marketcommentary_q3_2011
TRANSCRIPT
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Market Commentary Report™ 3
Q 1 1
Mid Year Analysis of Stock,
Bond & Commodity Markets
By Joseph J. JaniczekFounder & CEO, Janiczek & Company, Ltd.
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Choppy market conditions put both euphoria and ear into the heads o
investors. In this market commentary, we provide our mid-year analysis
o investment conditions and explain important tactical moves we
made in client portolios over the last quarter.
We want to remind our clients and riends that both proound
opportunities and threats exist in the economy at this time. We
believe our thorough process is precisely what is needed under these
circumstances and think our clients can sleep well knowing that rst
and oremost, they are investing rom a position o strength.
I we can do anything urther to assist you, please call us at 303-721-
7000
Joseph J. Janiczek
Founder & CEO
O U R T R A D I T I O N O F E X C E L L E N C E{ }
W E A
L T H MAN A G
E R
3 Q 1 1
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Economy
Our economic outlook remains the same,
despite Greece and U.S. debt ceiling issues . . . . .3
Asset AllocationWith a world of opportunities, we seek to
remove the “home country bias” . . . . . . . . . . . . .5
Equities
Despite trimming stocks during the quarter, we like
Corporate America’s balance sheet strength . . . . .7
Fixed Income
QE2 is over, but there’s opportunity within
certain corners of the bond market . . . . . . . . . . . .9
Alternatives
We continue to see interesting developments
in oil and currencies . . . . . . . . . . . . . . . . . . . . . 11
Financial Planning
Deserving success . . . . . . . . . . . . . . . . . . . . . . . 13
Analysis
Going beyond the numbers to increase
your results . . . . . . . . . . . . . . . . . . . . . . . . . . .15
CONTENTS
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Our economic outlook remains unchanged, despite
Greece and U.S. debt ceiling issues
During the second quarter, we saw downward revisions to economic growth both domestically
and globally. Global GDP is now orecast to be 4.3% in 2011, still driven by 6% growth in
emerging markets and 2% in developed countries. Given emerging markets contribution
to global growth, infation remains a key concern as does the continued interest rate hikes
by central banks in those countries. The risk o a “hard landing” in emerging markets is a
possibility, but we’d view a downturn as an opportunity to continue to put money into this
area or the long-term.
In the U.S., GDP or 2011 is now expected to be 2.6%. This growth alls short o the growth
needed to reduce our 9.2% unemployment rate anytime soon, and the most recent jobs report
ailed to deliver the required job gains. Further, Leading Economic Indicators (“LEI’s”) serve
as a trend indicator, and there are several we ollow. As we discussed last quarter, many LEI’s
display slowing growth, and we agree with one o our research partners that investors should
expect a “sot patch” – but not a double dip recession – in coming quarters.
As our overall assessment o the economy remains largely the same rom last quarter’s
remarks, we’ll take this opportunity to address some topical issues we’ve been discussing with
our clients.
Internationally, the ocus during the quarter returned to Greece. News o an austerity plan
and EU support helped rally global markets in the nal week o the quarter. Although Greek
liquidity appears better, solvency will remain an issue. We’re oten asked why a country with
11 million residents representing only 2% o the European economy has such an impact
on the global marketplace. The answer lies in what we learned rom 2008: The nancial
system around the world is so intertwined that one small crisis can have rather large ripple
eects. In Greece’s case, the EU is not only concerned with the scal condition o the Greek
government, but also the impact on European banks that hold Greek debt. Capital losses
in European banks could bleed into other nations’ banking systems, including our own. For
this reason, there is a strong incentive or the European and other developed nations to work
through a solution to the Greek (and other) sovereign debt problems.
In the U.S., the current economic debate is the debt ceiling and the looming August 2nd
deadline. Our opinion remains unchanged, although we believe the consensus has shited
into alignment with our assessment. We believe the most likely outcome in coming weeks
will be a $2 trillion increase in the debt ceiling to over $16 trillion. The compromise will
come with equivalent spending cuts and will kick the can down the road (yet again) until
late 2012 when the debt ceiling issue will return. More importantly, we believe that the
M A R K E T C O M M E N T A R Y R E P O R T 3
C O N T I N U E D
In the U.S., the
current economic
debate is the debt
ceiling and the looming
August 2nd deadline.More importantly,
we believe that the
U.S. has some tough
decisions in its uture.
3 Q 1 1
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ILLUSTRATION 1
Corporations have $3.6 tril-
lion in cash to put to use that
will serve as a meaningul
stimulus to the economy.
M A R K E T C O M M E N T A R Y R E P O R T 4
ILLUSTRATION 2
Debt, defcit, average
maturity and amount unded
by oreigners all determinethe severity o any sovereign
debt crisis.
Country
GovDeficit
asa%ofGDP
GovNetDebt
asa%ofGDP
%Gov.DebtHeld
Abroad
Weighted
Average
Maturity
(years)
Greece (6.0%) 152.3% 61.5% 7.8
Portugal (3.2%) 86.3% 56.7% 6.6
Ireland (5.9%) 95.2% 59.4% 7.0
Spain (4.7%) 52.6% 49.6% 6.7
Italy (2.8%) 100.6% 47.0% 6.8
France (4.0%) 77.9% 64.4% 7.3
U.K. (6.6%) 75.1% 26.7% 13.8
USA (8.1%) 72.4% 31.9% 5.3
Canada (3.6%) 35.1% 19.6% 6.3
Germany (2.1%) 54.7% 52.8% 6.7
Japan (8.3%) 127.8% 6.9% 6.2
Source:JPMorganAssetManagement
GovernmentDebt
U.S. has some tough decisions in its uture. On the other hand, Corporate America still
compares incredibly well to the government’s balance sheet. With $3.6 trillion in cash,
lower leverage, lower debt servicing, and growing sales, we believe Corporate America’s
strength will serve equity and corporate bondholders well and provide a stimulus to the
U.S. (and global) economy.
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With a world of opportunities, we seek to
remove the “home country bias”
During the quarter, we removed our tactical position we initiated last year by selling our
5% overweight equity position and increasing equally our 5% underweight bond position.
We believe that our tactical move was no longer justied given valuation and technical
indicators, and we already beneted rom equity gains o about 10%-12% over the holding
period. We are now positioned at our long-term target allocations. With volatile markets
and investors’ psychological tendencies, we expect to have uture opportunities to take
advantage o market mispricings. Case in point: Stock markets have nearly doubled over
the past 27 months, yet investors have poured more money into bond unds than stock
unds in over 20 o those 27 months and only recently have added more to stock unds.
In subsequent sections o this commentary, we provide our perspective o various asset
classes. Given our neutral stance on asset allocation, we’ll ocus our comments on some
additional actions we took while removing our tactical position.
The world is ull o investment opportunities, yet we still nd what we call “the home
country bias” alive and well among high net worth investors, as the accompanying chart
displays. High net worth investors tend to invest heavily in their home markets despite
what may be more attractive opportunities abroad. So, with this in mind, and given our
outlook or various international equity markets, we targeted domestic stocks in removing
our 5% tactical overweight. In some cases we even added to international stocks in this
move or clients whose portolios were too light in those markets.
M A R K E T C O M M E N T A R Y R E P O R T 5
ILLUSTRATION 3
Despite a world o opportuni-
ties, high net worth investors
remain within local markets.
C O N T I N U E D
With volatile markets
and investors’ psychological
tendencies, we
expect to have uture
opportunities to take
advantage o market
mispricings.
3 Q 1 1
High New Worth Investors Are Over-Invested in Home Markets
% Exposure to Home Market Home Market % of World Market
42%
53%
62%
72%
3%
33%
19%
46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
La.nAmericaHNWIs EuropeHNWIs AsiaPacificHNWIs NorthAmericaHNWIs
Home
Country
Bias
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ILLUSTRATION 4
A Composite Score below
zero indicates cheap markets,
while above zero is expen-
sive.
M A R K E T C O M M E N T A R Y R E P O R T 6
In developed markets, we see attractive valuations in both Europe and Japan that are
likely driven by their respective crises. As we do not expect a double dip recession in
those regions, we believe the current valuation warrants a market weight exposure relative
to long-term targets.
In emerging markets, we remain positive on the long-term prospects and look to continue
to build allocations over time. We’ve stated this beore, but we believe most investors are
not adequately invested in emerging markets despite avorable opinions. It’s a matter o
“walking the talk,” and our disciplined approach ensures our clients are invested properly.
In addition to opportunities in those geographic locations, we also gained some non-U.S.
dollar exposure. With no clear path to U.S. decit and debt reduction, we believe any
rally in the U.S. dollar versus other currencies is likely short-lived.
Among our xed income holdings, we took this rebalancing opportunity to gain exposure
to municipal bonds, an area we’ve been positive on or some time now. In addition to the
attractive municipal market (discussed urther in the Fixed Income section o this report),
we are returning our high net worth clients to a more normalized level o municipal
exposure. The benets o tax-ree xed income remain attractive to our client base, and
with the added prospects o higher taxes in the uture, we do not want to be underweight
in this area.
Forward
Price/
Earnings
Price/
Book
Price/
CashFlow
Dividend
Yield
Composite
Score
AllWorldIndex 11.6 1.8 6.7 2.6% (1.15)
EAFEIndex 11.1 1.4 5.4 3.4% (2.03)
France 10.2 1 .3 4.9 3.9% (2.49)Germany 10.4 1.5 4.7 3.2% (2.19)
Japan 13.2 1.1 3.5 2.2% (1.93)
U.K 9.9 1.8 7.8 3.4% (1.38)
Australisia 11.8 1.9 8.9 4.4% (1.04)
Switzerland 11.9 2.1 8.3 3.3% (0.76)
Canada 13.3 2.0 8.6 2.4% (0.23)
UnitedStates 12.5 2.2 8.2 1.8% 0.24
EmergingMarketsIndex 10.4 1.8 6.3 2.6% (1.38)
Russia 6.2 1.1 4.7 1.9% (2.39)
Brazil 9.3 1.6 5.8 3.3% (2.12)
Taiwan 12.9 1.9 6.2 4.0% (1.49)
China 10.4 2.0 7.3 2.7% (1.06)
Korea 9.2 1.5 4.6 1.3% (0.76)
SouthAfrica 11.1 2.2 8.8 3.3% (0.68)Mexico 15.0 2.6 7.0 1.6% 0.89
India 14.8 2.8 11.0 1.3% 2.52
NOTE:CompositeScorerepresentsanequalweightedindexofeachofthe
4metricsaboverelavetotheirrespecve10yraverages.Belowzeroischeap
relavetoits10yraverage,whileabovezeroisexpensive.
Source:JPMorganAssetManagement
Global Stock Market Valuations
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ILLUSTRATION 5
Currently, investors are
neither euphoric nor gloomy
on stocks…
Despite trimming stocks during the quarter, we like
Corporate America’s balance sheet strength
Whereas the rst quarter o 2011 brought us several unoreseen surprises (the “Arab
Spring”, Japanese earthquake / tsunami / nuclear crisis, etc.), the second quarter was
a reminder o our known problems. The equity markets were troubled with renewed
concerns over Greek debt and the specter o a U.S. deault.
In the U.S., the S&P 500 generated a mere 0.1% return or the quarter, while small cap
stocks ell 1.6%. Remarkably, with all the crises and drama in the world, the S&P 500’s
trading range remained within 100 points throughout the quarter. Non-U.S. developedequity markets ared a bit better, as the MSCI’s EAFE Index rose 1.8%. With a 4.7%
quarterly return, Germany proved to be the sae haven in Europe, while Japan’s 0.7% rise
indicates a long recovery rom its Q1 2011 crises.
Emerging markets continue to struggle with rising infation. The MSCI Emerging
Markets Index ell 1.1% during the quarter as central banks in those countries – most
notably China – continued to raise interest rates to combat rising prices. We remain
long-term ans o emerging markets due to their relatively strong nancial position, but
M A R K E T C O M M E N T A R Y R E P O R T 7
C O N T I N U E D
The secular bear
market remains
intact, and the
cyclical bull market
experienced since
March o 2009 is
waning.
3 Q 1 1
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we acknowledge that the near term impact o these rate increases will temper returns,
perhaps even cause a correction.
As we look at the global equity markets, we’re encouraged by continued strength incorporate balance sheets: For example, corporations remain fush with $3.6 trillion in
cash, and recent surveys indicate that 71% o nance ocers see cash balances fat to
down in coming months. That said, valuations appear air with the S&P 500’s P/E ratio
near its 40-year median while small cap stocks appear more ully valued. The market’s
improving sentiment could provide 5%-10% upside through year-end, but the valuations
will likely cap any signicant rally, in our opinion.
We are comortable with our recent sell o our 5% overweight position in equities and
our return to our long-term asset allocation targets. The tactical move allowed us to earn
an incremental return or our clients’ portolios o about 10%-12% since late last year.
The secular bear market remains intact, and the cyclical bull market experienced sinceMarch o 2009 is waning. Still, unless the global economy shows signs o recession, we’ll
weather short-term corrections and avoid the investor behavior penalty o excessive
trading.
ILLUSTRATION 6
…and middle-o-the-road
valuations oer no clearmispricings.
M A R K E T C O M M E N T A R Y R E P O R T 8
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M A R K E T C O M M E N T A R Y R E P O R T 9
ILLUSTRATION 7
With tight credit spreads,
investors are treating high grade corporate bonds as
near equals to Treasuries.
In speaking with
investors, it’s
evident that theelephant in the room
remains the risk o
rising interest rates.
Headed into Q2 2011, one would be hard pressed to nd supporters o Treasury securities.
But ater renewed concerns about European sovereign debt, Treasuries proved that they
remain a sae haven or investors.
The Barclay’s Aggregate Bond Index rose 2.3%, driven largely by its heavy weighting in
government bonds. The benchmark 10-year Treasury rate, which began the quarter at
a historically low rate o 3.4%, ell to 2.8% beore closing at 3.2%. At the opposite end
o the risk spectrum, high yield bonds rose just 1.1%. But the shining stars o the xed
income asset class were municipal bonds, rising 3.9% or the quarter.
We’ve emphasized municipals bonds since the beginning o the year, ollowing their
surprisingly violent sell o rom December through February, and we remain positive on
the group going orward. Fundamentally, despite a ew higher prole woes, state and local
revenues have increased or ve straight quarters. Further, deaults year-to-date o $600
million are running at 40% o last year’s level which was only one-third o the previous
QE2* is over, but there’s opportunity within certain
corners of the bond market
3 Q 1 1
96
98
100
102
104
106
108
1 2 / 3 1 / 1 0
1 / 7 / 1 1
1 / 1 4 / 1 1
1 / 2 1 / 1 1
1 / 2 8 / 1 1
2 / 4 / 1 1
2 / 1 1 / 1 1
2 / 1 8 / 1 1
2 / 2 5 / 1 1
3 / 4 / 1 1
3 / 1 1 / 1 1
3 / 1 8 / 1 1
3 / 2 5 / 1 1
4 / 1 / 1 1
4 / 8 / 1 1
4 / 1 5 / 1 1
4 / 2 2 / 1 1
4 / 2 9 / 1 1
5 / 6 / 1 1
5 / 1 3 / 1 1
5 / 2 0 / 1 1
5 / 2 7 / 1 1
6 / 3 / 1 1
6 / 1 0 / 1 1
6 / 1 7 / 1 1
6 / 2 4 / 1 1
BondSectorReturns,YTD2011
Treasuries
Municipals
AAACorporates
HighYieldCorporates
* QE2 reers to the Federal Reserve’s second round o Quantitative Easing. Quantitative easing represents the
explicit purchases o Treasury securities by the Federal Reserve with the intention o keeping prevailing interest rates
low. The Fed completed QE1 in 2010, while QE2 was concluded in June o this year
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year’s rate. Lastly, with continued pessimism over municipal nances, investors can lock
into abnormally high interest rates on investment-grade, essential service bonds (i.e.,
water utilities, power plants, etc.)
Another area we’ve been avorable on is corporate bonds, specically, high yield bonds.
Throughout the year, high yield issuers have issued debt and renanced existing debt,
locking into longer maturities and lower rates. Most high yield debt won’t come due until
2015 or later, so a Greek-like liquidity issue is unlikely. With the market’s recent panic
and the fight to quality (i.e. Treasuries), we believe corporate issuers in both investment
grade and high yield are attractive or investors.
In speaking with investors, it’s evident that the elephant in the room remains the risk o
rising interest rates. With average cash levels at bond mutual unds hovering at 9% o the
portolio, clearly many proessionals agree. We’d agree that, over time, long-term rates
will likely return to more normal levels in the 5%-6% range. However, with European
and American central banks keeping short-term rates low, we’d expect long-term rates to
remain in the 3%-4% range over the near term.
We’ve removed our 5% overweight in stocks and returned the proceeds to bonds. We’re
satised with our current positioning in the xed income part o our clients’ portolios,
and we’ll monitor and adjust as warranted.
M A R K E T C O M M E N T A R Y R E P O R T 1 0
ILLUSTRATION 8
Even without QE2, the
10-year Treasury could
ace some resistance on
its way to 4%.
2.40
2.60
2.80
3.00
3.20
3.40
3.60
3.80
4.00
4.20
J a n - 1 0
F e b - 1 0
M a r - 1 0
A p r - 1 0
M a y - 1 0
J u n - 1 0
J u l - 1 0
A u g - 1 0
S e p - 1 0
O c t - 1 0
N o v - 1 0
D e c - 1 0
J a n - 1 1
F e b - 1 1
M a r - 1 1
A p r - 1 1
M a y - 1 1
J u n - 1 1
10-yearU.S.TreasuryYield
ImportantResistanceLevels
4.00%
3.60%
3.40%
3.25%
3.75%
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M A R K E T C O M M E N T A R Y R E P O R T 1 1
ILLUSTRATION 9
The second quarter brought
rising (and irregular) oil prices …
With nearly twice
the return, investors
preerred the SwissFranc to gold as
ear returned to the
markets.
The “alternatives” allocation within a portolio can capture anything that doesn’t t
neatly into the denition o equities or xed income. At Janiczek & Company, we dene
alternatives as commodities, absolute return strategies, and real estate.
Across energy, agriculture, and metal commodities, returns or the quarter were largely
negative. The DJ-UBS Commodity Index* ell 6.7%, with the only bright spot being
gold. Our core (and sole) commodity holding invests across the commodity complex and
manages downside risk actively by reducing net exposure and, i warranted, establishing
net short positions. We established this position in the rst quarter ater conducting our
due diligence. During the second quarter the und served us well, alling 3.8% but limiting
losses and outperorming the DJ-UBS Commodity Index.
We cannot write this commentary without some mention o gold, which rose 4.7% during
the quarter. We’ve stated beore that we view gold as more o a currency than a metal
commodity. However, we ound the quarter’s “fight to saety” move rather interesting.
Short-term U.S. Treasuries securities rose about 2% or the quarter, while gold clearly
beneted more. However, we note that the Swiss ranc gained 8.5% excluding interest
We continue to see interesting developments
in oil and currencies
3 Q 1 1
$60
$70
$80
$90
$100
$110
$120
$130
6/30/10 7/30/10 8/30/10 9/30/10 10/30/10 11/30/10 12/30/10 1/30/11 3/2/11 4/2/11 5/2/11 6/2/11
OilPrices,12months
Brent
WTI
* The Dow Jones UBS Commodity Index is a widely used benchmark among commodities managers that capturesmetals, agriculture and energy commodities
Source:Bloomberg
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earned. To us, this highlights the growing need or investors to gain non-U.S. dollar
exposure, either directly via currency investing or indirectly via non-U.S. investments.
Oil generated some signicant headlines during Q2 2011. There continues to be a
signicant gap between the two most common oil benchmarks (West Texas Intermediate
and Brent Sea), initially explained by supply gluts in the U.S, then driven urther bythe Libyan civil war and resulting oil supply disruption to Europe. This culminated in
the IEA’s June 23rd decision to release 60 million barrels rom emergency stockpiles,
an announcement that sent both oil benchmarks lower or a ew days only to nd them
closing the quarter at higher prices. The oil release, which was explained as a response
to the Libyan confict, could also be viewed as an incremental stimulus on the part o
developed nations in response to OPEC’s reusal to increase production. Ater all, our
ragile economic recovery is contending with consumer energy prices that are up 20%
rom last year.
Our current absolute return strategy holding remains our market neutral und, and market
neutral investing in general aided portolios during Q2 2011. While we believe absolutereturns should be a core component o client portolios, we acknowledge that market
neutral is just one strategy we can deploy. For example, global macro investing is in
avor given the major issues currently unolding around the globe. Another strategy we’d
like to explore urther is managed utures, which involves quantitative-based trading o
utures contracts o various types to generate positive returns uncorrelated with other asset
classes. For now, we are monitoring our market neutral position or possible replacement.
M A R K E T C O M M E N T A R Y R E P O R T 1 2
ILLUSTRATION 10
… which negatively a-
ected the headline CPI,
not to mention consumer
confdence.
Component Weight(%) 12-MonthChange
Food&beverage 14.8% 3.4%
Housing 41.5% 1.2%Apparel 3.6% 1.0%
Transporta@on 17.3% 12.5%
Medicalcare 6.6% 3.0%
Recrea@on 6.3% 0.0%
Educa@on 6.4% 1.0%
Other 3.5% 1.5%
HeadlineCPI 100.0% 3.4%
Less:Energy 9.1% 20.7%
Less:Food 13.7% 3.5%
CoreCPI 77.2% 1.5%
Source:BureauofLaborSta>s>cs,JPMorgan
ComponentsoftheCPIIndex
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I I had to sum up our wealth management process in a handul o words, I’d have to say we
want to help our clients do everything possible to “deserve success” in all market condi-
tions. As George Washington said, “we cannot insure success, but we can deserve it.”
When I think about individual investors, many actors have to be considered when
constructing a portolio that is appropriate or their given goals and objectives. Not only
does one need to build a diversied portolio o market investments (stocks, bonds and
cash), they also need to think about and incorporate other assets and liabilities such as real
estate, mortgages, concentrated holdings, alternative investments, illiquid holdings, and
human capital. Beyond just the investment portolio, it is also important to remember that
whatever your balance sheet consists o, it should never be separated rom your cash fow
statement (one constantly aects the other). These are two areas that must complement
one another to mitigate unwanted risks and/or dangers to an individual’s long-term success.
There have been studies to show a majority o U.S. investors (including the afuent class)
are not well diversied. Without ull clarity o your entire nancial picture and a specic
plan, you can run signicant risks that they are not optimally diversied to weather volatile
and choppy markets. Depending on the circumstances o an investor, one may consider
into their “average rate o return” the importance o downside protection along with upside
potential. We rmly believe, based on historical market trends and the potential impacts
they can have on an individual investor (which can be signicantly dierent than that o
an institutional investor), that risk allocation is every bit as important as asset allocation.
We all deal with risks, which in the investment world are boiled down to two types—
systematic and unsystematic. Systematic risk (also known as market risk) by denition
cannot be diversied through asset allocation. An example would be a major catastrophic
event that aects the whole market regardless o asset class or investment (such as the 9/11
tragedy or the recent Japanese earthquake/tsunami). Comparatively, unsystematic risk can
be reduced through appropriate diversication.
3 Q 1 1
M A R K E T C O M M E N T A R Y R E P O R T 1 3
C O N T I N U E D
R. Brady Siegrist, CFP®
Chie Financial Planning Ofcer
Janiczek & Company, Ltd.
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We control the risks that we can control (through asset allocation and tactical
management). We position our clients through our comprehensive wealth manage-
ment process, ocusing on risk allocation to make sure they are protected rom taking
unnecessary or excessive risks that could irreparably damage their wealth. There is a
startling statistic that one in three American households is a single event away rom
going bankrupt! A good wealth management strategy is designed to protect an indi-
vidual or amily rom ever meeting this unortunate ate.
We believe at some point in the uture, we will likely ace another major market dis-
ruption like the collapse in 2008. While no one knows exactly when this will happen,
we will continue to work with our clients so they have a detailed plan in place that
ocuses on mastering our Five Guiding Principles, and meeting the standards o our 35
Essential Strengths.
While we can’t entirely insure success, we are committed to helping our clients de-
serve success.
M A R K E T C O M M E N T A R Y R E P O R T 1 4
‘We cannot insure
success, but we
can deserve it.’ –
George Washington
Wealth Optimization
Dashboard™ Example
N/A
Estate Optimization GridTM Asset Optimization Grid TM
Lifestyle Protection GridTM
Portfolio Enhancement GridTM
STRENGTH
RATING
of
STRENGTH
RATING
7Neutral
Scale1to 10
STRENGTH
RATING
8Strong
Scale1 to10
STRENGTH
RATING
3Weak
Scale1to 10
7 35
PASS FAIL
Back-test
BalanceSheet
CashFlow Portfolio
Stress-test
l i , LL . ll i . i i i i l i i i - i li i i . . .
ILLUSTRATION 11
The dashboard o our
proprietary Wealth with
Ease System® provides
our clients with a
snapshot o where our
clients are strong, weak
or vulnerable.
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M A R K E T C O M M E N T A R Y R E P O R T 1 5
There is no way
one can analyze
the undamentals
o investing
without assessing
the psychology o
investing.
In my previous lie as a research analyst, I worked or a manager who was a die-hard value
investor. I recall being surprised by how much we read on the subject o psychology. Now I
know why. Simply put, there is no way one can analyze the undamentals o investing withoutassessing the psychology o investing.
In the world o psychology, several seemingly irrational behaviors have been well documented.
For example, Amos & Tversky amously studied the concept o “loss aversion” in which
people will disproportionately orgo gains to prevent losses. In another study, “recency bias”
was the term used to describe the excessive value placed on newer inormation versus older
inormation. One o the best books capturing the psychology o investing is Poor Charlie’s
Almanack by Berkshire Hathaway’s Charlie Munger, and I recommend it to anyone looking to
learn more on the topic.
These psychological actors can have an impact on the markets. Loss aversion likely explainswhy people today are willing to buy a 10-year bond earning less than 3% over other more
productive assets. Recency bias clearly plays a role in mutual und fows as investors dump
underperorming unds and pour money into the best perorming unds, only to see those same
unds reverse course over the ollowing time periods. Incredibly, these are just two examples
that have been well documented or years …and yet they still persist today. For example, global
equities have generated a cumulative 43% return rom 2008 through 2010, yet investors have
pulled $45 billion out o stock unds during that time. Global bond unds, on the other hand,
have received a whopping $537 billion despite cumulative returns o less than 10% rom 2008
through 2010 and the looming risk o rising interest rates rom record lows.
The consequences o letting this irrational behavior drive your investing are signicant. In astudy by DALBAR Inc., the S&P 500 Index averaged a 9.0% return over the last 20 years while
returns experienced by the average investor were a mere 3.0%. Another study by John Bogle,
considered the ather o passive index investing, ound that investors owning index unds didn’t
are much better. When emotions overtake sound investing, the negative wealth impact o
yielding to one’s psychological tendencies is called “The Investor Behavior Penalty”.
But perhaps the biggest detractor to investor returns is “short-termism”, which has been around
or decades but appears to be worsening. The average holding period o a share o stock on
the New York Stock Exchange has allen rom 11 years in the 1950s to less than 1 year today.
Analysis: Going beyond the numbers to increase
your results
3 Q 1 1
C O N T I N U E D
James B. Callahan, CFA
Chie Investment Ofcer
Janiczek & Company, Ltd.
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The average portolio turnover in a stock mutual und is over 100%, meaning that the entire
portolio could be sold and reinvested in less than a year, generating costly short-term gains (i
any). Short-termism adds to investors’ tax bills and trading costs at the expense o investment
returns. Investors ampliy short-termism by selling an underperorming stock or ring anadvisor. For the average investor, however, rarely does this increased activity result in anything
but satisaction in the short-term and disappointing returns in the long-term.
Interestingly, some unpopular barriers that prevent some o these behaviors rom occurring
can actually generate higher returns. For example, studies show investors in load unds (in
which an additional cost is tacked on to the initial purchase or nal sale o a und) outperorm
those in no-load und despite the ~5% additional cost. Hedge unds and private equity unds
are derided in the media or their strict lock-up terms, preventing investors rom pulling their
money out at will. However, in both cases, note that not only is the investor protected rom
his/her psychological tendencies, but the manager is also ree rom those concerns and can
ocus on managing the portolio.
A brie examination o the private equity approach to investing might prove insightul.
Private equity unds typically invest in a portolio o companies (diversication) that they
view undervalued relative to a uture exit price (hence, buying cheaply). Further, they ocus
on business operations since, in many cases, their stake in the target company allows or some
control. They hold or a long time period (low turnover), requiring an assessment o uture
market conditions (and understanding psychological tendencies) and beneting rom the
compounding o returns, beore selling or a prot.
While we stand by our long-term approach to investing, we incorporate many o these
psychological actors into our portolio management. For example, we combine technicalanalysis to our undamental analysis to determine i and when to take tactical positions in
our clients’ portolios, and technical analysis incorporates much o the investor psychology
discussed here. For example, we assess market sentiment (indicates possible near term price
moves) and momentum (correlated to und fows) when considering any portolio moves. Too
much trading can whittle away returns, but investing rom a position o strength when the
markets oer dislocations oers the opportunity or above average returns, in our view.
No investor will succeed over time without thorough undamental analysis. But, a disciplined
approach that also protects rom the negative impact o that which makes us human can
increase investor returns over time.
M A R K E T C O M M E N T A R Y R E P O R T 1 6
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M A R K E T C O M M E N T A R Y R E P O R T 1 7
3 Q 1 1
Choppy market conditions put both euphoria and ear into the heads o investors. Our
primary role as investment, retirement and wealth advisors is to keep our clients on a dis-
ciplined wealth management track to successully navigate the conditions at hand. We are
reminded o a brilliant quote by Peter Drucker: “The main thing is to keep the main thing
the main thing”.
In short, we like to remind our clients and riends that both proound opportunities and
threats exist in the economy so we believe the main thing to ocus on at this time is invest-
ing rom a position o strength. Doing so enables you to weather storms, endure dry spells
and invest at the very best times: when others are too araid or nancially unable to invest.
The audio book version o our ounders book, Investing From a Position o Strength will soon
be released. For a ree copy (in CD or Podcast orm) just email us at [email protected]
“The main thing
is to keep the main
thing the main
thing.”
— Peter Drucker
ILLUSTRATION 12
The audio book version o
Investing From a Position
o Strength will soon be
released.
I N V E S T I N G
FRO M A P O S IT IO N O F
S T R E N G T H
Joseph J. Janiczek Joseph J. JaniczekBY
AUDIO BOOK
A high net worth investors guide to
surviving and thriving in all
economic and investment climates
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Tuesday, August 2, 2011
CLIENTS & FRIENDS ~ DELICIOUS PICNIC ~ LIVE MUSIC
A Perfect Summer EveningPlease join us for
Please join us for an
open house reception
anytime between 4:30
p.m. and 6:00 p.m. at
the Janiczek office. After
a brief reception, we will
walk a few steps to
Crescent Amphitheater
to enjoy Soul X, an
amazingly versatile
10-piece band. The
evening will include a
delicious picnic.
The concert begins at 7:00 p.m. and ends at 8:30 p.m.Seating is inormal, so please bring blankets or lawn chairs.
Friends and amily are welcome! Sorry, no pets.
You may park in the building lot; no garage parking.I asked, say you are with Janiczek & Company.
We are looking orward to seeing you or a un summer evening.
R.S.V.P. Required.
Please R.S.V.P. to Pam Dorn at303-339-4571 or [email protected]
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I N V E S T I N G F R O M A
P O S I T I O N O F S T R E N G T H
About Janiczek & Company, Ltd.
8400 E. Crescent Parkway • Suite 160
Greenwood Village, CO 80111
303.721.7000 • Toll Free 877.526.4293 • Fax 303.721.7082
Accepting clients throughout the U.S., Janiczek & Company, Ltd. offers comprehensive wealth
management services to individuals and families with investable assets of $1 million to $100
million. The company’s proprietary Wealth with Ease® System brings all the key elements of
successful investment portfolio management and financial, retirement and estate planning into a
simple yet comprehensive wealth management service aimed at transforming the lives and results of
each client and, if desired, multi-generations of each client's family. The company has been named
one of the top, best or most exclusive wealth advisory firms in the nation multiple times. For more
information call (303) 721-7000 or (877) 526-4293, or visit our website at www.janiczek.com.
About the Author
Joseph J. Janiczek is the founder and CEO of Janiczek & Company, Ltd., recognized multiple times as
one of the top, best or most exclusive wealth advisory firms in the nation. After decades of meticu-
lous work identifying the optimal way to create and manage wealth, he created the patent pending
Wealth with Ease® System, bringing together all of the key elements of success and satisfaction into
one cohesive wealth management service. An award-winning author and avid creator of concepts
and tools that simplify success, Janiczek is frequently featured in the national press.
Please remember that past perormance may not be indicative o uture results. Dierent types o investments involvevarying degrees o risk, and there can be no assurance that the uture perormance o any specic investment, investmentstrategy, or product (including the investments and/or investment strategies recommended or undertaken by JJJ Advisors,Inc. d/b/a Janiczek & Company, Ltd.), or any non-investment related content, made reerence to directly or indirectly inthis newsletter will be protable, equal any corresponding indicated historical perormance level(s), be suitable or yourportolio or individual situation, or prove successul. Due to various actors, including changing market conditions and/orapplicable laws, the content may no longer be refective o current opinions or positions. Moreover, you should not assumethat any discussion or inormation contained in this newsletter serves as the receipt o, or as a substitute or, personalizedinvestment advice rom JJJ Advisors, Inc. d/b/a Janiczek & Company, Ltd. To the extent that a reader has any questionsregarding the applicability o any specic issue discussed above to his/her individual situation, he/she is encouraged toconsult with the proessional advisor o his/her choosing. JJJ Advisors, Inc. d/b/a Janiczek & Company, Ltd. is neither alaw rm nor a certied public accounting rm and no portion o the newsletter content should be construed as legal oraccounting advice. A copy o the JJJ Advisors, Inc. d/b/a Janiczek & Company, Ltd.’s current written disclosure statementdiscussing our advisory services and ees is available or review upon request.
TM & Copyright 2011, Wealth with Ease, LLC. All rights reserved. No part o this document may be reproduced ororwarded without the express written authorization o the publisher. The Wealth with Ease® System, Market CommentaryReport™, and Investing rom a Position o Strength™ are trademarks o Wealth with Ease, LLC.
I N V E S T I N G
FRO M A P O S IT IO N O F
S T R E N G T H
Awar d Winni ng Aut hor of Absol ut e Fi nanci al Fr eedom
BY
A high net worth investors guide to surviving andthriving in all economic and investment climates
Joseph J. Janiczek Joseph J. Janiczek
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