The Market Is Not What It Seems
In the movie Charlie Wilson’s War, the character Gus, played by Philip Seymour Hoffman, recounts a chilling parable in cautioning Charlie Wilson, played by Tom Hanks. In a small village, a young boy receives a horse as a gift. A Zen master observes the celebration for the boy and exclaims, “We’ll see.” Later the boy falls off the horse and breaks his leg. The townspeople declare the horse to be a curse and the Zen master declares, “We’ll see”. When war breaks out, the boy cannot be requisitioned because of his injury and now the townspeople say the horse is a saving gift. “We’ll see, “says the Zen master again.
I couldn’t help correlating this story to the stock market over the past year.
Every time the market goes up, it is toasted and declared by the pundits to reflect all kinds of good things. Then when it declines pundits bemoan all of the reasons for the fall. The reality is that the stock market is setting up for a decline after a sharp advance. Conversely, a correction in the stock market seems to always usher an ensuing rally.
The volatility that we have seen so much over the past year is masking this beacon for investors. It is time to sell when the markets surge and it is time to buy when the markets sag. Effectively employing this strategy would have led to nifty gains during 2007 and I suggest the same will hold true for 2008. When all stocks rise and our portfolios show nice gains, it is time to brace for a decline. When stocks fall and portfolios show losses, it is time view the stock market more favorably and look for investments to make money.
2007 Investment Returns
The stock market boomed in the early months of 2007. Factors such as the “goldilocks economy”, the corporate buyout craze, and the boom in foreign markets led to good feelings about stocks and the markets moved higher. But after mid-year, the financial markets fell into disarray. “Subprime” became an ever familiar word. Numerous other financial and economic concerns continue to shroud the current climate.
By the end of 2007, stocks had barely budged from the beginning of the year. All stock market indices declined during the fourth quarter. The Russell 2000 declined for the year by 1.6%. The NASDAQ finished 2007 up 9.8% after being up over 20% at one point. Eliminating the financial stocks from the index, the S&P did gain 13% for the year according to the Wall Street Journal, but it also fell just under 5% in the fourth quarter. The contagion in the financial stocks has also spread to other sectors especially in the early days of this New Year. Bonds fared very nicely in 2007. Interest rates finally fell and bonds posted a 7% total return.
Peregrine Returns and Strategy
The Peregrine Composites had a good year in 2007. The Equity Composite rose 20% and the balance composite rose 10%. Both of these composites beat the S&P 500 and the return on the average mutual fund.* Our strategy will be to use the “beacon” that I mentioned earlier to guide us through market fluctuations. Our design is to accumulate equity investments after stock market declines and subsequently sell stocks after market advances.
Our outlook on the market remains sanguine in spite of the rough start this year. Despite concerns of a pending recession and ongoing fallout from problems in real estate and related finance, we view the majority of stocks very favorably as well as the likelihood of stock market gains for our client’s portfolios.
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.
Do you have questions or would you like to know more, contact Dan Botti.