August 16, 2006 –
When it comes to investing, nothing kills good returns more than nationalism. And nationalism rules at large investment firms.
In mid-2006, as you can see from the chart below,the major U.S. stock market index, the S&P 500 stands exactly at the same level it stood seven and a half years ago at about 1,250. So over seven and a half years if your portfolio has tracked the S&P 500’s index as some 97% of U.S. professional money managers aim to do, you have about the same amount of money you had seven and a half years ago — only with the rapid devaluation of the dollar, your same amount of dollars buys much less today, so in all actuality, tracking the index has lost you money. That’s a whole lot of waiting for a whole lot of nothing.
And that’s the good news.
The bad news is, as of 2006, the U.S. stock market’s performance will likely become even worse for the rest of this decade.
Why?
America is a Debtor Nation that is Sinking Under the Weight of Its Debt
For starters, check out the poor credit quality of thousands of American companies, many of which like the American consumer, seem to be overleveraged in debt.
Standard & Poors, a highly respected financial services firm that ranks the credit ratings of corporations all over the world, released a report on May 24, 2006 that declared a “Downgrade Potential Across Credit Grades and Sectors.” Standard and Poors covers corporations based in Asia/Pacific, Canada, Europe, the Middle East, Africa, Latin America, and the U.S.
This report stated that 85% of the corporations at risk for a potential downgrade in their credit rating (a rating that judges the corporation’s ongoing financial viability) were based in the U.S. or Europe, with the majority (61%) based in the U.S.
A breakdown by sector looks even worse. 80% of the corporations at risk within the automotive industry for a credit downgrade, 88% within the consumer product industry, and 88% of the retail/restaurant industry were all BASED IN THE U.S.
And don’t think that these statistics are skewed because the U.S. constitutes the largest percentage of the global stock market capitalization. According to a February, 2006 Forbes Online report, 75% of all publicly traded companies are non- U.S. based corporations.
But back to my opening statement:
When it comes to investing, nothing kills good returns more than nationalism. And nationalism rules at large investment firms.
To illustrate this point, it’s not just the small cap stocks, but also the large cap stocks of foreign countries that don’t trade on the stock exchanges of other countries. The overwhelming majority of clients at large investment firms don’t hold some of the leading, most innovative, most well-managed and fastest growing companies simply because these stocks are not traded on their domestic stock markets. For example, Samsung, a Korean company that is a world leader in high-end electronic goods, and LVMH (Louis Vuitton Moet Hennessy) a French company that is a world leader in luxury brand goods including Pucci, Fendi, Tag Heuer, Sephora, Dom Perignon, Moet & Chandon, Givenchy, DKNY, and Hard Candy do not even trade on American stock exchanges. And it’s not just the American stock exchanges. These two companies don’t trade on a lot of Asian stock exchanges either.
To buy them, you either have to open up a foreign trading account or purchase them through market makers that have been known to mark the price of foreign stocks up by as much as 15%. This means on a round trip buy and sell of the stock, you’ve lost 30% already. While mark-ups this high are generally rare, it does happen. And most times, because brokers don’t do the research to discover what they’re trading at on the foreign exchanges, they pay these outrageous mark-ups without even realizing that they are doing so.
Sure, your financial consultant may have recommended that you start buying heavily into foreign markets, so you may say that I’m wrong. But think about when this happened. After there was major instability in your domestic markets or before?
Was it a pro-active or re-active decision?
If it was a reactive decision, it’s still better than no reaction, but still this means that there is no forward-thinking about these types of decisions at all. In addition, many times financial consultants at investment firms ignore outstanding companies merely because their firm does not provide analyst reports of this company for them to read. Or they will buy foreign mutual funds that own perhaps 10 great companies mixed among 90 other terrible ones.
Recently, with conflict in the Middle East between Israel and Lebanon, I read an article that stated that money was beginning to flow back into the U.S. dollar for investors seeking a safe haven for their money. Articles like this amaze me due to the complete lack of understanding journalists have about certain economic conditions. Just as they keep telling investors that the U.S. markets are the safest stock markets in the world, they’ll keep telling investors that the U.S. dollar is the safest currency to own — but that’s an entirely different article for another day. Until then, follow the MoneyMitesâ„¢ to make more money.
Thanks JKIM