Just a quick note from my too-short island escape from the winter cold and snow:
When you’re on a beach on the north side of a tiny island, it’s easy to imagine you are back in time. The beach is deserted. The waves inexorably break over and over again against the distant reef. Between sand and breaking waves, pools of azure-colored water spread out before you on a moving canvas of blues and greens.
Then, a lone seagull appears. It is flying eastward into the teeth of the ever-present coastal breeze. At times, the aviator makes progress, then a gust hits and it appears motionless. And with a stronger blow, the bird actually retreats in its quest to navigate the coastline. But as it seems in all things natural, persistence wins out. The gull moves on, winging its way up the coast until it finally disappears into the distance.
Nature seems to be man’s ultimate teacher. All progress seems to originate in the lessons it can teach us. Is there any technology that we rely on today that we did not first observe the principles in nature, and then seek to emulate? Of course, it is in the nature of man to improve on what nature teaches us, but it always seems to lead the way to provide the example.
I’ve spent 40 years investigating, testing, and developing investment strategies to deal with what appears to be the chaos of the financial markets. Each strategy seeks to improve on nature – the buy-and-hold approach to investing. Each new discovery has resulted in improvements but in different ways.
Some generate greater returns but with equal or just marginally lower risks. Many investors seek these aggressive programs out – like our STF, VAN, Third Day, Systematic Long/Short Bond Trading, and Managed Income Aggressive strategies. They believe they can stand the heat when market volatility escalates.
Other investors seek a more middle ground, looking for strategies that generate high risk-adjusted returns – more return at a given level of risk (volatility). Market Leaders, Next Generation Asset Allocation, and Lifetime Evolution were developed in an attempt to meet these goals.
Finally, the most conservative among us focus on strategies that have a history of providing an upward sloping growth line, minimizing the volatility, preserving capital, and accepting a lower level of growth for a higher probability of constant appreciation. Our Managed Income, Global Maturities, Strategic High Yield Bond, Contrarian S&P Trading, S&P Trading Patterns, Disciplined Management, and Tactical Gold Equity models all seek to provide this result.
While all of these strategies strive to deliver the aforementioned objectives, they all behave much like the gull that persisted in its advancement up the beach. They all have their periods where they advance almost effortlessly, then hit a gust that slows their progress. And each has hit a time where a slow retreat seems the best that they can do.
Yet persisting with whichever one of our strategies an investor chooses can lead investors to the attainment of their objectives. But the period of time each takes to make it up the beach to reach their objective can be very different.
Last week, the stock market hit one of those gusts of headwind that seemed to stop the 2013 rally in its tracks and push it backward. When that happens, as it is again today, it is like watching the gull traverse just a few feet in front of us on the beach. What happens in the short run can be progress or retreat.
But the beach is very long, as is the time period of the current rally, and when you put last week’s two down days and one-week decline into the longer term perspective, an investor has a different sense of its progress.
In our Market Hotline of a week ago, we said that the current market was coiling like a spring trap in anticipation of a big move. After today, it looks like it is going to be to the down side. Still, as the chart discloses, the long-term rally seems to be intact. This means that we should be slow to change from our equity-based strategies, giving them time to avoid the wind gusts and take flight once again. In addition, unlike the buy and hold strategy, our strategies are actively managed and can adjust as the market provides new information to process.
Source: Bespoke Investment Group
The fact that the long-term market rally seems intact most assuredly does not mean that the market will move straight up from here or that it will even advance at all for a while. The headwind can continue for quite some time and we can still make it up the beach.
Last week, legendary investor Warren Buffet’s Berkshire Hathaway was being celebrated for having reached the $150,000/share level. But this investment giant did not reach that height by moving straight up. Check out the chart below.
Source: Bespoke Investment Group
The graph of Berkshire Hathaway’s ascent to its present market value looks like the topography of a mountain range or the track of a wild roller coaster.
While the chart makes clear that over time it has outperformed the S&P 500: 1) there were periods where it lagged and even lost money while the S&P surged ahead (see circled period); and 2) the losses sustained since it topped out in December of 2007 have just now been recovered – a little over five YEARS later.
Gold is a similar story. For more than a decade gold has been topping the price appreciation charts as it moved from $300 an ounce to over $1,700. But lately it has been in for a serious retreat. Nothing goes up forever. And while the recent losses are discouraging, I submit that nothing goes down forever, either. In fact, the chart below makes me want to buy!
Source: Bespoke Investment Group
And the currency war that I spoke of last week may help gold and has already benefited US stocks (the major indexes of which are up over 5% this year). While fourth quarter earnings stumbled last week (the real reason, in my opinion, why stocks retreated last week, not the Fed minutes the media fixated upon) as earnings reporting season came to an end, overall earnings and revenue reports were better than they have been for quite some time. The majority of economic reports (including two gold deflating but economically beneficial price reports) were also supportive.
Source: Bespoke Investment Group
The market seems to be slowly coming around to our point of view that the impending sequester is much ado about nothing. While uncertainty can still cause some further correction like today’s, $85 billion in cuts this year are not debilitating in a $6 trillion budget, and Congress will probably modify them anyway during the potentially more dangerous budget battle to follow.
The seagull that graced my presence a few minutes ago, that struggled, held motionless and fell back in its quest for forward progress is gone. But… it stuck to its plan, it persisted in the effort that it began with, it flew up the beach and reached its destination. We still can learn from Mother Nature.
All the best from the Caribbean,
Jerry
© Flexible Plan Investments
