The
approach of September is a favorite time of year for many. The weather
is starting to cool and the leaves will soon begin to turn. School
has started and routines have resumed. Nobody’s favorite college
football team has lost yet.
Still, September historically hasn’t been the friendliest
month to stock market investors. Looking at the Dow Jones Industrial
Average going back to January 1900, September has clearly been the
worst month for stocks. While many investors initially guess that
October is the worst month, it is actually September which has the
largest negative average monthly return at -1.1% (October’s
average is +0.2% which qualifies it as the fourth worst month of
the year). In addition, September is the only month that has had
more negative months (58%) than positive months.
This just isn’t the case looking back over the 100 plus years.
This story also holds up over the last 20 years. Since 1987, September
easily has the largest average monthly loss
(-1.2%) and has been negative 60% of the time.
Why would September be such a rough month?
There are several theories, though none seem fully satisfying. One
is that bills need to be paid. There could be some truth to that.
Credit card bills containing summer holiday expenses need to be paid,
as will new school year expenses. Another plausible reason is “window
dressing” going into quarter-end. Window-dressing, which means
selling losing positions and buying securities that have been performing
well, is indeed practiced by many investment managers, particularly
those who are often held accountable by a committee. Given that the
third quarter tends to be the weakest quarter of the year, there
could be some truth to that as well. “Profit-taking,” which
means to sell profitable investments before others sell the same
position, is not a satisfactory answer. Why book profits and move
to a notably more conservative portfolio position before the fourth
quarter – typically the best quarter of the year?
Which brings us to this question – “Is September a good
time to invest?” Our general answer is always the same. We
believe, that for the long-term investor, it is always a good time
to invest as the stock markets have an expected positive relative
return to cash. Still, pertaining to the September time frame, and
assuming that seasonal tendencies hold, adding to investment accounts
this month may make even more sense than usual – stocks could
be on sale!
Remember, seasonal tendencies are not certainties. In 2006, September
was the second-best month of the year for the Dow Jones Industrials
as it was up nearly 3% for the month. Only October was better last
year as it was up nearly 4%.
We Have the Technology
The market has some well-documented issues right now. Then again, when doesn’t
it? As a saying we came across recently stated, “If you can’t
find things to worry about (in the markets), you lack imagination and a sense
of history.” Given the concerns in the credit markets, and the potential
of continued spill over into the economy and markets, it could be considered
reasonable to modestly trim overall portfolio volatility. We have done so
in client accounts.
Nonetheless, there are always fresh investment opportunities to
identify. One sector where we have recently, and modestly, added
exposure is technology. There are several reasons why we are attracted
to this sector.
First, technology is expected to grow earnings in 2007 by over 12%.
The only sectors with higher expected growth rates this year are
health care and telecommunications. Technology is also expected to
show above-average earnings growth in 2008. But it isn’t just
about absolute growth rates. Another important consideration is whether
earnings growth is accelerating or not. In this case, technology
is expected to see accelerating earnings growth in both 2007 and
2008. No other sector, except for telecommunications, is likely to
see such acceleration.
Second, valuations are considered to be more reasonable than they
have been in recent years. While technology is still not cheap on
an absolute level, its relative valuation to the broad market is
expected to be lower than it has been in recent years. The anticipated
contraction in relative valuation is supposed to be the largest of
all sectors, with the exception of the consumer discretionary stocks.
Valuation can also be looked at relative to expected earnings growth.
This is called a “PEG Ratio.” In this case, technology
is considered to be one of the cheapest sectors based on expected
earnings growth. (Consumer discretionary and telecommunications also
look cheap on this metric.)
Third, technology is one of the two sectors that have still not
fully recovered its losses from the March 2000 market peak. Tech
was still down 59% from the peak through 06/30/07. The average sector’s
return over that same period was +57%. While it could be argued that
tech was wildly overvalued back in 2000, which we agree with, that
doesn’t mean that it has to remain in the doghouse forever.
Given the technology sector’s expected earnings growth, relative
valuations, and relative price performance so far this decade; this
is a sector that could be poised to post above-average returns in
coming years. (For a frame of reference, technology currently represents
about 15% of the overall market capitalization of the U.S. stock
market. It was approximately 30% of the S&P’s market’s
cap in 1999.)
Kaizen
Kaizen is a Japanese expression for “continuous improvement.” It
is an expression often associated with the management practice of Ned Johnson
who manages Fidelity Investments. The emphasis of kaizen is to eliminate
waste, which means to remove activities that add cost but do not add value.
While kaizen is not something we expressly embrace at Kobren Insight Management,
it’s definitely central to our research culture. At the top of our
internal on-line Research Library is this statement: “Our mission is
to continually improve our investment process to efficiently manufacture
effective multi-asset and multi-manager research and service.” Perhaps
this mindset was developed because we have covered Boston-based Fidelity
Investments for so many years and because so many of the individuals working
at Kobren once worked at Fidelity.
That said, proper investment research can sometimes be messy. Not
every avenue explored results in an actionable response, at least
not a positive one (sometimes we learn what not to do!). Research
also means to turn over as many rocks as possible so we can compare
and contrast between multiple investment options. In this way, our
current year-to-date pace of meeting with managers, listening to
conference calls, and attending conferences is at a record level
for Kobren Insight Management.
Good research also means that we continuously endeavor to innovate
and explore new tools and approaches. On this count, it has also
been a very strong year so far. While we have brought on a new sophisticated
third-party tool, we have also added new internal tools. We have
also conducted a variety of studies on portfolio attributes and how
they might correlate with future relative performance. We have explored
new investment products. Each of these has enhanced how we conduct
money manager due diligence.
In sum, regardless of the season and short-term economic and market
conditions, there are always opportunities to improve our investment
processes and portfolios.
Again, thank you for your confidence. If you have any questions, please feel
free to contact us.
