Anderson Griggs Investments | Financial Advisor - Rock Hill, SC
  • Home
  • About
    • Our Story
    • Our Investment Philosophy
    • Our Team
  • Services
    • Services for Individuals & Families
    • Trust Management Services
    • Our Process
    • Our Fees
  • Resources
    • Our Letters to Clients
    • Intelligent Investing Radio Shows
    • Video Series >
      • Investing Basics
      • Differences Between Professionals
      • 10 Steps to Improve Returns
      • Investing Strategies
  • Contact
  • Home
  • About
    • Our Story
    • Our Investment Philosophy
    • Our Team
  • Services
    • Services for Individuals & Families
    • Trust Management Services
    • Our Process
    • Our Fees
  • Resources
    • Our Letters to Clients
    • Intelligent Investing Radio Shows
    • Video Series >
      • Investing Basics
      • Differences Between Professionals
      • 10 Steps to Improve Returns
      • Investing Strategies
  • Contact

Letters to Our Clients

Our Five Year Forecast Beginning February 4, 2013

3/8/2013

 
Executive Summary & Methodology

We believe that predicting short term swings in the market is an exercise in humility.  Longer-term market predictions can have some value, but they should be based on a form of valuation methodology of the underlying securities which make up the market of choice, and a consideration of the current mood of the market participants should also be included.
We don’t believe there are scientific factors which can be isolated and replicated to provide insight into short-term market predictions.  However, we do know that over longer periods of time, the price of a security or the total market value of all the securities in a market will approximate the underlying capital retained and available for earning future income for its owners.  This may not make much sense, so I’ll illustrate with an example. Wal-Mart is the world’s largest retailer.  Most of us know the story of Sam Walton and his creation, Wal-Mart, in 1962.  In 1970, the company issued stock for the first time and raised $3,400,000.  If the market never recognized the value of capital growth over time, then Wal-Mart would only be valued for $3,400,000 instead of the $238 billion that it is today.

With that in mind it’s easier to understand how our approach to predicting market returns is based primarily on the analysis of current capital and the return potential of that capital,with only a stab at predicting the current mood of investors.   

The tables in Appendix A and B may look confusing to you, but it gives us a basis for a projection of both the level of the market five years into the future as well as of the expected returns, in the form of dividends and growth of capital over time.  Beware of taking this at face value, however.Our methods are based on a statistical model which does not take into consideration human emotions, the primary driver of short-term market prices, both at the market level and at the individual stock level.  These valuations will not mirror others because our calculation methods are based on a proprietary weighting method.  The tables do not factor in any changes yet to occur which may affect prices or emotions. 

Given these caveats our projections would indicate the following:

Our calculated return potential for holding the S&P 500, S&P 400 and S&P 600 ending five years from  2-4-13 are:

S&P 500:  10.60%     S&P 400:  7.40%     S&P 600:  7.22%

Given the estimated returns as calculated, we are overweighing larger companies.

We update our projections weekly.  We not only complete this work for the S&P 500, S&P 400 and the S&P 600, but we also calculate an estimated return potential for each major industry sector.  The constituents of each sector are companies that are currently included in the S&P 500 and whose industry is assigned by Standard & Poors.

Our calculated return potential for each sector ending five years from 2-4-13 are:

Consumer Discretion:           7.22%             Industrials:     9.19%
Consumer Staples:                 9.56%            Materials:       10.07%
Energy:                                     12.38%           Technology:    12.60%
Financials:                                7.68%            Utilities:          12.60%
Health Care:                            12.46%

 It is time consuming and takes Justin two full days simply to run the quantitative models.  But what is more important to you is that these models are used as a guide in the overall direction of your portfolio.  We use these numbers to compare one alternative to all other alternatives, and this is the real value of the work.  Every day the market offers us a choice of where we can invest.  By producing a quantitative study based on sound theory, a choice as to where to deploy our funds can be made on an apple-to-apple comparison.

What about emotions? Emotions are, and will continue to be, the drivers of short-term demand for stocks and bonds.  At the individual stock level we believe we can isolate certain human traits which drive this demand.  However, at the broader market levels, we believe that markets regress to the mean, and judging emotions is more intuitive than quantitative.  In other words, it pays to be somewhat of a contrarian and to try not to become a member of the Buy High/Sell Low Club.  Over the next twelve months we believe that history will be a helpful guide to understanding “regression to the mean” and the emotions that have driven previous investor buying decisions after other market declines.
Worst Periods of Market Declines in the Dow
Courtesy of Zacks Research & Yahoo Finance

Since the March 2009 lows, the S&P 500 has gained 122.3%.  Although this seems extraordinary, the recovery is well within reason when we look at the history of bear markets.  The recovery in the past three years is the second best recorded.  However, this recovery followed the second worst bear market in the past 100 years.    The worst period, from September 1929 through July of 1932, was followed by a recover that recorded a gain of over 380% in the five years following the lows.  Believing that the market will not go up because it has gone up so much since the 2009 low should not have any impact over the next twelve months.

The rapid increase in prices is reflected in our calculation, and as such, the potential return over the next five years is close to the normal returns that US stock markets have experienced over many years.

Given our quantitative work combined with history and a regression to the mean, it would seem logical to maintain a commitment to common stocks relative to alternatives in the market place.  For those of you who are number crunchers who would like to speak with us in more detail about our quantitative work, by all means give us a call.

Until next time,

Kendall J. Anderson, CFA

For more detailed information, please contact us at info@andersongriggs.com for a copy of Appendix A:  S&P 500 – S&P 400 – S&P 600 and Appendix B:  Sectors.

Comments are closed.
    Kendall J. Anderson

    Kendall J. Anderson, CFA, Founder

    Justin Anderson

    Justin T. Anderson, President

    Categories

    All
    Market Commentary
    Monthly Client Letters

    Archives

    March 2022
    February 2022
    January 2022
    October 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    January 2021
    December 2020
    November 2020
    August 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    November 2019
    September 2019
    July 2019
    June 2019
    April 2019
    February 2019
    January 2019
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    April 2018
    January 2018
    December 2017
    October 2017
    September 2017
    July 2017
    May 2017
    April 2017
    January 2017
    November 2016
    October 2016
    September 2016
    July 2016
    June 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    October 2015
    September 2015
    July 2015
    April 2015
    January 2015
    December 2014
    November 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    December 2013
    October 2013
    August 2013
    July 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    February 2012
    January 2012

    RSS Feed

Disclosures
Privacy Policy

Common Sense Investment Management for Intelligent Investors
113 E. Main Street Ste. 310
Rock Hill, SC 29730
803-324-5044 or 800-254-0874
info@andersongriggs.com