Market Commentary

Five Years On

October 2013

"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February" –Mark Twain

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years" –Warren Buffett

Five years ago we were in full-blown financial crisis. "How to Handle a Market Gone Mad" was a particular suggestion made on the front page of the Wall Street Journal at the time.[i] Madness cooled, and your portfolios weathered the storm reasonably well. They were down, but, as we like to say, not out, and for the most part clients' portfolios were back at the high water values, in terms of investment returns, within about three years. This rebound was in part due to opportunism we and your fund managers found warranted as the market bottomed. And yet, particularly since 2011, things have stalled. You haven't been keeping pace with an up market, which given our style to be more cautious when others are more blasé about what the future holds, is somewhat to be expected. But, this year, you really aren't keeping up with an up market. Not by a long shot. Why?

We are working to protect as well as grow your assets, and right now we are emphasizing protection. First and foremost because this bear market, which started in the year 2000 and has had some wonderful rallies in it as well as frankly terrifying declines, is not over. The 57% S&P 500 stock index decline in 2008-2009 was only eight years into a long-term bear the likes of which, in studies going back over a century, last on average seventeen years.[ii] We have been more cautious even as we have now seen riskier assets continue to climb in price. And, one of our hedges – gold and investments related to gold – have been losers this year, putting pressure on your portfolios. Our viewpoint is that we are in year thirteen of this long-term bear right now and so caution overall, including a moderate level of hedging, is warranted.

Second, the responses of the federal authorities here and in other countries around the world have been nothing but eye-popping in terms of what they have been willing to do to grease a troubled financial system into activity, and this is distorting key elements of the financial markets. Here in the U.S., there is triple the amount of money in circulation today than there was five years ago. One would not guess by looking at the U.S. stock market ticker this morning on October 1, that Italy, the ninth-largest economy in the world, is in a serious government insolvency crisis and that the U.S. government last night sent home a third of its workers over the failure to pass a budget. The strength of making money flow easily at all costs has been that powerful! Warren Buffet himself has likened our Federal Reserve, which has been printing money in part to buy back in long-dated bonds and bonds that others don't want to own, a 'giant hedge fund.' Like with an addictive drug, our stock and bond markets need to be weaned off of this easy money, and we worry about what is ahead in that regard. We think that this systemic response to our financial failings, made so clear five years ago and mostly just papered over and not really solved, will lead in its time to more volatility.

Warren Buffet recently told the New York Times, '"Humans, they all think they're Cinderella at the ball, and they think, as the night goes along, the music gets better and the drinks flow, they all think they're going to leave at two minutes to 12 and of course there's no clocks on the wall, and they're still dancing, so [a panic] will happen again'...'But,' he slyly adds, 'buy when it happens.'" [iii]

Buffet adds that "you don't need twenty decisions to get very rich. Four or five will probably do it over time." We think today we may be suffering the inverse of this principle, in that we think an important decision we are making for you right now, across all our years of working with you past, present and future, is to hold you in a more conservative stance. And, the converse will be the decision at lower prices and higher opportunity, to make the next big decision, which will be to position you much more opportunistically with significantly higher proportions of stocks and riskier bonds, both here and overseas.

We don't want to confuse speculation with investment. As Twain pointed out, every month is a bad month to speculate, but there come times, as Buffett points out, when there are wonderful long-term opportunities to much more heavily invest in riskier assets. We are working to both protect and grow your investments, and we welcome your questions, concerns, and other comments.

This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.

[i] Wall Street Journal, September 16, 2008, page one

[ii] See for example and

[iii] Maureen Dowd, 'America's Billionaire,' New York Times, September 21, 2013

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