A September to Misremember 

This is one of those times when we don't have to tell you the news you already know it.  Instead, we'll simply react to it and educate from it.

Today's loss of nearly 9% in the S&P 500 (and it was in that range regardless of what market index you look at) was startling in its intensity.  However, given all the economic news and political news that led up to it, it should not shock anyone that the stock market eventually fell to its current level.  That current level (1106 on the S&P) is about where the index stood in late 2003, the first half of 2001 and the first quarter of 1998.  In other words, stocks are now about flat for the past 5 years, 7 years and 11 years.  Secular bear markets look like this! 

The key is that once you have identified one, how do you navigate it if you are truly a long-term investor?  You can do a lot of damage to your portfolio, as well as your investment psyche, by jumping in or out of the markets in these emotionally-charged environments.  Balance is the key, and we have an approach to balance that differs from the masses.  That may be a very good thing right now.  

A few more observations following this unusual day in an unusual month of market activity:  

·        Recent restrictions on short sales of financial stocks did not stop people from short selling stocks in other sectors, buying gold, buying foreign currencies.  These are the bull markets right now, and we made a point of saying that in last week's GreenThought$.  Our portfolio strategies each have significant positions in one or more of these current bull market areas.
 
·        Style box thinking is not helpful in this environment.  Adding value to growth, small caps to large caps, and international to U.S. equity investments does not lower your risk enough to matter.  The best performing U.S. "style box" category today according to Morningstar was Small Cap Growth, down "only" 6.6%.  Large Cap Value was the worst, dropping 10.3%.  This merely adds more to the already weighty evidence against this type of investment approach in bear markets.  It is also what the masses (investors and advisors) have been taught, and some re-education is needed for many of them to avoid bigger problems (reduction of lifestyle, business risk) than they have now.
 
·        Independent thinking is good medicine in tough markets.  You know the names of the brokerages that have capsized recently.   According to Registered Rep online (on 9/22/08), "the last 18 months of turmoil in the financial markets and at the individual New York brokerage firms appears to be benefiting the RIA industry. Despite the still-outsized signing bonuses offered by most Wall Street firms, the steady trickle of brokers leaving wirehouse firms to join-or form their own-RIA firms is growing."
We at Emerald will celebrate our 10th anniversary as a RIA firm this Wednesday, October 1st.  We know first-hand the benefits of an advisor taking an independent approach, versus what the big wirehouse brokerages have offered both clients and shareholders.
 
In a year of political "stump speeches," this is a good time to remind you of the key parts to our mission.  They guide all that we do in the portfolios we manage for you:
 
1.      Be flexible in our investment approach
2.      Be adaptive to significant changes in the global economy and markets
3.      Capture most of the global markets' upside and little of their downside
4.      Keep losses short in duration and shallow in magnitude
5.      Produce positive returns in nearly all market environments (it is nearly impossible to do so in all, but we are trying hard to do so without getting "whipsawed" by markets that change their posture daily, and hang on the outcome of certain short-term events)
6.      Low correlation to the global stock and bond markets
7.      Low volatility relative to the stock market
8.      Be opportunistic but not aggressive
 
We didn't get jealous when markets were in an upward frenzy, and we are certainly not going to try to trade our way through the current environment.  What we have done, however, is to position ourselves in advance of the September turmoil so that we could keep the losses in a reasonable range for long-term investors, so that when the next bull market comes (and it will), our clients will be starting from a competitive position. 
 
That is also the justification for avoiding the emotional reaction of "selling out," as doing so only means that you will have to make two good timing decisions - one on the way out, another to get back in.  Furthermore, since our portfolios are less correlated to the broad stock market than most of our peers, we believe we have taken much of the emotion (not all) out of long-term investing for investors and advisors that work with us.
 
Finally: a personal thought from Rob
 
I know a bit about crisis.  My father grew up during the Great Depression, and throughout his life has never forgotten that things can always get worse, even when "they" tell you they can't. 
 
Like many on the portfolio team here, I was a Wall Street "newbie" when the Dow dropped 22% in a day in 1987.  You don't forget days like that.  One comment I made to the team today is that 2008 has sort of been a very slow-motion version of the October '87 crash.  The good news is that this time around, we have had much more time to make adjustments at each stage of the decline, and we continue to do so. 
 
I also happened to be working on the 97th floor of the World Trade Center in New York in 1993, when terrorists attempted to take the towers down the first time.  When you go through that, and also consider what happened eight years later, you take nothing for granted.  We believe we have behaved this way always, but especially this year.
 
This is an environment we have anticipated for some time, and now that we are in it, we are doing all we can to balance risk and return in our portfolios so that we can keep losses shallow and strike when opportunities present themselves.  While the events are unprecedented, human emotion in times of market strife tends to repeat itself.  We are trying to use our collective experience to protect capital and take advantage where possible.  We welcome your calls and emails during this period of uncertainty.
 
It should not be assumed that any of the securities holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. The securities discussed do not represent a portfolio's entire holding and in the aggregate may represent only a small percentage of the portfolio holdings. The information herein has been obtained from sources believed to be reliable, but Emerald Asset Advisors, LLC ("Emerald") does not warrant its completeness or accuracy. Prices, opinions and estimates reflect Emerald's judgment on the date hereof and are subject to change at any time without notice. Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Further information on the firm and its advisory fees may be obtained from the firm's Form ADV Part II, which is available without charge upon request. Complete descriptions of all Emerald's products and benchmarks are available upon request.

(c) Emerald Asset Advisors

www.emerald-eas.com