• 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. Your financial representative should understand investing at its core, not just be able to show you a pie chart, use industry jargon and provide deceptive mutual fund ratings.

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 and securing your future.

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Kirk Spano Financial Network

Work with me anywhere in America. I have developed relationships nationally that will allow you to benefit from the same ideas that I write about, discuss on radio and present in public forums.

By working with my network, you will get the value of two (or three) heads for the price of one.

We will give you the dependable service and guidance you need to find the peace, freedom and security you are looking for.

Learn more about working with me and my carefully selected network of financial leaders.

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 a multi-layered quantitative analysis of the markets can protect you against much of the downside of markets while allowing participation in the upside.

An easy way to understand this approach, which is different than what 90% of the industry is doing, is that we are not trying to predict the future. Rather, we are using low cost index funds to participate in the market’s upside and  getting out quickly when the markets start to move downward — which we can do by using sophisticated mathematical analysis.

Think of it as coming in from the rain while it is still a drizzle before the downpour occurs. You will still get a little wet, but you are not soaked. Similar approaches have been used by some of the best hedge fund investors for decades. Bluemound works with some of the best people in the industry to help our clients stay dry.

Learn more about how including our Tactical Asset Management programs in your portfolio can help protect your retirement.

Family Wealth Management

“For all your days be prepared, and meet them ever alike.” Markham

Families with seven and eight figures of wealth have special long-term financial and estate planning needs.

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

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Legacy

Retirement Plan Monitor

Your retirement plan at work — 401(k), 403(b), 457 — is a major part of your future. 

Managing the fund choices in your plan is not easy. Our simple and low cost tactical approach is the solution.

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The Pension Protection Act has made 401(k) sponsorship more complex and dangerous.

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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, has authored articles for multiple publications and has two books in development. 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.