What follows is a summary of the notes from a conference call we held for clients of Emerald Asset Advisors on Tuesday, October 7th.
At the recent Schwab IMPACT investment advisors' conference in Atlanta, a speaker said, "you know you have a great investment management business when more people are calling you to see how you are doing than calling in a panic to see how they are doing." While we understand the reasons for both, we are happy to say the "how is my money manager holding up?" calls have overwhelmed the "am I OK?" calls. Thank you for your thoughts, and let us assure you, we're doing just fine, even if each day our brains are required to process as much information as we used to process in a month.
Still, however stoic a person might be in times like this, we would not be human if we didn't all have questions and concerns at this point. Today, we put out some of the issues we think are on investors' minds, tell you what we see from our perch, and encourage you to ask us if there's anything else we should be answering and talking about.
WHERE WE HAVE BEEN:
· In South Florida, we prepared for another hurricane season in the tropics, but got this storm instead: Auction rate securities, muni bond insurers, Bear Stearns, Fannie/Freddie, Goldman and Morgan Stanley, AIG, Washington Mutual, and Wachovia. The past year has taught us one thing: never say never! - it all started from the housing glut and it will continue until that market is repaired.
· Many homeowners and investors have found out what "risk" really means-if debt becomes a lifestyle, there may be a big punishment later. It took a while but the system broke.
· The range of possible events in the markets has expanded, and that's why we are bigger believers than ever in an investment approach that is FLEXIBLE AND ADAPTIVE.
· Investing themes we have talked about for years, and printed in my book published two years ago, and here in the GreenThought$ newsletter, are all still as valid as ever:
· Investment climate - Very different from the 1980's and 1990's
· The return of inflation - A serious threat to wealth and retirement
· High-Quality Bond investing - Returns too limited to be a retirement savior anymore
· Asset allocation - Traditional "style boxing" has many flaws
WHERE WE ARE NOW
"The Noah Rule: Predicting rain doesn't count; building arks does." We believe we are as prepared for this as anyone could be for an event of historical proportions. That preparation has shown in our ability to preserve capital in our strategies relative to the general mayhem that exists around us.
· Processing new information is the greatest challenge for people in our business now, and while it's challenging for us, it must be overwhelming for people who don't do this all day. So we sympathize, but also point out that we are in a period where most investment styles are not currently working for more than hours or days at a time, but there ARE places to make money.
· THE #1 KEY FOR RIGHT NOW AND GOING FORWARD is BALANCE in one's portfolio and investment attitude - or what industry veteran Steve Leuthold calls "emotional neutrality."
THE KEY TENETS OF OUR PORTFOLIO MANAGEMENT PHILOSOPHY AT EMERALD: · Be flexible in our investment approach
· Be adaptive to changes in the global economy and markets
· Be opportunistic but not aggressive
· Find bull markets wherever they exist (via long or short investments)
· Capture as much of the market's upside and as little of its downside as possible
· Keep losses short in duration and shallow in magnitude
· Produce positive returns in as many market environments as possible.
· To use a football analogy: If at the start of the 4th quarter of the game we are down by a touchdown, we still are within reach of victory. If another team were down 4 or 5 touchdowns (as many are), their game is over. We are still in the game.
· Why not go to cash? Because that takes two excellent timing decisions, and timing decisions are often forced by investors in times of short-term panic. People emptying brokerage accounts, dumping their mutual funds, and redeeming their hedge funds at the next possible escape date are all part of the madness that surrounds us. But Emerald investors have something those folks don't have: a strategic approach carefully designed to experience less volatility than the headline stock indexes you watch flashing despair on TV every day lately. OUR APPROACH WAS CREATED TO HELP INVESTORS STAY IN THE BOAT!
WHERE WE ARE GOING
· Potential future threats include more bank failures, liquidity problems at insurance companies, credit card defaults, student loan defaults, and perhaps the biggest - the frenetic selling by the "little guy." This is typically the last phase of a market panic. A month ago we would not have expected to say this, but we are getting closer to what we call a buying opportunity, which we define as "can you buy something that can generate a reasonable annualized return over the next 3 years?" We are not there yet, but think about it this way: if something has dropped in price from 100 to 50, it may have downside to 40. However, if in 3 years we give it a good chance to be at 65, we're getting closer. We have not jumped into many beaten down areas in our strategies, but we are at the stage where we are starting to create "new money buy lists" for the cash hoard we have in all of our strategies. We just don't know if it will take two weeks or two years or somewhere in between to get to the next step.
REASONS FOR LONG-TERM OPTIMISM:
1. Cleansing of the financial system will be not good in the long run it will be great! More responsible homeownership (if you put 20% down, you can get a house. If not, you rent). Those who work hard to maintain a good credit rating will be rewarded, not looked at as low-risk, low-return borrowers by banks and mortgage companies. This is the "deleveraging" process you hear about on TV these days. It has started but it will take a long time to finish (years not months).
2. Stocks often bottom about 6 months before the economy does. We have no idea when either will happen, but we do know that there will be places to make money at all times. Our job is to find them for you, even if they are in unusual places.
3. Along with reduced desire for risk by investors and financial institutions should come a greater appreciation for true balance within a portfolio. "Balance" is not accomplished by buying a collection of things that sound different but act the same (growth, value, small cap, international), but by creating portfolios with components that are not highly correlated with each other or the markets. We believe that can allow your portfolio's growth to be steadier than the index-fund crowd (and how are they doing these days?) As a very successful portfolio manager once told me: when you pay the lowest fees for money management, you get lowest level portfolio management skills. Index funds are not managed, they are dictated by the index's makeup. That may work in bull markets, but not in bear markets as we have now.
HELPFUL RESOURCES
(for you and your friends, family, and other advisors) ·
www.emeraldassetadvisors.com - our website
· Your phone and email- tell us what's on your mind, ask us about it, and tell us what we can do better
Enjoy your weekend!
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, which is available without charge upon request. Complete descriptions of all Emerald Asset Advisor's products and benchmarks are available upon request.
