Of course, with the passage of time and a modest increase in wisdom (we hope), we concede these critters do have some sort of role to play in the universe — although we could still live just fine without them. Take cicadas, for example. You know that constant annoying noise they make during most of August? What’s that all about? Is it really necessary for the common good?

Well, you can see we’re out of our league when it comes to a vast slice of nature. So let’s get back to what we do know something about. We’ll concentrate our attention on something we started in our last letter — the whole concept of “stocks for the long run.”

If you remember, last time we began an analysis of a very important article by Rob Arnott that appeared in the “Journal of Indices” recently, entitled “Bonds: Why Bother?” Among other points, the article takes us through a series of stunning revelations about the real return you get from stocks.

We focused our attention here because so many advisors claim stocks ought to play a key role, in fact a major, dominant role, in your investments. As you’ll see, the claim doesn’t stand up to scrutiny.

A suggestion: read this whole letter. We’ll stick with a few key points and keep it simple, maybe even interesting. Here’s what we’ll cover:

• How To Know When Stocks Will Absolutely Hurt Your Long-term Investing Plans
• Why Dividends Should Be Your #1 Consideration In Deciding To Invest In Stocks
• Diversification: Totally Overrated When Structuring Your Portfolio
• Why We Could Still See A Return To 1929 Levels In The
  Stock Market — Yes, You Read That Right.

When we’re done, think about your wealth building/wealth preservation strategy — especially in light of what you’ll learn. On our end, we’ll simply attest to the fact that this knowledge helped us keep our heads above water during last year’s terrible meltdown.While we’ll be spending the bulk of our time in this letter on this one important subject, let’s kick things off with a quick review of the most important moving parts of an increasingly and disturbingly complex financial landscape:

The Stock and Bond Markets:

Stocks are in the midst of an historic rally. The question to ask: is this the beginning of a new primary bull market, or simply a rally in an ongoing bear market. Right now we’re treating it as a bear market rally. Since our losses were minimal in 2008, we have no reason to jump in or even to rush to judgment. If it turns out to be a new primary bull market, we’ll have plenty of time to “get in.”As for bonds, in the face of all the logical reasons why interest rates should go up, they haven’t. While there’s a bond bear market out there waiting to drive interest rates up over the next few decades (bond trends historically go on for decades rather than just years), we’re not there yet.

The Real Estate Market:

Most of the increased home sales you’re reading about consist of foreclosed homes or folks who are delinquent on their mortgages. While it’s certainly better than nothing, and some good values are being scooped up by wise, experienced real estate speculators, there’s no reason for the rest of us to grab the first property that looks like a bargain.

The U.S. Dollar:

Everyone’s now talking about the dollar going down. It makes us wonder if we’re not due for a surprise rally in the dollar — one that will slam all those who decided to bet against the dollar simply because everyone’s betting that way (always a bad reason to invest). With that, we will say that if the dollar strengthens, it may present an opportunity to add some currency diversification to our portfolio.

The Banking System:

The banking system’s been propped up by the U.S. government. In spite of that, bank failures are increasing. On top of it all, the FDIC may be technically bankrupt as we speak.Which brings up the question: should you worry about your bank accounts? The short answer: no, if you’ve got less than the $250,000 limit in any one bank. The government will use taxpayer dollars to keep the FDIC alive and kicking. There’s our quick and dirty view of the tip of the financial system iceberg. We’ll have a lot more to say in our next letter. For now…

We think differently. Good money management starts with saving — then investing safely. Saving money provides the solid foundation of the wealth building process. It’s not as hard as some people make it out to be. So fill ‘er up.

(You can read more about this and other helpful, simple suggestions at our blog)

Now on to our discussion of what you need to know about the role of stocks in your wealth building/wealth preservation strategy. Again, to keep it simple, we’ll cover four points, starting with…

Which leads us naturally to point #2:

Of course, what do most people concentrate on when they decide to invest in a particular stock, or even the stock market in general? Answer: the price of the stock. You rarely hear anyone talk about a stock’s dividend. They’re counting on the price of the stock, or even the market as a whole, to go higher. A bad bet much of the time.

So now you’ve actually got two reasons to focus on dividends: 1) If the dividend is too low (< 3%), the chances that the price of your stock will rise much, if at all, are greatly reduced; and 2) Your ultimate return will depend heavily on the return you get from the dividend, as opposed to the stock price itself going up.

How about diversifying your stocks across different “asset classes” (large cap, mid-cap, small cap, growth, value, etc.). Again, that’s all well and good when stocks are on the way up. But in a bear market, this won’t do much for you.

That’s why some people suggest you expand your horizons and include asset classes like bonds, real estate, certain hedge fund strategies, commodities, etc.

Two points on this advice: first, very few investors hold any more than one or two, at most three of these assets classes (typically stocks, bonds, cash). So you could possibly help your cause by moving money into one or two additional asset classes. At least you could until 2008.

We say at least because the second point is this: Arnott looked at16 different asset classes during the 2008 meltdown and found that they all lost money. Every single one. But getting back to stocks, let’s take a look at point #4:

You see, stock promoters of all stripes make the argument that only stocks will keep up with inflation. The claim is that history shows us that stocks provide a hedge — in fact the best hedge — against the eroding effects of inflation. Rob Arnott begs to differ.

Adjusting prices for inflation, during the 1929-1932 bear market, stocks dipped below the recorded level of the stock market of 1802 — a 130 year period during which stocks were flat, albeit with great swings up and down.

(By the way, a good example of the importance of our first two points: you would have made money during that 130 year period — from your dividends.)

More recently, at the lows of the bear market that ended in 1982, you would have been holding stocks valued at 1905 levels — a period of 77 years — again with up and down swings. Did you know that? We didn’t.

To absorb the full impact of this, let’s suppose you were born in 1905 and daddy gave you a nice stock portfolio as a birthday gift. Current wisdom has us believe that you’d be fat and happy in 1982 and we’d all be singing the Beatle’s “Baby You’re a Rich Man” to you. But, alas, you’d have no more value in your portfolio than the day the old man staked you in 1905. If you had totally avoided an honest day’s work during your life and instead relied on the common “wisdom” that “stocks for the long run” would make you rich, you might still be fat and happy, but you certainly would not be rich.

So where does this leave us with our stock investments? Does it mean we should avoid stocks, or keep only a tiny portion of our portfolios in stocks? Or does it mean that we should only invest in “dividend-paying stocks for the long run”?

Actually, it means none of the above. The first, most important lesson you should learn is simply that it is by no means a “golden rule” or fact of life that you must own stocks to build wealth over the long run. If you only learn this one lesson, we can pop the cork on a bottle of champagne and consider this letter a success.

Of course, this leaves you with the problem of what you should invest in. There’s no short and simple answer to that one. If investing could be on auto-pilot, anyone with half a brain would be rich.

So is our point just a negative one?

Nope. We’re just tired of reading and listening to the endless litany of Wall Street mumbo-jumbo that keeps pushing stocks on young and old, rich and poor alike.

Maybe you saw the devastation we saw after last year’s meltdown. In our experience, most people who lost it all, or at least most of it, were people heavily invested in stocks.

We don’t know it for a fact, but we suspect many took “the big loss” simply because of a kind of blind faith in stocks. (And those of you who work with us know that avoiding the big loss is a major component of our investment philosophy — and we suggest you make it a major component of yours as well.)

We could stand on a soap box and preach, but we’d prefer it if you just understand this simple reality: Wall Street makes its money from only a couple of basic sources: trading (which involves the buying and selling of stocks) and investment banking (which involves selling newly issued stock to the public).

You don’t need to be a cynic to understand why the bulk of the research that pours out of Wall Street firms focuses on stocks. Without stocks, Wall Street’s name would still be associated with its role as the one-time walled street that protected the early Dutch settlers from marauding natives. Stocks made the Street what it is today. Those are just the facts.

But look. None of that should have anything to do with your investing decisions. The decision to buy or sell stocks as part of wealth building and/or wealth preservation strategy should be one part of a carefully thought-out, big-picture strategy, where investing in stocks plays a role — possibly a minor role. It really does depend on your individual circumstances.

Speaking of facts, wouldn’t you know it, you can actually boil this all down to an appreciation and understanding of the True, the Good and the Beautiful. (Where have we seen this theme before?) What we’ve outlined above are facts that add up to some powerful true conclusions. We stand by our assertions and welcome any discussion or debate anyone might want to bring to the table.

But let’s also recognize that the True isn’t just about being right. While the pursuit of truth is certainly good for its own sake, it’s also good because it can lead to a better life. Think healthy, wealthy and wise, to use a cliche. Don’t you agree?

(See what happens when a philosophy major goes into the investment business!)

As for the Beautiful, it’s all around us. Here’s a true story about a recent encounter.

A Personal Note…

One of our sons came for a surprise visit (two days notice) from North Carolina. Whenever he comes back to his native land (New York), he tries to get a decent dose of the city life that filled in much of those 23 years before professional considerations lured him to the hinterlands. This go-round would culminate with Lincoln Center’s “Mostly Mozart” festival.He had arranged for tickets for interested Esposito’s, which this time included my wife, our youngest son, and me. Since I have a tendency to over-plan things, the decision on Thursday to attend a concert on Saturday was a bit rash. Combined with my natural inclination to pull the purse strings tight during recessions, I almost decided not to go.

But in the end, sanity ruled. So it would be Mom, Dad and two of our “guys.” Great opportunities like this are as rare as stocks with dividends over 3% these days.

So to Avery Fisher Hall we drove to see Osmo Vanska, music director of the Minnesota Orchestra, lead the Mostly Mozart Festival Orchestra in Beethoven’s Coriolan Overture, the Piano Concerto #4 (with guest pianist Yvgeny Sudbin), topped off by the 8th Symphony.

First off, we sat on stage behind the orchestra. It’s a special arrangement for the Festival and I’d never experienced sitting on stage (except for a Peter, Paul and Mary concert a few years back — a completely different sort of experience, as you might imagine).

I’m looking right into the face of Osmo Vanska — a most intense, engaging conductor, obviously well-liked by the musician’s who played their hearts out for him. Remarkably, Vanska’s dynamic gestures and facial expressions were not at all self-conscious or (as is so frequently the case) self-absorbed — a rare feat for a maestro at this exalted level of accomplishment.

The orchestra was first-rate, the pieces absolutely riveting. I had never really listened to the Coriolan Overture. It’s a dramatic reconstruction of the historically true incident of a Roman general who marches on the Eternal City at the head of an enemy army in the 5th century BC, believing himself slighted by his fellow citizens. He is dissuaded from attacking the city by his mother. The score captures the stark contrast between the general’s thirst for revenge and his mother’s tender entreaties. The conductor and orchestra conveyed every bit of the harrowing conflict.

After the audience’s enthusiastic response to the Overture, the stage hands positioned the Steinway concert grand at center stage. Out walks the pianist, Yevgeny Sudbin, tall, thin, with dark circles under his eyes (somewhat similar in height and carriage to our youngest son who was there with us.) Sudbin walked straight onto the stage, sat on the piano bench and, with virtually no hesitation, began the 4th Concerto with its first few bars of solo piano. After that, it was all magic. The piece is magnificent, the playing was miraculous. The conductor and orchestra worked seamlessly with Sudbin.

Mr. Sudbin, a 29 year old Russian who now lives in London, was touted as one of the up-and-coming superstars of this young 21st Century, and his playing equaled the advance billing. Slavs, as my wife pointed out (being a Slav herself), are great pianists — playing with power, discipline and heart. One disadvantage of sitting behind the orchestra was in having to strain a bit to hear the piano. But it was a minor problem. The audience demanded three bows. Bravos filled the hall during the long standing ovation.

After the intermission, Beethoven’s 8th Symphony literally leaped from the orchestra straight through your ears and into your soul. With this relatively light-hearted break between the heavier 7th and 9th symphonies, the great composer’s harmonies and rhythms, ever so slightly askew or “off,” cut through the humdrum that can dominate most of our days on this earth. What emerged was a brightness and joy that only the Beautiful brings to our lives.

In addition to our view of the conductor, sitting behind the orchestra presented us with a vivid palate of sound. Perhaps this had to do with the specific acoustics of Avery Fisher Hall, but you could distinctly hear each section of the orchestra better back there than if you sat out front, though the strings were a bit faint at times. Beethoven’s powerful rhythms, harmonies and orchestrations filled your mind and body with something that must be akin to any poet or theologian’s vision of heaven.

As if all that weren’t enough, our youngest son, the one who decided to come to the concert with his parents and older brother, is learning Beethoven’s “Appassionata.” It’s his first serious Beethoven piece. He had never seen Beethoven live, never mind a first-rate pianist playing one of the master’s piano concertos. Imagine that — and all not only unplanned, but not even imagined just 48 hours before.

I learned a lesson. The Beautiful can come when you least expect it. Just as with the True and the Good, you simply must be open to it. And it doesn’t have to be as spectacular as a Beethoven concert. It could simply be the bright blue skies of summer or the faint smile of someone you love waking up to a new day. To think I almost turned my back on it.

Enjoy the rest of your summer…and see you in the Fall.

Rick

Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952

Email: resposito@lighthousewm.com