Historians will remember the third quarter of 2008 as the time
when the credit crisis morphed into a confidence crisis that
brought the global financial system to its knees. As one would
expect, there were few safe harbors for investors other than
short-term government bonds and gold.
While it would be foolish to underestimate the impact of this
crisis and the length of time it will take for the markets to fully
recover, it would be equally as foolish to underestimate the
adaptive powers of an increasingly-global capitalistic system.
Therefore, our overarching strategy is to position our clients’
portfolios for an eventual recovery, but in a manner that
minimizes short-term principal losses to the greatest degree.
As we set about this task, we are mindful of Warren Buffett’s
observation that, “investing is much like dieting: it is simple,
but not easy.” In both cases, understanding the principles for
success is simple, but having the discipline to stick to those
principles is not.
One way human nature works against our success as investors
is our tendency to extrapolate recent experience – what
psychologists call “anchoring.” We tend to rationalize how the
good times can continue and fear that the tough times will never
end. This explains why most money tends to enter a market
near its cyclical peak only to be subsequently withdrawn near its
cyclical bottom.
Anchoring also helps explain why the most prudent investment
advice often appears counterintuitive in the short run. Holding
cash or bonds when stocks are rising seems too cautious, while
holding stocks in a declining market seems rash. Yet, these are
precisely the types of actions that can significantly improve a
portfolio’s long-term results.
Some of our more specific portfolio activities include:
- In portfolios with significant cash balances and modest stock
holdings, we are using the continued weakness in stock prices
to add to our positions. We are proceeding slowly given that the
likelihood of a prolonged slowdown or recession has increased.
- Tax-loss harvesting – or selling losing positions in order to
offset capital gains – is traditionally a fourth quarter activity at
Chess. These losses can also be carried forward from one tax year
to the next and thus used to offset future capital gains whenever
the market rebounds.
- The sharp decline in commodity prices has given us the
opportunity to restart our allocations to real-return-oriented
investments, which tend to own commodity-related securities.
While our prospective return expectations for these investments
are modest, we value the diversification and inflation protection
they add to our clients’ portfolios.
Several months ago, we sent a brief e-mail to our clients noting
the passing of Sir John Templeton, the legendary global investor,
along with some of his more notable quotes. Since that time, we
have come across a few others and wanted to close with this gem:
“Bull markets are born on pessimism, grown on skepticism,
mature on optimism and die in euphoria.”
Thank you for your continued trust through these challenging
markets.
(c) Chess Financial
www.chessfinancial.com |
