HOFFMAN,
WHITE & KAELBER FINANCIAL SERVICES, LLC
Investment
managers & Financial Advisors
December 4, 2004
This is the December 2004 monthly Wealth Management newsletter from Hoffman, White & Kaelber Financial Services, LLC. If you do not wish to be included in our circulation, please reply indicating your desire to be removed and we will be happy to oblige. Alternatively, any of your friends or colleagues may receive this on a regular monthly basis by sending their name and email address to info@hwkfs.com. Feel free to forward this to any of your friends who may find it useful. Thanks for your interest and I hope you enjoy the letter.
On the other side of the discussion, this month’s CFA® Magazine showcases an interview with Jeremy Grantham. CFA® Magazine is the CFA Institute member magazine for investment professionals; and, Jeremy Grantham is among the most respected investment management professionals in his peer group. Grantham is predicting “a very painful market environment ending in typical fashion with people [as a result, becoming] more concerned with caution, conservatism and capital preservation… An ending in 2006 would be perfectly typical for a bear market; it wouldn’t be the shortest, and it wouldn’t be the longest.” Grantham assumes the bear market started in March of 2000.
This month’s letter will review what some well-credentialed
market observers have professed recently.
So lean forward, and listen closely to hear the stock market’s message
to see if it seems to be saying that it wants to go higher. But, consider this, the task of assessing how
high and for how much longer may likely be far less soothing. As our investors already know, we’ve
positioned ourselves defensively since May of this year. You decide.
Lastly, and as always, we will finish
with an update on our investment activities.
How Upbeat Are Advisors?
“With the great majority of advisors optimistic about the
stock market, many are putting their money [or reputations] where their mouths
are”, says IA magazine. “Twenty-six
percent said they allocated more to stocks over the previous 12 months, while
20% said they had allocated less to stocks.
The remaining 54% said they had maintained the same allocation to stocks
over the past year.”
Most stock indices have moved up nicely over this past
month. In fact, a nearly unceasing surge
pushed up the S&P500 to a new high for the year. And the result – greatly increased investor
spirit and hunger for risk. The
prevailing mood has gone from the fear of an election stalemate and angst over
rising oil prices to excitement and an urgency to buy into the rally.
Barron’s, Michael Santoli, wrote this month: “It’s always hazardous to guess what causes
any market move. But the market’s lift
coincided with an electoral sweep by Wall Street’s preferred political party, a
sharp retreat in petroleum prices and an improved employment report [present]
good enough proximate causes to keep the story moving.” He continues with the belief that,
“previously frustrated investors took it from there, rushing to participate and
salvage what has been a tough year to turn a buck in stocks.”
Not alone in these proclamations, even self announced market
maven, former hedge fund manager and columnist for TheStreet.com, Jim Cramer,
was seen as returning to the fray. Last
month, Cramer opined, during an episode of Cramer and Kudlow that: “the only way to catch up is to join the
crowd… There simply aren’t enough trading days left to make a lot of
money... The clock is ticking... The downside will be very limited here because
the feeling you felt in your stomach when the market opened up huge is the
feeling that comes from recognizing 'Darn it all, I gotta get in. Because you
do’.”
Well that
is all right then, invest because you have a feeling in your stomach; just make
sure it isn't trapped wind! Investors
falling over themselves to buy highly valued stocks are the investment
equivalent of Pavlovian dogs. Just in
case you aren't aware, Pavlov was a pioneer in conditioning. He showed that if a bell were reliably rung
before dogs were fed, eventually the dogs would start salivating when they
heard the bell, even if no food were present. Santoli, Cramer and friends may
very well be the bell with nothing behind them.
As the theory goes, a “small investor” buys – purchases
investment assets – when prices are high and sells when prices are low. This is because the “small investor” is more
likely to follow the crowd rather than follow a disciplined approach. They invest when they hear of the successful
experiences of friends, neighbors and, yes, even touting market professionals –
usually after a significant run up in the market – and sell when they hear that
market prices are falling. This is the
parenthetical opposite of what investors need do to create wealth.
One the
most important figures in the history of economics, John Maynard Keynes,
noted in his writings: “Our decisions to
do something... the full consequences of which will be drawn out over many days
to come, can only be taken as a result of animal spirits - of a spontaneous
urge to action rather than inaction, and not as the outcome of a weighted
average of quantitative benefits multiplied by quantitative probabilities.”
It’s not
my belief that the boom is back; rather I think the bubble mentality never
left. Too many investors cling to the
hope that the good times are about to return, urged on by the dream of bubble
blowers. However, conditioning doesn't
last forever. Eventually investors may
learn that investing in overvalued stocks is a short cut to the road to ruin.
Unfortunately, this lesson is likely to prove an expensive one once again.
As CFA® Magazine writes, “[Jeremy] Graham first made a name
for himself by avoiding the Nifty Fifty in the early 1970’s… A devout student
of history, Grantham has imbibed the lessons of the past and uses them
assiduously to help steer the [asset management] firm he co-founded in
1977”. Today, Grantham’s firm manages
over $70 billion in money for large institutional investors.
Grantham believes that we are
experiencing an extended bear market rally due to the amount of stimulus, in
the form of interest rate and tax cuts, which was hurled at the markets. Yet he warns that history reflects “there has
never been a worse broadly based overpricing [across several markets] than we
have this year” with bonds and real estate as anything but cheap and small cap
stocks, perhaps, dangerously overpriced.
With the bear market starting in
March 2000, according to Grantham, he hopes that the markets will begin to
provide greater opportunity by 2006. His
thoughts are that 2000 through the end of 2002, marked the first leg down and
the next leg could deal investors more significant damage. Upon reviewing the entire article, however,
it’s clear that he favors capital preservation strategies over greater risk
taking, for now.
Grantham is not making the
argument that investors need to keep their money in cash. Among his various recommendations, he sees
conservative hedge funds – translate: long/short and other market neutral
strategies – as a safe place to be.
Clearly, he sees this as a very important time for managing investment
risk. In fact, he cautions investors not
to go looking for big gains right now, unless prepared to stomach potential
large losses.
And, just in case you missed
it. Fed Chairman Alan Greenspan
announced at the European Banking Congress last month: “Rising interest rates have been advertised for
so long and in so many places that anyone who has not appropriately hedged this
position by now is obviously desirous of losing money.”
Well, I’m certain to hear from my
contemporaries – from both sides of the isle – for what I’m about to say, but
here goes.
While
I am not a proponent of market timing, economic cycles have been around for
hundreds of years and markets have duly reflected this fact. The cycle of boom and bust has been repeated
so many times that it seems sensible to conclude that there must be a
fundamental tendency for this to occur, just as the tides are caused not by
chance, but by the varying gravitational pull of the moon on its orbit.
What
is interesting, however, is that from time to time human beings manage to
convince themselves that these cycles have ceased to exist. Historically, whenever a large number of
people have believed that the old rules no longer apply, the market at some
point delivered a salutary lesson. As
the famous saying goes, “Those who do not learn the lessons of history are
doomed to repeat them”.
While
most academic studies have proven that you don’t need market timing when
things are bad. After a bad year, simply
waiting for the market to "come back" can produce big paper losses
that may last for years, along with a lot of anxiety that could be avoided with
the judicious use of market timing. Is
it fair and realistic to expect investors to endure devastating losses, even if
those losses are temporary? I don’t
think so.
We’re At
Your Service
At Hoffman, White & Kaelber Financial Services, our focus is to help our clients achieve a more certain future. As such, our wealth management clients gain comfort in knowing that they’ve hired disciplined decision makers whose objective favors consistency of returns and capital preservation rather than magnitude of returns. By the way, our non-pension plan accounts enjoy that we hedge risk by employing a long/short strategy.
Hoffman, White & Kaelber Financial Services Investment Performance
Update
For the month ended November 30, 2004, our one-month
performance is up 0.10%, our three-month return is up 0.22%, our one-year
return is up 1.23%, and our average annualized return since inception is up
9.50%. While volatility (risk) continues
to increase considerably in most market sectors, our (since inception) risk profile has edged downward further to +/-
6.55%. This
risk level remains conservatively low and is consistent with our strategy. With our expectation that this statistic gains
increasing importance, our Sharpe Ratio remains a very respectable 1.27.
Investment pros borrow a tool from the
statisticians—standard deviation—to measure investment risk. It shows the range of returns that investments are likely to earn
over a given period of time and it has two sides, the out-performance and the
under-performance of an average rate of return.
The Sharpe Ratio is a commonly used measure of portfolio earnings quality. In short, the Sharpe Ratio is a measure of return achieved per risk taken. Sharpe ratios can be better than just looking at performance because it incorporates the issue of risk. Some would say it is a measure of a manager’s ability to perform consistently. The number by itself, however, is hard for many to understand without comparing it to something.
Let’s take a look at the S&P 500 Index for a quick
comparison. The Standard & Poor's
500 Index is usually considered the benchmark for
Are you familiar with Morningstar, Inc.? They are a Chicago-based, global investment research firm, providing information, data, and analysis on the mutual fund industry. They say that a Sharpe Ratio of over 1.0 is "pretty good" and outstanding funds achieve something over 2.0. Using this “yardstick”, we are more than pleased with our accomplishment to date.
For most
investors, the Sharpe makes good intuitive sense because they not only hate to
lose money but they often compare the returns to risk free investing. You owe it to yourself to understand and
consider this measure when making investment decisions.
Is a comfortable retirement or preservation of wealth important to
you?
Want better long-term results from your investments?
Choose Us As Your Investment Manager!
Research us on the web at www.hwkfs.com