Issue 22
01/03/05
Market Outlook for 2005
Issue #22 - Market Outlook for 2005
1. 2004 in Review
2. Market Outlook for 2005
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Dear Friends,
Obviously being a young man, I have not experienced the full and
complete spectrum of investing situations. That said however, unlike
some of my colleagues who started out in the late 90's, I have had the
privilege of spending most of my formative investing years during the
post-1999 bubble days.
In a way, I've been blessed in that I've actually had to learn how to
do proper research, because from the start it's been obvious that
stocks will not constantly go up. Yes, it's nice to think that every
pick I make will be a homerun, but it's just not realistic.
As I've been reading through a large number of annual reviews, as well
as a fair number of predictive issues for this New Year, it amazes me
how few investment analysts are actually concerned about the coming
year.
Now don't get me wrong, I'm not going to sit here and predict a crash,
...a return to Dow 5000,
...or any other such nonsense, but I do think that thanks to 2
straight years of gains, most "analysts" have decided that their
glasses are a particularly nice shade of pink.
I would like to think that mine are not, rather I tend to see the
coming year as if I was looking through a privacy door and having
trouble making out exactly who's in the boss's office.
Either way, when I had finished writing this issue it came to over
3500 words and so in the spirit of saving your eyeballs and my sanity,
I have decided to split it up over 2 weeks.
This week you get a review of 2004, as seen through the eyes of the
Advisory Newsletter and a preview of the major US markets for 2005.
Next week, we'll cover currencies, commodities and bonds, along with
anything else that strikes our fancy.
So enjoy!
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2004 in Review
Less than 3 weeks after I launched the Investing With Mom Advisory
Newsletter service for paying subscribers, I also created what I
continue to refer to as the Investing With Mom Index, or IWMI for
short. However, while this index is an excellent tool for me to use
long-term to describe how I'm doing overall for my mom's portfolio, it
is not a very accurate description of what has actually occurred in
the Advisory itself.
With that in mind and with an eye to be as critical of the Advisory as
I possibly can be, I decided to also take a look back over the first 3
months of the Advisory and give you all a better understanding of our
results up through the end of the year.
Unless otherwise stated, anytime I say that the average return has
been X, all I am giving you is a simple arithmetic average for the
stocks in question. Lots of newsletter advisories like to play games
with their figures. I am not.
We need to know how we did to know how to improve.
However, calculating the results this way understates the actual
return investors would make by following the advice published in
Investing With Mom -- by a wide margin.
For example, the one stock with the highest return from the date my
mom and I originally purchased it, has had a -2% return for the
Advisory newsletter, and yet that's the return I will be using in this
recap.
Another factor that affects the returns I discuss below is the fact
that every Advisory subscriber had 24 hours to buy a recommendation
before my mom and I did. Which means that it is quite possible that
subscribers would have been able to get lower entry prices and thus
higher returns.
An example of this would be one of the 3 repeat recommendations. I
made the recommendation on October 21st and the high for the day for
this stock was $5.10 and yet the next day, when my mom and I were able
to make our purchase, we paid $5.54. This would have provided
subscribers a chance to boost their return by an additional 8.6% over
the 83% return my mom and I will get.
To further illustrate this point, if a subscriber had bought at the
market's open the morning of October 21st, they would have been able
to get the stock for just $4.64. 90 cents lower than where my mom and
I eventually purchased the next day, and thus an additional 19.4% over
the 83% return my mom and I will eventually get.
(A more detailed version of this will be made available to Advisory
subscribers within the next few days, when I publish the January
Issue.)
In our inaugural issue for the Advisory, I reviewed 6 stocks that were
already in the Investing With Mom portfolio and said that in my
opinion these were the best options for someone looking to start a
portfolio based upon the Advisory. Since that time, these 6 stocks
have increased an average of 14.5%, with one stock declining 5% and
another having no gains, except dividends, in the last 3 months.
In addition since that time, I have recommended 7 new stocks,
including one just in the last few days. Because these stocks have not
had much time to mature, all but 2 of them have returns of less than
6%, and yet that is also our average return - 6%, thanks to one stock
that has already given us a 23% return since October 21st. Again, I am
not including dividends in this assessment, in spite of the fact that
4 of these 7 stocks have already paid or will be paying us dividends
because of the timing of when we bought them.
Finally, at 3 separate points I have either re-recommended stocks that
were in our portfolio prior to the launch of the Advisory service, or
re-recommended stocks that I had previously mentioned in the Advisory.
These 7 stocks included 3 that were a part of our inaugural issue for
the Advisory. Of those 3 stocks, 2 have outperformed their initial
recommendation and 1 has not, for an average return of 39.3%. When you
add the other 4 stocks to the mix the average return for these 7
stocks drops significantly, but is still a respectable 20.4%.
All told in the first 3 months of the Advisory, there have been 20
recommendations, 3 of which were repeats. When you look at the 17
"original" recommendations, you find an average return of 9.1%, with 3
stocks sporting a negative return and another 9 stocks sporting a
return of 8% or lower. However, when including the 3 repeat
recommendations, the average return jumps 4.5%, to 13.6%.
Either way you slice it, the returns have definitely outperformed the
general markets over the last 3 months. In fact, you could have stayed
out of the markets all year, bought only after I launched the Advisory
service and only buying the stocks recommended in the Advisory service
and still had the same or better returns than the S & P 500, Nasdaq or
Dow Jones Industrial Average.
However, since I am trying to compare apples to apples, here is how
each of the three benchmark U.S. indices have performed since the
October launch of the Investing With Mom Advisory Newsletter:
S & P 500 - 6.8% (9.4% for full 2004)
Nasdaq --- 11.4% (8.4% for full 2004)
Dow Jones - 5.5% (3.6% for full 2004)
At 13.6%, we have still outperformed them all and this period has
included the entire post-election bull run.
Looking forward into 2005, if we can match the 13.6% return before
including dividends, then we will be in excellent shape. I have always
stated that my goal is to achieve returns in excess of 25% annually,
but being perfectly honest and realistic, I have to admit that
anything above average, if maintained over a long enough period of
time will place us at the top of the investment heap.
In other words, to be truly successful through investing in the stock
markets "all" that is necessary is to beat the markets by a percent,
or 2 or 3, for at least 10 years, preferrably longer. After just 10
years a 2 percent annual difference in return on investment will
result in at least a 20% greater final tally, after 20 years, the
difference grows to nearly 45%.
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Market Outlook for 2005
After 2 straight years of good returns in the U.S. markets, everyone
is looking to see whether the Dow, Nasdaq and S & P can continue the
run, or if we'll return to our long term bear market.
Currently the most bullish prediction I've seen, says that the Dow
will hit 14,000 and the Nasdaq will return to 3100 by the end of 2006.
However even this prognosticator admitted in the very next paragraph
that, "It may take a year to get there, but what's not to like? Well,
what's not to like in the short term is too many people getting
bullish."
With that in mind, I couldn't agree with him more, too many people
getting bullish too early in 2005 will be what makes it especially
difficult for the markets to repeat for one more up year.
Personally, while I do believe the U.S. markets will be able to
pull off a third straight winning year,
...they will be fortunate to outperform the Dow's 2004 performance of
just 3.6%, plus dividends.
The 16 years of the late '60s and all of the '70s were the last long
bear market in the U.S., and yet more years were up years than down
years, and the 9 up years averaged a 13% return.
And yet, by the end of the bear market stocks had still lost 10%,
before taking into effect the massive inflation of the late '70s. No
wonder equities were declared dead in 1982 by BusinessWeek magazine
and gold soared to over $800/oz.
By 2015, we will probably have experienced a similar situation, in
spite of any of a long laundry list of differences, and yet some years
you'll be able to make money, no matter what you do.
Just not in 2005.
This year, you'd better be prepared to generate high dividends,
returns on currencies and returns due to continued inflation in
commodities.
IF you sit back instead and buy an index fund, you might make some
money, but you'll be sorely disappointed.
The best markets in 2005, will be emerging international markets. Of
the 6 stocks currently in the Advisory portfolio that are
international stocks, we have 5 different countries represented and I
expect to be adding another 2 or 3 countries over the coming months.
The hard part for me will be picking the best of these countries to
represent in the Advisory portfolio, because they all look pretty good
at this point, at least the ones I'm looking at.
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Conclusion
In addition to the remainder of the 2005 forecasts, I'll be sharing my
travel itinerary for the rest of the month in next week's issue, so if
you'd like to get together and pick my brain, let me know so that I'll
be able to adjust my calendar acordingly.
While I won't be going too many places, most parts of Texas, Oklahoma,
Louisiana, and Mississippi will be in my plans.
Well, that's all for now,
Investments good for my mom and you,
Andy Prior
