The markets seem a shamble and fear is rampant.  I know you are concerned; any thinking person should be.  I can not promise you the worst is over, though I think it is, and Tim agrees.  I can tell you this:  the worst will eventually be over, and it will probably be over soon.  This is a time to hold what you have, and to buy lots more if you can.  Financial assets have gotten very cheap in terms of the earning power you get for what you pay.  Thousands of worthy babies have been thrown out with the bathwater of failing banks (an exposure we’ve been carful to shield our clients from), and opportunities for heartwarming upside abound. 
This is a time to keep faith, hunker down, and weather the financial storm which will eventually fade and pass.  Times like these have swept across humanity since the beginning; the rich folks have found it within themselves to bide their time, and keep their powder out of the rain.  When guys like Buffett (the Berkshire guy, not the singer) are buying with both hands, it speaks volumes, if you make yourself listen.
 

There is significant attention paid to benchmarks, as well as to the fact that most investors underperform them. Unfortunately, few investors understand the purpose of benchmarks, let alone know why they’re so hard to beat. The truth is, benchmarking is a losing proposition for the vast majority of investors because they invariably compare themselves over too short of a time horizon. In other words, they suffer from nearsightedness. Consider that the benchmark always has the luxury of momentum, as it gets to overweight its winners and underweight its losers, each and every day; on the other hand, the ideal strategy for a long-term investor is to buy low and sell high – in essence, pulling from the winners and adding to the losers – which is contrary to the prevailing momentum. Over the short-term, therefore, the advantage goes decidedly to the benchmark!

Of course, buying low and selling high results in the best performance over the long run, but too many investors focus on the short run when it comes to their own money. In doing so, they often experience a deleterious downward spiral in performance as they wrongly abandon long-term investment strategies which would otherwise prove successful, but for the fact that they don’t give them enough time to incubate. In large part, this is out of frustration for having underachieved some benchmark over as short an interval as a month or a quarter! It’s complete nonsense, of course, but that’s what separates the smart money from the dumb. The pros keep to the race they’re running. They stay within their strategy, much in the same way that an accomplished marathon runner stays within himself and runs his first mile like his last. Typically, there is always the overcharged novice who goes faster off the line, but his first split time is truly meaningless to those around him. He may very well remain in front for several miles, but he’s no example to watch or follow, believe me! Such is the nature of benchmarks in the general vernacular.

Chasing a benchmark over the short-run is even more futile when you consider that most benchmarks are unmanaged baskets of securities that incur no fees or trading costs. On the other hand, real life portfolios have costs associated with their management, which will further detract from relative performance, everything else being equal. (Fees are unavoidable, of course, just as friction and drag are unavoidable anywhere in the earth’s atmosphere.) In the long run, mind you, a well-managed portfolio will pay for itself in spades – visà- vis the benchmarks – even if it doesn’t do so over every finite period of time…and such times will occur, most assuredly.

The key is to recognize benchmarks for what they’re worth, but to not be overly captivated by them in the near term. More importantly, the challenge is to fashion an optimal portfolio for the time frame one has to work with, given their fact pattern, and to mind the strategy without fail or interruption. Each ISIS® Master Portfolio™ is built and maintained this way – and this way alone – because it is in your best interest, solely. By keeping our eye on the prize and not on the distracter, the odds are high that you’ll beat it when it counts – over time.  

A client asked this great question in response to the June Chairman’s Communiqué, and kindly allowed me to answer it here.  I think you will find it most interesting.
              Q.  Some feel that the continuing rise in the cost of oil will fuel (a little pun there) a deeper than expected recession and it will hit next year.  Indeed, it appears that the market is currently in the process of discounting for that possibility.  With that in the picture and all the uncertainty of a potential major shift in world economies, markets, and lifestyles brought on by high energy costs and global warming, what do you see over the next 18 – 24 months, and how is ISIS^® structured to handle this challenging economic time?   I am approaching retirement and am concerned that the conditions painted above, combined with the “baby boom” retirement bubble, may cause a significant restructuring of investments in the future – possibly away from stocks, etc., and more towards other safer portfolios. This could put long-term down-ward pressure on the U.S. and foreign stock markets.   In other words, could we be about to enter an unusual time where tried and true market/investment models of the past either no longer apply or will require major overhauling, including ISIS^®? Hanging in there but feeling a little concerned!!!! – Jim B.
A.  Jim, what a great question.  The market certainly seems like it’s in free fall, and the meteoric rise in oil – along with the collapse of credit and the comeuppance of the lending industry – is pretty universally blamed for the carnage. For the most part, though, I think the markets were due for a cyclical bear phase. I strongly believe this cyclical dip is just a short-term blip in a long-term secular bull market, and that the upside is far loftier than even the optimistic forecasts you will see in the media.
There is no question that oil is high, and maybe going a little higher, at least for a while.  Let’s not forget that in inflation-adjusted terms (the “real” dollars you and I spend on gas and hamburgers), oil is just now only a little bit higher than it was in 1979, the peak of the OPEC crisisbefore it tumbled for about 25 years. I personally think that there is still enough petroleum in the ground to satisfy demand at least for a few decades, and that prices will sooner or later come crashing down. Alternative sources like solar, wind, nuclear, and yet undreamed-of methods, are abundant and will come to replace oil as economic tipping points are reached.
Global warming is much harder to predict.  Carbon emissions are indisputable, but their effect still inconclusive, in my opinion. If global warming is a fact (a position I share but can not scientifically defend), its economic impact is unknown. It surely will change things; maybe even enhancing prosperity. No one knows.
Getting back to bread-and-butter, I think stocks will do very well through 2009-10, and well beyond. For one thing, the low dollar is bound to attract even more foreign interest in U.S. stocks, from individuals, institutions, and corporate acquirers. The current InBev bid for Budweiser is an excellent example of this. U.S. stocks are cheap now by many measures. For another, there is simply no substitute for equity as an anti-inflationary growth engine for retirement savings or anything else. Owning things that create exponential value – like companies or shares of companies – is about the only proven way to throw off the income you need now and produce the growth you need to offset taxes and inflation later.  For this reason, I think that the huge pool of boomer (and foreign) retirement savings will produce one of the greatest periods of economic prosperity and stock market booms to ever grace history. You and I will count ourselves fortunate to have lived in such times. 
There are no guarantees, but there are proven methods to enhance the probability  of success based on historical economic patterns. While history does not exactly repeat, human economic behavior is very predictable, and systems like ISIS^® that can harness these patterns give us a very good chance of achieving the results we need.
Hang in there, Jim B.  I really think the best is yet to come.
 
 

Sorry to email you thrice in the same month, but I wanted to give some reassurance on the dramatic markets plunge we saw yesterday. As you will read shortly in our quarterly Investors’ Market Forecast (to be including in your July 1 statements), Tim and I both think the markets are close to a bottom here, and that the worst is over for the U.S. economy.  I found it noteworthy as I read the papers this morning that the U.S. Commerce Secretary sees our economy as far healthier than is being reported in the media, and interesting to not see this in either the Wall Street Journal or New York Times, but only in the Financial Times*, a London paper. A side piece in the Financial Times  (also reported in the U.S. papers) shows signs of hope (finally) for the housing market, as well.  It’s always darkest (they say) before the dawn, folks, but I think the sun will rise soon.  Happy Independence Day to all.
 

*You can read an online version of the story at http://www.ft.com/cms/s/0/84b6d766-43b9-11dd-842e-0000779fd2ac.html?nclick_check=1

This article will be published in your next Wealth Advisor^™ (July issue) but one of our Senior Vice Presidents, John Bowsman, thought you might be interested in reading it sooner so we are sending it to you, in advance.
 

As always, if you have any questions please do not hesitate to give us a call.