Q. Are your investors beginning to question long-held assumptions that a balanced stock-bond portfolio is a safe bet long term?
A. Yes, but in our experience this is a normal part of the investment cycle. When the stock market is extremely strong, “cash is trash” and similar sentiments prevail. However, when we see a big decline in stocks, the sentiment becomes “cash is king,” and investors flee stocks to cash. And this cash then becomes the fuel for a sustained rally when it finally arrives. In part, we use investor sentiment and cash levels as “reverse indicators” for investing. When the public is jubilant, we are cautious. And when investors are afraid, we begin to feel that it’s time to buy.
Are you as money managers reconsidering those assumptions yourself?
No. We have been in business since 1924. Our investment managers have many years of experience. While every recession, financial crisis, and other financial events differ, we find some common elements. This current decline is certainly larger than most. Yet we remain confident in the fact that it will ultimately pass, and when it does, stocks will be cheap, confidence will be rising, and economic conditions will be improving.
Has the financial crisis tended to make investors move toward taking more personal control over their investments, or are they more committed than ever to using money managers they trust?
We are experiencing a renewed commitment to money managers. In our world, a money manager is different from a broker in that the former does more than just buy and sell stocks. When the market is surging and investors are giddy, mistakes are easier to reconcile, and an experienced financial manager is seen as unnecessary. Times like these, however, highlight the need for discipline, not emotion. Most people do not have the time, expertise, or the stomach to be taking the right action at the right time…which is fine, it means they are spending their time and focus on things more important to them, like their family!
Where will the Dow Industrials be at the end of 2008? End of 2009?
We are reluctant to provide exact numbers, mostly due to the violent, daily swings that are so closely scrutinized by pundits and media experts. We think the volatility will temper by the end of this year, but the market may not see substantial improvement by then. Looking to year-end 2009, however, we think the market will rally substantially from here. Our analysis of historical market cycles, the current economic cycle, valuation levels of stocks, and a variety of other factors lead us to this conclusion.
