Bear Mountain Capital Inc.


| May 18, 2012

Planning Perspectives

Facebook’s IPO reminds everyone of what is possible when it comes to having an idea, taking it to market and being rewarded for the risk of seeing it through.  While the IPO hoopla that dominated today’s headlines was welcome relief from the news regarding Greece and Europe, it does little to help long-term investors during these volatile times.

To be sure, since the end of the “credit crisis”, volatility in the markets has seemingly become the norm.  And while there are big issues facing the global economy (namely Greece, high unemployment and a lumbering housing market domestically), today’s Facebook IPO reminds us that there are a lot of people working hard, developing new ideas, new ways of communicating, new technologies, pushing society to evolve in ways it didn’t anticipate.  These people create opportunities for growth and they are what drives the US and global economy forward.

A sideways market, much like we are experiencing over this last year, provides ample opportunity for long-term investors.  Below are four things you can do when the market goes through its up and downs, that will help you be a successful long-term investor:

1. Dollar-cost-average into the market – this strategy works in up and down markets.  The goal is to consistently put a certain amount of money into the market on a monthly, or quarterly basis.  It allows you to continue to participate in the growth of the market if it is trending upward, but more importantly it ensures you take advantage of the lower prices experienced during a down market.  Remember, the number of shares you purchase goes up, when the market goes down.  Lower share price X same amount of money invested every month, means more shares for your portfolio and that will lead to stronger returns when the market rebounds.

2. Put idle cash to work – if cash flow doesn’t allow you to invest on a consistent periodic basis, but you have a cash cushion built up in a savings account, taking advantage of big market movements like we are seeing can go along way to improving your long-term returns.  Its true that we can’t predict the bottom, but we do know that over time productivity and economic growth will drive the markets upward.

3. Rebalance aggressively – as we’ve discussed over the last several quarters, taking advantage of the volatility that comes with sideways markets requires you to have a target allocation for your existing portfolio.  It then requires the ability to monitor and to rebalance aggressively to that target.  We’ve implemented this for clients accounts and it will help ensure we buy at the low-points and sell at the high-points.

4. Remember your goals – investing is a means to meeting your long-term goals.  If anything, history has shown us that “this too shall pass” when it comes to all of the disconcerting headlines we are bombarded with on a 24/7 basis.  If your goals are longer then 5-7 years, a well-built portfolio that has the right mix of stocks, bonds and alternative assets (real estate and commodities) will help you meet your goals faster than keeping the cash in a bank or under a mattress.  If your needs have a shorter time period of less than 3 to 5 years, than maintaining the right mix of US and international bonds, will help you fight-off inflationary pressures, provide you with income and help preserve your principal in volatile times.

One last thing to remember, when investing for the long-term.  Try to keep things in perspective, when the headlines are exceptionally sensational.  For example, there are two very well run technology companies, Apple and Google, that have very strong revenues, very loyal customers, very large cash cushions and dominate their market.  They are leaders, innovators and very exciting companies.  Currently, their stocks trade at 12 times earnings for Apple ($530/share) and 18 times earnings for Google($600/share).  These are very reasonable valuation levels, if not very attractive valuations levels for these types of companies.

On the other hand, Facebook debuted at $38/share today and finished at $38.23.  While the share price is lower than Google and Apple, compared to their respective earnings Facebook’s share price is off the chart.  Currently a share price of $38 means the company is trading at 127 times earning.  If Apple trades at 12 times earnings and Google trades at 18 times earning, 127 times earnings starts to put things in perspective.  Best to give this company time to mature and let it earn its rock-star status as a properly valued public company, much like Apple and Google have done.