August 2014 Client Letter

Quality and dividends. If I had to describe our equity strategy in as few words as possible, that would probably do it. This is good news for most clients who are retired or soon to be retired. The strategy is easy to understand and provides a degree of comfort in today’s uncertain global economy.  There is nothing more overwhelming than having one’s nest egg tied to an investment strategy that requires a long, confusing explanation, and nothing more underwhelming than a strategy that’s too generic, diversified across too many stock and country sectors.

Longtime favored stock Johnson & Johnson (JNJ) fits our quality and dividends requirements nicely. JNJ is generally thought of as a stodgy company. But there’s nothing boring about its stable of popular brands, including Band-Aid, Tylenol, and Splenda. Nor is there anything boring about its dividend payout dating back to 1944. For investors, the consistency of an annual dividend check is reassuring, especially during periods of market volatility.

Read More

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.

Read More

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.

Read More

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.

Read More

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.

Read More