Whether you're talking about misleading, "apples-to-oranges" comparisons or the attractiveness of "low-hanging fruit," analogies that tie investing to agriculture permeate the market landscape. Of all these, I find none more thought-provoking as those of Ron Muhlenkamp, who actually grew up on a farm, went on to start his own no-load mutual fund, and now applies the patience and discipline he developed early in life to an investment philosophy that has helped him achieve an impressive long-term track record.
Muhlenkamp Fund
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Expense Ratio
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1.18%
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Assets Under Management
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$746.9 million
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1-Year Return
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35.9%
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5-Year Annualized Return
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(5.2%)
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10-Year Annualized Return
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4.3%
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Source: Morningstar.
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Top Holdings
As of Dec. 31, 2009
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% of Net Assets
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Philip Morris (NYSE: PM )
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4.65%
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General Electric (NYSE: GE )
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3.97%
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UnitedHealth (NYSE: UNH )
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3.96%
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Pfizer (NYSE: PFE )
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3.81%
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Kinetic Concepts (NYSE: KCI )
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3.66%
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Oracle (Nasdaq: ORCL )
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3.43%
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AT&T (NYSE: T )
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3.29%
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Source: Muhlenkamp Fund.
"We had a good year"
After correctly timing the market's lows in early 2009, Muhlenkamp put his cash to work last spring. As a result, he's already made good progress toward recovering the losses his shareholders incurred over the prior two years.
However, by no means does he think we're out of the woods. Among his chief concerns, Muhlenkamp thinks politicians will put pressure on the Fed to keep interest rates low even once the recovery starts up in full force. This same mistake, he believes, compounded the damage inflicted on our financial system by encouraging questionable lending practices that were prevalent through 2006 and 2007. Keeping rates too low for too long again, Muhlenkamp suggests, could lead to the same problems.
On top of that uncertainty, the profit-farmer sees speculative stimulus spending, pending health-care mandates, and other regulatory initiatives as serious impediments to future recovery.
Fate of the consumer
Perhaps the biggest issue that will influence the fate of consumers has to do with government incentives. In Japan, stimulus spending has gone primarily toward infrastructure maintenance and improvements. Muhlenkamp would rather see government money go toward funding incentives that give consumers and workers a direct benefit.
"I don't know too many people who work overtime so the government can build another bridge. I know a lot of people who are willing to work overtime so they can buy a Corvette or take a vacation, or have a nicer house, or whatever it is -- the discretionary kinds of things that we own. "
As Muhlenkamp sees it, proposed taxes and regulation in the U.S. threaten to take away the incentives that are currently in place. In his words, "If we kill the incentives, we'll kill any growth in the economy."
Stocks
Muhlenkamp believes that 2009's v-shaped stock market chart was a direct result of "forced selling that was caused by deleveraging among hedge funds and the resultant redemptions that took place in both hedge funds and mutual funds."
Subsequently, as he sees it, the party is over ... for now. Tying back to his concern about keeping rates too low for too long, Muhlenkamp sees a number of hedge funds participating in the carry trade, in which one borrows at low rates to buy other assets. In 2008, these funds were forced to sell after banks finally tightened their lending practices, and it could feasibly happen again.
What to do
All of these problems present challenges to investors trying to navigate the waters of the stock market. But as Muhlenkamp points out, "Our challenge as investors is to find companies which can thrive despite these penalties."
So what does the former farmhand look for in a stock? In short, he wants companies that have good profitability, the ability to deploy cash wisely, and the wherewithal to retain both of those qualities for the foreseeable future.
As of now, Muhlenkamp believes that stocks on average are fairly priced. "If inflation is 0% and long-term treasuries are about 3% ... then a company with an ROE of 7% or 8% should be worth book value. When we work through that process, a lot of companies are selling at what look like reasonable values." That may not answer lingering questions about the recovery, but it should tell you loud and clear that Muhlenkamp isn't planning to bail out of stocks entirely any time soon.
What do you see as the biggest obstacle to successful investing in coming years? Let me know in the comments below.
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