It wasn’t the cataclysm we
thought it might be, but last week’s intense market collapse/rebound does help
to put into focus the various longer-term phases within global markets, and
what significance these daily anomalies play in shaping the overall landscape
for securities investing.
We now must confront the issues that arise from the
collapse and whether or not there is cause for concern.
First and foremost, we have to
stop putting credence into exogenous factors that don’t relate to the
longer-term, top-down fundamentals of our economic landscape. Whether
the precipitous decline was caused by a faulty switch, or part of a broader
chain reaction to global credit crises in Spain and Greece, our focus must be risk/reward
parameters that factor into improving earnings performance, and asset
allocation models that heighten probabilities of upside portfolio performance
while diminishing the significance of downside risk potential, like the events
of last week. In the process, we
need to expand our scope to include industrial, political, and demographic
trends that impact psychological and fiscal capital. In
that regard, events like the fall in equity prices only heighten the
ambivalence most already feel about getting “in bed with” Wall Street and its
chicanery.
It would be dangerous not to include psychological components
in our evaluation because fundamentals seem to have rolled over and given
up. The world is in a very volatile
place right now, what with oil spills, airline crashes, natural disasters,
political discord, financial disarray, etc.
One’s recollections of a more serene time seem long ago, unattainable,
and a constant daily reminder of one’s evolving task simply to survive the
status quo.
What to buy?
I don’t wish to be glum, but my portfolio efforts today
deal more acutely with the need not
to lose money than with how much money we make. As we wait for
recovery in the financial arena, our focus is less upon sustained upside
momentum as it is on counterbalancing the flood of negative alterations to our
lifestyles and portfolio valuations.
Clearly the psychology of the markets is “defensively optimistic.”
All is not glum, however. Highlights include our stellar relative and
absolute portfolio performance. Owing to
an asset allocation plan, and proprietary quantitative vector modifiers, we
have largely been “immune” from serious exogenous noise that pollutes other’s
perception of long-term fundamentals.
Our discipline is not perfect, but it is precise. When our stochastic numbers in 2008 became
excessive we scaled back our exposure to risk categories and either bought
bonds or sat in cash. Our goal is not to punish clients with fluid
modulation of risk but rather to reward them for it.
Wider horizon.
Part of our strategy, also, is
to allocate within sectors into those companies that generate positive earnings
growth primarily through unit volume
expansion and top-line revenue growth.
This discipline reinforces the notion that simply by cutting employees,
or expanding their workload, or shutting down inventory capacity we know
companies are skirting the real issue of defining themselves by building a
better mousetrap or attracting new buyers.
Going forward, any change in
the average investor’s appetite for risk is going to have to be preceded by a
change in anecdotal data, for example from low employment to high employment,
from lower home values to higher home values, from stagnating portfolio and
retirement fund valuations to higher fund valuations, from a sense of
disorganization to a sense of self-fulfillment and calm. Prices don’t predict everything, but in a
world of experiential satisfaction, removing obstacles from someone’s way opens
up the potential for a change in behavior and, hopefully, upside market
valuations which follow.
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