Market Commentary for the week of July 16, 2012

Watching and waiting.
In order to achieve optimal portfolio returns, particularly in “un-optimal” market periods, it is vital to adopt an ongoing strategy/methodology that is consistent.  Attention to details, without capitulation, is the hallmark of a professional portfolio manager.  Ideally, one is seeking durable results over the course of a long-term, and not a reflex change to short cycle events.

This is not to suggest a stubbornness about one’s endeavor, a kind-of intransigence that a child might exhibit when denied a cookie, but rather a calculated comprehension of the details of one’s science which confidently produces consistent outcomes.

If this goal is met, one has a repeatable set of prescriptions which can be applied to all geographies of the financial landscape.

Not only should these “laws” be understood by the tactician, but it helps if a client can, within reason, marginally regurgitate the concept of these laws for his own comprehension.  As market conditions change, precipitating portfolio allocation changes, what might seem random becomes the basis for successful decision-making and a greater appreciation between client and manager.

The essence of that relationship relies not only upon a highly desired positive alpha for the portfolio but upon the consistency and proficiency of the manager’s stated discipline.

In my relationships with clients we hold to the notion, unique to each account’s risk/reward tolerance, that asset allocation plays a greater role in the probability of portfolio capital appreciation than does any individual security within that portfolio.  In other words, there are no heroes or villains, only groupings which heighten the possibility of the portfolio achieving its stated objectives.

Uniquely, my discipline has outperformed its “benchmarks” by two-to-one for nearly three decades by minimizing drawdown (the big error) in allocation combinations.

It is impossible to avoid any mistakes within the security selection process, but it is possible to aggregate the preponderance of positive outcomes in your favor.

Mammoth jump.

Today’s marketplace is a series of negative probabilities wrapped by insufficient psychological expectations.  Given the heightened state of insecurity, most investors will do whatever it takes to avoid another dot.com collapse in their portfolios, including doing nothing.

That is not a plan.  Market cycles ebb and flow and we must be responsive to those cyclical events.  Focusing upon the minutae, however, diverts your attention from the secular themes that resonate most strongly, and which ultimately impact upon raising valuations.

So far 2012 has been what I had forecasted:  a global economy with significant risk.  Individually, countries, sectors, and equities are doing their best to gain earnings traction.  Collectively, they are fighting against psychological disruption like none we have witnessed in the last decade.

Until, or unless, wealth perception changes significantly, wealth collection will continue to deleverage.

Equity prices will continue to rise and fall depending upon news events and a steady drip of data from local television and government sources.  But don’t expect the net effect seriously to alter the secular paradigm that earnings drive prices in the long run.  We are less about managing money than we are about managing one’s expectations about money.