INVESTMENT COMMENT


December 4, 2008

This week's big project is deciding if we should sell one of our long term holdings, a formerly low risk mutual fund which is now down about 50%.

I spoke with the management team of this fund.  They have been managing this fund very successfully for about 30 years. They insist that this is a gigantic buying opportunity...hence a cash position of 1%. They believe that patience will yield substantial gains which more than reward us for the current downturn, within the next five years.

That's not the conventional wisdom, is it?

Actually, there are some studies to back them up. We're attempting to track down the original work rather than reporting to you from a source who got it from a source who got it from somewhere else. But at present, it appears that such a two year downturn in value stocks has historically always been followed by a substantial recovery.

I don't want to sell simply to create the impression of active management in your account. Sometimes the best thing I do is leave things alone. So I am continuing to study. If you have any further questions about this, please call me at the office.

Today's foray into an exploration of Ford and GM bonds revealed that these bonds are essentially priced for at least temporary bankruptcy. So that's the conventional wisdom on that topic. At some point, a balanced fund manager is going to make a killing when some or all of these auto manufacturers survive and become viable again.

Data indicates that the first decade of the 21st century is the worst decade ever in terms of the stock market. It's even worse than the 1930's. Stay tuned for the details of this information as well.

The see-saw action we are witnessing in the financial markets reveals the profound insecurity of investors. The slightest bit of data can send markets moving dramatically in one direction or the other. Monday’s move was down 9% on the S&P 500! That's equivalent to the annual results in some years past.

I remain committed at this point to continuing our ownership of mutual funds. If our studies reveal something different, we'll sell that mutual fund and others like it.  We are actively combing portfolios for potential tax losses, so you may some selling and buying in your account which will reflect this strategy.  Other than that, we plan to stay the course.


Free-Fall  November 21, 2008

Today’s stock market finished up about 6% for the day.   That puts the market down about 45% for the year. This is undoubtedly the fastest decline I have ever witnessed, and probably one of the most rapid stock market declines in history. 

I will continue weeding the garden to root out mutual funds which are failing, or seem likely to suffer disproportionate damage. If this continues next week, I will block-trade out of them and replace them with income-oriented balanced funds which are more likely to endure a recovery that takes longer than five years. We don’t know that the recovery will take longer than five years. It may just as easily happen in a shorter time. But some preparation for a longer recovery is appropriate.

Watching the market slam today’s IPO of recession-resistant Grand Canyon Education (symbol LOPE) is yet another indication that this is wholesale rampant emotional selling fueled by predatory short-sellers.  I am hearing from about one client daily who demands to go to cash. People are selling simply because other people are selling. It doesn’t really matter what I think about that. Clients who call me to sell out don’t want to discuss it. They’ve made up their minds and damn the facts. And that’s why the market is as it is. Selling begets more selling.

I have found in life that whenever anyone believes a future event to be inevitable, I should think strongly about the possibility of other events taking place instead. Three years ago the investors’ herd thought that the good times would be here forever. Now the herd thinks that the financial world is ending. Forgive me, but they don’t have a very good track record in forecasting.

If you sell out, you then face the prospect of deciding when to get back in. You won’t get back in until the market goes up and stays there. As a result, people who sell out and go to cash historically UNDERPERFORM people who just ride it out. This is even true of big market drops like we are now experiencing.


Time to Calm Down.  November 5, 2008

With our selection of President-elect Obama, investors are reacting to a spectrum of rumors and speculations about what will happen next. Today the Dow Jones Industrial Average is down more than 400 points, although my interpretation is that this decline is due more to profit-taking than anything else.

Since the Panic of 2008 was so unexpected and so profound, I am doing lots of research. I am currently reading a book entitled "The Black Swan: The Effect of the Highly Improbable" by Nassim Nicholas Taleb. The author, a professional statistician and philosopher, puts out the hypothesis that history is mostly shaped by large, unexpected events. I disagree with his perception that they are utterly unexpected. I also find his focus on only large events implausible. But he’s right about our inability to shape the future.

We need to simply realize that we don't know what will happen. Many presidents have shifted course and agenda after their election. Many have not. What this Congress...and this president...will do is unforeseeable at the moment.

That being said, any anxiety is wasted, since we can’t control anything related to our collective political future. The media and the internet will teem with extreme expectations. Obviously, they can’t all come true. In the larger sense, things have a tendency to work themselves out.


The Fat Lady May Be Singing...
or Perhaps She is Merely Screaming In Pain.  October 24, 2008

 
This morning a nurse walked up to me on the street to talk about the economy. She has just lost her job at a plastic surgeon's office out of the area. The good news is that her one hour commute is gone. The bad news is that she has lost her job. Apparently her boss has seen his business fall by 50% in the past six months.
 
The recession is upon us. It's ugly. In Europe factory orders are plummeting much more dramatically than here.
 
Residential real estate foreclosures in California are up 228% from last year, and last year was bad.
 
I have never in my professional life witnessed such a broad and sudden meltdown. Here at the office, we are continuing to monitor our mutual funds. Our basic game plan is to ride this out unless individual funds appear to be developing catastrophic losses, at which point we start moving into other funds which appear to be more controlled.
 
Our average client is now down 28%. The S&P 500 stock market index is now down about 35%.
 
This downturn has dramatically confirmed the value of investing in mutual funds. As the stock markets dropped an average of 20% in a bit more than a week, some individual stocks with great credentials simply imploded, down 70% or more. With diversified mutual funds we avoided that.
 
Many hedge funds are also collapsing. A lot of the market action we are seeing today is driven by hedge funds cashing in their leveraged positions.
 
Many 529 College Savings Plan investors are stuck because they can only make one move a year, and they've already made it. This inflexibility is the primary reason why I have never recommended these plans.
 
In the midst of all this, I am working to determine our path to recovery. The data suggests that we are seeing signs of bottoming. If nothing else, the shrieking lemming-like mass of investors is a contrarian indicator that hysteria is reaching its apogee. Meanwhile existing home sales increased 5.5% in September, as low prices are bringing in buyers. The money supply numbers are looking better.
 
Several very accurate indicators are suggesting a complete recovery within 4 years.
 
I will detail this more in my next newsletter, which we will mail next week. I'm expecting a tough six months. Somewhere out there, though, is a recovery. It will be worth the wait.
 

We knew this would happen, but I'm still surprised.  October 13, 2008

 
Today the stock markets soared upwards. The increase was the greatest one-day move... ever. This was a natural reaction to the weekend news of central banks working in harmony to reduce the current financial crisis' effect on the global economy. Current rumors of a massive Treasury purchase of bank stocks didn't hurt.
 
At this point I will take any gains I can get. You know I've been advocating riding this out, that at some point we would experience a turn of the tide. But the size of the move was still a surprise. It reeked of herd-driven irrationality. And we still don't know what is going on in the unseen depths of our economy.
 
At this point we are all relieved we didn't sell out at the bottom. But the volatility isn't done yet. There will be more frightening down days as we lurch towards recovery. I don't know what will happen in the short run. In the longer term, this is a very good sign.
 

Stop the Panic. October 10, 2008

Watching the stock markets and President Bush this morning, I find myself in uncharted territory in my professional life.

 
I have never seen anything like this. After this experience I don't think any of us will ever be the same again. I have never experienced such a decline in "safe" investments. The financial markets keep going down whatever the news. When someone calls me now I hear fears that he or she is literally going to lose it all. We are in mutual funds. My average client has hundreds of stocks and hundreds of bonds, all via mutual funds. The likelihood of "losing it all" is nil. But that's the fear.  
 
I have three tools at my disposal. I have my own experience. I have history which is recorded in books or other sources but is not part of my own memory. And I have the capacity for rational thought.
 
Rational thought isn't very useful now. This is utter, frenzied panic. People have lost all trust in Wall Street, the banks, the global financial system, and for the most part, the government. Rational it is not. People sell and sell and sell...because people are selling. That's it.
 
My own experience--indeed anyone's experience--is inadequate. Probably nobody is alive who experienced this as a money manager in 1929 and the 1930's. We've all experienced volatility and bad markets. What is new is the frenzy and the blind panic. What is new is the global and all-encompassing nature of what is happening now. It's important to try to think outside our personal experience.
 
However history is relevant. Of course it's imperfect. This time, like all life, is different in the details. But history tells us in detail about other similar financial panics. What does it tell us? What the government is doing now is very different from what it did in 1929, which is a good thing.  It tells us that we will recover. The only question is, will we recover in a few years or a  longer period? That will depend on how effectively the government manages the next few years.
 
Depending upon where we finish the year, a recovery will require three or four years...or even 5 years...of modest 10% performance. The average stock market performance for over a hundred years is 10%. So we cannot only survive this, but reasonably expect to recover within 5 years. Ouch. But it's easily doable.
 
In the coming years the government will have to handle the economy with kid gloves. The economy will be very fragile and will need nurturing and boundaries. And we will have to be very careful about portfolio selection.
 
Meanwhile the fear has reached ridiculous proportions. It's time to say no to it. Step back. Let's make ourselves enjoy the weekend. Let's consider that the panic is just that. We'll get through this. It's time to say no to the fear which has been running our personal and national lives.

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