• Bluemound Asset Management
    Bluemound Asset Management A Kirk Spano company

A Better Way…

Kirk SpanoAccording to Warren Buffett, the top 2 investing rules are…

Rule No. 1: Never lose money. 

Rule No. 2: Never forget rule No. 1.  

What we can take from those rules is that the most important aspect of financial planning is having an investment approach that protects you from large losses and still gives you an opportunity to make money over the long-term. Very few people actually have that.

My name is Kirk Spano and I founded Bluemound Asset Management, LLC in 2010 as a response to what I saw the financial industry doing to people. I am widely published, including regularly on MarketWatch.com of the Wall Street Journal network. I have also appeared on television and radio. Take some time to learn for yourself how I have helped people a lot like you. 

If it is time for you to better know that your lifestyle and legacy are secure, please contact me soon.

MarketWatch  Fox Business  WisBusiness.com  Seeking Alpha

Small Company Stock Investing

Q2 2012

Small Company Stock Investing

This quarter’s letter will be a little shorter as I have been writing quite a bit for MarketWatch of the Wall Street Journal network and Motley Fool.  As clients know, for several (not all) of our investment strategies, I prefer to carry a higher percentage of our asset allocation in small company stocks than what many other advisors do. This is so for one simple reason, in general, smaller companies have historically provided more growth than larger companies. 

There is a perception that investing in smaller companies is more risky than investing in larger companies.  While in the case of start-ups that applies, once a company has reached a certain critical mass, the risk difference mostly disappears.  I point out regularly that companies such as General Electric, Microsoft, Pfizer, AT&T, among other large well known companies have been trading 50% to 70% below their historical share price highs for years now. 

Since 1982, small company stocks have outperformed large company stocks by about 1% per year.  This is a smaller margin of difference than the prior sixty years when small company stocks outperformed larger company stocks by about 2% per year.  Further, over virtually every rolling ten year time frame, smaller company stocks have outperformed larger company stocks.  

As I pointed out above, over the past thirty years the difference between small and large company stock performance has contracted.  Why has this happened?  In my opinion, due to two words, globalization and politics.  During the past three decades, multinational companies have gained primacy among the corporate universe.  This happened as larger companies have often been better equiped to deal with global trade than small companies.  It also occured though because politicians helped unlevel the playing field in favor of the larger companies.  Why would they do this?  One need do more than follow the campaign contribution money. 

It is interesting that at a time when we are inundated by politicians with the fact that small companies are responsible for most hiring, that larger companies have been given more advantages via politics than small companies.  Right now, we are at a cross-roads.  Small companies are already at a disadvantage in the market place versus large companies from the standpoint of regulation.  Will that continue?  It is a coin flip from what I can tell.  While unpopular, the health care reform favors small companies over large companies.  We will see what happens with that.  If small companies continue to get the short end of the regulatory stick, then it might indeed be time to rethink asset allocation strategy.  

From a current investment standpoint, there does appear to be an opportunity for certain small company stocks to outperform.  With less small company competition surviving, those that do survive can make very large returns on their share prices.  The trick of course is finding the survivors.

Small companies that make it past the non-profitable, in danger of failing stage, are those companies which we can look to for winning stocks.  Below is a chart I use to describe what I am looking for.

 

If we can identify a company after it has made it past its “start up” or “birth stage” identified on the left hand side of the “S” chart and invest as it has achieved a measure of stability buoyed by positive business developments, then we have the makings for a fine longer term investment.  Right now, many of those companies are involved with oil shale exploration and production.  I have written extensively about these companies at MarketWatch.com and encourage you to browse those articles which talk about some of our specific holdings.

Now, to be sure, from time to time, the market treats small companies, profitable or not, as potential “failure” candidates.  In those cases, it is up to us to make a decision as to whether or not we agree with the market.  More often than not, if a company is making money, or has been making money, and nothing material to its long-term survival has changed much, then short-term price swings are an opportunity to buy, not sell.

Emotionally, the volatility of small company investing can be disconcerting on a stock by stock basis.  But, with adequate diversification, an overweight in small company stocks offers the greatest growth potential for a long-term investor.

Your looking for long-term growth adviser, 

Kirk Spano

 

This letter contains forward looking statements that may not come true.  Past performance does not guarantee future results.  This letter is intended for informational purposes only, and reflects only my thoughts and opinions in general, and do not constitute individual advice.  Opinions expressed may change without prior notice.

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Tactical Asset Allocation

The best offense is a great defense.

Tactical Asset Allocation

Are you utilizing the appropriate defensive strategies for your portfolio?

Today’s economic and financial climate are extremely dangerous and could lead to a large, fast drop in asset prices. Do you have a strategy to get out of the way quickly should that happen? 

“Set it and forget it” methods of investing like mutual funds, do not usually work. So-called “guaranteed” products, like annuities, are expensive, often lock people into low returns forever and aren’t always as safe as advertised. 

Tactical Asset Allocation using some of America’s top financial minds can offer protection that sales driven investment approaches don’t. Call today to find out how a tactical investment strategy can protect your retirement nest-egg and secure your lifestyle.

Punch Card Stocks

Buffett MungerWarren Buffett has famously said that investing in only twenty stocks, represented by a punch card, could improve your financial welfare. That is the impetus behind my “Punch Card” Stock Portfolio. These are the roughly twenty companies that I believe belong in the long-term growth portion of your portfolio and mine. 

Read my columns on MarketWatch, on my websites and elsewhere to see how a slow-handed and well thought out approach to stock investing can control risk and be profitable long-term. Learn more here.

 

Monthly Investor Call

The first Friday of each month at 4pm Central. Open to the public.

My next call is on: October 3rd, 2014

To join, follow this link or call 262822-3677. No PIN needed.

Submit questions by email. Podcasts available.

Retirement Catch-up Plan

Behind on your retirement saving? Call us today to get back on track with a unique barbell approach to retirement saving.

Kirk’s Recent Quarterly Letters

Dealing With Today’s Volatility

“I don’t really care about volatility.” Warren Buffett

Asset Returns vs InvestorsI put off publishing this letter for about two weeks, as over the past month, stock market volatility has increased quite a bit. While we are not seeing the wild swings of 2011, we are seeing a significant reaction to the overdue realization that the enduring slow global growth I have talked about multiple times and the end of quantitative easing by the Federal Reserve are both real. 

Buffett’s quote above is meant to convey a message that emotions should not be a part of our investing process. He goes onto discuss how volatility gives us opportunities to buy great companies at good prices.

With the uptick in volatility, I have not responded by fearfully selling assets. We actually were doing some selling between May and September when volatility was lower and most investors were complacent. Instead of being a seller the past two weeks, I have indeed been a buyer.

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 Freedom to Unite and Invest in Tomorrow

UpWhen I was a kid I dreamed about being an astronaut, a baseball player, a rock star and the President. As I hit my teen years and I hadn’t done much musically, I dropped the Mick Jagger aspirations and focused on baseball. By senior year of high school I knew that baseball was fun, but that I wasn’t an elite player so I had to drop the Robin Yount dream too. 

When I got to college, I focused on having a good time and taking courses that might help me when I grew up. For awhile I thought I’d be a lawyer, but a great uncle gave me some guidance and I decided against that career path. I graduated from college with a degree in economics and a second in political science with a law certificate tossed in. That’s not what I dreamed about as a kid, but it has proven to be a good direction for me. I got there by taking one step at a time and just not stopping.

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 The Great Retrenching Continues…

Total DebtIn September of 2008 I had coffee with a group of executives from local manufacturers, it was just after the financial crash had started. One company president in the group — a particularly political sort — asked me how long the economic slowdown would last? I said “until the middle of the next decade sometime.” He laughed at me.

Fast forward to today. What we know now is that the economy still has not recovered in real terms and that it will be a few more years until it does. The United States is just about in the middle of a demographic depression that can not be fixed with legislation or easy money. We must wait until household formation and spending by the very large millennial/ echo boom generation ramps up. Last year was the first year since 2008 that we saw an uptick in the birth rate, so that is a positive, however, it is only a baby step.

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2014 Another Crossroads

 

S&P 5002013 proved to be a profitable year for investors. The S&P 500 rose 29% and set new record highs. Global balanced indexes, more representative of most people’s portfolios, also did very well by returning about 20% despite a tough year in China which lost 9%.

The high return of the stock market had an expected effect on people. Many investors started to chase returns and look to be more aggressive after years of being risk averse. The result was that 2013 saw the most money from retail investors flow into stocks since 2000. I discussed this in a November article on MarketWatch titled “How Bad Will New Investors Get Hit.”   

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Volatility, Opportunity and the Next Crisis

Secular Bulls and BearsOver the past several years, I have discussed the monumental demographic changes that not only America is dealing with, but also that Europe, China and Japan are dealing with. The cumulative impact of national and personal debts, de-leveraging from the bubbles of the 2000s and the four largest economies in the world having aging populations has created global demand destruction that is not likely to end soon.  

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