July 2014 Client Letter

For most retired or soon-to-be-retired investors, significant portfolio losses are unacceptable. Since year-end 1999, the stock market has experienced two peak-to-trough declines of about 50%. During the dot-com bust, the S&P 500 lost 48% of its value, and during the credit crisis, the index cratered 56%.

How would you react if your life savings, the source of your livelihood in retirement, was cut in half? Would you be comfortable riding out the storm in hopes of making your money back in future years? Or would you cut your losses? These are not hypothetical scenarios. These were actual returns. And based on the potential bubble valuations in the stock market today, significant market declines could be seen again before the decade is out.

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April 2014 Client Letter

During most stock-market cycles, usually in the later stages of a bull market, investor behavior can take a speculative turn. Caution is thrown to the wind as consensus builds that the market has nowhere to go but up. Investments considered safe fall out of favor, carefully developed asset-allocation plans are abandoned, and risky investments become fashionable.

These periods can lead to emotionally charged investment decisions with the potential to wreak havoc on investment portfolios. Based on anecdotal evidence we now observe (some of which we shared with you in recent letters), there are signals that investor sentiment has entered this speculative phase. Many investors today seem to worry more about generating the highest possible return (irrespective of risk) and less about crafting a suitable investment portfolio based on desired investment objectives.

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March 2014 Client Letter

Is rampant speculation bubbling under the surface of today’s stock market? In February, Facebook announced its purchase of WhatsApp, a company with $20 million in sales that was nonexistent before 2009, for $19 billion in cash and stock. WhatsApp is a mobile messaging platform allowing users to send text messages without having to pay for SMS. If you own an iPhone, Apple’s iMessage program basically does the same thing. Seems like a large sum of money for a company whose product appears to be easily replicated.

Then in March, Facebook decided to buy virtual-reality firm Oculus for $2 billion. Oculus is a 20-month-old maker of virtual-reality goggles. Oculus doesn’t yet sell a product that is available to consumers. To date, the firm’s only revenue comes from a prototype sold to developers.

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February 2014 Client Letter

On the back of over $1 trillion of virtual money-printing by the Federal Reserve, 2013 was a barnburner of a year for most U.S. stocks. Leading the way in the S&P 500 index was the consumer discretionary sector, with a 43% gain. Portfolios not packed with companies including Netflix, Best Buy, GameStop, TripAdvisor, and Priceline.com (the top-performing discretionary stocks) probably did not keep pace with the broader market.

Consumer discretionary companies are ones we tend to avoid. The fact the sector had a stellar year does not change our view. Why? At Richard C. Young & Co., Ltd. we favor companies operating in high-barrier-to-entry businesses. We favor companies with durable competitive advantages and ones owning vast reserves of essential natural resources. We favor companies that have built solid brands over decades, giving them pricing power and the ability to withstand threats from competition. Above all, we favor dividend-paying stocks with a history of annual dividend increases.

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December 2013 Client Letter

Lehman Brothers was founded in 1850, became a member of the New York Stock Exchange in 1887 and in 1906 teamed with Goldman, Sachs & Co. to bring Sears, Roebuck and Company to market. Over the next 20 years, Lehman and Goldman paired up to underwrite F.W. Woolworth Company, R.H. Macy & Company, The Studebaker Corporation, B.F. Goodrich Co. and Endicott Johnson Corporation, among many others.

A little over five years ago, Lehman’s fortunes drastically changed. On Monday, September 15, 2008, the world watched in disbelief as Lehman employees removed files, company items and other belongings from its world headquarters on Seventh Avenue. Earlier that morning, the 158-year-old investment bank announced it would file for Chapter 11 bankruptcy.

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October 2013 Client Letter

Most investors now realize the powerful influence monetary policy has on U.S. financial markets. And the most important player in the conduct of monetary policy is the chairman of the Federal Reserve.

As we have witnessed, under the Bernanke Fed, an unprecedented amount of money has been electronically created for the purchase of bonds. As the Fed continues to buy bonds, interest rates are kept artificially low. Meanwhile, the extra cash created sloshes around the financial markets, and some is used to buy stocks, bonds, and real estate. In our view, the markets have not risen entirely due to increased economic activity and an improvement in efficiency but as a result of the additional cash in the system.

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September 2013 Client Letter

Today’s financial markets and most of society’s everyday operations are linked top to bottom by electricity. Electricity is a key component of the Internet, heating systems, medical equipment, transportation, and light. The list of items required day in and day out that rank ahead of electricity is rather short.

For years, we have favored utility companies. Investing in utility companies has a built-in layer of protection not found in most other businesses. By example, utilities are usually monopolies, and unlike almost every other business in America, when a utility makes a capital investment, it earns a guaranteed return on that investment set by local regulators (assuming proper operational execution).

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August 2013 Client Letter

It is our view that the U.S. economy is far from being on sound footing, with potential bubble conditions existing in the stock and bond markets. Considerable blame lies at the feet of the U.S. government and the Federal Reserve. As time passes, economic conditions as measured by GDP continue to look weak, and yet the government continues to borrow from abroad a big portion of what it spends. The debt burden on Americans increases as the Fed continues to debase the currency with its money-printing excess. In July, writing in The Wall Street Journal, Mort Zuckerman wrote that a jobless recovery is a phony recovery:

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May 2013 Client Letter

It’s not easy finding a company whose share price is down 55% on the year. And you most likely would not expect such a collapse to come from a boring utility company. But such is the case for Atlantic Power, a utility company that owns a diversified portfolio of power generation assets in Canada and the U.S.

Why did the shares of a supposed staid utility, a utility that began the year with a dividend yield of over 10%, no less, crater 55%? Has the Federal Reserve’s endless money printing campaign finally caused investors to go mad? Well, yes, but in the case of Atlantic Power, the stock did a face-plant for a more basic reason: the dividend was slashed. In late February, Atlantic Power announced a 66% reduction in its monthly dividend. Shareholders were crushed. It turns out that Atlantic was shelling out much more in dividends than it was generating in cash flow—an obviously unsustainable arrangement.

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April 2013 Client Letter

One of the simplest economics lessons I received came decades ago from my dad. He would tell me to look at copper to gauge the economy. When copper prices are rising, the economy is probably expanding. Falling prices could signal trouble ahead. Dr. Copper is what he called the metal because it has a PhD in economics.

Another economic indicator is the stock market. Generally speaking, one would expect a rising stock market to occur during favorable times. Today, with the market near all-time highs, it would be reasonable to assume we have an economy supporting the stock market’s rise.

To check in on the U.S. economy, we can take a look at Dr Copper. Certainly, a stock market nearing all-time highs will be confirmed by a decent trend in copper prices.

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