I learned long ago that I’ll never have all the right answers, although that doesn’t stop me from trying to improve my percentages. I spend a lot of time reading articles and books by different authors covering a wide range of fields. Let me turn to the thoughts of a couple of them as I close the year with an update on the markets and resultant changes in our investment strategy at Warren Ward Associates.
I am one of many who appreciate the work and wisdom of Warren Buffett, arguably the most successful investor of our age. He has always maintained that his investment process is basically the application of common sense and that he never invests in a business he can’t understand. He is very conscious of the extreme swings which markets endure, having offered this insight on the topic: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” Here’s another of his thoughts, regarding how he makes the decision about whether to be in the market or not: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. With consumer confidence at its lowest level since the index was created in 1967, perhaps fearful is not too strong a word to apply to the current situation.
Winston Churchill, while not quite as approachable as Mr. Buffett, proved to be exactly the right leader for his time. One of his better known quotes is: “Pessimists see problems in every opportunity. Optimists see opportunities in every problem.” I consider myself more a pragmatist than either of those but must confess to feeling somewhat optimistic right now, at least about the future of the markets.
I have written before that, among its other activities, the St Louis branch of the Federal Reserve keeps track of the “immediately available” segment of the domestic money supply – what is known as Money at Zero Maturity (MZM). This figure now stands at its highest level since I have been following it. At the end of November, it was over $8.8 trillion and increasing at a compounded rate of about 3.8% annually. If it gets much higher, it will reach the gazillion level made famous by Tom Hanks in the movie Forrest Gump. To put that number into perspective, the US government stimulus package signed into law in early October totaled about $700 billion. US consumers and businesses have more than ten times that much on the sidelines and ready to put to use. It is our experience that most of those MZM dollars make their way into the stock and bond markets as people’s fears subside. We hope to keep our clients positioned so their account values are lifted as that tide rises.
A common thread running through many of the investment-related articles and newsletters which have appeared recently is “there’s been no place to hide”. Regardless of which of many investment strategies is being discussed, the song has remained pretty much the same. Our approach to investing has always centered on the prudent allocation of assets among multiple segments of the stock and bond markets. The reason is simple: in the past, that strategy has offered our clients protection against market downturns, in part because investors typically buy bonds as they are selling stocks. This time around, bonds have been sold as well and, as others have reported, there has simply been no refuge other than cash – which has led to the increase in MZM.
Although our managed accounts have shown losses, in many cases they appear to have been smaller than those suffered by the broad markets. Asset allocation has not eliminated losses for our clients but it has buffered their account values as we intended. We will continue to utilize that strategy even as we attempt to refine it.
The US economy is clearly not the only one in the world but I do think it remains the most important. It seems to me that both recessions and recoveries have a tendency to begin and end here, with the rest of the world following in turn. Although WWA invested in Japan on behalf of our clients about a year ago, we have closed those positions and have also reduced our broader overseas exposure. We will redeploy those assets domestically, adding to the large cap value and small cap growth sectors. Also, since oil and most other commodity prices have fallen dramatically, we are adding a small position in the natural resources sector as a hedge against a future upswing. We will also begin to transition to a less volatile approach to owning bonds on behalf of our clients and will include tax-free municipal bonds in those accounts where it makes sense.
As always, these changes will be made automatically for our wealth management clients. We suggest that those who read my articles but are not yet clients discuss ongoing strategies with their own advisors.
This has been a very difficult period to be an investment advisor. I am an almost compulsive reader, perhaps hoping that the next book or article will be the one that provides the key to unlocking even better performance for our clients. Although no single right answer has appeared so far, we continue to make incremental improvements and use the wisdom of people like Warren Buffett, Winston Churchill and even Forrest Gump to guide us. Life’s “box of chocolates” has included some pretty unpleasant selections this year but WWA continues to employ a diversified strategy aimed towards improving our clients’ returns in both up and down market situations.
Comments