Market Commentary

 Market Commentary: 3^rd Quarter 2008

In the first six months of the year, the markets have been dismal for many reasons, including the price of oil, the likelihood of more foreclosures, a weak economy, and potentially very big changes coming with the November elections.    

We do not yet know if June 30 will prove to be the low point in 2008 for U.S. stock prices.  However, we know that on numerous past occasions—including many that have faded from memory—the investment outlook was so discouraging that even experienced investors were daunted by the challenges they faced. 

 In the next year, we are not likely to see things look much better for most equities.  As we discussed last quarter, recessions are part of a healthy economy and normal investor cycle.  What seems different is the global scale and speed with which these changes are occurring.  Some of the challenges or risks the market faces are obvious: oil, food, and health care price inflation; falling real estate prices; the upcoming election; and asymmetric security threats (terrorism).  Others are more subtle, such as the graying of the U.S. workforce and growing nursing shortages, while still others are more dramatic, such as our nation’s entitlement obligations or the impact of a geopolitical event like an Israeli attack targeting the Iranian nuclear facilities before the current administration steps down.  Though all of these concerns are very heavy in the market right now, there is nothing new under the sun here.  Markets still work.    

Benjamin Graham, author of Security Analysis and The Intelligent Investor, two of my favorite books, wrote, “The underlying principles of sound investing do not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.”  Our challenge is just that: to understand what risks are strategic in nature, which might, or might not, be taking place, and how we can help you prepare for them. The fundamentals do not change, despite the gravity of the current set of risks.     

Graham’s most famous student, Warren Buffet, also wrote that successful investing requires, “a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”  We provide that framework for you by creating investment portfolios that are based on solid foundational financial principles.  Specifically, our recommendations focus on the investment elements we can control (cost, allocation, and risk) and integrate the principle of flexibility (opportunity, time, and indifference) into your unique personal situation.  All of that said, the hardest part is applying emotional discipline.  The rapid fire information age has not helped.  More information does not mean better information.  Arguably, we need to work even harder to sort out the wisdom. 

As I shared in the last market commentary, we anticipate more and deeper volatility that could last for a year or more.  The market trades on emotion, but in the long-term it trades on fundamentals.  It is on fundamental principles that your portfolio is built.  The risk reduction techniques we have implemented in your portfolio continue to give us great confidence and the risk in the market should not be feared but understood; it is what ultimately provides for the return. 

Graham wrote, “We have seen much more money made and kept by ordinary people who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had an extensive knowledge of finance, accounting, and stock-market lore.”  That was true in 1950 and even more so today. 

As the market climate changes and investment opportunities present themselves, we will look at each individual portfolio through the proper strategic lens.  Ever mindful of your cash needs, risk tolerance, and our 5-plus year time horizon, we will propose changes, ensuring they are in line with foundational principles.  Your life goals are important to us, be they a secure retirement, funding a college education, or leaving a legacy.

As always, we want you to know how much we appreciate your trust.  We value our relationship and are working hard to make your lives better.  As always, please call us with any questions or concerns.

Carl A. Johnson

July 2, 2008