P 500 index dropped 12% and is now down 7.6% for the year. Our model Growth account is down only 3.37% for 2010. The 50/50 balanced portfolio is unchanged this year. |
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January 2010 |
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Our Best Year Ever |
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Our average Growth style account was up 41% for 2009 while the S&P 500 returned 23.5%. This means that we have been able to beat the S&P 500 by over 15% for both 2008 and 2009. In our industry that kind of performance in an up and down market is exceptional. The Fixed Income investments also did very well. Fortunately, our accounts are very close to their all time high!
THE LOST DECADE
The financial industry has labeled the past ten years as the lost decade. The following statistics from this period illustrate why:
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Ten Year Total Return |
S&P 500 |
-24% |
NASDAQ |
-44% |
US DOLLAR |
-13% |
Over the past 9 years our Growth account has increased over 125%. We believe that our performance compared to the market indices during the same time span confirms our philosophy and reinforces the value of our services.
LOOKING TO 2010 AND BEYOND
Our primary concerns are with the continuing problems in the residential and commercial real estate markets and the Federal Government’s astronomical accumulation of debt. We are taking these into account with every investment decision we make. |
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October 2009 |
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No Correction....Yet |
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In August, after a big move in the stock market, we heard from a countless stream of investment professionals predicting a correction. We then realized what they were really saying. They weren’t fully invested... but weren’t selling either. Many of them missed the move and were waiting to buy at lower prices. It became obvious that there was not going to be a meaningful correction with so many investors needing to get in. We began to put more of your money to work. That decision paid off with another great quarter.
As long as money market and bank interest rates remain below 1% we believe more and more money will be forced into equities. Don’t be surprised if another bubble develops in the stock market. Longer term, we are concerned about the negative consequences from the actions the government has taken to stimulate the economy. |
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January 2009 |
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The Worst Year for the Stock Market Since 1937 |
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In 2008 the S&P 500 declined 38%. Gratefully, our losses were much less. We managed to soundly beat the results of Warren Buffet’s company Berkshire Hathaway again.
OUR CORPORATE BOND EPIPHANY
Along with the sell-off in almost everything, corporate bonds prices also dropped dramatically, even while the Fed was aggressively cutting interest rates. This created, what we believe was, a fantastic opportunity. So, at the beginning of December we invested almost half of the funds allocated for stocks (which had been waiting in a money market fund) into Vanguard’s Intermediate and Short-term Investment Grade Corporate Bond funds. At the time Vanguard indicated on their web site that the yield to maturity on their intermediate fund was 9.4% on a portfolio with an average maturity of only six years. With the 10 year U.S. Treasury note yielding a little over 2% the interest rate differential between these securities was about 7%! We confidently expect that as fear subsides and things stabilize prices on these bonds should return to their range of last summer - at least 15% higher than they are now. This along with the interest the bonds are earning should produce equity like returns with dramatically less risk. Since our move we have already had a 4% increase. Just recently, we have noticed that other investment professionals have recognized this opportunity.
CAUTIOUS ON THE ECONOMY BUT OPTIMISTIC ABOUT OUR STOCKS
Even though we expect the economy to worsen we are sticking with our energy, agriculture and Asia plays. They are still incredibly cheap and should do well even in a difficult economy. These positions should also do well should inflation become an issue.
A NEW IRA RULE JUST PASSED
Investors over age 70½ will not be required to make an IRA distribution in 2009.
WE EXPECT GOOD THINGS FOR OUR ACCOUNTS THIS YEAR
Between our stock and bond investments we expect very good results in 2009! |
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April 2008 |
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Keeping The Real Estate From Getting Worse |
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We remain cautious. It’s hard to tell if we have seen the market bottom or if we’ve had just another bear market rally.
The Federal Reserve has lowered interest rates in an effort to soften the tide of adjustable rate loan resets coming over the next year. There will be many more defaults and foreclosures. This will put further pressure on home values. Lower interest rates and additional government spending may help minimize these problems, but, at a price; higher inflation. Many are surprised to learn that the consumer price index (CPI) was up 4.1% in 2007. |
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January 2008 |
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2007 Another Good Year For Our Clients |
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For 2007 our equity accounts gained more than double the return of the S&P 500. Some of the small accounts had lower returns because we were not able to diversify like we would prefer. That is one reason why we like to work with accounts of at least $100,000.
OUTLOOK
Our concerns about the economy and real estate are now a reality. We continue to be cautious about the economy.
7 YEAR PERFORMANCE
Our clients who invested with us seven years ago now have almost twice as much money as those investors who put their money in an S&P 500 index fund.
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October 2007 |
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Third Quarter |
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The biggest debt rating agencies finally started downgrading the bonds that track sub-prime and other questionable loans. This prompted a wave of selling that unnerved the mortgage market and equities markets during August and September.
The bad things we predicted about the housing market are actually coming true. Regardless, the U.S. stock markets have rallied back to near all-time highs. The Dow is up about 11.5% for the year while the S&P 500 has lagged behind; up only 7.6%. Even though the housing problems are far from over, the Federal Reserve’s drastic move to cut the discount rate ½% led many investors to believe that the Fed will “save the day.”
MORTGAGE MESS
It still appears that real estate prices have not yet found a bottom. Foreclosures and inventories of homes for sale have continued to rise. According to Fortunemagazine, there’s about $571 billion in adjustable rate mortgages that will “re-set” by the end of 2008. The increase in interest rates on these loans could possibly cost Americans another $42 billion in mortgage payments. Those who can will likely refinance. Many won’t be able to due to tighter lending standards and lower appraised home values. This will almost surely result in even more defaults and foreclosures.
COMMODITIES AND THE DOLLAR
In an effort to avoid a recession, the Fed could continue to cut the discount rate. Additional rate cuts are likely to cause the value of the dollar, already at record lows, to decline further. We believe that this would add additional pressure on commodity prices and inflation. We still like energy, metals and select foreign markets. |
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July 2007 |
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Sub-Prime Mortgage Debt |
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It appears nationally that real estate prices have not yet found a bottom. Foreclosures and inventories of homes for sale have continued to rise. The Puget Sound region has been somewhat insulated from the large price declines seen in the sun-belt regions. This is probably due to the limited availability of raw land and good job demand with companies such as Boeing.
According to a recent article from Bloomberg, rating agencies are masking mounting losses in sub-prime mortgages by failing to downgrade the bonds tracking these loans. If these downgrades were to take place it would force selling that would further roil the mortgage market. |
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April 2007 |
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First Quarter |
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The Dow Jones Industrial Average had its first losing quarter in two years. The S&P and NASDAQ were basically unchanged. Economic indicators continued to weaken; especially in residential real estate. A large number of lenders have gone bankrupt from the predictable outcome of pushing risky loans to unqualified borrowers. Other lenders have been tightening lending standards which will have a further negative effect on real estate and the economy. The number of unoccupied homes hit in all-time high.
LEI
The leading economic indicators (LEI) have continued to slip. The March number will have to be unusually good to avoid a year-over-year contraction. A year-over-year contraction in the quarterly average LEI has heralded every recession since 1960. Most investors are still counting on the Federal Reserve to cut short-term interest rates even though Chairman Bernanke has reiterated their concern over the persistent level of inflation. Rising inflation in a slowing economy would be hazardous for the stock market. The rising cost of gasoline is once again an issue. |
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April 2003 |
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Positioned For Growth |
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I am optimistic that our equity mutual funds and stocks will do well over the next year. In addition to our holdings in a few individual stocks we have roughly 30% of the equity portion of our accounts in energy funds (concentration in natural gas stocks), 10% in a small company fund with a great track record and 10% in a large company, value type fund with a successful manager. These fund managers are experienced and have demonstrated their abilities by making good decisions during this bear market.
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October, 2002 |
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Looking To Buy |
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Great stock market bottoms are made when the news gets so bad that it scares many investors into finally giving up and selling. I think we may be close to one of those times. I’m looking to buy. There are several mutual funds with good managers and relative track records that I’m considering.
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October 2, 2001 |
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Now For Some Good News |
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most of our accounts are still up for 2001 compared to the major stock market indices which have been “hammered”. In the last 12 months, many stock mutual funds are down 25-30% with most technology and growth funds down over 50%! This should create a great buying opportunity for us.
I expect many stocks to reach reasonable valuations sometime in the next six months. It may still be a little early, but I will be looking for signs of stabilization. It is typical for stock markets to start a recovery before the economy does. Remember, bad news creates an opportunity to buy at low prices and achieve high returns when a recovery does come. |
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