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2006-12-12 :: Catching Up

Hi there!  Its been about a month since I last posted on the blog, so if you’ve been getting frustrated by the lack of communication, you have my sincerest apologies.

Its been a busy Fall at BankChampaign.  We have gone through a reorganization to better realign the bank for the coming years, plus Andy and I have been studying after work and on weekends for a new certification.  So, my normal blogging hours have been supplanted by hours keeping my nose in a study manual.

Anyway, I thought you might like to hear that as part of the reorganization, we are hiring a new VP of Trust Administration to assist me.  His name is John Clausen, and many of you will recognize that he is Dean’s son (Dean being our President).  John is an attorney in Champaign, and his focus will be on handling the account and department administrative issues related to my business, as well as starting a formal Financial Planning division.  This should offer us the opportunity to provide additional and expanded services to our clients, as well as allow me to focus on the strategic issues of our business.  In particular, I am going to focus on providing more consistent communication of investment strategy to clients.  This means both in this blog, in a more frequent newsletter, and in personalized written investment reviews for client portfolios.  Andy will relinquish most of his administrative responsibilities and focus on investment communications.  We’ve also shuffled our operations area and added an Operations Officer, Shirley Thornton, who has worked in and out of my Trust and Investment area for the last 10 years.  All in all, 2007 will be the year of improved customer service and a return to our outperformance, from an investment standpoint.

2006 has been a tough year for my investment methodology; it has been the year of the index as index and index-like investing has outperformed everyone like me that buys companies based upon growing earnings.

I’ve posted the graph above which shows the performance of my proprietary Earnings Growth Model compared to the S&P 500 over the last several years.  Those of you that have been clients for several years know that 2006 is not a typical year for us.  My system ranks stocks based upon Earnings Growth and Valuation.  It is a fairly technical mathematical model and includes a number of factors, weighting the 7500 stocks traded on Wall Street from 100 (best) to 1 (worst).  

Fortunately, in the long run, earnings and valuation are the two things that create investment  performance.  Unfortuantely, there are limited periods of time where index-style investing, where the large institutional investors simply buy the megacaps that drive the capitalization-weighted indices and ignore the fundamentals of the companies themselves.  This has been one of those time periods, at least since May 12th when everything changed as the large institutions began to become afraid of the impact that the Fed’s interest rate increases.  At that time, they began to move into the index as a flight to safety.   That type of wholesale liquidation of a portfolio and reinvesting into index members isn’t practical or prudent for individually managed portfolios.  So, you just have to hang on for the rollercoaster ride.

You can see on the graph that up until May 12th, we had spiked ahead strongly this year, but then took a tumble through the end of September.  Since the end of September, we’ve been moving back to catching up with the index for the year.    We have started to see that earnings and valuation are starting to take over from index-style investing, although  this can  have short-term reversals, in the long-term earnings and valuation will always be the winning strategy.

In a separate posting, you will find  our Philosopy and Practice.  I thought it might be interesting for those of you that have never seen this to understand how and why we do what we do.

If I don’t talk to you prior, have a very Happy Holiday season.

Mark