although the statements of fact and data in this presentation have been obtained from, and are based...
TRANSCRIPT
Although the statements of fact and data in this presentation have been obtained from, and are based upon, sources that the firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this presentation constitute the firm’s judgment as of the date of this presentation and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. The data do not reflect the material differences between stocks, bonds, bills and inflation, such as fees (including sales and management fees), expenses or tax consequences. Common stocks generally provide an opportunity for more capital appreciation than fixed income investments but are also subject to greater market fluctuations. Corporate bonds, US Treasury bills and US government bonds fluctuate in value but, if held to maturity, offer a fixed rate of return and a fixed principal value. Government securities are guaranteed as to the timely payment of interest and provide a guaranteed return of principal. The principal value and interest on treasury securities are guaranteed by the US government if held to maturity. The Standard & Poor’s 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot directly invest in an index. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing.
To the extent the investments discussed herein represent international securities, you should be aware that there may be additional risks associated with international investing involving foreign economic, political, monetary and/or legal factors. International investing may not be for everyone.
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Important Smith Barney Disclosures
INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
Market Volatility and theLong-Term Investor
The Elm Street Group at Smith Barney
August 2008
11,500
12,000
12,500
13,000
13,500
14,000
14,500
10/9
/07
10/1
6/07
10/2
3/07
10/3
0/07
11/6
/07
11/1
3/07
11/2
0/07
11/2
7/07
12/4
/07
12/1
1/07
12/1
8/07
12/2
5/07
1/1/
08
1/8/
08
1/15
/08
1/22
/08
Dow Jones Industrial Average: 10/9/07 to 1/22/08
Source: Smith Barney
-15.5%
The Recent Correction
Dow Jones Industrial Average: 10/9/02 to 1/22/08
+64%
Source: Smith Barney
The Correction in Medium-Term Focus
2002 2003 2004 2005 2006 2007 20087,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
-15.5%
Dow Jones Industrial Average: 12/31/77 to 1/22/08
+1340%
Source: Smith Barney
The Correction in Long-Term Focus
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
77 80 82 84 86 88 90 92 94 98 00 02 0496 06 08
-15.5%
0%
10%
20%
30%
40%
Jan 1
-82
Jan 1
-84
Jan 1
-86
Jan 1
-88
Jan 1
-90
Jan 1
-92
Jan 1
-94
Jan 1
-96
Jan 1
-98
Jan 1
-00
Jan 1
-02
Jan 1
-04
Jan 1
-06
Jan-1
7-08
300 point swings in the Dow in percentage terms over time
Feb. 5, 2008: 2.45%
Source: Smith Barney
Get the Point?
Dow Jones Industrial Average on a Log Scale
1987 Crash
Source: Smith Barney
A Clearer Perspective
74 76 78 80 82 84 86 88 90 94 96 98 0092 02 04 06 08
1973-74 Bear
Market
2000 to 2002 Bear Market
Is the Market Getting Riskier?
“Postponing an attractive purchase because
of fear of what the general market might do
will, over the years, prove very costly.”
Philip A. Fisher
0
25
50
75
100
125
150
77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
30-Year Average:
57
Daily Moves in the S&P 500 Index of More Than 1%
Source: Smith Barney
Volatility Cycles
77 8373
473743
0
20
40
60
80
100
12/77 - 12/87 12/87 - 12/97 12/97 - 12/07
Positive Monthly Returns Negative Monthly Returns
Monthly Returns on the S&P 500December 1977 Through December 2007
Source: Smith Barney
What About the Down Side?
Num
ber o
f Mon
thly
Ret
urns
A Look at Some Other Popular Asset Classes
• Treasury Bonds
• Corporate Bonds
• Treasury Bills
• Other Cash Instruments
$0
$1
$10
$100
$1,000
$10,000
$100,000
1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2007
Cumulative Return on an Invested Dollar: 1926 Through 2007
Small Cap Large Cap LT Gov Bonds T-Bills Inflation
$15,092
$3,255
$77
$20$12
Source: Smith Barney
And the Winner Is . . .
3.1%3.7%5.4%
10.4%
12.5%
Small Stocks
Large Stocks
LT GovBonds T-Bills Inflation
Annualized Returns: 1926 Through 2007
Source: Smith Barney
Rates of Return
434443
36
1510
20
11
57
00
10
20
30
40
50
Annual Rolling 5 Year Rolling 10 Year Rolling 20 Year
StocksLT GovBonds
T Bills
Top Performing Asset Class 12/31/45 Through 12/31/07
Source: Smith Barney
Leader of the Pack
Num
ber o
f Per
iods
Where Do We Go From Here?
“An investor who has all the answers
doesn't even understand the questions.”
Sir John Templeton
Average: -31.8% 13.7 26.2
Declines of 20% or More in the S&P 500: 1950 Through 2007
864
203
7021
71411
2000-02199019871980-821973-741968-70196619621956-57
-49%-20%-34%-27%-48%-36%-22%-28%-22%
30.5 3 3 19 21 18 8 6 15
Decline(in months)
Recovery(in months)Date
Peak-to-Trough
Source: Smith Barney
The Bear Facts
The Real Story
“The true objective for any long-term investor
is maximum total real return after taxes.”
Sir John Templeton
Average:
-34.5% 14.3 42.8
Declines of 20% or More in S&P 500: Total Return After Inflation
?
20
123
29
10
32
2000-02
1987
1973-74
1968-70
1962
1946-48
-47%
-30%
-52%
-35%
-23%
-20%
23
3
21
18
6
15
Decline(in months)
Recovery(in months)Date
Peak-to-Trough
Source: Smith Barney
The Bear Facts II
72 73 74 75 76 77 78 79 80 81 82 83
$100,000
Investor #3 adds $25,000
$351,758
$244,301
Cumulative Growth of Three PortfoliosDec. 31, 1972 Through September 1984
$93,451
Investor #2 stays in stocks
Investor #1 sells stocks, earns 5% return
Source: Smith Barney
Note: The above represents a hypothetical investment and does not reflect the deduction for investment-management fees or transaction costs. Actual results would be reduced by these costs.
The Case for Waiting Out the Storm
62 67 72 77 82 87 92 97 02 07
$10,000
$10,000 $10,000
$10,000
$10,000$2.74 million
Stocks Treasury Bills
$502,716
Cumulative GrowthDecember 1961 Through December 2007
$10,000
$10,000
$10,000
Buying at the Top
Source: Smith BarneyNote: The above represents a hypothetical investment and does not reflect the deduction for investment management fees or transaction costs. Actual results would be reduced by these costs.
62 67 72 77 82 87 92 97 02 07
$10,000
$10,000 $10,000
$10,000
$10,000
$10,000 $3.68 million
$469,367
$10,000
$10,000
Stocks Treasury Bills
Cumulative GrowthDecember 1961 Through December 2007
Buying at the Bottom
Source: Smith BarneyNote: The above represents a hypothetical investment and does not reflect the deduction for investment management fees or transaction costs. Actual results would be reduced by these costs.
What the Experts Say About Market Timing
“I have never met a person who could forecast the market.” Warren Buffett
“Don’t try to buy at the bottom and sell at the top. This can’t be done—except by liars.”
Bernard Baruch
“There is no basis for assuming the average investor can anticipate market movements more successfully than the general public, of which he is a part.” Benjamin Graham
And the Losers . . .
“It’s no trick at all to be right on the market.”
Jesse Livermore
A famous Wall Street trader during the
“Roaring ’20s,” Livermore lost his entire
fortune in a failed effort to time the stock
market.
3.6%5.2%
7.0%9.0%
11.3%
14.4%
0%
5%
10%
15%
20%
Full Period Less the 10Biggest Up
Days
Less the 20Biggest Up
Days
Less the 30Biggest Up
Days
Less the 40Biggest Up
Days
Less the 50Biggest Up
Days
Annualized Increase in the S&P 500: 1980 Through 2007Net of Dividends
Source: Smith Barney
Easy Boat to Miss
FollowingDayDate
FollowingYear
FollowingWeek
+5.3% +2.4% +5.1% +3.9% +1.7% +4.7% +2.3% +2.8% +3.3% -1.1%
#1 Oct. 19, 1987#2 Oct. 26, 1987#3 Oct. 27, 1997#4 Aug. 31, 1998#5 Jan. 8, 1988#6 May 28, 1962#7 Sept. 26, 1955#8 Oct. 13, 1989#9 April 14, 2000#10 June 26, 1950
-20.5%-8.3%-6.9%-6.8%-6.8%-6.7%-6.6%-6.1%-5.8%-5.4%
+23.2% +23.6% +21.5% +37.9% +15.3% +26.1% +7.5% -4.8% -12.8% +17.6%
+1.3%+12.3% +7.1% +1.7% +3.6% +3.2% -0.3% +4.1% +5.8% -2.6%
Average:
-8.0% +3.0% +15.5%+3.6%
10 Worst Days for the S&P 500: 1950 Through 2007
Source: Smith Barney
On the Rebound
Decline
77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Buy and Hold Market Timing
$3.87 million
$1.71 million
Returns on a Buy-and-Hold Approach Versus a Market-Timing Strategy
December 1977 Through December 2007
The Costs of Short-Term Investing
Source: Smith BarneyNote: The above represents a hypothetical investment and does not reflect the deduction for investment management fees or transaction costs. Actual results would be reduced by these costs.
A Bad Time for Bad Timing
• Bear markets can be points of maximum vulnerability to poor market-timing decisions.
• Historically, net cash outflows by investors have marked major market bottoms.
A Winning Hand
“The stock market is like a gambling
casino where the odds are rigged in
favor of the players.”
Burton Malkiel
Distribution of Returns on the S&P 500: 1926 Through 2007
-40%-50%
-30%-40%
-20%-30%
-10%-20%
0%-10%
0% +10%
+10% +20%
+20% +30%
+30% +40%
+40% +50%
+50% +60%
1931 1937 19301974
192819351958
1947194819561960197019781984198719921994
1927193619381945195019551975198019851989199119951997
19261944194919521959196419651968197119721979198619881993
19331954
1982
1942194319511961196319671976
1983199619981999
1929193219341939194019461953196219691977198119902000
19411957196619732001
2002
2003
2004
2005
Up Years: 59 (72%)
Down Years: 23 (28%)
2006
Source: Smith Barney
The Odds Favor the Long-Term Investor
2007
Source: Smith Barney
More Hits Than Misses
Probabilities of Various Annual Returns 1926 Through 2007:
Up 10% or more: about 3 in 5 Up 20% or more: about 2 in 5 Up 30% or more: about 1 in 5
Down 10% or more: 1 in 8 Down 20% or more: 1 in 16 Down 30% or more: 1 in 40
Positive and Negative Returns on the S&P 500: 1945 Through 2007
Negative ReturnsPositive Returns
One-Year Periods
Five-Year Periods
Ten-Year Periods
485314 5
Source: Smith Barney
Time Pieces
53
In a Nutshell:
• Volatility is a fact of life in the stock market.
• Over the long run, stocks have offered significantly higher returns than bonds or T-bills.
• Market timing can be an expensive undertaking.
• Historically, the odds have favored the bulls.
“Patience is a necessary ingredient of genius.”
Benjamin Disraeli