Shesa's JANUARY 2014 INVESTMENT BLOG

2 January 2014

JANUARY 2014 Investment Blog

Shesa Nayak

Market Commentary

Before I kick-off my blog for this year, let me wish all the readers and my invest group members a “VERY HAPPY and SUCCESSFUL NEW YEAR 2014”. I hope and wish all of you to be a successful investor.

2013, what an amazing year it was for the US stock market! The year happened to be one of the best Years in US stock market history. The DOW Jones Industrial Average closed the year at a record-high 16,576.66, up 26% for the year, its largest annual gain in 18 years. The S&P 500 closed the year at a record-high 1,848.36, the index gained 30%, its best annual growth in 16 years. The only exception was NASDAQ that did not close at a record high; it still finished the year with a whopping 33% gain at 4,176.59. This represents a whopping 33% gain in 2013. Reminding you, NASDAQ is yet to exceed its high of 4572 points in that it reached in Jan 2000. But do not be surprised if it surpasses its record in next few months. If you were not invested then you might have missed the boat. But always there is a beginning and nothing is too late to start. This is how it looks for 2 years comparison of major US Stock Indexes between 2012 and 2013.

Today was first trading day of the year. All the indexes got hammered. The Dow dropped 135.31 points on its first day to 16,441.35, S&P sank 16.39 points to 1831.98 and Nasdaq lost 33.5 points to 4103.07. This was the first time since 2008 that stocks opened with a drop.

I would like to kick-off the year with some investment strategies that an investor should keep in mind to become a better investor. Many of these are based on my personal investing experience for over 20 years and learning from media, research and other sources.

What can we expect in 2014?

As I always say, I am not a fortuneteller and cannot predict the future. I will be a fool if I say that. But I can provide my thought on what I feel to be a better strategy for 2014. I am not predicting any particular stock rather a general thought, based on assessment of current micro and macro economic environment. Stock market always takes its own course of action and we should be prepared for the best and the worst. So let’s jump in straight..

·    International market particularly Asian market could bounce back in 2014. So it may be worthier allocating some fund in the emerging market. Mutual funds or ETF could be a better way to get invested in those markets

·  US market would continue to do well but not as good as 2013. It could be more bumpy/fluctuating than 2013. The equity appreciation would be more a case-case basis, hence stock selection could be of immense significance

·    Commodity prices, especially Gold and Silver could see some bounce back once inflation starts taking up in the later part of 2014. Today, we already saw a bounce on the commodity prices

·      Fed may not raise interest rate till later part of 2014 or may be till 2015. But as you know, the stock market factors in 6-8 months ahead of time

·     Real Estate market may become stable, interest rate could go up to 4.5-5% for 30 years fix. can expect 2-5% home price appreciation around the San Francisco Bay Area

·      Unemployment rate may come down to about 6% from current 7% level

·      NASDAQ could outperform DOW and S&P 500

           

A Look back to Market History

Since 1945, S&P 500 gained more than 20%, 23 times (including 2013) based on the historical data compiled by S&P Capital IQ. In the following year, the S&P 500 recorded an average increase of 10 percent, versus an average price gain of 8.7% for all years since World War II. But it can also be noted that, 2014 happens to be mid-term election year where S&P 500 has gone through 12 bear markets during this period and 7 of them falling in a mid-term election year (1962, 1966, 1970, 1974, 1982, 1990, 2002). If history is any example, we can be sure that 2014 may not be a smooth ride like 2013 but we can still expect reasonably a good year. Let’s have a glance at past performance of S&P where it gained more than 20%.

Note: In 2013 S&P 500 jumped 30%. The previous high was 31% in 1997.

·       Why invest our money?

Before I start discussing about the investment strategy let’s first discuss whether we should invest our money or just deposit it in a savings or checking account, not lose our hard earned money and be safe? Let’s do a little more analysis on that. We all do a job or strive to get a better job in order to accomplish a better living standard and hopefully peaceful living for our kids and us. The end result of earning and saving money is to have a better life, now and in future. There is a saying “how much you earn is important but how much you save is vital”. Thus, if we are putting our paycheck in the bank, is that enough? If your answer is “YES”, then I am sorry that this blog may not be helpful for you. Otherwise keep reading. I have often heard from friends who tell me that investing is like playing in LAS VEGAS Casino. It’s like gambling! Why is that? Their argument, it’s extremely risky.. Agreed, life is not without risk. When we walk, drive a car, fly on a plane or even play some games, there are risks associated for being injured or fatal. So also, investment may have some risk.

Let’s analyze a situation. Let’s say we have $10000 and we get 0.50% (approx. current interest rate) per annum on a savings account. So after the end of the one-year we get $10,050. In other words, we get $50 for keeping $10000 for 1 year in the bank. So after 10 years we get $10,511. Currently, we do have inflation of about 2-3% in USA. So if we factor in the 3% average inflation to our return than $10000 will be worth $7440 after 10 years (inflation adjusted). As a matter of fact, we are losing about $3600 and earning interest of $511. So effectively we are still losing $2049 (10,000 – 7440 + 511 earned interest). In other words, our $10000 in Savings account will have ultimate value of $7951 after end of 10 years. If you look at the above example then we can determine whether our money is really safe in the savings a/c or are we losing money! Now let’s say you invest the same $10000 in S&P 500, which has given an average return of 8.7 percent for all years since World War II. So you get a ROI (Return On Investment) of $23,030 after then end of 10 years. So we have to decide whether we want $7,951 or $17,408, after 3% inflation adjusted. Humm!! Did we ever think about this??

What Investment Strategy should we follow?

If the above statistics caught your eye then let’s spend some time talking about Investment strategy. There could be numerous strategies that can be suggested but I am outlining a few, which I believe worth considering.

·      Not to Lose money

 In investing we should always remember the key principle of the greatest investor of our time “Warren Buffet”. As an investor, one should not lose money from investment. You may not able to get huge return but at least you should not lose your hard earned money! Now, what the 2^nd principle? Not to forget the 1^st principle!! So let’s make our best effort in this New Year to remember this key principle of investing and try not losing money.

·       Who is a successful investor?

A successful investor allocates certain percentage of their net worth to equities based on an analysis of their risk/return profile. Their idea of a successful investment is not one that expects to hit a jackpot but an investment that performs in line with their reasonable expectations during up and down turn. I believe that, being too conservative or too aggressive either way is not good. You can have a portfolio like 80-20 or 90-10 rule wherein 80% of returns can be anticipated from 20% of invested capital. It’s extremely hard to find such equity but not impossible. In this case, it’s reasonable to say that if such return is possible then why not put all 100% capital in such aggressive portfolio? But be aware that no investment is bullet proof and things may not turn as one anticipated. Some may win and some may lose hence it’s better not to lose your sleep and money that is irrecoverable. A reasonably consistent return over a long haul would ensure better return on investment.

·       Why an investor becomes Unsuccessful?

Very often, it has been observed that the unsuccessful investors put all their effort and far too much of their asset base into chasing those big returns. They hear from some journal/radio/friend that a stock returned 100% and they want it. Another stock made 300%. They want that, too! Many times, it goes on momentum rather than having any fundamental. The big fishes viz. financial institutions, Mutual funds, major stockholders, day traders etc. play a major role in such price escalation. But ultimately small investors like us are crushed and dejected! This is very unfortunate but true..

·       Diversify your Portfolio: This is one of the key component to investing. A mixed Approach Conservative + Aggressive depending on your age, available capital, risk tolerance etc.  In addition, one should always have certain %age of Cash for any market down turn or any unforeseen situation. One should also determine on the equity mix, such as, stocks viz. large cap, mid-cap, small cap, mutual funds, ETF, some percentage of Bonds and obviously reserved CASH. The Bond market has not been doing well in last several months as interest rate is rising. So Bond may not be the best place to be in at this point but still it is essential to have some position. But these days one should diversify the portfolio to Real estate. Whether you are in a foreign country or you are living in the San Francisco bay area.  If History is any guide then always the real estate price has gone up despite many hick ups and down turn. To make it simple, a good real estate investment could earn several years of savings for an individual. Those homes in the SF Bay Are which were beaten down almost 60% during 2009 home market collapse in Silicon Valley and its adjacent area have almost reached to its previous high. The rents are going up each year. Hence it’s a good idea to allocate some part of your portfolio in in real estate. Someday, I will devote a complete write-up on Real Estate investing. Please note that diversification is of immense significance but over-diversification could be dangerous. Because you earn money on some but lose more money on other laggards. Some conservative blue chip dividend paying equities are very important. Even if they fall down, one can hold them longer term and keep getting some dividends. So please be judicious on how much to diversify.

A small portion of portfolio could be allocated to commodities as hedging strategy in case the stock market goes south and inflation shots up. Please note that the commodity prices viz. Gold, Silver, Copper etc. are almost at 3 years low. It could go down further. But I believe it may be worthwhile to take some calculated risk and allocate some portion of your portfolio. I would continue to write few more strategies in my next blog... Please stay tuned!

At this point let me go over this month’s recommendation. As I stated earlier, the emerging market(s) are expected to perform better this year. But of course there is no guarantee. It’s better that an investor is equipped ahead of time to take advantage, if the market recovers.

·       EDC (Direxion Daily Emrg Mkts Bull 3X Shares):

This is an Exchange Traded Fund (ETF) and highly volatile. I wrote on this earlier but wanted to re-iterate. So I wanted to make my self very clear that this is an aggressive fund and fluctuates big time on daily basis. So one has to take a position only when comfortable in handling the fluctuations and risk. Otherwise one should stay away from such aggressive investment. Coincidently, there could also be big reward for the patience investors. Usually this ETF creates long positions by investing at least 80% of its assets in the securities that comprise the MSCI Emerging Markets Index. It’s well diversified but little heavy on Financials and Technology sector. On Thursday, it was hammered 11.3%. I do not see any specific reason to this correction. And I feel that this may be a good time to take some position. One should view this ETF in trading perspective rather than long-term investment. So buy certain %age now and if it further falls further than do a dollar cost average. One should wait with patience for a few days/weeks/months. It would bounce back as soon as there is some recovery in the emerging market sooner or later. As soon as it goes up 10-20%, take some profit and may keep some for further run. But one should not get too much invested, preferably 2-3% of portfolio value on individual comfort level. One should always use Limit orders to buy and sell such high volatile ETF and put a STOP limit to minimize downside risk. Currently, it’s trading at $25.45.

AAPL (AAPL) update:

I feel that Apple (AAPL) should have a reasonably good 2014. There is a deal with China Mobile who will start selling iPhone 5S and 5C starting 17^th Jan. Moreover, I am expecting that they would come up with next iPhone with around 5-inch screen later this year. In addition, there is a possibility of new wearing technology, iTV and bigger size iPad. My expectation is that they should come out with good Q4 earning. These are just my thought. But let’s wait and see how it goes..

Here is the Table of my Recommendations. These are purely my personal opinion.

Note: The dates can be read as April-13 meaning April 2013.

Folks, that’s all for today. It has been long enough! Thanks for your time in reading my blog. I will try writing some new recommendations and strategies in my next blog. Please note that, sometime I send the ALERT exclusively to my Google group. If you are interested, send me an email and I will add you there. Please feel free to send me your comments and suggestions to shesa.nayak@gmail.com

Disclaimer: This blog is meant to provide my own opinion rather than professional recommendation to buy/sell any stock, ETF, mutual fund or any other security. As an investor, it’s your hard earned money and you should decide what is best for you. The above are merely my own recommendation(s) and please contact a professional money manager to buy/sell any security. I do not earn any money by writing such article. I have position on whatever security I write on the blog and avoid recommending any security that I do not follow.

Note: You can read all my Blogs in the following location: www.shesanayak.blogspot.com