Author Archives: Kathryn

Managing Yourself Well

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Managing your emotions is as important, if not more important, than managing your holdings.  Late in the afternoon on Friday, October 31st, 2014, I sat and reconciled the year to date returns on the Pawleys Funds.  I tried to work quickly so I could make it to a Halloween party on time.  The Pawleys Growth Fund, through October, had posted a gross total return gain of +13.65%, versus +10.87% on the S&P 500.  That made me happy to have good numbers for my investors.  On the plus side, I had doubles for the year in Green Mountain Coffee Roasters and Questcor Pharmaceuticals, the latter of which had been bought out earlier in the year.  On the negative side, Whole Foods Market and Mitcham Industries had lost -31% and -42% respectively – nothing to write home about.

As I scanned the range of returns for the portfolio holdings, one stood out to me: Sapient Corp, a digital marketing firm based in Boston, which sat at exactly 0% for the year.  The fundamentals of the company continued to look good, but how could a nimble player in a hot space deliver a goose-egg return during a decent year in the market?  Feeling impatient, I had thought for several weeks now that there might be a better opportunity to replace this stock.  I turned off the computer, trundled off to my Halloween party, and tried to forget about it over the weekend.  Late Sunday night, my e-mail lit up with news alerts on Sapient – there was a rumored buy-out pending.  Monday morning, it was officially announced that Publicis Groupe would buy the company at $25/share, which turned my goose-egg into a +44% gain for the position overnight.  For the full year of 2014, the Pawleys Growth Fund trounced the S&P by +5.65%, helped in part by the nice gain on Sapient.  Thank goodness I had held the position.

In the 1990’s, I spent several years in management roles within financial services.  I loved the challenge of motivating and inspiring others to do well.  I remember vividly in one training class being taught that the most important aspect of managing others rested on how well you could manage yourself and your emotions.  Now I see how the same holds true as a manager of assets.  Self-managing my impatience around Sapient directly resulted in good gains for my investors last year.

© 2015 Pawleys Investment Advisors, LLC. All rights reserved.

Portfolio Improvement by with Home Depot – Extending Holding Periods

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The Pawleys Dividend Fund has been long Home Depot stock since late 2010.  For the past four years, the total return figures for HD have been dizzying: +22% in 2011, +50% in 2012, +36% in 2013, and +30% in 2014.  It was the top performing holding for the Pawleys Dividend Fund in only one of those years – 2012.  Yet HD has been a solid contributor to the overall portfolio returns, and has helped keep our gross return figures ahead of the DJIA for each year.  We decided to break down the HD numbers on a daily basis to see if we could learn anything more.

For each year, the price movement on the stock generated the entire yearly gain in just a select number of trading days.  Traders moving in and out of the stock who were not long on those select days would have the return on their HD position reduced to zero.  What did we learn?  In 2011, the DJIA annualized total return was only 5%, while HD delivered +22%.  The entire total return could be attributed to just 6 trading days.  The markets were more robust during the other years, and the HD gains were a result of several days, not just a few.  Stock picking and extended holding periods become even more critical to delivering good performance in lackluster markets.

If we continue to hold HD during the next recession and stock market downturn – which we may or may not – we will crunch the numbers again to see how the daily returns break down in falling markets.  Stay tuned for more from the beautiful beaches of South Carolina!

Source: Yahoo! Finance

© 2015 Pawleys Investment Advisors, LLC. All rights reserved.

Does a Flattening Curve Mean Choppy Seas Ahead?

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Some days along coast, the ocean is flat and glassy, with small waves curling up to the beach like gently folding flower petals.  The only thing that makes this picture more serene is a nice summer day, with 90 degree sunshine and a cold Corona Lite, fresh lime, and salt.  As we enter 2015, Fed watchers are eagerly chomping at the bit for the first overnight bank lending rate hike.  But in 2014, the yield on the 30-year treasury actually dropped yet again – a full 117 basis points.  On January 14th, 2015, the 30-year stunned Wall Street when the yield dropped below 2.4%.  This action on the far end of the yield curve sets the stage for an interesting scenario:  when the Fed does start raising rates, there is less distance for the short end of the curve to catch up to long end rates – and flatten the curve.  Will such flattening come this summer?  And if it does, will the clouds gather and ruin the mostly serene days the stock markets have seen since 2009?

In 1993, short-term rates remained around 3% for the entire calendar year, while the 30-year treasury yield fell 1%.  In 1994, short term rates rose above 5 ½%, and the 30 year rose 1%.  It took until the end of 1995 for the curve to flatten.  When did the next recession occur?  Not until 2001.  Investors enjoyed a booming decade of stock market returns during to 1990’s and it took years before the next economic slowdown began after the first Fed action was initiated in 1994.

Many investors fear Fed action which leads to a flat, glassy yield curve.  But beware lightening up on equites in your portfolio too early, as you might miss some great gains in the market.  Stay the course, and your patience may pay off enough to fund a late summer vacation at the beach with some Corona Lite, fresh lime and salt.

© 2015 Pawleys Investment Advisors, LLC. All rights reserved.