At the risk of oversimplification, we believe the key to achieving success in the equity markets is to consistently maintain our broadly diversified portfolios of undervalued stocks in good times and bad. Happily, though most folks seem to remember the latter, there have undoubtedly been plenty more of the former.
We understand that keeping emotions under control and staying committed to one's long-term investment objectives is never easy. Unfortunately, as the media has been saturated with stories about the five-year anniversary of the collapse of Lehman Brothers, we know that many, many folks were scared out of stocks in the aftermath of that cataclysmic event.
Yours truly was writing Special Updates seemingly every day during that tumultuous period. Here was commentary offered on our missive of September 17, 2008: "Although we know that investors hate uncertainty, which we now have in spades, and it is likely that we have yet to see the bottom of this downturn as there is still substantial deleveraging and hedge-fund liquidation that must occur, and seeing a prominent money market fund 'break the buck' is not exactly reassuring, I can say that these are the times that have historically created the greatest investment opportunities...We must not lose sight of the fact that equities have historically returned 10% to 12% per annum, that economic slowdowns and recessions ultimately give way to recoveries and expansions and that the markets have survived wars, impeachments, assassinations, depressions, accounting scandals and terrorist attacks. As Al Frank would say, this too shall pass, though not without some more scary moments."
Al was very much correct! As the chart above illustrates, there were plenty of additional scary moments, before stocks finally bottomed on March 9, 2009. Happily, those who managed to stay the course through that incredibly volatile time span were rewarded with solid, though not spectacular, gains over the entire five-year period. Believe it or not, both the S&P 500 and the Russell 3000 index posted returns of better than 8.5% per annum over the five years from September 13, 2008 through September 13, 2013.
Clearly, we would have loved to have avoided the post-Lehman meltdown (and the carnage in the run-up to the bankruptcy filing), so that we could have put all of our cash back to work on March 9, 2009, but the history books have very few entries for successful market timers. Yes, there are those who have been credited with seeing the disaster coming and there are a few who supposedly called the bottom, but they are not the same individuals!
We'll leave market timing to others, as we are comfortable with our risk mitigation efforts that include buying undervalued stocks, generally of dividend payers, holding broadly diversified portfolios and maintaining a long-term investment time horizon. Of course, ours is not a 'Set and Forget' approach, as we constantly look to sell stocks that have become fairly-valued so that we can reinvest the proceeds into more undervalued names, starting the process anew.
For example, just in the last few days, we captured our outsized winnings on giant defense contractor Lockheed-Martin (LMT), while freeing up cash for new opportunities, such as
Turning our attention to Apple, shares of the consumer electronics giant remain far below the $700 level that was pierced last September. The stock traded down earlier this week, indicative of investor concern that the entry-level iPhone 5C had a poor number of presales over the weekend, as the company broke tradition and did not release presale numbers on Monday. Happily, both of the new iPhone models are receiving generally upbeat reviews amongst the critics ahead of Friday's actual release date.
Sporting a colored polycarbonate shell, similar internals to the previous generation of iPhones and a new operating system, we believe that the iPhone 5C will be a tremendous seller in markets without carrier subsidies. And though we have some concern that pinched supplies of the premium iPhone 5S might slow early sales of the device, we believe that the new camera, Touch ID biometric technology, improved high-speed LTE cellular connection and much-improved iOS 7 operating system will make the phone tremendously popular with consumers around the world. We also believe that the firm's launch of iTunes Radio should be a value-add, and we are pleased that the tech giant was able to come to an agreement with major Japanese mobile provider NTT DoCoMo to finally offer its millions of customers the latest iPhone models. Additionally, there seems to be meaningful positive momentum in securing an agreement with
Although Apple is constantly battling margin compression, we believe that the introduction of entry-level devices like the iPad Mini and iPhone 5C, in addition to the continued roll out of refreshed lines of premium devices, will bolster the bottom line. AAPL is very much a value investment, given that it has a low P/E ratio (less than 12 times earnings), a superb balance sheet, a big share buyback program and a generous 2.6% yield. Our long-term price objective for Apple is $706.
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Opinions expressed are those of John Buckingham, chief investment officer of Al Frank Asset Management, Inc. (AFAM). a division of AFAM Capital, Inc., and are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results or investment advice.
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