Turkey Turbulence

This year — and every year — our thoughts go out to our community of like-minded investors. As we gather around the Thanksgiving table, we’re thankful for all of the wonderful moments we’ve shared over the last year and for the ideas and exploration that you’ve all encouraged all of us to pursue. We count many blessings and are grateful for all of you and your companionship on this journey.

Share. Share your optimism and dreams. We believe that we collectively have the requisite courage to create better worlds and days to come.

The current challenges will pass. And formidable challenges-yet-to-come will take their place. A few of you have noted the alarming recurrence of None when it comes to Materially Stronger companies in recent updates. (And the gut-wrenching extensive lists of Materially Weaker at the same time.)

I’m not sure whether (or how many) turkeys would follow lemmings off a financial cliff given the opportunity. But taxes are likely to increase. And the January Effect is probably well underway and something to consider. There are likely to be many small companies with attractive return forecasts between now and the end of the year and most likely, well into the first quarter of 2013. Shop prudently while keeping your portfolio centered on an adequate blend of faster-growing and slower-growing companies.

Jeremy Grantham’s latest quarterly message is pretty dire. (You can retrieve your own copy at http://www.gmo.com — but wait until after Thanksgiving Dinner and a suitable number of pie slivers before doing so.) We love Jeremy and his outlook. We’ll chalk this curmudgeonly tirade up to a grumpy spasm … realize and acknowledge that it is ALWAYS a good idea to heed and consider his words … and continue to seek opportunities as GMO and Jeremy always do — with an emphasis on QUALITY.

We’ll leave you with the words of Phillips Brooks:

Stand up, on this Thanksgiving Day. Stand upon your feet. Believe in man. Soberly and with clear eyes, believe in your own time and place. There is not, and there has never been, a better time, or a better place to live in.

Brooks is known as the man who wrote “O Little Town of Bethlehem”

And we’ll add one extra Thanksgiving wish this week … that being a profound hope that the launchers of Gaza either run out of rockets, or matches, SOON.

Bob Dylan (and Nick Picini) have it right:

The answer, my friend, is blowing in the wind.

It wasn’t all that long ago that I wrote about the Perfect Storm at the turn of the century that brought the NASDAQ to its knees. Perhaps ankles? Some of you will have difficulty remembering that the NASDAQ index peaked at 5132.52 and I penned an article that described the advent of 365/24/7 … news anchors with stock market indices displayed in their arm pits during the national news … and a flurry of hyper attention to investing, much of it the get-rich-quick flavor. And over the next lost decade, we watched as the greed and fraud decimated a housing industry all the while insulating the largest rhinos from risk while guaranteeing reward (at our collective expense.)

Is it any wonder that true wannabe investors are disenfranchised and frustrated?

And now we get a dose of one of the largest storms in history as Sandy lands with incredible fury. We pause and hope that the east coast — although in some cases will never be the same again — in others, resilience and restoration will display the best attributes of our humanity and generosity as a nation.

We don’t get hit by hurricanes in Michigan. (At least not very often) But those 70 MPH winds, coming from the northeast for a period of DAYS are something quite unusual. 20-foot waves crashing into Chicago from Lake Michigan are pretty rare, too.

But the prevailing winds come from the west. This storm of considerable magnitude, will pass — and so will the turbulence in stock markets and investing. The only thing that we can do is discover and prudently own the best companies. Those who do will be smiling when the prevailing winds return to their “normal” direction and amplitude. And although we don’t invest in markets (I’m eternally grateful to Ralph Acampora for talking a Detroit audience out of index fund investing back in 2000) a closer look at the primary three characteristics (think prevailing winds) for the overall market can be comforting and reinforcing.

Sales Growth Trend and Forecast

• The long-term trend/forecast for top-line growth is 4%. (This universe is pretty close to the S&P 1500 or Value Line 1700 ex-Financials)

• The impact of the Great Recession (2008-2009) is pretty clear.

• The recovery has been sluggish, “muddling through” according to John Mauldin.

• Recent forecast revisions have put considerable pressure on 2012-2013 expectations, consistent with the top-line warnings issued by Barry “The Big Picture” Ritholtz and Joshua “Reformed Broker” Brown.

• One way to look at a “New Normal” is to observe the ~6% growth pattern pre-2008 and contrast it with the 2011 (and beyond) pattern that seems to more closely resemble ~3%.

Profitability Trends

• Once again, the impact of the 2001 and 2008-2009 recession is clear. Profitability gets hammered.

• It’s also clear why this recovery “feels like a recession.” Look at the weak recovery during 2010-2012 and note that 2012E is now below that long-term trend (productivity renaissance) and the 2013E forecasts are steadily weakening.

• Note: The 2016E is a single opinion, Value Line, and possibly represents considerable unbridled optimism. (We hope they’re right)

• We have seen the typical/traditional erosion of profitability expectations for 2012 as the year winds down. But check out the 2013E forecast. Keep in mind that forecasts for 2013E and 2014E are typically pretty exuberant right about now — year-in and year-out. Squint all that you want. You won’t see a whole lot of exuberance in the 2013E forecast and keep in mind that this is eroding as rhinos update their analyses going forward. We’ll continue to watch and hope that somebody stems the erosion tide.

Valuation: Historical and Projected P/E Ratios

• This is actually something of a bright spot. Previous collective P/E forecasts for 2012E and 2013E were actually lower — and have improved in recent months.

• Note that the P/E forecasts dove tail with the ebb of the sales growth trend and that “New Normal” conditions for the foreseeable include lower P/E expectations for the collective.

We’ll never think of “Sandy” the same way again. It seems like there’s a hundred songs of the same name, from John Travolta’s Greasy rendition over Olivia Newton-John, preceded by Graham Nash, Harry Chapin, The Carpenters and Bruce Springsteen. Closing, I’ll go with The Boss:

“Sandy … the aurora is rising behind us.”

Our thoughts and prayers go out to those in Sandy’s wake — and we look to better days ahead … and prevailing winds, in the right direction.

We want you to experience better results. Period.

I’ve witnessed time-honored success in investing that spans several decades. That success has been realized by individual investors and groups of investors (partnerships known as investment clubs.) Success can be defined many ways. For our purposes, we regard success as achieving superior returns.

Investing is not easy. But it doesn’t have to be complex either:

“… in 44 years of Wall Street experience and study, I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal … of substituting theory for experience … or to give speculation the deceptive guise of investment.” — Ben Graham.

In our work with successful investors, we’ve seen what works. It’s a harsh reality that STOCK PRICES FLUCTUATE. These fluctuations often produce a calamitous combination of frustration, fear, confusion and frankly — drives most would-be investors crazy. The result commonly produces ostriches and in a nutshell, fosters conditions where people avoid life-changing potential of discovering and OWNING the best companies at the best prices.

“Investing is most intelligent when it is most businesslike … DISCIPLINED [and PATIENT] … and superior results are possible.” — Benjamin Graham, George Nicholson Jr., David L. Babson, Kenneth Janke, Warren Buffett, Thomas O’Hara, et al.

Chaos is not a reluctant investor’s best friend. But the reliable extremes achieved by momentum-driven pendulums can be one of the best friends to a patient, committed and disciplined long-term investor.

We created Manifest Investing to generate and maintain FOCUS on the things that really matter — focused specifically on the most important factors that have led to decades of superior investing results. Lessons learned over decades still apply.

Superior results are possible. Rinse. Repeat.