The Fallacy of Fundamentals…And More!

As fundamental investors, it can be frustrating to see companies' stock prices not reflect their true condition. Seeing things like Citigroup trading at half its tangible book value or Oracle unchanged on the year despite posting record profits is frustrating. But for long term investors like us, moments such as these present great entry points. Who will remember the European debt crisis in 10 years? Citigroup won't. All they will remember is the fact that more and more of their profits come from emerging markets. Apple will sell iPads and iPhones and iWhatever no matter what economic conditions it faces. In markets where everything trades together, it is important to find companies that should be trading elsewhere. That is the art of long-term investing. Short-term investing is an entirely different field, since fundamentals matter far less, and it is a field into which we rarely venture. We invest into stocks for the long-term, unless we are in a stock that has produced a decent return in a short amount of time, for sometimes our theses play out faster than we expect.

The Reality of Unemployment

For 2 years, politicians and pundits have been speaking loudly, but rarely clearly, on the employment situation in America. Everyone bemoans the fact that our unemployment rate is over 9%. While this is no doubt a social tragedy, as well as a personal one for millions, the truth may very well be that this does not have as much of a meaning as it used to. Structural unemployment in the US is around 4-5% even in prosperous economic times, and although we have 4% or so less people employed than we should as a nation, the harsh reality is that this may be a "new normal." Many companies, such as Apple, UPS, Qualcomm, and Starbucks have all posted record profits while employment is stagnant. 46% of sales reported by S&P 500 companies came from overseas, and that number will only rise going forward. With many companies now dependent on international growth for continued overall profit growth, the US economy, and by extension unemployment, is becoming less and less relevant. People complain that US corporations are not  hiring enough workers. The harsh and unfortunate reality is that they simply do not need more employees. We sincerely hope that employment growth accelerates, something that can happen only when small businesses, the engines of job creation, are confident in their futures. Hopefully the President's speech tonight will help.

Combining Dividends & Growth for Profit

Our investment strategy has always been simple. Invest in the stocks we feel will generate the most alpha. That approach has led us to companies such as Apple, Netflix, Intuit, and Whole Foods. However, we recognize the importance of income as well. To that end, our portfolio is almost perfectly balanced between dividend paying stocks and non-dividend paying stocks. This occurred purely by chance, but we are thrilled it did, for it provides us with both some income as well as protection during weak markets. We choose dividend players that have both opportunity for rapid growth and dividend raises as well. Most people think of companies such as AT&T, Coke, or Johnson & Johnson when they think of dividend payers. Not us. We see Qualcomm, Costco, Starbucks, and most recently, Intuit. Companies like these are able to grow far rapidly than traditional "defensive dividend payers" and have plenty of opportunity to raise their payouts going forward. But, we soon realized that we wanted more income than this. We wanted a true monthly income stream from a group of stocks. This led us to the recently launched Global X SuperDividend ETF, an ETF that tracks 100 dividend paying stocks around the world and pays a monthly dividend at a yield of about 5%. We think it is a great way to boost our portfolio's yield while generating some upside in a slow and conservative manner.