• Bluemound Asset Management
    Bluemound Asset Management A Kirk Spano company

Top 2 Investing Rules…

Kirk SpanoRule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.  

Warren Buffett

The most important aspect of financial planning is having an investment approach that protects you from permanent loss and gives you an opportunity to make money over the long-term. Industry statistics demonstrate that most financial people fail in both regards. 

At Bluemound Asset Management we focus on Buffett’s top two rules daily. My name is Kirk Spano and I am the founder of the firm. I am easy to follow online. Please read some of my articles and notes to help filter the noise in the markets and verify the sound advice I have given over the years. When you are ready, contact me to discuss building a better plan that can help secure your future and build towards your biggest dreams.

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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 Management

The best offense is a great defense.

Tactical Asset Allocation

Are you utilizing the appropriate defensive strategies for your portfolio? Today’s economic climate and financial markets require strong risk management.

Tactical asset management using low cost ETFs (Exchange Traded Funds) and mathematical analysis of the markets can protect you against much of the downside risk while allowing participation in the upside.

An easy way to understand this approach is that we are not trying to predict the future. Rather, we are reacting quickly when markets have a verifiable change of direction. 

When the market starts to fall, think of this approach as coming in from the rain while it is still drizzling. You will still get a little wet, but you won’t get soaked in a downpour. When the storm clears, we let the clouds get toward the horizon and then we reinvest.  

Learn how our Tactical Asset Management programs using some of America’s top financial minds can protect your lifestyle.

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Kirk can lead you through a volatile world, manage life changes and help make your long-term vision reality. 

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Kirk Spano at MarketWatch

Kirk Spano’s views have been recognized and sought after nationally. He writes for MarketWatch of the Wall Street Journal network, has appeared on television — including Fox Business, is a regular radio guest and has authored articles for multiple publications. He also publishes the American Resource Boom Letter.

Boomers Rock Radio

Mr. Spano regularly appears on the Boomers Rock Radio Show with host Tom Matt. Boomers Rock is focused on baby boomer issues, including finance, wellness and fulfillment.