Spring 2015
Transcription
Spring 2015
Directions Spring 2015 For your journey to lasting wealth and security In In This This Issue: Issue: Welcome Welcome Darren Darren Timothy Timothy Munn Munn First First Quarter Quarter Market Market Commentary Commentary What What AOL AOL Taught Taught Us Us about about Investing Investing Welcome Welcome Drew Drew Steinman Steinman Maurice Maurice Clarett Clarett Shares Shares His His Story Story of of Life Life Change Change Welcome Darren Timothy Munn Munn Wealth Management is a highly credentialed team of professionals whose mission is to see our clients achieve Security through the stewardship of their assets, by providing advice with Wisdom and Integrity. A diverse mix of investments-- individual stocks, individual bonds, mutual funds, Exchange Traded Funds (ETF), and hedging vehicles-compose the “tool box” we utilize to manage each account. We align our interests with those of our clients through our fee-only compensation structure. We do not receive commissions from any investment company or product, thereby eliminating many of the conflicts of interest inherent in the industry. Munn Wealth Team Darren Munn, CFA, CIO/Chairman Carol Kowalski, Administrative Assistant Cindy Westlake, Receptionist David Munn, CFP, Financial Planner Drew Steinman, CPA, Research Analyst Grant Sims, Service Advisor Jennifer Rogers, Chief Compliance Officer Karen LeCompte, CFP, Financial Planner Phil Ruyle, JD, Senior Advisor Sarah Berndt, Senior Portfolio Manager The MWM team is excited to welcome Darren Timothy Munn. He was born to Darren and Erin on March 18th, measuring 7lb 5oz and 20” long. Our Team Camelot Portfolios Team Ryan Zeeb, Chief Executive Officer Eric Kartman, Research Analyst Laura Noble, JD, Wealth Consultant Matthew Moses, CAP Executive Vice President Rebecca Perez, CB, Executive Assistant Tammy Strause, Director of Account Services Advisory Board Dan Rogers, Cherry Street Mission Ed Reiter, Retired Albert J. Caperna, CMC Group Jim Lange, Truth@Work Jay D. Malcolm, Expand Interactive Keith Burwell, Toledo Community Foundation Russell R. Miller, Rohrbachers Cron Tom Beutler, Mosley, Pfundt & Glick Ken & Jean Lovejoy, Retired Hon. Richard Knepper, Retired Past performance does not guarantee future results. As with any investment strategy, there is potential for profit as well as the possibility of loss. All investments involve risk and investment recommendations will not always be profitable. This document does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the user. All investments involve risk, including foreign currency exchange rates, political risks, market risk, different methods of accounting and financial reporting, and foreign taxes. Your use of these materials is your acknowledgement that you have read and understood the full disclaimer as stated above. 1323AGV 2 growth were too high, interest rates would stay relatively low for longer than many expect, and greater opportunities existed outside the S&P 500, the first quarter played very well into our thesis. Most of our strategies turned in very strong performance – nearly across the board. In general, the ones that lagged last quarter produced the strongest returns to start the year as small caps and international stocks looked much better relative to the S&P 500 – as we suggested was likely to happen at some point. First Quarter Market Commentary By Darren Munn, CFA Boring! If there is one word that sums up the first quarter in the financial markets, that is it. After a bit of excitement in the previous quarter, 2015’s kickoff was rather tame and, in many ways, the inverse of last quarter. The S&P 500 ended slightly higher and barely moved more than 2% from where it started the year. Economic numbers were equally as boring, likely extending the time before the Federal Reserve starts to raise short-term interest rates. Positives • The unemployment rate continued its slow grind lower – dropping to 5.5% after starting the year at 5.6%. • Low oil prices continued to keep gasoline prices fairly attractive. While sub-$2 gas is not likely anytime soon, we think sub-$3 is likely here for most of the year. • Lower interest rates created another great opportunity to save money as mortgage rates were still very attractive. Oil still dominated the headlines with its wild swings – often times 5-10% per week. But, it ended the quarter slightly higher after bottoming out early in the year, leading us to believe it has stabilized and will continue to trend slightly higher from here. Challenges • The drop in oil prices (and other commodities) created numerous painful ripples – energy-related jobs were highly affected, although we expect it will only take another year or so to work off the energy glut. • Housing – growth in the market for new homes was still very sluggish. • Valuations – As corporate profits are expected to have dropped in the first quarter and equity prices continued to move higher, stock prices are still at the upper end of the “normal” range, which means we expect lower returns from stocks in future years. As interest rates dropped further, bond prices now look very expensive & risky in many cases, making it much more difficult to get decent yields with low-volatility investments. • Dollar strength relative to other currencies was a head-wind for exports. The Dollar continued to rally – up around 10% for the quarter and nearly 50% over the last year compared to the Euro. Anyone up for a European vacation? As the quarter wound down, an old familiar story started to rise again as Greece is once again on the brink of default. While things have been relatively quiet out of Russia, we don’t believe it will stay that way. Nor do we believe the “boring” market movement will be with us long. Volatility is inevitable. Stocks – While the S&P 500 registered another positive quarter, it was up just under 1% and trailed most of the other major domestic and international market indexes, as we expected would happen at some point. Bonds – Interest rates continued to slide lower to start the year, leading to nice gains in most parts of the bond markets, including those that were roiled by oil last quarter. The 10-year treasury ended the quarter around 1.9% after briefly dipping below 1.7% in January. Opportunities & Risks • The drop & stabilization in oil prices has led to strong opportunities for gains in much of the energy & materials sectors. • Lower energy prices will help lower expenses As we have believed the expectations for US economic continued on page 4 3 continued from page 3 What AOL Taught Us about Investing for consumers and businesses, leading to greater discretionary spending and higher profits, respectively. • Low interest rates will likely reignite moderate growth in housing markets. • Russia, ISIS, North Korea, Iran – enough said. • Volatility – this is (and always will be) a short-term risk, but long-term opportunity. Expect volatility as it is a normal part of investing – the last few years have been abnormally calm. As always, we will seek to embrace and capitalize on it for your benefit. By Drew Steinman, CPA During the 1990s a company called America Online (AOL) emerged as a leader in the internet revolution. AOL was most notably known as a provider of dial-up internet service starting in the early 1990s. In 1996, AOL made the decision to switch from an hourly pricing structure to offering unlimited usage for a flat monthly fee. This change led to an explosion of new users. In a few short years AOL had over 10 million users and they could not keep up with demand. AOL’s servers were maxed out and customers complained they were not able to stay online. Welcome Drew Steinman Despite their issues, AOL was able to dominate the market, at one point providing internet service to over 50% of Americans using the internet. One key to AOL’s stronghold was their development of AOL Instant Messenger (AIM). In a world before cell phone text messaging, AIM was a huge part of many Americans’ lives during the 90s as it allowed users to send instant messages to their friends. In the early years, users had to use AOL to have AIM and since AOL had over a 50% market share, those without AOL could not communicate with most of their network. We are excited to welcome Drew Steinman, CPA, as the newest member of our team. Drew began his career in public accounting and worked as an analyst in the health care industry before joining Munn Wealth Management in 2015 as an investment analyst and tax professional. After graduating from the Fisher College of Business at the Ohio State University with a BSBA in Finance and Accounting, he earned the Certified Public Accountant (CPA) certification. Drew has managed the Leveraged Value portfolio on Covestor.com since 2013 while writing articles on Covestor’s Smarter Investing blog. He is currently pursuing the Chartered Financial Analyst (CFA) designation. As value investors, we rarely invest in high flying technology stocks due to price. But aside from price there are two very important questions to ask before investing in a stock for the long term. 1. Does the advantage? Drew was a leader in CRU at Ohio State and now serves as a community group leader with his wife, Chelsea, at Findlay Evangelical Free Church. Drew enjoys playing many sports, especially basketball and golf. Drew also enjoys spending time with friends and family, playing strategy games, and learning about a wide a variety of industries. company have a competitive 2. Is their competitive advantage sustainable? In the case of AOL, the answer to the first question was a resounding yes. Customers were sticking with AOL in spite of poor service because moving to a competitor meant losing communication with their social network. But when we look at these two questions, it’s the second question that is harder to predict. For a short time AOL was able to sustain their competitive advantage, but eventually the game changed. Microsoft He can be reached at [email protected] continued on page 5 4 continued from page 4 Netflix model, I believe original content will set Netflix apart. Netflix has had great success with shows like House of Cards and Orange is the New Black which draw in more subscribers. began to program their instant message service, MSN Messenger, to allow its users to chat with AIM. This led to a back and forth battle where AOL would block chat between MSN Messenger and AIM and then Microsoft would make changes to restore this functionality. AOL eventually lost this battle and raised their white flag when they made AIM available to all internet users. Of course, it was just a few years later that the proliferation of social networking sites like Facebook, as well as texting-enabled cell phones would have also likely eliminated this competitive advantage. But of course we still need to determine if Netflix’s advantages are sustainable. It’s hard to imagine a competitor making video more convenient and accessible than a smartphone app that’s available 24/7, but what about content? Why doesn’t the competition create original content like Netflix? The answer is scale. It’s estimated that Netflix controls about 57% of the video streaming market while their largest competitor (Amazon video) controls about 3%. Netflix’s massive scale allows them to invest much more in creating quality content while Amazon video’s original content has been largely unsuccessful. AOL was not without other problems. At the height of the tech bubble, AOL merged with Time Warner in what is now considered one of the worst mergers of all time. This may have contributed to their unpreparedness for the major industry change that followed. AOL was the king of dial-up internet and when high speed internet emerged, AOL was left in the dust, unable to adapt quickly enough. The value of AOL’s stock rapidly went from over $200 billion to $20 billion and today a reinvented remnant is worth about $4 billion. As long-term value investors these are the kinds of questions we ask. We look at the competitive environment of the industry as a whole and beyond what numbers alone can tell us. It is with these principles that we aim to spot warning signs in companies like AOL and identify strengths in companies like Netflix. So how should we invest today to avoid these pitfalls? One key is to identify companies that have more than one competitive advantage. For example, Netflix, a current holding in many of our individual stock portfolios, has at least three competitive advantages: Maurice Clarett Shares His Story of Life Change 1. Accessibility - When comparing Netflix to a Redbox or Family Video, it’s just more accessible. I don’t need to drive out to the video store, find the movie, and then drive back to return it. I just utilize my computer or television and watch right away. Several members of our team had the opportunity to attend the Fellowship of Christian Athletes’ Hall of Champions Celebration at The Pinnacle on April 13th, with guest speaker, Maurice Clarett. Most college football fans will remember Clarett for his starring role when the Ohio State Buckeyes won the 2002 National Championship--and his subsequent downfall. After being dismissed from the university for compliance violations, he was arrested multiple times, convicted of armed robbery and imprisoned at the Toledo Correctional Institution, where his life began to change for the better. 2. Convenience - Netflix is much more convenient than television because I don’t have to plan my schedule around what time my favorite shows air on TV. I can watch them whenever I want and as many times as I like, without commercials. And while Digital Video Recorders (DVR) provide some of this same convenience, it is far more expensive. While in prison, Clarett became an avid reader, estimating he finished over 200 books. He shared that he was captivated by business and finance books, especially those by Warren Buffett (whom he had the 3. Original Content - As Amazon Prime Instant Video, Hulu and other competitors try to copy the 5 continued on page 6 1700 Woodlands Drive, Maumee, OH 43537 (419) 794-0536 www.munnwealth.com Address service requested opportunity to meet several years later) and Bill Gates. He enrolled in a distance-learning program, working towards earning a bachelor’s degree. Originally sentenced to serve 7 years, Clarett, who was described as a model inmate, was released after 3 ½. Though he had been in involved in church and religious activities his whole life, participated in Kairos, a Christian prison ministry while incarcerated, and read large sections of the Bible, it wasn’t until several years after his release that Clarett said he began a personal relationship with Jesus Christ, through the influence of fellow football players. When attempts to revive his football career fizzled, Clarett decided to move on. He returned to Ohio and has since started multiple businesses, primarily public speaking and as a pallet supplier. In 2013, he was featured in Youngstown Boys, an ESPN documentary. Maurice Clarett’s story serves as a reminder that even the most hardened hearts can be changed. Now a soft-spoken, humble business man, he spends much of his time speaking to at-risk youth, both in and out of prisons, hopeful they can learn from his mistakes. Maurice Clarett and Munn Wealth’s Grant Sims 6