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(B)(N) There And Done That

August 10, 2012

We are aggrieved that bank after bank, insurance company, pension funds and portfolio managers of all sorts are complaining that “the market is not a good market” and what they mean is that they can’t – just can’t – get “good” returns and that the bond market returns are not good either, meaning, basically, that longer term money rates are below a reasonably expected rate of inflation of about 2% although, of course, there is a great deal of international variation between 2% and 7% or more.

Insurance companies are particularly affected because segregated funds are required to guarantee the capital that they have invested in the equity markets (all kidding aside). For example, MFC Manulife Financial Corporation had a market capitalization of $60 billion in 2007 and today it’s $20 billion while at the same time increasing its common shares outstanding from 1.4 billion shares in 2007 to 1.8 billion shares today and its “investments” under management in the equity markets from $90 billion to the current $180 billion. One might say, twice the “investments” and 1/3  or less the stock price in the past five years, all the while keeping the shareholders equity at a steady $25 billion in order to meet regulatory requirements.

But when will the market be “good”? And why should they expect that the “markets” will increase at unpredictable rates that are not eventually moderated, or circumscribed, by the productivity of the companies in them and, therefore, that the longer term markets will in fact not be much different than what we have now, having already behind us the recent experience of some major booms and busts during the last twenty years that are – in retrospect – marginally or not at all linked to a demonstrated productivity of the people (persons, companies, countries) in them? Is the “free money” to be brought only by “newbies” and gathered by “much smarter than thou” portfolio managers? See, for example, The Secret Life of a Portfolio Manager, July 2012.

Moreover, it is not clear that there is even a cause for complaint. For example, year-to-date, the S&P TSX Composite group of companies (of about three hundred essentially Canadian companies) is down 1% but the Dow is up 7%, the S&P 500 Companies are up 11%, and the NASDAQ 100 is up a staggering 19%, all exclusive of dividends.

And, absent braggadocio (truly), all of the (B) portfolios in these markets are in consistently positive territory between +4% and +11% this year, not including dividends, and we know exactly how that is done and can expect to do it indefinitely regardless of the “markets”. See, for example, our post What’s a girl to do? in June 2012 and for theory Stock Prices Are The New Pink and Capital Safety in the Market Lane, June 2012.

We have already discussed the theory and logic of the (B)(N) and Perpetual Bond decisions in our previous Letters (and hope that you will refer to them) but would like to take a look at the Dow portfolio as its evolved from our post on What’s a girl to do? in June 2012.

What's a girl to do - Buy everything

What’s a girl to do – Buy everything

The chart shows that we held sixteen Companies in early January valued at $1,005,000 and a Cash account of $715,000 from previous transactions so that our Total investment was $1,720,000. Buying all of the thirty Dow Companies on the same basis in blocks of 1,000 shares cost $1,639,000 at that time and it is worth $1,740,000 today whereas our Portfolio, including Cash of $555,000, is now worth $1,800,000 and has given us a 5% return (plus dividends) in the last seven months. We also note that holding so much cash when we’re investing in the equity market is generally not a good idea and that we could actually have improved our returns to 8% (plus more dividends) by simply buying more of what we had in January or at any time subsequently.

In the intervening months, we have also made eleven buy decisions based on new apparent or plausible (N)- to (B)-transitions and eight “sell” decisions based on (B)- to (N)-transitions. “Selling” is a discipline and can involve either profit-taking and/or buying “protective puts” forward (and possibly selling opportunistic calls at the same time) in order to protect our current price and give us more time to make our decision. Please see our recent post, The Wall Street Put, August 2012, for more on this.

And that’s all there is to it. What’s to worry and what possible complaint should we have about the “markets”?

John Maynard Keynes, the economist and mathematician, was both wildly successful and, at times, wildly unsuccessful in stock market investing and provides us with these sobering thoughts about the “market” from more than seventy years ago:

“ All sorts of considerations enter into market valuation which are in no way relevant to the prospective yield.” – J. Maynard Keynes, The General Theory of Employment, Interest and Money, New York, 1936.

“It is interesting that the stability of the system and its sensitiveness to changes in the quantity of money should be so dependent on the existence of a variety of opinion about what is uncertain. Best of all that we should know the future. But if not, then, if we are to control the activity of the economic system by changing the quantity of money, it is important that opinions should differ.” – ibid. J. Maynard Keynes, 1936.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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