Q4 2015 Market Commentary
Content
Q4 2015 Market Commentary
Recently my seventeen year old nephew, Benjamin, asked me about buying a stock. That innocent query
turned into an ongoing conversation, over many weeks, about financial planning, investing, and the
markets. As the conversation evolved I realized that a lot of the pointers I was giving him are actually
tenets of sound financial planning that are applicable to all investors of any age, amount of experience or
net worth.
Below is a kind of open letter to Benjamin of the points I have made to him about how to approach
investing for the rest of his life and I hope, in a period of time when the market has been a bit volatile,
that it helps us all remember the reasons we buy stocks in the first place.
Rome wasn’t built in a day.
Saving, compounding interest and, most importantly, time. These three components are the ingredients
for making your plan happen and achieving long term wealth. Without actively saving and investing in a
methodical manner it becomes very difficult to achieve financial wealth of significance. And time is
your best ally. The earlier you start the more compound interest potential you have, and the less overall
capital you will need to save. The longer you wait, the more you capital you will need, as you have less
time to earn interest (and interest on that interest earned). But the sooner you create the habit of saving
for your future, the better it will be. The sooner you accept that this will be a lifetime endeavor, the
easier it becomes to put a plan of action into motion.
Always have a plan.
Every journey begins with an end point and investing is no different. Investing without a goal is
investing simply to see if you can make money, just like gambling in a casino, with similar emotional
and behavioral results (leading many to make that comparison). By creating a financial plan that
includes end goals, time frames and a realistic idea of risk, you will be able to identify how much money
you will need to save, how long you will need to save for, and how to allocate your savings among many
investment choices and various opportunities.
This is strategic investing, with everything geared towards achieving the desires you now have in your
life and will have in the future. A well thought out and defined financial plan should be the cornerstone
of your investment experience. If you are running a little ahead or a little behind, resist the temptation to
move the goalposts by making changes to your investments, at least until you have revisited your plan
and retested your assumptions. Your goals and your savings must dictate the shape of your portfolio, not
the other way around.
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
There is no free lunch.
No market or individual investment goes up forever in a linear motion, something that is easy to forget
in a bull market. Risk and return are interrelated – they always come together – so never underestimate
the stress of a stock portfolio when the downturn arrives. And it will; this year has been a prime
example. We are experiencing an increase in volatility because the price of stocks got too far ahead of
what corporations are actually earning, and so now prices must adjust.
Investing in stocks is taking ownership of a company’s ability to grow. Without growth, or with slower
growth than the market may have anticipated, the demand for a company’s stock goes down in the near
term, and that is reflected in declining stock prices. Getting through such adjustments can be difficult –
but holding a well-diversified, appropriately balanced portfolio and having the discipline to stick to your
plan will make even the sharpest downturns manageable.
You can’t eat relative performance.
You are probably familiar with the idea of “herd mentality” as it relates to the market, and that you
should try to avoid it. But that becomes easier to say and harder to do when everyone is using the same,
rather inappropriate measuring stick.
The S&P 500 is the most widely recognized index of stocks, and as such it is often used as both the
bellwether for the market as a whole and as the benchmark against which money managers of all stripes
are measured for performance. Both uses are probably a little misguided, because it is a limited
collection of a rather specific type of stock, and no fund – not even funds that mirror the index – can be
a superior performer in every time frame because there are costs to running a fund (even when a
computer does the trading).
The index as a benchmark becomes even more misguided when an individual investor uses it against
their own portfolio – or worse, a single holding. For fund managers, at least, relative performance as the
goal makes some sense. They have no real time horizon and their risk tolerance never changes – there is
no purpose for the fund, outside of the fund.
If there is no defined purpose for your portfolio outside of the portfolio, however, then emotion will
become the primary driver of your decisions. Your goals, as expressed in your plan, must become the
measuring stick by which you judge your progress. Try to resist the urge to compare your returns with
some external benchmark or against one piece of the whole, otherwise you may up running from
shadows along with the herd.
Be realistic about your tolerance for loss.
A good financial plan requires you to know what amount of savings is needed to achieve your goals over
a given period of time. The amount will be determined not only by the end goal, but also the assumed
long-term rate of return you expect to make on those savings. According to Ibbotson, the average (mean)
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
return of large company stocks, since 1926, has been 10.1%. That level of return is outstanding as it
means that you can save less and still achieve your goal. But remember, there is no free lunch.
The flip side of return is risk. Ibbotson also reports that, since 1928, the standard deviation of large
company stocks has been 20.1%. What does that mean? Standard deviation measures the spread of
prices around the average - the more widely distributed the spread, the higher the number. A standard
deviation of 20.1% means that, in any given year there is a 99.7% probability that the return on large
company stocks will be anywhere between 70.3% (3 deviations above the mean) and negative 50.2% (3
deviations below the mean).
How do you feel about that? Maybe ok
when we talk about $100 dropping to $50.
But how would you feel if $10,000
dropped to $5,000 or $1,000,000 dropped
to $500,000? Drops like that are rare (very
low frequency) but they do happen and
they are difficult to get ahead of fully. So
examining in advance, and revisiting often,
the level of loss that you can reasonably
tolerate is critical. It allows you to apply
realistic return assumptions, based on the
allocation of stocks and bonds that match
your tolerance, and determine the optimal
amount of savings required to meet your
goals. In the middle of a downturn,
everyone’s tolerance for risk drops to zero. Having a plan based on realistic expectations, before the
downturn, will prevent you from abandoning that plan when your fear of loss is at its peak.
It is not different this time.
And you may find that your tolerance for risk might expand when your biggest fear is being left behind,
if the market is doing extremely well and investors are piling in to participate in the upward swing. You
might even find yourself beginning to justify the additional risks you are taking because of the return
that is being made. And you might say to yourself “it’s ok to take those risks because this time, it’s
different.” It’s at that moment that I want you to remember this letter. Because it is never different this
time.
When it feels like the market will just keep climbing, bounding over mediocre earnings and taking bad
news in stride, it is very likely that a price adjustment to push things back to average is on the way.
When it is selling off and it feels like it is going to go to zero because fear has gripped the hearts of
every investor, reversion to the mean is likely beginning to take shape. You must find it in you to think
like a contrarian. Buy when others are selling. Sell when others are buying. Don’t follow the herd
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
because the herd is saying “this time is different.” Have faith in the markets long term averages and
believe in its efficiencies, despite all its emotion.
Everyone’s a winner …
There will be many times in your life when someone, at a party or informal dinner, will regale you with
a story about the great stock they just bought and are making a killing on. Listen to what they have to
say, because being informed includes listening to opinions. However, don’t get sucked into their
excitement and rush out to jump on the bandwagon. Investors think things through and ask whether a
purchase fits into the allocation that is driving their plan. Take two steps back and ask yourself “will this
investment help me achieve the goals I have set without increasing the risk I am taking to get there?”
The answer might be yes. It might be “not right now.” Often, however, the answer is no.
… because nobody talks about the losers.
We all have a bias towards things that have worked out for us. We like to “let our winners ride” and
ignore positions that aren’t doing as well. We don’t discuss losses, or bad choices, or even wellinformed decisions that simply haven’t lived up to our expectations. There is no investor that I know,
and I know quite a few, who has made money on every individual stock they bought. So realize that
every “home-run” you hear about was preceded (and likely will be followed) by innumerable strikes and
foul-balls.
Trading stocks is not investing.
Investors pay attention to what they are buying, because they generally buy with the intention of holding
for a long time. Find those assets that you feel can grow in value by dint of what that asset represents –
superior management, innovative products, a global reputation for excellent service. Investing is
throwing your hat in with a company (or set of companies, in the case of a fund) because you are willing
to risk your time and money to be a part of the future of that company. Investing, by its nature, is about
potential.
Trading is about timing. Traders are more concerned about the nature of the market itself – the
movement of stock prices and the catalysts behind those movements – than with the companies whose
stocks they buy and sell. Traders are short-term thinkers by necessity because the market acquires,
interprets and reacts to a constant stream of information at a frenetic pace. Few traders hold positions
for much longer than a calendar quarter or two – that is the default life-cycle of market news. This
quarter’s undeniable winner is forgotten by next quarter’s earnings call, when a new winner is found.
Trading is more exciting that investing. You get to see the results of your decision making in days,
instead of years. This is satisfying, even if when the results are disappointing, because it provides both
the thrill of anticipation and (relatively) instant gratification. Being an investor can feel boring, even
tedious, by comparison – but the short-term focus of trading encourages the kind of horse-race mentality
that can inflict irreparable damage on your ability to meet long-term goals.
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
Don’t be afraid to ask for help.
No one can know everything, no amount of due diligence can remove all uncertainty, and everyone
makes mistakes. And so it is important to remember that asking for advice is ok. Sharing information
and discussing points of view can help guide you in your decision making process. Being forced to
defend your position allows you to hone your philosophy and your various investment theses and at
times, if you are being honest with yourself, come to understand where you are wrong and help you
make the changes needed.
I have reached out to peers and professional acquaintances many times during my career, and I have
advised other advisors on several occasions. It is good to have advisors who specialize in areas that you
may be less familiar with, so that you can stay focused on the things that advance your success.
Be kind with your success
Monetary success is a wonderful thing. It helps you achieve the goals you set out for yourself and your
family and allows you to experience life in a manner that can bring you great joy. It is also a very
powerful tool to help you bring joy to others. Be it assisting family members, giving charitable
contributions while alive or posthumously, helping a friend in a tight spot or giving to a complete
stranger, money provides you an opportunity to make a material difference in someone else’s life, in the
same way that it has made one in yours. I encourage you to embrace that capability.
I am certain there will be more exchanges, and more bits of wisdom worth sharing. Until then, I would
love to hear of any insights you feel may have helped you make progress toward your goals. And, of
course, should you have any questions regarding your planning or your portfolio Julia and I are always
available to talk things through with you. We can be reached by email at [email protected] and
[email protected] or by phone at 800.220.2161.
Steven B Girard
President
The opinions expressed are those of Northstar Financial Companies, Inc. and are based on information believed to be from reliable
sources. However, the information’s accuracy and completeness cannot be guaranteed. Past performance is no guarantee of future results.
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
Recently my seventeen year old nephew, Benjamin, asked me about buying a stock. That innocent query
turned into an ongoing conversation, over many weeks, about financial planning, investing, and the
markets. As the conversation evolved I realized that a lot of the pointers I was giving him are actually
tenets of sound financial planning that are applicable to all investors of any age, amount of experience or
net worth.
Below is a kind of open letter to Benjamin of the points I have made to him about how to approach
investing for the rest of his life and I hope, in a period of time when the market has been a bit volatile,
that it helps us all remember the reasons we buy stocks in the first place.
Rome wasn’t built in a day.
Saving, compounding interest and, most importantly, time. These three components are the ingredients
for making your plan happen and achieving long term wealth. Without actively saving and investing in a
methodical manner it becomes very difficult to achieve financial wealth of significance. And time is
your best ally. The earlier you start the more compound interest potential you have, and the less overall
capital you will need to save. The longer you wait, the more you capital you will need, as you have less
time to earn interest (and interest on that interest earned). But the sooner you create the habit of saving
for your future, the better it will be. The sooner you accept that this will be a lifetime endeavor, the
easier it becomes to put a plan of action into motion.
Always have a plan.
Every journey begins with an end point and investing is no different. Investing without a goal is
investing simply to see if you can make money, just like gambling in a casino, with similar emotional
and behavioral results (leading many to make that comparison). By creating a financial plan that
includes end goals, time frames and a realistic idea of risk, you will be able to identify how much money
you will need to save, how long you will need to save for, and how to allocate your savings among many
investment choices and various opportunities.
This is strategic investing, with everything geared towards achieving the desires you now have in your
life and will have in the future. A well thought out and defined financial plan should be the cornerstone
of your investment experience. If you are running a little ahead or a little behind, resist the temptation to
move the goalposts by making changes to your investments, at least until you have revisited your plan
and retested your assumptions. Your goals and your savings must dictate the shape of your portfolio, not
the other way around.
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
There is no free lunch.
No market or individual investment goes up forever in a linear motion, something that is easy to forget
in a bull market. Risk and return are interrelated – they always come together – so never underestimate
the stress of a stock portfolio when the downturn arrives. And it will; this year has been a prime
example. We are experiencing an increase in volatility because the price of stocks got too far ahead of
what corporations are actually earning, and so now prices must adjust.
Investing in stocks is taking ownership of a company’s ability to grow. Without growth, or with slower
growth than the market may have anticipated, the demand for a company’s stock goes down in the near
term, and that is reflected in declining stock prices. Getting through such adjustments can be difficult –
but holding a well-diversified, appropriately balanced portfolio and having the discipline to stick to your
plan will make even the sharpest downturns manageable.
You can’t eat relative performance.
You are probably familiar with the idea of “herd mentality” as it relates to the market, and that you
should try to avoid it. But that becomes easier to say and harder to do when everyone is using the same,
rather inappropriate measuring stick.
The S&P 500 is the most widely recognized index of stocks, and as such it is often used as both the
bellwether for the market as a whole and as the benchmark against which money managers of all stripes
are measured for performance. Both uses are probably a little misguided, because it is a limited
collection of a rather specific type of stock, and no fund – not even funds that mirror the index – can be
a superior performer in every time frame because there are costs to running a fund (even when a
computer does the trading).
The index as a benchmark becomes even more misguided when an individual investor uses it against
their own portfolio – or worse, a single holding. For fund managers, at least, relative performance as the
goal makes some sense. They have no real time horizon and their risk tolerance never changes – there is
no purpose for the fund, outside of the fund.
If there is no defined purpose for your portfolio outside of the portfolio, however, then emotion will
become the primary driver of your decisions. Your goals, as expressed in your plan, must become the
measuring stick by which you judge your progress. Try to resist the urge to compare your returns with
some external benchmark or against one piece of the whole, otherwise you may up running from
shadows along with the herd.
Be realistic about your tolerance for loss.
A good financial plan requires you to know what amount of savings is needed to achieve your goals over
a given period of time. The amount will be determined not only by the end goal, but also the assumed
long-term rate of return you expect to make on those savings. According to Ibbotson, the average (mean)
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
return of large company stocks, since 1926, has been 10.1%. That level of return is outstanding as it
means that you can save less and still achieve your goal. But remember, there is no free lunch.
The flip side of return is risk. Ibbotson also reports that, since 1928, the standard deviation of large
company stocks has been 20.1%. What does that mean? Standard deviation measures the spread of
prices around the average - the more widely distributed the spread, the higher the number. A standard
deviation of 20.1% means that, in any given year there is a 99.7% probability that the return on large
company stocks will be anywhere between 70.3% (3 deviations above the mean) and negative 50.2% (3
deviations below the mean).
How do you feel about that? Maybe ok
when we talk about $100 dropping to $50.
But how would you feel if $10,000
dropped to $5,000 or $1,000,000 dropped
to $500,000? Drops like that are rare (very
low frequency) but they do happen and
they are difficult to get ahead of fully. So
examining in advance, and revisiting often,
the level of loss that you can reasonably
tolerate is critical. It allows you to apply
realistic return assumptions, based on the
allocation of stocks and bonds that match
your tolerance, and determine the optimal
amount of savings required to meet your
goals. In the middle of a downturn,
everyone’s tolerance for risk drops to zero. Having a plan based on realistic expectations, before the
downturn, will prevent you from abandoning that plan when your fear of loss is at its peak.
It is not different this time.
And you may find that your tolerance for risk might expand when your biggest fear is being left behind,
if the market is doing extremely well and investors are piling in to participate in the upward swing. You
might even find yourself beginning to justify the additional risks you are taking because of the return
that is being made. And you might say to yourself “it’s ok to take those risks because this time, it’s
different.” It’s at that moment that I want you to remember this letter. Because it is never different this
time.
When it feels like the market will just keep climbing, bounding over mediocre earnings and taking bad
news in stride, it is very likely that a price adjustment to push things back to average is on the way.
When it is selling off and it feels like it is going to go to zero because fear has gripped the hearts of
every investor, reversion to the mean is likely beginning to take shape. You must find it in you to think
like a contrarian. Buy when others are selling. Sell when others are buying. Don’t follow the herd
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
because the herd is saying “this time is different.” Have faith in the markets long term averages and
believe in its efficiencies, despite all its emotion.
Everyone’s a winner …
There will be many times in your life when someone, at a party or informal dinner, will regale you with
a story about the great stock they just bought and are making a killing on. Listen to what they have to
say, because being informed includes listening to opinions. However, don’t get sucked into their
excitement and rush out to jump on the bandwagon. Investors think things through and ask whether a
purchase fits into the allocation that is driving their plan. Take two steps back and ask yourself “will this
investment help me achieve the goals I have set without increasing the risk I am taking to get there?”
The answer might be yes. It might be “not right now.” Often, however, the answer is no.
… because nobody talks about the losers.
We all have a bias towards things that have worked out for us. We like to “let our winners ride” and
ignore positions that aren’t doing as well. We don’t discuss losses, or bad choices, or even wellinformed decisions that simply haven’t lived up to our expectations. There is no investor that I know,
and I know quite a few, who has made money on every individual stock they bought. So realize that
every “home-run” you hear about was preceded (and likely will be followed) by innumerable strikes and
foul-balls.
Trading stocks is not investing.
Investors pay attention to what they are buying, because they generally buy with the intention of holding
for a long time. Find those assets that you feel can grow in value by dint of what that asset represents –
superior management, innovative products, a global reputation for excellent service. Investing is
throwing your hat in with a company (or set of companies, in the case of a fund) because you are willing
to risk your time and money to be a part of the future of that company. Investing, by its nature, is about
potential.
Trading is about timing. Traders are more concerned about the nature of the market itself – the
movement of stock prices and the catalysts behind those movements – than with the companies whose
stocks they buy and sell. Traders are short-term thinkers by necessity because the market acquires,
interprets and reacts to a constant stream of information at a frenetic pace. Few traders hold positions
for much longer than a calendar quarter or two – that is the default life-cycle of market news. This
quarter’s undeniable winner is forgotten by next quarter’s earnings call, when a new winner is found.
Trading is more exciting that investing. You get to see the results of your decision making in days,
instead of years. This is satisfying, even if when the results are disappointing, because it provides both
the thrill of anticipation and (relatively) instant gratification. Being an investor can feel boring, even
tedious, by comparison – but the short-term focus of trading encourages the kind of horse-race mentality
that can inflict irreparable damage on your ability to meet long-term goals.
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
Don’t be afraid to ask for help.
No one can know everything, no amount of due diligence can remove all uncertainty, and everyone
makes mistakes. And so it is important to remember that asking for advice is ok. Sharing information
and discussing points of view can help guide you in your decision making process. Being forced to
defend your position allows you to hone your philosophy and your various investment theses and at
times, if you are being honest with yourself, come to understand where you are wrong and help you
make the changes needed.
I have reached out to peers and professional acquaintances many times during my career, and I have
advised other advisors on several occasions. It is good to have advisors who specialize in areas that you
may be less familiar with, so that you can stay focused on the things that advance your success.
Be kind with your success
Monetary success is a wonderful thing. It helps you achieve the goals you set out for yourself and your
family and allows you to experience life in a manner that can bring you great joy. It is also a very
powerful tool to help you bring joy to others. Be it assisting family members, giving charitable
contributions while alive or posthumously, helping a friend in a tight spot or giving to a complete
stranger, money provides you an opportunity to make a material difference in someone else’s life, in the
same way that it has made one in yours. I encourage you to embrace that capability.
I am certain there will be more exchanges, and more bits of wisdom worth sharing. Until then, I would
love to hear of any insights you feel may have helped you make progress toward your goals. And, of
course, should you have any questions regarding your planning or your portfolio Julia and I are always
available to talk things through with you. We can be reached by email at [email protected] and
[email protected] or by phone at 800.220.2161.
Steven B Girard
President
The opinions expressed are those of Northstar Financial Companies, Inc. and are based on information believed to be from reliable
sources. However, the information’s accuracy and completeness cannot be guaranteed. Past performance is no guarantee of future results.
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated
