Below are two interesting articles from today’s WSJ. One discusses the fact that because stock prices in general are relatively expensive, but with bond yielding being so low, it is very possible that this type of range-bound market that we have seen this year could continue. The second article discuss bond yields, which have just gotten lower so far this year, meaning that returns moving forward are likely to be extremely low. For instance, junk bonds on average are yielding about 5.1%, which clearly provides very little margin of safety for defaults, or interest rate increases. The below table shows the impact on just a 1% increase in interest rates on various fixed income securities:
If you are invested in bonds and interest rates do go higher, it might take several years just to get back to even and over the long-term it is hard to imagine interest rates not moving higher. Clearly, several points up can be quite devastating to what many people view as conservative investments. I’d particularly draw your attention to your 401K or retirement assets, which many people don’t pay too much attention to at times. At T&T Capital Management, our goal is to have your money working for you as hard as you worked to accumulate it over the years.
In this type of market environment, one must be exceptionally careful in choosing investments and I firmly believe that our firm is extremely well-suited to thrive. First of all, by utilizing individual security selection and intensive research, we are able to find those companies that are trading at large discount to our estimates of intrinsic value. If you look at our portfolios’, most of our investments are in companies trading below book value and/or with single-digit earnings multiples. We use a concentrated investment strategy, where we are willing to endure a little more volatility with a focus on maximizing long-term risk-adjusted returns. Our primary concern is on avoiding permanent losses of capital. This has kept us out of these high-flying tech stocks’ which have dropped by 20-50% this year.
Secondly, our strategy is particularly well-suited for flat, slightly up, or down markets. Our utilization of strategies such as covered-calls and cash-secured puts allows us to generate income and reduce risk, without taking the interest rate risks that bond investors are taking. In an investment world, where most people are faced with the primary choices of investing in expensive stocks via funds, bonds and real estate, our customized approach gives us a competitive advantage that I believe will show over time. The U.S. economy is sluggishly growing like it has since the Great Recession, and until our government starts initiating more business-friendly policies to stimulate growth, things are likely to stay slow. 10-15% returns seem highly unlikely if you are just long stocks and seems impossible if you are long bonds, but I don’t believe that is an unrealistic expectation for our strategy and for how our portfolios’ are positioned. Time will tell. Lastly, we’ve been blessed with a tremendous amount of referrals of late and we can’t thank you enough. Referrals are the lifeblood of our company and I believe and hope that many of our clients’ get the same satisfaction that we do in helping friends and family create a better financial future. Thank you very much and if you have any questions or would like a free portfolio review, please feel free to call me directly at 805-886-8140!