Weekly Risk Report 12/28/2009
This has been one of the most unusual years I’ve experienced in the market place. Even the 12 months surrounding the 1987 “crash” were of a far different nature. Rarely do we see such large price movements across so many different asset classes in as short a time frame as 2009. Extending the time to 18 months makes almost any stock chart one could summon look like a profile of either the Grand Canyon or the design for the latest scary ride at the nearest theme park. (maybe there should be a roller coaster ride called Wall Street!)
Such events are relatively rare. There’s a school of thought that these are once-in-a-lifetime events. But, our lifetimes are longer now and maybe this needs rethinking. While our SignalPoint process isn’t specifically designed for such events, it is comforting to see just how well the machinery worked. In general, our portfolios were rich in cash when market risks were the highest and were essentially without surplus cash when prices were at or near their lows. The money was put to work systematically as prices declined thus lowering our average costs and improving our chances of profitable recovery.
As we start the new year our accounts have recovered nicely and the cash levels have increased as the perceived market risk has risen. Today our cash levels are closer to the middle of the historical bell curve than it has been for a long time. From 2007 through 2009 it has ranged from one end of the curve to the other and now back closer to the midsection.
If we could measure the consensus opinion for the 2010 year from all the business news commentators and contributors, we probably could construct a bell curve of that data. Would it have any meaningful predictive power? There are those who feel the markets act in regular cyclical patterns that are predictable. There’s another school of thought that considers the markets random in their movements. The 2007 book “The Black Swan” (by H.H. Taleb) discusses “The impact of the Highly Improbable” – those far ends of the statistical probability projections. It is usually assumed the safest bets have always been to stick to the highly probable. However, history shows that the biggest changes have occurred when the least probable and non-predictable events have come along. Portfolio designs including ‘shock absorbers’ that can adapt to rare or even unpredictable events would seem to be a logical choice. Mr. Buy n’ Hold may have survived the last 18 months, but he consumed an unusual amount of Rolaids along the way.
Best wishes for a prosperous 2010.
