In This Issue…
…I have years of financially related experiences to offer my clients
In my college classes I try to prepare investors for a lifetime of shopping for investments.
One point I stress in every class is that when someone tells you this or that is safe, the first question that should come to mind is “Safe from what?”, because there is no investment without any risk at all.
Treasury bonds are a common item for discussion along these lines because repayment is guaranteed by the government. I am often asked, “How can you lose money on Treasury bonds? They are guaranteed!”
Yes, but guaranteed against what?
It is true that default is not a worry with Treasuries. They can roll the presses to pay you off with $100 bills if they need to. That part is the guarantee.
The two main risks not covered by the guarantee are market risk and inflation risk. Despite their best intentions, 85% of bond holders do not hold bonds to maturity and end up selling them in the open market at whatever the market price happens to be. That can be a long way from the maturity value.
When talking about bonds of all sorts, it is good to remember that interest rates earned and resale prices move in opposite directions – like opposite ends of a teeter-totter. As interest rates rise, resale values of bonds drop and these market rates can fluctuate wildly.
As an example, a 10-year Treasury bond paying 5% (not a current rate) in a 10% market will lose almost 1/3 of its market value, despite its guarantee of principal repayment in 10 years.
T-Bonds have little potential for gain in an environment where rates are very likely to rise. So ask yourself, what do you think interest rates might do over the next few years?
The recent credit crisis in Europe and the worldwide stock market correction that we just experienced drove the price of Treasuries up (interest rates down) to levels only seen in the financial panic of 2008.
What this means is Treasury prices are near all time highs, with the very real prospect of rising interest rates (falling prices) on the horizon. This could be double trouble for holders of long term bonds, Treasuries included.
Remember, the investment goal is to sell high, not buy high.
Some years back when my son Matt was in school, I noticed that many year-end awards given for academic or athletic achievement tended to be given to the same group of bright, talented kids year after year.
I found myself wondering what could be done to motivate the other 90% of students to dig a little deeper to develop strength of character. After all, good character will get you through life when a lot of other things fail.
The entrepreneur in me went to work and developed an award for the kids who are not high achievers in the traditional sense, but who have displayed an ability to overcome adversity and succeed.
It is called the American Youth Character Award, and Hepburn Capital has made the award at Prescott Mile High Middle School for 7 years, now.
Cash gets attention, especially at middle school ages, so I decided that the best way to immediately get our awards noticed would be to make them cash awards. Our 6th and 7th grade winners each get $100 along with their names on a perpetual plaque at the school, and you should hear the “oohs” and “aahs” from the kids when someone in the 8th grade is awarded $300 cash.
This year’s winners, nominated by their teachers and selected by the staff at the school, are:
6th grade – Grace Padilla,
Each is a leader and an inspiration to those around them. Congratulations, girls.
On the wall in the office lobby, we have a moving newspaper article on a past winner if you want to get more flavor than is presented here in the newsletter.
This has been a fun and rewarding program to sponsor, and we look forward to continuing it for many years. If you would like to start a similar award program at a school you have an interest in, just let me know and I’ll be happy to show you how it is done.
Carm Staker is a family friend who has worked tirelessly for Prescott and Prescott Valley for more than 30 years. One of her latest projects, as Board Chairman of the
The event will take place on Tuesday, June 15th from 9:00 a.m. to 2:00 p.m. at the Adult Center of Prescott, 1280B E Rosser Street, Prescott AZ 86301 · (928) 778-3000
Free services available at Senior Safety Day are:
Private paper shredding
VIN number window etching on vehicles
Safe disposal of your unwanted medications
Information on preventing ID theft, and avoiding the latest scams
– and much more!
As a client of mine you may know me as an investment manager, but I have years of related experiences to draw upon. Just let me know if there is anything else I can help you with. Membership has its privileges, you know. The only thing I ask in return is that if you have any friends that could use my services, please think of me. I’ll treat them just as I have treated you. That is the way I do business.
June 1, 2010
William T. Hepburn
A nationally recognized authority on investment management.
The Riddle of The Week
Q: When I am filled,
What am I?
A: A glove
What’s Going On In Your Portfolio?
Whew, I’m glad May is over. It was a rough month for just about all investors. The S&P 500** stock index dropped 8.25% in May and about 10.5% from its April 23rd highs.
Fortunately for HCM clients, our safety net system, which tells me when it’s time to sell, saved us a lot of money and kept losses in our Careful Growth* model to about half of what the stock market delivered.
Even our Flexible Income* model experienced a small loss in May, but is still showing gains for the year-to-date.
Each night, my safety net system calculates a new “stop loss” price, the point at which all previous research indicating this may be a good investment becomes invalid. When that price is hit, I need to just admit that the investment is not working, accept that fact and sell it.
I try to deal in facts, not hope or hype or predictions.
Since all large losses start out as small losses, it is critically important to successful investing to cut all losses short and never let them grow to large losses.
One of the most common mistakes made by both investors and advisers is to let their ego get involved in an investment. This creates resistance to selling when things just aren’t working.
It is tough to back away from something you earlier declared good enough to put your money into. “I know I’m right. The market just has to recognize my good research before long”, the ego-driven train of thought often goes. Oh, is that expensive thinking.
A good sell discipline is worth much more to an investor than the ability to pick investments.
One troubling aspect of the current market is the large outflows of money from mutual funds, which already held record low levels of cash with which to pay off shareholders. If cash gets too low, to meet redemptions, they are forced to sell stocks in large quantities which can create more downward pressure on prices.
The good news, if there was any last month, was that 10-15% of our stocks in the Careful Growth* model did not “stop out”. Stocks that hold up in weak markets, like we have seen recently, often become leaders in the next leg up.
We continue to hold some gold along with an inverse Treasury bond fund (one that will go up as Treasury bond prices fall, and vice-versa). All portfolios have 50-60% of their money out of harm’s way, in cash, as we wait to see what the market tells us to do.
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If you like what we are doing, please continue to tell your friends.
Our mailing address is:
Hepburn Capital Management, LLC
Our telephone: 928-778-4000
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Balanced Strategy Description and Performance Information
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, a Registered Investment Advisor. Advisor will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2010 William T. Hepburn. All rights reserved.