Published on April 10, 2008
The Courage to Be An Investor: The Courage to Be An Investor Tal Daley Senior Vice President, Director Legg Mason Funds Marketing Slide3: SPECULATOR A person who engages in a business deal where a good profit may be made at considerable risk. INVESTOR A person who expends for future benefits or advantages. Slide4: EXTREME Located at one end or the other of a range or series. EXPECTATION The act or state of expecting;to consider reasonable, due or necessary. Rev 2000 Annual Median Returns: Rev 2000 Annual Median Returns Past performance is no guarantee of future results. YTD is as of 12/31/04 Source: FactSet Slide7: From ISI 11/26/03 Slide8: “There is always a disposition in people's minds to think that existing conditions will be permanent. When the market is down and dull, it is hard to make people believe that this is a prelude to a period of activity and advance. When prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which makes it unlike its predecessors and give assurance of permanency. The one fact pertaining to all conditions is that they will change.” -Charles Dow Profits & Jobs: Profits & Jobs “The worst crime against working people is a company that fails to operate at a profit.” Samuel Gompers “An economy where jobs are looking for people—as well as people looking for jobs—is one of the best social programs we have.” Larry Summers Former Secretary of the Treasury January 2000 Economy: Economy Unemployment Rate: Unemployment Rate Source: Bureau of Labor Statistics Initial Jobless Claims: Initial Jobless Claims Source: Bloomberg, Bureau of Labor Statistics ISM Purchasing Managers Index: ISM Purchasing Managers Index Source: Bloomberg The ISM PMI has been above 60 for nine consecutive months. The only other time that such a string of above 60 readings occurred was between July 1983 and February 1984. Slide14: Source: Bureau of Labor Statistics Outsourcing Index: Outsourcing Index Slide16: The War Over “Global Imbalances” In November, 2002 the FED suggested to European financial leaders that the imbalance was due to the gap between U.S. and European/Japanese growth rates and return on investment, which clearly favors the U.S. The Europeans suggest that our trade deficit and our budget deficit create imbalances in the world economy. Source: Thomson Financial, May 2004 Slide17: Source: U.S. Department of Treasury Slide18: Estimates Source: Standard & Poors Past performance is no guarantee of future results. These estimates are based on Tal’s analysis and are not indicative of the future performance of the market or any security. Slide19: Federal Deficits & 10-Year Interest Rates Source: Legg Mason Slide20: 1950’s & 1960’s Source: Federal Reserve Slide21: ISI Group, August 2004 Slide22: ISI Group, August 2004 Slide23: Criminal problem with international institutions resolving? Long delayed war that will take as long as the Cold War to win? Replacement of the 1648 Peace of Westphalia organizational concept? Dean vs. Kerry vs. Bush (anti-war, war with alliances, war with U.S. as the lead) The end goal--democratization of the Middle East? Where do the European's stand, really? How will this affect my investments? The War on Terror Slide24: Average annual return: 4.89% (not including dividends) Source: Thomson Advisor, 2004 WAR CHARTS Slide25: Average annual return: 14.73% (including dividends) Source: Thomson Advisor, 2004 Slide26: Average annual return: 6.46% (including dividends) Source: Thomson Advisor, 2004 Slide27: A Strong Economy Produces a Strong Defense Slide28: A billion seconds ago it was 1959. A billion minutes ago Jesus was alive. A billion hours ago our ancestors were living in the Stone Age. A billion dollars ago was only 8 hours and 20 minutes, at the rate Washington spends it. Government vs. Market: Government vs. Market Slide30: A nickel ain't worth a dime anymore. -Yogi Berra Economic Growth, The Price Level and Inflation: Economic Growth, The Price Level and Inflation Major economic transformations: Agricultural to industrial to information economy 1865 to 1915: Agricultural to industrial—economic growth of 500%, price level falls 50% The farmer in 1865 and the farmer in 1915 Parallel universes: productivity/scarcity vs. traditional inflation Inflation: Always and everywhere a monetary event (late 1960's, 1970's) We are currently at the front end of a major economic transformation that drives global economic growth The electric iron, Jeff Bezos, Day One and the Milton Berle Moment Where is the monitor? Slide32: THE TEMPLETON MARKET PROGRESSION PESSIMISM SKEPTICISM OPTIMISM EUPHORIA S&P 500 Composite Total Return: S&P 500 Composite Total Return Source: Weisenberger This illustration includes an initial investment of $10,000. Past performance does no guarantee future results. When To Buy: When To Buy Source: Weisenberger This illustration includes an initial investment of $10,000. Past performance does not guarantee future results. Slide35: Four Portfolio Choices Invest a hypothetical $100,000 on 12/31/94 in: A portfolio consisting of 75% S&P 500 and 25% NASDAQ 100, rebalancing at the end of 1999 to bring the portfolio to its original allocations. A portfolio consisting of 75% S&P 500 and 25% NASDAQ 100 without rebalancing A diversified portfolio consisting of 35% S&P 500, 15% S&P Mid-Cap, 10% S&P 600 Small-Cap, 20% MSCI EAFE, 10% Lehman Gov’t/Credit Int., 10% Lehman Gov’t/Credit, rebalancing at the end of 1999 to bring the portfolio to its original allocations. A diversified portfolio consisting of 35% S&P 500, 15% S&P Mid-Cap, 10% S&P 600 Small-Cap, 20% MSCI EAFE, 10% Lehman Gov’t/Credit Int., 10% Lehman Gov’t/Credit without rebalancing. Slide36: Index Definitions S&P 500 – An index of common stock prices and is generally considered representative of the U.S. stock market. NASDAQ 100 - an index based on the largest and most active non-financial domestic and international issues listed on the Nasdaq Stock Exchange based on market capitalization. Lehman Intermediate Government/Credit - an index based on all publicly issued intermediate government and corporate debt securities with average maturity of 4-5 years. S&P 400 Mid-Cap - a market-weighted index that represents approximately 10% of the aggregate market value of U.S. domestic companies. MSCI EAFE - an unmanaged index based on share prices of approximately 1,470 companies listed on stock exchanges around the world. 20 countries are included in the portfolio. Lehman Government/Credit – a market value-weighted index that tracks the daily price, coupon, and total return performance of fixed-rate, publicly placed, dollar-denominated obligations. S&P 600 Small-Cap – a market capitalization-weighted index that tracks the daily stock total return performance of an investable universe of domestic small-capitalization stocks. Investors should be aware that indexes are unmanaged and one cannot invest directly in any index. Summary: Summary Core Four® Growth: Core Four® Growth The purchase and sale of securities should be made on an individual basis, considering the risk and investment objectives of each investor. Core Four Asset Allocation: Core Four Asset Allocation The purchase and sale of securities should be made on an individual basis, considering the risk and investment objectives of each investor. Slide40: In theory there is no difference between theory and practice. In practice there is. -Yogi Berra Bill Miller and Warren Buffett: Bill Miller and Warren Buffett “Certainty belongs to mathematics, not to markets, and anyone who awaits clarity, visibility, or the diminution of uncertainty pays a high price for a chimera.” -Bill Miller, Value Trust 12/31/02 Shareholder Report “There is nothing dumber than betting against America.” -Warren Buffett, Wall Street Journal Slide42: Major Themes Major economic transformation to IT underway Low inflationary environment driven by FED credibility Falling price level bias from productivity We are in a "hot" Cold War era that will last decades Most of the civilized world understands the stakes Capital surplus and excess rates of growth, return on investment noticed by the world Domestic economy should grow 4% this year, 3.5% for the next several years Market valuation fair; returns will be driven by earnings and cash flow growth These estimates are based on Tal’s analysis and are not indicative of the future performance of the market or any security.