Friday, September 16, 2011

Glimmers of hope

"Not all that glitters is gold", say the Doom-and-Gloomers! Economics are not without reason called the 'Dismal Science'. That becomes abundantly clear when we hear the moaning and groaning from the dismal corner and compare it with facts. ATB's Daily Bulletin (subscribe to this less than dismal economic thermometer) showed the September retail sales. You may remember last month's Personal Consumption graph when the trend was less clear! Last month it could be argued that consumer spending was about to fall off the cliff just like it did in the 3rd quarter of 2008 before the Great You-Know-What. With the negativity of August's Debt Ceiling debacle, the Japanese Earthquake fall-out and the 'crashing' stock market one may have expected the U.S. consumer to hide under a rock. But that did not happen – the pessimists are wrong once again. Yes growth in U.S. retail and food sales slowed down but sales did NOT fall.

And another tidbit was hidden below an avalanche of negative headlines! U.S. consumer sentiment inched up from 55.7 to 57.8 based on the Thomson Reuters/University of Michigan's preliminary reading. You know what the headline was? "U.S. consumer sentiment edges up, but expectations lowest in 31 years" So much for a bit of encouragement!

Once again some progress was made in Europe with the Greek debt issue. It won't be resolved overnight and yes, politicians may not take the harsh and unpopular measures the bond vigilantes demand along with their dismal brothers. But the world is not only governed by numbers and stats; there is also a human element. I bet you wouldn't be so eager to reduce the Greek deficit if your father's state pension was cut down! Furthermore, severe cut backs in government spending also cuts jobs and lowers economic output. Remember the outcry a month ago about falling GDP and rising unemployment – that was due to government cut backs and everyone was in a panic! There is a balance between debt and cuts; governments have to walk a narrow line.

Media sell fear not reality! The headlines are full of negative extrapolations and bearish forecasters. Who wants to know that things work out and that you don't have to worry that much. That you can enjoy your weekend breakfast in peace rather than reading the fear mongering newspapers back to front in order to raise media advertising revenue! Why do fund and wealth managers speak so gloomily on BNN? Well that is easy! First of all they won't be quoted by said media if they are not scary! Second, they have to show how badly you, the investor sucker, need them, the super smart wealth managers! How else can they attract new clientele! As Don Campbell of REIN says: "Look behind the curtain!"

David Chilton, in the "The Wealthy Barber" has also a little nugget for you: "It's a mathematically certainty that investors who buy market-matching index funds will outperform the majority of investors who attempt to outperform market-matching index funds." Even if all wealth managers were as good as Charlie Munger, Warren Buffett and George Soros, the total result would be average market performance with some of these managers under performing and some that will outperform. But to guess who will outperform is near impossible to guess. Even worse, if you buy the ETF, you would pay less in commissions and compensation than if you engaged these fine managers and thus : "accepting the market averages (minus a bit for costs) makes you an above average investor."

Now, this is a bit of an oversimplification because the average retail investor underperforms the stock market indexes significantly. So there must be others that outperform. Statistical analysis has shown that over the long term, investing in low valued dividend paying stocks and reinvesting those dividends does outperform the market  (see earlier postings of Dreman and Siegel). After all, the market also includes a lot of 'garbage' stocks. But it requires a lot of discipline and restraining your emotions, something most investors just cannot handle.

The consumer data shows me that we are not in recession territory and that we will continue the economic recovery. So don't give in to the scaremongering – stick to your guns.

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