“And one other thing: you have to be willing to look wrong for a while.”                                                        -Howard Marks, Oaktree Capital

By now, most of you know when it comes to investing, we generally prefer active fund managers as opposed to passive, or index investing.  Sometimes index funds work very well, such as the phenomenon of low volatility investing. And then there is the argument that index funds, usually in the form of exchange traded funds (ETFs), are less expensive and more tax efficient.

But as allocators of risk capital, yours and our own, it makes sense to study long term, high performing investment managers (or better yet, management teams) and compare them over time to their respective index.  Markets usually move on three things: 1) global economic conditions, 2) corporate valuations and 3) investor psychology.  It is at market tops and bottoms, when the “greed and fear” factors of investor psychology are at their greatest, that we see the most value being added by active managers.  As markets go up, well, let the good times roll! And as they fall, well, things are bad and will never get any better.  Indices mirror this human behavior, but good managers usually don’t.

It’s not news to any of you that the U.S. markets have been on an incredible bull run, both last year and through the first quarter of this year.  This is despite a lackluster U.S. economy, which generally has been the best performing in the developed world.  Our research leads us to conclude that our market has gotten ahead of itself, overbought, so to speak, and needs to rest.  As I write this on April 5^th, the jobs report widely missed the economic consensus forecast, so we are seeing the beginning of a pullback and the return of some volatility.

Some of the managers we employ stay fully invested during a downturn and use the volatility to either add to existing positions at lower prices or to pick up new bargains. But some, like the management team of First Eagle Global, slowly raise their cash position as the markets climb.  The primary reason for this is that as the markets get more expensive, the higher prices conflict with their discipline and they can find nothing to buy that meets their value criteria.  It is not unusual to see their cash allocation at 20 -25% of their asset base at a market top.  This strategy of being disciplined buyers slows their returns slightly as markets reach for a top, but it also gives them a natural cushion as markets retreat. It also gives them plenty of “dry powder” to use as bargains become available in a lower market.  This strategy is one that has worked well for them for over thirty years, and is most “un – index” like, but tends to smooth the jagged tops and bottoms of the market.

We know that index funds, whether they cover a broad market index or a tiny sliver of an individual market sector, are a daily reflection of the markets’ progress.  This must be correct because it presents a summation of not only global economic health and individual corporate health, but also a snapshot of the underlying investor sentiment that day.  Yet we also know that our active managers have choices:  they can choose to hold what they consider are the best stocks or bonds, or can hold abundant cash if need be.  Because of these choices, good active managers tend to outperform over long periods of time, and often do so with much less market risk.

In closing, if we go back to Howard Marks’ quote about “looking wrong”, we often do.  We are willingly to “look wrong” sometimes in order to achieve good long term results with less risk.  As always, thank you for being clients and for your continued confidence in the Longview team.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

“The riskiest thing in the investment world is the belief that there’s no risk.”

Howard Marks, Oaktree Capital

I think most of you will agree with the old saying that “you are what you eat.”  Just look around the world at wealth levels of societies and their locals.  A broad generalization is that those societies who are wealthier are heavier, with the generalized exception of those coastal populations who tend to eat a healthier diet of fish.  In the investment world, it could be said that you are what you read, although this is also a broad generalization complete with much background noise. In Howard Marks’ latest newsletter, he writes quite frankly about investment cycles, past and present, investor psychology and behavior, again past and present, and lastly, the importance of risk and the prudence of controlling investment risk.  Cycles do happen in investing where you can almost compare bull and bear markets to daylight and dark.  The last dark cycle was so deep that many stock investors have been afraid to come back into the market, at least until now.  The S & P 500 is up over 100% above its low in early 2009, and only now do individuals show a renewed interest in buying equities.  Many see the return of the individual investor as the beginning of the end of this cycle; certainly it is a sign of a heightened appetite for risk assets.  There are also other signs, such as Bank of America’s roll-out of an aggressive new mortgage lending program, and the much increased use of leverage in private equity deal making. While large capitalization stocks are still fairly priced, some mid-cap and small-cap indices have already hit all-time highs.  Don’t get me wrong, I like a bull party as much as anyone, but as Marks writes, a time for caution may be in order.

As the signs crop up for a little more risk control in the stock markets, the bond markets are way ahead of their equity brethren in terms of being at high risk levels.  The U.S. Federal Reserve Bank, along with most other central banks around the western world, has kept a low interest rate policy for four years now.  They have “forced” fixed income investors farther out on the risk curve looking for better yields. I get the feeling that many of the these investors understand the inherent risk they are taking in reaching for higher yields, but feel they have been forced into participating in Bernanke’s strategy of recreating wealth through risk assets. Paul Volcker, back in the early 1980’s, had a similarly mammoth task of fighting runaway inflation, certainly different than the deflation problem Bernanke has tackled.  But in both cases, there was a growing budget deficit caused by tax cuts and high Congressional spending.  Volcker created much pain by putting the U.S. economy into recession by raising interest rates above 15%, but he did something else just as important.  After inflation began to moderate, he held rates relatively high, forcing Congress to focus on the growing federal deficit because the country couldn’t afford to pay those high rates of interest.  It worked and the U.S. economy enjoyed an unparalleled period of prosperity from 1984 through the late 1990’s.  One can only hope our current officials read Volcker’s new biography.

Many of you know we have a preference for using small mutual funds where the owners of the fund have a substantial stake of their own money at risk.  In other words, they are “eating their own cooking.”  Our experience is that these funds tend to have very focused, high performing management teams.  The downside of this strategy is they also tend to close the funds sooner than later, knowing that they cannot effectively deploy huge influxes of cash.  So it is with our emerging markets selection; representatives of the Virtus Emerging Markets Opportunity Fund called us about two weeks ago saying the fund would close at the end of January.  The next day, Morningstar named the manager, Ravi Jain, international mutual fund manager of the year.  We have enjoyed and hopefully will continue to enjoy our relationship with Ravi and his team, but primarily because, as Howard Marks preaches, he has factored risk control into his methodology.  Congratulations to him, and continued thanks to you for your ongoing confidence in the people of Longview.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER® practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

By Jeffrey Cedarholm, CFP®, ChFC®, CLU®
Chief Investment Officer

“Well, Armageddon is not around the corner. I don’t believe in the imminent demise of the U.S. economy and its financial markets. But I’m afraid for them.”

-Bill Gross, October 2012

A week or so ago, during one of my bi-weekly early morning trips to the gym, a client commented to me that the markets seem to be doing pretty well. I shot back, “you would be doing pretty well too if you were in the hospital and the doctors had just ordered a constant morphine drip, and had given you assurances that it would be there until you were all better!” The U.S. Federal Reserve and Ben Bernanke’s team have done just that; they have assured us that with QE3, they will be there to supply an unlimited amount of credit to our banking system and hence to us. The Fed has a dual mandate: 1) to keep interest rates appropriate and stable, and 2) to control unemployment. It is this last mandate that seems to worry Ben. This is what he still sees: bank deleveraging = household deleveraging = low consumer demand = high unemployment = threat of deflation. Therefore, QE Infinity!

The positive result of the Fed QE programs has been to stabilize the economy and the markets, taking the threat of financial Armageddon away. But the loose money, like water, flows along the lines of least resistance; in this case, into the stock and bond markets first and more slowly into the residential real estate market. Over the last quarter, stock markets around the world have outperformed their respective economies and in many cases, even their underlying companies. I am a believer in the “reversion to the mean” theory, but feel this reversion has yet to happen. Will it be economies coming up to meet their markets, markets coming down to meet their economies, or somewhere in between?

Writing these letters (or now blogs) used to be easier. Asset price correlations were more historically normal and not continuously manipulated by the central banks around the world. This manipulation has muted some risks and created others, making us seriously rethink our role as caretakers of your investment funds. Being mindful of all the risks we can see and understand, whether with investing or planning, has always been part of our process. Yet, the demand now is for a much, much sharper focus. As always, thank you for your confidence in the people of Longview.

Best regards,

Jeff Cedarholm

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER® practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

By Jeffrey Cedarholm, CFP®, ChFC®, CLU®
Chief Investment Officer

“Elvis is dead and I don’t feel so good myself.”

-Lewis Grizzard, Jr.

My neighbor Lewis’ quote pretty well sums up my feelings on the global economy and markets, as well as the state of global politics.  While I will express an opinion on the economy and markets, I’ll leave the politicians to Lewis as fodder for his jokes.

In the U.S., we are experiencing one of the worst recoveries after a major recession ever!  The growth in Gross Domestic Product (GDP) has been muddling along at 1.5 – 2.0% instead of the normal 3.5 – 4.0% you see in most recoveries.  Job creation has been disappointing and the Federal Reserve has maybe only one more bullet left in their gun.  Throw in the pending tax resets, also known as the “fiscal cliff,” combined with slowing corporate profits and it’s easy to be negative about our prospects.  And globally, that’s the good news. Thanks to the Federal Reserve, the U.S. has clearly done a better job of solving its economic problems when compared to other developed countries.  Chugging along at anemic growth levels may be the best we are going to get until some of the political and policy uncertainty is removed.

The bad news continues to be related to the European Union and their seemingly never-ending debt and banking crisis.  The Eurozone is in recession, with Spain, Portugal and Greece in full- blown depression.  The European politicians don’t seem to be as well equipped to deal with this crisis as their American counterparts (not implying that we have done a stellar job).  The risk here is whether European problems will precipitate a recession in the emerging countries because of diminished trade, or whether the Asian and Latin American economies will also find a way to muddle through.  Certainly there is a risk that even the U.S. slides back into recession due to the Eurozone problems.

As I have stated in the past, I think we may have a period of unusually high volatility.  However, as Longview has shied away from most foreign equities and now foreign bonds, I don’t think the volatility our portfolios may experience will reflect as much actual risk as just shorter-term fluctuations.  In addition, we are seeking returns from other sources such as high yield bonds, where the overall risk / return ratio currently appears to be much better than stocks.  All in all, we are in an environment where the Eurozone debt crisis and weak growth probably will sustain a higher sense of risk, but this should be offset from time to time by continued monetary policy efforts, lower energy costs and generally good (but waning) corporate profits.

And Lewis, who certainly created a lot chaos of his own, died back in 1994.  It is his ghost who is my neighbor, Lewis having owned a cabin close by in the mountains.  In his memory, the current owners have left one of his pink flamingos on their porch.  While a pink flamingo is not exactly a clown, it comes pretty close to describing the craziness we see in the global economy!

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER® practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

By Jeffrey Cedarholm, CFP®, ChFC®, CLU®
Chief Investment Officer

“Wisdom consists of the anticipation of consequences.”

- Norman Cousins

You know, having a corporate website leaves you with the obligation of having to keep it updated.  In our office over a year ago, we discussed this updating task and Mitch Marsden volunteered to develop a blog to fill some of the gaps.  Never having been one to look a gift horse in the mouth, the rest of us breathed a collective sigh of relief that we didn’t have to shoulder this entire burden ourselves.  Mitch really has done a good job putting it together and assigning us to come up with articles, or in my case, the quarterly market letter that I have now written for over ten years.  I have always felt free to discuss whatever was on my mind and usually relate that to current market conditions.

Little did Mitch know that I would feel free enough to discuss chicken, free range chicken.  Back in the summer of 2010, Steve Romick, the long-time manager to the FPA Crescent Fund, used this description to discuss his style of investing: “free range,” because his mandate states he is not constrained, but can invest in almost anything, and “chicken,” because he doesn’t like to lose money. His strategy has worked well over time, producing an 8.51% annualized return over the past 10 years, with much lower volatility than the S&P 500.  The fund’s statistics are important, but not nearly as important as the diversity it offers to our portfolios.  With the developed world’s huge government debt burdens, the continued Eurozone crisis and next year’s anticipated increase in both income and estate taxes, there is a good chance we may see fear and increased volatility return to the markets by late spring or early summer.

While global economies are still relatively weak, stock markets around the world have rallied strongly over the last six months on continued central bank support (especially the European Central Bank) and the prospects of stronger economic growth, at least in the near- and mid-term.  While we are still bullish, as BCA Research has recently written, we also believe “the path to higher prices will be much rougher than before.”

Since last November, Longview has steadily increased equity positions, but we also understand that in a risk on / risk off market, you take asset growth where and when you can.  In embracing Steve Romick’s opportunistic philosophy running the FPA Crescent Fund, we are again asking our investment managers to help us with our “grow and protect” strategy.  So, we are now officially adding chickens to our herd of bulls and bears.

As always, thank you for your continued confidence in our investing abilities.

Best regards,

Jeff Cedarholm

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER® practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by  Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or blog post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.