IN CASE YOU MISSED IT Vital GreenThought$ issues...revisited
As the summer winds down, and financial market participants re-engage with the realities that surround them, we thought it would help to look back at some of the investment themes we have covered in GreenThought$. We started this newsletter back in July of 2007 and from the start we have contemplated the impact on you and your clients of the dramatic changes that have occurred.
Today, we peek back at some excerpts from past issues, only to emphasize that much of what we have covered and opined on for two years should still be front-of-mind for investors. This will also give the many recent subscribers to GreenThought$ some perspective, which will help them get the most of this free publication going forward.
From August 1, 2007
WHERE's "VOLDO?"....
...the "volatility index," nicknamed "VIX" was created in 1993 and measures volatility every minute of every day that the stock market is open.
Historically, readings have been as low as 9 during complacent periods, and have spiked as high as the 40s-60s during emotional periods such as 9-11 and the Enron fiasco. For most of the late 1990s, the 20-30 level was common.
The past few years, the VIX has spent nearly all of its time under 20. It can be an excellent tool to gauge the potential impact of a change in market conditions.
We study volatility closely and conduct research to identify investment styles that use volatility to fuel their success, not as an excuse for their demise. This is one of the key facets of the strategies we have developed at Emerald, starting with our Hybrid portfolio and continuing with the creation of the rest of the Emerald Allocation Strategies (EAS) program...
Voldo's here. Keep an eye on him.
From September 19, 2007
"WIMPY"
Consider this, taken from www.urbandictionary.com
The Phrase: I'll gladly pay you Tuesday for a hamburger today
Definition: "I'd like you to lend me some money"
Etymology is from the cartoon "Popeye," where the character Wimpy would frequently utter this phrase. He was a glutton, and would consume burgers at a ferocious rate but could rarely pay for his habit.
The phrase implies the underlying feeling that the person will unlikely actually pay for the hamburger (or whatever) on Tuesday (or ever, for that matter).
I told my bank that I'd gladly "pay them Tuesday for a hamburger today" to buy that new sports car, but they wouldn't approve me.
Unfortunately, there have been a lot of sports cars, burgers, homes and toys purchased with borrowed money. While there is celebration over the Federal Reserve interest rate reductions announced yesterday (a Tuesday, ironically), there is more to the story...but we can't write it as history yet, because it is likely bubbling up under the surface of the global economy. It's called inflation - the rate at which the prices of the things we buy go up.
How are we going to pay for all of this? If you are the government and own the Mint, you can print more money. That pays your debts but devalues your currency (seen the U.S. Dollar's value lately?). When you hear that the Fed is "pumping liquidity into the system" there is a good reason - they are the only ones left who can.
So, the Wimpy syndrome is alive and well. Inflation is out there and it could be an inevitability well before this decade is over. Hopefully, you can tell that we are aware of this, we have been for some time, and continue to discover strategies we hope will combat and even exploit higher inflation if it appears in a meaningful way. In other words, we are not going to be "Wimpy" about it and stay the course. Because those burgers may cost a lot more, several Tuesdays from now
From February 1, 2008
COUNTING BACKWARDS
What do these dates have in common in the history of the U.S. stock market?
1/14/08, 5/1/06, 4/9/99
Not sure? Now look at it this way:
Date S&P 500 closing price
1/14/08 1325
5/1/06 1325
4/9/99 1326
That's right. As of mid-January, the S&P 500 was essentially flat over the past 20 months, and over a period stretching back nearly nine years! During that period since April of 1999, we saw the height of the tech bubble (the market peaked about a year later in March of 2000), the bursting of that bubble, 9-11, Enron/Anderson, war, and the launch of a new credit crunch (subprime mortgages, credit cards, etc.). Keep this in mind when we talk about what a secular bear market is.
The opinion we at Emerald Asset Advisors express over and over to our clients and friends until we are blue in the face is this: in periods of prolonged market futility, such as what we experiencing this decade, INVESTORS AND THEIR ADVISORS MUST RECOGNIZE THAT THEIR APPROACH TO PORTFOLIO MANAGEMENT MUST BECOME MORE FLEXIBLE AND ADAPTIVE. It should be flexible to expand beyond the constraints of standard stock-bond asset allocation schemes, and it should adapt to the different set of rules that govern a secular bear market, as opposed to the secular bull market we experienced in the 1980s and 1990s. Today, simply establishing a portfolio that will largely track the market may be a threat to both investors' lifestyles and advisors' businesses.
If you don't believe us, ask yourself this question: if someone showed you that based on some theory of investing from the 1980s, with academic research to back it up, the stock market always wins out over the "long run," how many years would you stick around to see if that person was right? For those that have waited patiently for 20 months, nine years or some time in between, we believe the conclusion is clear - traditional strategies are not without merit, but most resort to closely tracking the market. In our opinion, this is NOT a complete strategy.
Compounding the problem today is that investments once considered "safe havens" now have warts. T-bill and CD yields start with a number 2 or 3, and that income is taxable for many. Insured municipal bonds, once considered by many to be a "layup" for safety, are now under scrutiny as the firms that insure those bonds (MBIA, Ambac, ACA, etc.) are fighting not merely for their reputation, but their survival.
For baby boomers approaching retirement, seniors on a fixed income, or younger folks who are trying hard to wisely plan ahead, it can be quite a frightening picture. If the market continues to drop, we'll keep tracking how far back in history we have to go to in which the market is flat...
....As an example of this, during January, we increased our "dedicated short" positions in each of our three main strategies - Hybrid, Concentrated Equity, and Global Cycle. The intended effect of this is to shrink the range of possible outcomes in the portfolios - sacrificing homerun potential in exchange for a potentially higher batting average. Stay tuned.
August 8, 2008
TWO WILD AND CRAZY GUYS
The stock market's split personality
and what we are doing about it
In our insatiable quest to rekindle pop culture memories of the 1970s and 1980s, we think back to the lovable Czech brothers (played by Dan Akroyd and Steve Martin) from the old Saturday Night Live skit. The Festrunk brothers, who referred to themselves as "Two Wild and Crazy Guys," proved that when dating in America back in the disco days, a little knowledge was a dangerous thing. For those of you too young to know what the heck we are talking about, try this link and have a laugh http://www.youtube.com/watch?v=t9SaKYFR6ms&feature=related. The stock market has behaved like two wild and crazy guys for most of 2008. By our calculations (using data from Yahoo! Finance), in 41% of all trading days this year (through August 7th), the S&P 500 Index closed 1% higher or lower than the previous day.
The most common question we get these days is "what should I do in this environment?" While the specifics are up to the client and advisor working as a team, there are some broad but important guidelines we are following:
1. Be more active, as needed. Buy-and-hope is not a strategy.
2. Understand what you own - there are a lot of odd securities out there, in untested forms. No heroes please!
3. Certain segments of the market are experiencing volatility that from a historical perspective is extremely high. In our opinion, conservative portfolios should be positioned away from that as much as possible.
"Wild and Crazy" has been the story so far in 2008. But by leaning on our conservative nature, and being opportunistic when the risk/reward tradeoff is favorable to us, we believe we can deliver a successful long-term investment experience with only modest bumps along the way. For partiers like the Festrunk Brothers, that would not be very appealing. We suspect they would be in the minority these days.
From October 21, 2008
IT'S ALL ABOUT THE U
(SHAPED RECOVERY)
Here are a few more guidance points during these very confusing times for investors:
Many here in South Florida have had an affiliation with the University of Miami. Emerald Partner Allan Budelman, for instance, earned his MBA there. Fans of the school's sports teams have a rallying cry, "it's all about the U!" We think that same idea can be applied to the eventual recovery in both the economy and global stock markets. Many will assume that stocks transition from bear markets to bull markets, rising as fast as they fell. On a very short-term basis, this can and does happen. However, like a sprinter trying to run a marathon, it runs out of gas fairly quickly.
Market strategists distinguish between "V-shaped" recoveries (in which plummeting prices are followed by rapid rises, so that a shape of a letter V is formed) and U-shaped recoveries, in which prices rattle around near the bottom (or perhaps within 20-30% of the bottom) for a while before gradually, and in give-and-take fashion, a new bull market can be established. Think in terms of years, not weeks, and we believe your expectations will be in order. In our opinion, there are still significant risks of further losses in the stock market and the long-term rewards of being patient and disciplined as the U eventually develops can be high.
As for the near-term, we are reminded of one of our favorite lines in the history of the movies. In Kevin Costner's "Bull Durham," Costner is playing a minor league baseball catcher. After his pitcher (played by Tim Robbins), throws a few pitches that are nowhere near home plate, and nearly knock the batter down, the batter looks down at Costner, as if to ask what's going on. Costner replies, "don't look at me, I don't know where it's going." THAT is today's stock market, even if you follow it closely.
That is why, while we continue to be vigilant against near-term market risk, we are now spending a lot of energy thinking about how to benefit from the ultimate recovery. Or to use yet another sports analogy, this is like a boxing match: you defend yourself first, with your gloves up, but keep looking for openings to go on the offensive. That's been our strategy for the past 12 months. While we often don't keep up with the biggest up days in the stock market, we feel the competitive results we've achieved over the past several months and beyond are a testament to that approach. It is okay to lose battles, just win the war - the war is the maintenance or enhancement of your lifestyle.
From December 9, 2008
HOT 'N COLD
...So, investors should be investors, NOT GUESSERS. Yes, it is all an "educated" guess, and you should aim to find the best educated guessers you can, because the difference between one investment process and another is the difference between retirement and a longer working career. One of the best things you can do is avoid the "all or nothing" philosophies many investors are tempted to adopt in times of economic and market stress. If you approach wealth management as "its black or its white," we believe you are introducing an unnecessary large amount of luck into the occasion.
Do you feel lucky? Unfortunately, many are stuck between "do I go to all-cash" and "I rode it down, I'll just have to ride it back up." In our opinion, both of these philosophies are extremely risky, given the short-term and long-term risk-reward analyses we are doing here at Emerald. There is an element of skill, which can be applied through thoughtful, flexible and adaptive asset allocation (not the mass-appeal versions of allocation invented in the 1980s and still clung to today by too many investors and advisors). We'll talk more about our "21st Century Asset Allocation" approach in many upcoming issues of GreenThought$. Of course, if you don't want to wait for the published segments, just call and talk to us about it.
From January 9, 2009
2009: ANOTHER BOX
OF CHOCOLATES?
...We believe that 2008 showed us that the risk management approach taken in one's investment portfolio is more important than any other aspect of investing. In our view, risk management is more important than profit "potential," more important than how thorough your research was, and certainly more important than past performance.
Does risk management prevent you from losing money over short or long-term periods of time? We think, NO. Does it have the potential to keep more of your assets intact versus investment strategies that consider time their ally (i.e., those who say not to worry about market bumps from year to year - be a long-term investor, it will all work out)? In our opinion: YES. That is why, while we will continue to write about a variety of investment-related topics in GreenThought$ this year, we are dedicating this year to communicating our understanding of risk management, and exporting our experience and approach to all who will listen.
In our opinion, our belief that "style box investing" - allocating one's portfolio among different segments of the stock market based on company size, geographic region, or the growth/value paradigm - is largely a misguided approach was borne out in 2008. Equity indexes dropped 30-60%. As they say, the only thing that goes up when the stock market goes down is correlation - that is, when they fall, they all fall together.
...We believe that in rushing to Treasuries and away from all things growth oriented, that process is underway. Translation: we are as 3-year bullish on growth assets as we've been at any time since 2003.
Of course, risk must be managed along the way. We'd advise investors to stop obsessing about "calling the bottom." Bottoms in most financial markets are usually not an event but a process, often a lengthy one ...
...Long-Short funds, which offer the flexibility to buy or short stocks according a specific discipline, fell 15.4% last year. In a year in which cocktail party chatter often contains the statement "I'm down 40%...like everyone else," this sounds pretty good. We think the more insightful way to judge this is not to simply say "well it lost money, too." Instead, we believe that all growth investing comes with risks attached, and that...here comes that phrase again...risk-management in these funds allowed them to escape with losses that were about 2/5's as large as the broad market. Does that feed your family? NO. Does it put you in a much better position, having 85% of that portion of your portfolio intact at year end when many around you have only 60% of theirs to grow from here? ABSOLUTELY.
From April 24, 2009
TIRED...AND NOT
RETIRED
That's what a majority of Americans predict for themselves. Why they could be wrong...
To those of us on the Emerald investment team, the next many years will be about two things:
1. "Renting" the stock market instead of owning it - i.e. not committing to have some set percentage of money in the stock market all of the time, as static investment plans often do.
2. Applying a level of portfolio "risk-management" that we believe is not only uncommon to most investors, but foreign to some of those in the money management industry as well.
We think that investors cannot live by stocks and bonds alone and that you must add investment styles that allow you to squeeze some of the juice out of the "orange" that is the stock market, but avoid most of the rind and pits. Combine this with more traditional long-term equity approaches and use bonds only for pure preservation of capital, if you use bonds at all.
We think this approach makes for a more proactive response to retirement planning for all who have the courage to inquire and adopt it. We are proud to be a proponent of such an approach (and one that is increasingly being recognized as such in our industry), and we are also very pleased that our industry is getting more innovative by the day. We sense that the message is getting out that the way investors made money in the past may not be the way they will in the future.
Most Popular Articles
