I wish I had not already used the word stinker in this letter, as it explains perfectly my feelings about 2012 and the financial markets. Here is a critical valuation benchmark I want you to have that lets you calculate on a matchbook the financial climate.
Simply add together the year-over-year (Y/Y) advance in the Dow industrials, transports, and utilities, and then divide by three. Next, add the Y/Y gain for Vanguard’s GNMA (MUTF:VFIIX) and Short-Term Investment-Grade (MUTF:VFSTX) and divide by two. Now, add your stock and your bond sums together and divide by two. Bingo! A year-to-date total return for what I consider a nice balanced portfolio proxy. No, not perfect, but user-friendly.
Avoid Crippling Losses
Today’s number is 1.5%. Over the decades, I would look for this number to annually average 8% (impossible in today’s low interest rate environment). Don’t forget our proxy is not a stock market proxy, but a 50/50 balanced portfolio proxy suitable for a prudent man. And yes, I realize that most investors are far from prudent.
I started studying the financial markets in 1959. Not once over my many decades of study have I had a reason to look for a better benchmark. With all due diligence, I assure you that I am certainly more conservative than are most of you. I have never tried to score big in the markets. In baseball terminology, my strategy is to take more walks than third-strike pitches. I don’t want to suffer crippling down years. I want to avoid annual portfolio declines exceeding 10%. Remember, when you take a brutish 50% loss, you must rack up a 100% gain on your next move simply to get back to even. With my rigorous, disciplined investment strategy, I simply am not going to see many 100% gainers, just as few plate-disciplined baseball players are likely to lead the league in home runs.
Continuing on with my YTD benchmark of 1.5%, let’s annualize the number to get a relative look versus my historical full-year 8% target. With five months gone this year and seven to go, divide 12 (months in year) by five (elapsed months) to get 2.4. Now, multiply our YTD 1.5% by our 2.4 to get a 3.6% annualized target. On the surface, pretty cruddy, but you want to analyze the derived annual proxy to reflect the reality of today’s financial markets.
America’s Lost Triple-A Credit Rating
I like one analytical tool here—my Payday Indicator. The current reading is at the lowest level since I began my investment studies in the months following my graduation from Shaker Heights High in 1959. Were my Payday Indicator back at levels of the 1980s and 1990s, I would be right unhappy with a currently projected 3.6% annualized target. But the investment environment is even worse than cruddy. Investors aren’t being paid squat to invest. The reason? Fiscal mismanagement by our elected politicians, which then leads to artificially low interest rates courtesy the Fed. I would vote out the entrenched lobbyist-controlled politicians. And the Fed needs to be shuttered.
Americans are being duped and defrauded. The currency is being debased. I am unsure how voters continue to stand for all the duplicity and politically self-serving officialdom in Washington. You are aware that America has lost its triple-A credit rating, are you not? And, yet, the very folks who have dragged America down this Alice in Wonderland rat hole not only want to return to Washington, but also are able to raise tens of millions of dollars from successful, intelligent Americans who should know better. The reason for continuing financial contributions is, as usual, self-interest.
We are on a sickening financial merry-go-round that spins ever faster and faster. My advice for you is to do what I am doing and what I have been telling you to do for years: Get off the ride. Once the g-force becomes too strong, the financial merry-go-round is going spin out of control and break apart. All remaining riders will be hurled into oblivion.
Sound cool to you?