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Quarterly Newsletter - April 2012
April 4, 2012 – the day on which the great market collapse of this decade finally got back to even. From October 9,
2007 through March 9, 2009 the S&P 500 fell nearly 50%, the worst bear market since 1929. However, as of April
4, the Wilshire 5000, the broadest measure of U.S. equities, was back to its old 2007 high (if reinvested dividends
are counted). It has been a real emotional roller coaster. The final push toward breakeven has happened in the last
three months. In our last letter we said that market sentiment was very pessimistic. Three months later the
pessimism is more restrained, and replaced with hints of optimism. Citibank has declared their “raging bull thesis”,
that we are on the cusp of a “new secular bull market” within the next twelve to eighteen months. Another Citi
report speaks of the U.S. as “the new Middle East” in energy production and says that the new energy finds in the
U.S. will fundamentally re-shape the economy – potentially turning the U.S. into the largest energy producer in the
world and creating millions of new jobs. In a report entitled “The Long Good Buy – the Case for Equities”
Goldman Sachs now describes the present as a “once in a life-time” opportunity to buy equities. Perhaps, and
hopefully so. But for many investors this is all a bit late. The generational buying opportunity in fact dates from
three years ago, on March 10, 2009 at exactly 9:30AM. The bull market bell rang then, though very quietly. We
did not hear it. We have not met anyone who did. Since that date we have already had a great bull market. The
market of the last three years has been in the top two percent of all three-year periods since 1871. The generational
bull market has been motoring along since March 2009 – for investors like you with enough gumption to stay
invested and even to rebalance and buy more. What were Goldman and Citi recommending three years ago? Were
they aggressive buyers? Not that we recall. There was certainly no table pounding enthusiasm about a new
generational bull market. Stocks were very cheap but many advisors were telling people to cut and run. Hide out in
gold or bonds or cash. Did they have a choice in these recommendations? Not really – as a practical business
matter at least. Many professional investment advice givers are in the entertainment business, not the investment
business. They must keep their investment recommendations basically in tune with the emotions of their audience.
If they say things diametrically opposed to the opinions and emotions of their audience the audience will simply
walk out of the house. We are not gainsaying the new bullishness. It could well prove to be correct. We certainly
hope it will be. What we are saying is that the attempt, by investors and/or their advisors, to time or predict the
market, to buy or sell equities based on some view of the future, has been a disastrous failure. This failure has cost
many people the chance for a comfortable retirement because they sold out based on bad advice or fear and have
not yet bought back in. This is really unfortunate. It was a mistake to sell in 2009 because the future looked bad
and it is a mistake to buy now because the future looks good. Those are just not good reasons to act in the stock
market. Acting, doing things, in the equity market is dangerous. The best thing, we think, is to sit still and do
nothing. This hyper-activity, this doing and doing and doing, is as true of hedge fund investors as much as anyone
else. Money flooded into the hedge fund fad starting in 1995. The returns were good while the industry was small
and not so good when the invested dollars became large. For the full data details see The Hedge Fund Mirage, by
Simon Lack. Mr Lack shows that the average dollar invested into the hedge fund industry as a whole did not do
nearly as well as the funds themselves. Money invested early did well. Money invested late, following the good
returns and just in time for the bad returns, did not do well. From 1995 through 2008 the return to the average
hedge fund investor dollar was a pathetic 2.1% per year, after fees. They could have done twice as well by sitting
in treasury bills and much better than that by sitting in a diversified portfolio and rebalancing. Again, the same
mistake - buying after performance has already been good and selling after performance has already been bad.
Here is a table of the performance of various asset classes for the three years ended March 31, 2012: Investment
Category Total Return Annualized Return Barclays Aggregate Bond Index 21.94% 6.83% S&P 500 -- U.S. Large
Growth Stocks 88.00% 23.40% Russell 2000 -- U.S. Small Stocks 104.37% 26.88% Dow Jones REIT Index
201.58% 44.48% MSCI EAFE Index -- Int'l Large Stocks 60.69% 17.12% MSCI EAFE Small Cap – Int'l Small
Stocks 93.09% 24.52% MSCI Emerging Markets Index 97.27% 25.40% These are the kinds of total returns one
might expect to see over a decade or more. They have arrived in the last three years. Returns of this scale, once
missed, are gone forever. Unlike almost all other advisors, the crash did not cause us to change what we say, or
what we do, in the least. In the letter we wrote in April 2009, exactly three years ago and very near the market
bottom, we described the emotional rollercoaster of markets and explained why we believe emotions are not a
good guide for investing. We counseled patience and grit and were correct to do so. We consider that letter to be
one of the best we ever wrote and recommend a second reading. You can find it on our website
(http://www.pinneyandscofield.com/quarterly-newsletter-april-2009/). Could a crash like that happen again?
Certainly. And if one does we will act exactly as we acted the last time. In office news, John is now a notary
public. If you need your signature notarized give John a call. He will be more than happy to help you. Jim, Dean,
and John
Post date: 2012-04-15 15:43:52
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