The Coastwise Quarterly Dividend
Q2 2008 Issue

Welcome to the “Coastwise Quarterly Dividend,” a newsletter where we discuss various important and relevant investment issues as well as recent market news. For previous months newsletters, see www.coastwisegroup.com/News/News.php.

ATTENTION SHOPPERS

In mid-January, with markets plunging domestically and internationally, I reached out to Coastwise Partners and friends with a message that said, in effect, “Pain is pleasure. Markets go up, they go down, when they go down it is ugly and you think the storm will never pass, but it eventually does, so if you have extra capital, now, by definition, would be a good time to put it to work. Most brokers (which Coastwise Capital Group, LLC is not) will only contact you when the stock market is on an upward tear; I am here to tell you what you don’t want to hear and that is that we are all actually lucky that the market is dropping…if you take advantage of this sale. Don’t make the mistake most novice investors make which is to wait for clarity, for the storm to pass, before putting capital to work because while it might feel better, it will only make your pockets less deep than they otherwise could be....”

Since that time major market indices are up 10% – 15% or more depending on the sector/region.

With sincerity and humility I can state emphatically that this missive is not an ‘I told you so’. To be sure, the point of my communication in January and my reiteration today is that short-term stock movements, by definition, are not predictable. If your money manager tells you that he or she knows (or even has a good idea) as to where the stock market will be in the near term, pull your money and run. Further, the ‘calling’ of a bottom is also not achievable, other than by sheer luck, and luck is not a quality you should attempt to rely on when it comes to managing money and attaining consistently superior returns. By the time you read this email stocks may have risen or fallen 5% or more. That is not the point.

The all important lesson is twofold. 1) It will always feel the worst when it is in reality, objectively speaking, the best time to invest capital in equities. Therefore be prepared, or work with someone who can provide you that objectivity. By way of example, it is virtually always uncomfortable to get out of bed at 5:30 a.m. for that all important physical training session. If you can not help yourself but to hit snooze 9 times before finally getting up too late to get in your work out, hire a personal trainer who will hold you accountable to your goals and objectives. 2) You do not need to call a bottom to make money in equities; rather you just need to know they are on sale. You don’t need to have paid the very lowest price in order to have superior returns; you just need to pay a reasonable price relative to the company’s/market’s long-term prospects. And, by mathematical definition, equity prices are more reasonable, thus your return potential greater, when your entry price is lower rather than higher.

As a related aside, what causes such sudden volatility and dramatic selling in the market after years of relative stock stability and appreciation? To be sure, there are, by definition, myriad if not innumerable variables and influences that drive near-term stock movements (so, when TV financial commentators state emphatically that ‘yesterday’s’ sell-off was a foregone conclusion driven by variable X – oil prices going up or whatever, know
that they are being paid to entertain you and drive advertising sales, not to manage your money). Basically put, and often lost in the noise, is the fact that investors often sell on the margin simply because they have to – not because, as EMT (Efficient Market Theorists) would have you believe, that each market participant is aware of every available piece of information and processes and acts on it accordingly and rationally. Far from it. Often people sell quality companies like Google, Inc. (GOOG) or Goldman Sachs, Inc. (GS) not because they have read the latest quarterly earnings reports and feel the company’s long-term prospects have diminished dramatically…but rather because they are getting margin calls from their brokers and nasty letters from their mortgage lenders and they need to come up with money to pay their bills – and/or they are simply scared – and GOOG or GS or other high quality, highly profitable companies like them are the ones on which they have historical gains (people rarely sell their losers in hopes of ‘getting even’ one day) and thus they click their mouse and GS is gone and cash is raised to pay the bills. And so on and so forth, and voila, GS goes from 240 to 160 (when the smart money pours back in) and back to 220 in a matter of a couple months (losses are also typically exacerbated by investment banks who invariably lower their stock recommendations to SELL from BUY only after a given stock has gone down, further heightening near-term selling pressures).

Will investors have an opportunity to buy GS in the 150’s or 160’s again any time soon (more importantly and to the point, at reasonable P/E and other valuation metrics)? Possibly, and if so, don’t be one of those investors who hits snooze in hoping that the bad dream will all go away and that soon the sun will be up. At that point, it will be too late to buy low.

Here is a very interesting and telling analysis that really drives home the point. For simple math’s sake, let’s say the DOW is trading at 13,000 today. In 10 years it will be approximately 26,000 plus or minus (this is basic math – any amount doubles in 10 years if it is compounding at approximately 7% per year which is a realistic assumption for equity returns over the next decade given today’s valuations. In any case, it will be what it will be in 10 years – we have no control over that. We only have control over what we do between now and then).

To make the point, let’s say the stock market’s path from 13,000 today to 26,000 in 10 years follows 1 of 3 routes:

1) All of its gains occur in the first year and then it stays flat for the remaining 9 years (100% of gains in year 1).
2) The market gains equally each year (its rise is linear at about 7% per year).
3) The market stays flat for 9 years and all of its gains occur in the final year (year 10).

For net savers, those putting money into the market either through new capital infusions and/or the reinvesting of dividends from existing equity positions, conjecture as to which path yields the highest portfolio balance at the end of 10 years? You guessed it, an investor regularly putting money in the market would be better off if stocks gained absolutely nothing (she would be even better off if stocks went down in the interim periods) for years on end and then made whatever gains they are going to make in the final year of the investor’s time horizon. In fact, dramatically so. Contact me if you want me to walk you through the actual numbers.

Of course stocks neither go up in a linear manner (the same amount each year) nor do they attain all their gains today or in some subsequent period. Rather, they go up and down and up and down, and over time go up.

Thus, the point of the above example is that when the stock market is down, you are very well served to add incremental dollars to your equity portfolio as you have math on your side vis a vis superior returns. Or, as I like to say when I am practicing martial arts, ‘hit ‘em when they are down.’ The next time I will tell you I told you so….

For those of you who check in with me from time to time, you have noted that the Coastwise Dividend Newsletter has been absent lately. There are two reasons. First, I have been focusing my daily attention on taking advantage of the market volatility as described above. Secondly, I have been utilizing my night and weekend hours to complete a book entitled, The Most Powerful Force In The Universe: Dividends, Options and The Magic of Compounding. Watch for it this Fall. The Coastwise Dividend Newsletter will go out quarterly hereafter which seems to be a good time interval for investor communications. Of course, in the meantime, feel free to contact us directly with any questions or comments.

Until next quarter,

Scott. G Kyle

COASTWISE CAPITAL GROUP, LLC IS A BOUTIQUE MONEY MANAGEMENT FIRM CATERING TO HIGH NET WORTH INDIVIDUALS AND INSTITUTIONS. WE OFFER AN ARRAY OF PRODUCTS AND SERVICES INCLUDING HEDGE FUNDS AND SEPARATE ACCOUNTS.

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