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Small Bank Newsletter
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HUGHES
MANAGEMENT
12/1/99 Market Update:
Asset
Allocation
Asset
allocation can not only make you a more effective investor over
the long run, it
may smooth out varying market conditions, letting
you sleep at night. Studies show it's not when you invest or what
you own but the combination of asset types that has the greatest
impact on investment success. Basically, asset allocation helps
you balance risk and reward. Putting together a combination that
will work for you begins with the thing you know best: yourself.
Determine if you are a conservative or moderate aggressive investor
from a risk standpoint. While your goals may change over time,
chances are your fundamental nature will not.
Common
stocks, which represent shares of ownership in a corporation, are
generally used to build wealth over time. Their values have historically
fluctuated more than those of other asset classes, yet they have
produced significantly greater total returns and have consistently
outpaced inflation. Of course, past performance is no guarantee
of future results.
The
past three months ending October 31, 1999 was a very volatile period
to be invested in the banking sector, as it has been each of the
last two years. The Federal Reserve decided to raise short-term
interest rates twice, which caused the stock market to sell off
each time. Also, two large banks announced earnings shortfalls
(First Union and Bank One), Fleet/ BankBoston announced that they
were selling their divested branches to Sovereign Bank, and Summit
and Hibernia announced some asset quality problems. Small banks
were briefly in favor, but that soon changed, as once again, the
large investors in the sector began seeing redemption's and were
forced to sell stocks.
Despite
all the excitement, we continue to stick to our disciplined approach
of buying banking institutions we know well at discounts to the
market.
The
NASDAQ Bank Index, a market capitalization weighted index composed
of 270 banks, fell 9.9% in the third quarter, and is down 8.4%
for the year. We feel that this index is the closest proxy to our
sector, and therefore feel that its performance best represents
the performance of our sector as a whole.
The
Dow Jones Industrial Average decreased in value by 5.8% during
the third quarter, while the S & P 500 decreased by a little more
than 6.5%.
We beat
the indices by sticking to what we do best: investing in cheap,
high quality companies and selected takeover
situations, and avoiding
expensive or low quality companies. An example is Yardville National
Bank (YANB), first management is very smart and shareholder friendly.
They have a superior franchise in their marketplace with earnings,
loans and deposits all growing by over 15% even while they do a
major expansion with new branches. While the stock is up around
9% off its low, we continue to buy it everyday at around the 10
area. This company will make a lot of money over the next few years,
which should benefit us greatly.
The
banking industry was a hot sector in the mid-90s, and some of our
competitors produced great returns for investors as we did. This
caused some " hot money" to flow into their funds. This type of
money tends to chase returns, and tends to flee a fund quickly
when returns start to slow or turn down. F
ortunately for us, this
is not the case with my services. Everyone is a long- term investor
not chasing some over-priced stocks.
None
of our competitors came close to matching our performance in 1998
and for the first 9 months of 1999. In fact, most financial services
sector funds are down between 5% and 10% for the year so far. As
a result, they are seeing large redemption's from investors that
are tired of losing money. In their defense, the sector has not
performed very well at all during the last 18 months. But their
investors do not care about that, and have been pulling out large
amounts of money. This creates opportunities for us. While it was
only 18 months ago banks going public were doubling the day they
went public, now it's the Internet stocks taking the entire fanfare.
We simply want to take advantage of value while managing risk.
No one seems to care about risk management in this market but someday,
maybe soon, many people will. In the mean time, we will just continue
to load up on great companies at cheap valuations.
Competitors
are sometimes forced to sell stocks to meet redemptions. They n
eed
to sell, and usually quickly. This provides us with some great
opportunities like with FLIC last month. While sometimes it may
hurt short-term returns in the long run, we should benefit greatly.
We were
one of the few managers that had positive results for last year
investing in this sector. Some accounts did substantially better
than others, if they invested on margin in the crash of October
in 1998. The average account was up in the 30%- 50% ranges in 1998.
To date in 1999 the average account is up 15%- 35%.
In the
future, we will continue to build our portfolio of cheap high-quality
companies that are by shareholder-oriented management with superior
franchises. There are more opportunities to buy cheap banks today
than there have been, at any time, in the past five years, (excep
t
October 1998), and we feel that new money invested in our managed
accounts today will earn high returns over the next few years.
As always, you may call me with any questions on any stock. This
is a free service to our subscribers.
To contact Douglas Hughes via email - dhughes33@charter.net
Personal Account Management: Bank Stock Portfolios.1.25%-1.75%
FEE. $100,000 Minimum. Douglas Hughes Hughes Investment Management,
A Registered Investment Adviser 1-888-814-7575.
The Small Bank Newsletter is published 12 times a year. (To
Subscribe: 1-888-814-7575).
Douglas Hughes -- Small Bank Newsletter, Hughes Investment Management
, can and does take positions, in stocks it recommends.All
material Copyright© 1995-2007 by Douglas Hughes. Reproduction
of this publication in whole or in part is strictly forbidden.
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