Many pundits are arguing over how far in to the economic crisis we are and what is the correct direction for investors to take. Many are predicting far worse catastrophes yet to come, while others believe a bottom has been put in and things are beginning to turn.
If there is a central point to all the posts we make on the Taylor Frigon Advisor, it is that investors must remain focused on the foundation of investing, which is businesses.
We continually try to draw people's attention back to the fact that investing is about providing capital to businesses, whether you are investing in common stock or whether you are searching for yield through ownership of bonds, preferreds, or other income securities.
The reason that a large percentage of investors lose sight of this fact is that it is quite the opposite of what Wall Street has been selling them, which is that there is some kind of magic to investing, and that there is a caste of those on the inside who can "read the tea leaves" and on whom you must rely to tell you what is going to happen next.
We categorize this approach as snake oil, and we have written about it recently in "Beware of the witch doctors of modern finance" and in "Stock market guessing."
Investors who have been taken in by this concept, as well as those who haven't, should look to the foundation concept of "investing in businesses" as they try to determine what they should do at this juncture.
We argue that it is critical to place your financial foundation firmly upon the ownership of shares in well-run, growing businesses. If you own income-producing securities, such as bonds or preferreds, you should be equally critical in your analysis of the business fundamentals of the issuer -- its cash flow, its balance sheet, its leadership, and its future business prospects.
If the market price of the securities of a good business go down during hard times, it is important to remember that wealth is not made by bailing on your business in hard times. Those who have built a successful small business can attest to the truth of that fact. It is probably safe to say that there is not a successful small business owner who has not faced hard times and resisted the temptation to give up.
However, it is also true that many of those successful business owners did something more than just hold on through the hard times: often they succeeded because they positioned themselves during the bad times to be successful on the other side, and to take advantage of the opportunities presented by the exit of some of their competition or other new circumstances.
Likewise, investors should now be positioning their investments during the bad times to be ready when there is a turnaround.
Although this current crisis is a dire set of circumstances, it is by no means unprecedented. In fact, it is no more dire than situations the economy has faced in the past. We have had equally dire threats in the past and survived them.
Some pessimists are claiming that America is economically on its way to becoming a "banana republic," heading for economic disaster because it has thrown away its industrial base and is just a "phony service-sector economy."
Many are listening to such rubbish because those who are pushing such views "predicted" the financial panic of the past months. This is just another example of the "snake oil" discussed earlier, and those who feel tempted to follow this or that new witch doctor should go back and revisit the two articles linked above.
In fact, America's industrial base produces significantly more manufacturing output than at any time in previous history. Look at the chart of manufacturing industrial production above, which shows that even with the downturn of the past few months, current manufacturing output is far above that of ten years ago and dwarfs the output of previous decades.
Over the next few months, economic data will continue to come out that will look bleak, reflecting the grinding halt in the economy that took place in September through November. But economic data is backwards-looking.
We would urge investors to force their focus onto business fundamentals, to not bail on those businesses that are actually well-run companies positioned in front of promising opportunities for growth, and to make necessary changes wherever they have allocated capital without a good look at the businesses underneath. By doing so, they can avoid the siren call of the snake oil salesmen at the same time.
Subscribe to receive new posts from the Taylor Frigon Advisor via email -- click here.
For later posts on this same topic, see also:
We continually try to draw people's attention back to the fact that investing is about providing capital to businesses, whether you are investing in common stock or whether you are searching for yield through ownership of bonds, preferreds, or other income securities.
The reason that a large percentage of investors lose sight of this fact is that it is quite the opposite of what Wall Street has been selling them, which is that there is some kind of magic to investing, and that there is a caste of those on the inside who can "read the tea leaves" and on whom you must rely to tell you what is going to happen next.
We categorize this approach as snake oil, and we have written about it recently in "Beware of the witch doctors of modern finance" and in "Stock market guessing."
Investors who have been taken in by this concept, as well as those who haven't, should look to the foundation concept of "investing in businesses" as they try to determine what they should do at this juncture.
We argue that it is critical to place your financial foundation firmly upon the ownership of shares in well-run, growing businesses. If you own income-producing securities, such as bonds or preferreds, you should be equally critical in your analysis of the business fundamentals of the issuer -- its cash flow, its balance sheet, its leadership, and its future business prospects.
If the market price of the securities of a good business go down during hard times, it is important to remember that wealth is not made by bailing on your business in hard times. Those who have built a successful small business can attest to the truth of that fact. It is probably safe to say that there is not a successful small business owner who has not faced hard times and resisted the temptation to give up.
However, it is also true that many of those successful business owners did something more than just hold on through the hard times: often they succeeded because they positioned themselves during the bad times to be successful on the other side, and to take advantage of the opportunities presented by the exit of some of their competition or other new circumstances.
Likewise, investors should now be positioning their investments during the bad times to be ready when there is a turnaround.
Although this current crisis is a dire set of circumstances, it is by no means unprecedented. In fact, it is no more dire than situations the economy has faced in the past. We have had equally dire threats in the past and survived them.
Some pessimists are claiming that America is economically on its way to becoming a "banana republic," heading for economic disaster because it has thrown away its industrial base and is just a "phony service-sector economy."
Many are listening to such rubbish because those who are pushing such views "predicted" the financial panic of the past months. This is just another example of the "snake oil" discussed earlier, and those who feel tempted to follow this or that new witch doctor should go back and revisit the two articles linked above.
In fact, America's industrial base produces significantly more manufacturing output than at any time in previous history. Look at the chart of manufacturing industrial production above, which shows that even with the downturn of the past few months, current manufacturing output is far above that of ten years ago and dwarfs the output of previous decades.
Over the next few months, economic data will continue to come out that will look bleak, reflecting the grinding halt in the economy that took place in September through November. But economic data is backwards-looking.
We would urge investors to force their focus onto business fundamentals, to not bail on those businesses that are actually well-run companies positioned in front of promising opportunities for growth, and to make necessary changes wherever they have allocated capital without a good look at the businesses underneath. By doing so, they can avoid the siren call of the snake oil salesmen at the same time.
Subscribe to receive new posts from the Taylor Frigon Advisor via email -- click here.
For later posts on this same topic, see also:
- "New Year's Resolution: swear off snake oil" 01/05/2009.
- "Solid convictions versus snake oil" 01/08/2010.
- "Another black swan?" 05/13/2010.
- "The dance of the hippos" 08/10/2010.
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