Tuesday, February 10, 2009

Midwinter Thoughts 2009

Back in October, when Warren Buffett published his op-ed piece in the New York Times advocating buying American stocks, it was easy to rationalize that this would indeed be the moment to buy “straw hats in the winter”.  Warren made no guarantees about performance in the short-run and is looking five or more years out to be rewarded (the market is about 4.5% lower than it was when he wrote the piece).  We generally agree with his long-term assessment for returns in the stock market, but feel the near-term is too uncertain for us to put more client assets at risk.  While Buffett may have been too early in his call for stocks, given the unprecedented nature of this crisis, we would rather be slightly late and more certain. 

We are all in uncharted waters because of the severity and complexity of the financial problems now being encountered both in the U.S. and worldwide.  As President Obama said in his February 5th Washington Post Op-Ed: “By now, it's clear to everyone that we have inherited an economic crisis as deep and dire as any since the days of the Great Depression.”

To read President Obama’s entire op-ed piece follow this link:


Looking back at recent history, both the S&P 500 and Dow Jones averages are currently trading at levels of nearly 12 years ago, i.e., mid-1997.  This is somewhat reminiscent of the period from 1968 to 1982 when the major averages were virtually unchanged.  These events argue against the time-honored theory of buy and hold long-term investing, but not against holding high-quality, dividend- paying equities with a trading philosophy that takes profits along the way.

Fortunately, we did take many of our profits in 2008; unfortunately, however, we deployed a portion of those funds into holdings that looked very attractive last fall, only to see them decline further.  So, even though we significantly outperformed the market in 2008, we weren’t as immune from the problem as we might have been.  In our fully invested accounts we are currently holding approximately 40 percent of client assets in investment-grade bonds and government money market funds, and 60 percent in high-quality equities.

Given the current “deep and dire” economic situation, it is our intent to find a conservative balance in our portfolios by investing in bonds, government money-market funds and high-quality, value-creating equities.  This balanced approach will provide our portfolios with consistent yield and staying power, while allowing for significant upside potential, as we patiently wait for the inevitable turn in both the United States and world economies.

The operative word here is “patience”.  We believe that our investments are relatively well positioned and that we must see certain initial outcomes of the new stimulus bill, before we act further. There are early indications that the vast deficit spending upon which the United States is embarking will have an inflationary effect, with significantly higher interest rates to follow, once the deflation we are currently experiencing is forestalled.  We believe there is enough time to make carefully reasoned judgments about both bonds and stocks, once more facts are known.

That’s the way we see it in Mid-Winter 2009.  Please let us know what you think.

Jack and Peter Falker

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