Market Commentary

Invest in Living

November 2008

"You shouldn't overspend at the moment. Frugality is important."
"Do not worry about the stock market. Invest in family." - Side-by-side fortunes from fortune cookies Sue opened last week

There are fortune tellers at every turn. The headlines trumpet fear and anxiety, and CNN broadcasts a visual of the Dow swooning minute-by-minute in the corner of the TV screen. Real economic problems abound, and we are working diligently to continue to assess what this correction and recession will mean for your portfolios moving forward. We continue to sift through data, think carefully, and make deliberate long-term moves in your portfolios. We continue to work with you to calmly plan while we move through this unusual and tumultuous time.

We have been writing to you periodically this fall and think that it is an opportune time for another update. A new president-elect has been handed a mandate on a wave of hope, but is not yet in office. A stock market in decline in anticipation of bad economic news has moved into the period of actual bad economic news. Economies the world over are slowing quickly, including our own, where consumers have pulled in their spending quite dramatically. Entire industries in the U.S. are on tenterhooks anticipating being the beneficiaries – or not – of U.S. government intervention. Commodity prices have fallen dramatically. And, of course, the U.S., international, and real estate stock benchmarks that we track are down 45%, 52%, and 64% from the peaks they reached in 2007.* Bond markets have been extremely weak as well, in cases where there is any credit risk involved. On the lending front, banks continue to be extremely cautious lenders, although we note that things have thawed just a little in recent weeks.

We will be very frank with you. As we positioned your portfolios over the past two years to become more conservative because we anticipated a market downturn, we did not anticipate the breadth (all continents, all asset classes) or the depth of what has come. It is small consolation that your portfolios' losses to date during this part of this market cycle are less substantial than those of the indices we cite above. It is a tough time, one in which the value of your assets has dropped and many of you have expressed your discomfort and alarm at this.

We are with you in the sense of alarm at just how volatile your portfolios have been in the near term. We too are uncomfortable to see your portfolios down the way they are; however, we also are assessing the best moves for you from this day forward. We see the following as important elements of our perspective, for immediate asset management and for long-term planning:

• We do not expect another depression. The United States government is using its tremendous economic leverage to create and encourage exactly the government and business response that did not occur when liquidity dried up in the early 1930s. By all metrics, we will go through a recession, the length and breadth of which will probably be pretty bad. But, we don't anticipate a 1930s style freeze.
• Liquid assets – stocks, bonds, and publicly traded real estate - are at historically high levels of volatility, as the market goes through its gyrations trying to price this recession into the fundamentals. Shoot first and answer questions later, is the motto of the day as we see it. For this reason, while the stock market particularly has been going through a down market not unlike what we saw in the 1930s, we think it is far from the case that we will see economic bad news like the 1930s.
• This means that as stocks have come down, they have not only gotten cheaper, but we ascribe to the school of thought that considers these assets less risky than they were before. While it is paradoxical to the way we are wired as humans to understand this concept, stocks of well-run, well-capitalized companies that are 40% or lower in price than they were just a year ago are considered less risky now, as opposed to more risky now. This is the lesson of Buffett, Grantham, and other smart, conscientious value-oriented investors. While stocks could go down further, they represent better long-term investments today than they did just a year ago.
• There is an old saying that a core manager of many of yours, Bruce Berkowitz of Fairholme, has been using in the past several months. "You make most of your money in a bear market. You just don't realize it at the time."

What this means for your portfolios is that we have maintained fixed income allocations in this environment to slow the rate of asset value decline in a bad market, but that we have not bailed out of stock and real estate investments as we have seen the market come down. We have reshaped many portfolios this fall in order to further concentrate on investments that are run by managers who will look to bonds, certain commodities such as gold, as well as undervalued stocks to produce absolute return in a dicey time for all asset classes. However, we have not sold and do not plan to sell. We believe we are well on our way to some kind of bottom; we want you to be invested and present when the market recovers, and we believe it will recover. John Hussman, another smart value investor, thinks that while the stock market could continue to go down, it could also rally 30% up from here, and we can't time stock investments day to day or month to month. Hussman also recently pointed out that from the 1932 bottom in the market, it took the market one year to double its value, and less than three years to triple its value. We're keeping you in for the long haul, as counterintuitive as this might feel right now.

Of course, your assets are worth less than they were at the beginning of the year. On the overall planning front, then, it is totally understandable that we are testing the levels of comfort we have developed with you in working together on your long-term financial plans. It may be that you are concerned about your retirement spending, or education funding, or other issues important to you and your family's long-term financial comfort and viability. For many clients, these questions bear fresh examination under new assumptions relating to lower investment asset values. It can at first feel demoralizing to confront new projections in this environment, but it can also be energizing to recognize that in response to new analysis, there are actions you can take to enhance your confidence in a positive long-term financial outcome for you and your family.

In the end, the two fortunes from Sue's Chinese meal, put side by side, are probably as good advice as any out there: Don't spend too much. Don't worry too much. Invest in living.

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