HAPPY BIRTHDAY GREENTHOUGHT$!
What We've Seen in Our First Year

Part 3 of 3

It is now 12 months since we started this little educational project known as the GreenThought$ newsletter.  Today we conclude our review of the first year of this publication.

We'll introduce new material in our next issue.  If you have a topic you think we should write about, just ask!
 
From "Don't Let the Market Be Your Evil Twin" - 3/7/08

  Your portfolio may have done well in the good times.  It mimicked the market on the way up.  It fooled you into thinking it is your buddy, like a twin sibling who will always be there for you.  But it is only now, when the going gets tough (and who knows for how long?) that your twin turns evil.  Whatever trouble it gets itself into, it drags you into the mess.   To help you understand how your portfolio can be "influenced" by the market, there is a simple concept with a funky name: R-Squared.
  
From "Does Your Portfolio Manager Have Skills?" - 3/20/08

  The Alpha concept may be more important today than at any point in your investment lifetime so far.  As markets get rough and perhaps stay rough for a while, finding Alpha is the key for investors.  In the investment community, there is a big scramble going on to find sources of Alpha.  Like many natural resources, it is getting rare.  Fortunately, our firm has generated a supply of Alpha.  This is in large part due to our flexible investment discipline.  If we simply diversified amongst different stock and bond index funds, the Alpha would likely vanish, and with it, many fortunes.  That is why we are not only working hard, but doing so with an open mind and adaptable approach to a rapidly changing investment climate.
 
From "Penny-Wise, Pound-Foolish?"- 4/14/08

Of the 34 mutual fund categories studied, the 10 which produced the highest 10-Year Alpha had an average Expense Ratio Rank of 28.  That is, the fund categories that showed the most skill were also among the most expensive.
  
From "130-30=100" - 4/23/08

  While the published materials we've read make it very clear that 130/30 funds do not aim to dramatically reduce risk (their stated goal is to deliver returns modestly above their stock market benchmark), we have heard numerous stories in the field that they are being sold to investors as hedge fund alternatives.  They are nothing of the sort!  To summarize: 130% long minus 30% short leaves you 100% net exposed to the stock market, unless the managers do something to add value.  That has not happened yet.
 
From "In T-Ball as in Life" - 7/3/08

  Now, think about investors.  Like T-ball kids, they also tend to move in packs.  They often succumb to doing what all the other "kids" are doing as they perceive safety in numbers.  They are certainly not thinking more than one step ahead.  Their attention can easily be taken "off the ball" by insignificant, extraneous items, just when it is most important to have some perspective.
  
A portfolio should be judged in its entirety, not by pulling out the parts that worked best or failed the greatest.  That's what asset allocation is.  And even though we at Emerald practice a different version of asset allocation than much of our industry, the validity of this mental approach to portfolio management is no different.  So, remember this when you are tempted to make an investment decision based on what the crowd is doing: do you want to think like a major leaguer, or like a T-ball player?
  
The preceding article is not a complete analysis and should not be considered investment advice.  Emerald Asset Advisors, LLC ("Emerald") is a SEC registered investment adviser.  If you would like to receive more information about Emerald, please contact us for a copy of our disclosure document, Form ADV Part 2 and Schedule F.

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