Note: This market review was published on February 17, 2014 and may not be reflective of current market or investing issues.
Only when the tide goes out do you discover who’s been swimming naked.
Warren Buffett
Don’t you think it odd that market sentiment has a habit of changing with the calendar, or more precisely, from one calendar year to the next? Other than a tax-year change, which admittedly is a significant change for some, what really changes overnight from December 31 to January 1? As we go into 2014, out research sources have mostly the same forecast: a year where returns should be high single digits (8 – 9%) with the U.S. economy stronger, Europe on the road to recovery, Asia, both developed and developing, having a mixed bag of problems and more market volatility than we have seen in a couple of years.
A wise old market truism says that as goes January, so goes the year. Unfortunately, back testing data shows this to be correct a high percentage of the time. So with January over and the S&P down almost 5%, the positive returns may be in jeopardy, but the return of volatility is spot on. Many investors, including some prominent academics, equate volatility with risk, but we tend to view this relationship a little differently. Human emotions are sometimes slow to turn and where last year’s fourth quarter showed unadulterated greed, it seems the magic of the calendar year change has reintroduced greed’s counterbalance, fear. Investors knew that our Federal Reserve was beginning to taper its massive quantitative easing program and the initial withdrawal was causing some turmoil in the emerging markets debt and currency markets, but they just kept buying and buying global stocks right up until New Year’s Eve!
As we review portfolios at any time, but especially in last year’s fourth quarter, we do so with the intent of investing any new cash accrued. We typically hold only 2 – 4% cash by design, so this is an endeavor of asset allocation. Also, we have software that allows us to study our portfolios back tested with the actual assets used in their construction. With these reviews, the cash percentage numbers were quite dissimilar – about 3% cash we hold on purpose to over 12% showing in our models. Why such a discrepancy? Some of our investment managers tend to reverse the greed / fear equation that leads to volatility by accumulating cash as excess greed builds and then deploying that cash as volatility, lower prices and some sanity returns. This past month has given us a small taste of this smoothing process.
So if we don’t completely agree with many market participants on risk, how do we define it? Longview really views risk not as volatility per se, but as the “permanent impairment of capital”, a loss so deep that you could not accomplish the monetary life goals you intended. We view volatility as a necessary reset, where our investment managers get us collectively better values and the investment markets return closer to stable conditions. We wish you all a good investing year and as always, we are very appreciative of your continued confidence.
Disclosure: 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 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 upon request.
