Tuesday, September 7, 2010

Don't "Over Think" It

During one of our investment team meetings last week, we made the point that it is often important to look for the “easy” trade. It reminds me a lot of watching youth soccer teams where the athletes try to thread a pass through several defenders in order to set up the Striker with a breathtaking play, when a simple pass towards the sidelines would advance the ball and create a situation that is ultimately harder to defend. In our case, I believe we were discussing dividend paying stocks in the context of market valuation, where the earnings yield of high quality S&P companies is more than twice the yield of US Treasury bonds. The “easy" trade would be to buy a high dividend ETF and hold it as long as the dividend growth is supported by the economic and earnings cycle.

Our discussion prompted some emails among team members trying to explain our current investment stance into a few short declarative sentences. And here is what Yours Truly had to say:

“The economy is very slow but the evidence is murky as to whether it is still slowing. The stock market is secularly expensive but on many measures it is now cyclically cheap. With the Fed and the President (but maybe not Congress) standing by to apply fiscal and monetary stimulus, there is real risk in getting too far out of the market. Considering that the portfolios are running very cool already with a beta for DMG at about .35, it would appear that no more selling is warranted, and that we should wait until we break the bottom of the range for any further changes.”

Like many other things in life, trying to simplify can be a good thing. We don’t want to “over think” this market. If we can find an easy trade to fit our theme it is definitely worth our strong consideration for inclusion in our managed accounts.