| As
we enter the New Year 2010 and commence our 29th year of business,
we extend to you our sincere wishes for the best of health, safe
journeys, and every Blessing of happiness and peace.
Here is the bottom line. Our clients are up more than + 40% over
the past decade, while the S&P 500 Index is down nearly -10%
for the same ten years.
(cumulative total, dividends included, gross of fees)
We made the bold and prudent decision to exit the equity markets
in late 1999. Since then, we have safeguarded our clients’
assets in United States Treasury Obligations with varying maturities,
and have preserved their capital against both the visible turmoil
in the equity markets and the invisible deterioration of value caused
by compounded inflation. Not for naught has the preceding decade
been termed the “Naughties”: those investors who passively
indexed have naught to show for their decision, while other investors
have been wiped out by the naughty deeds of people now serving criminal
sentences in jail.
It was easy to lose money and esteem over the past ten years. Those
who lost conviction and those who lost patience were susceptible
to speculators and get-rich-quick schemes. Winners, on the other
hand, stayed focused on fundamentals and economic reality. Many
people can boast about making money in an up market, but few professionals
know when and how to safeguard money in a down market. It may not
be very glamorous to say “I’m in cash”, but it
is certainly a great relief to securely be in cash well before the
equity markets implode.
We have preserved assets in down markets. What awaits is the opportunity
to invest that cash.
Over the past year, speculation, the infusion of stimulus money,
a depreciating Dollar, and the collapse in real estate values contributed
to soaring stock prices through the end of 2009. Some investors
wiped their proverbial brows as the 2009 rise in stock values partially
offset some of their painful losses. Had it not been for the most
recent rally, though, the return on stocks for the decade would
have been much worse. It is important to recognize which factors
did NOT contribute to the rise in the stock market: high unemployment,
high rates of bankruptcy and insolvency, high levels of debt, and
high taxes. Given these persistent and debilitating elements in
the economy, many prudent investors have questioned how stock prices
could rise so high and be sustained for so long.
Historically, the only movement which is faster than an ascent
in the stock market is the descent, and as economic reality takes
hold, this speculative bubble in prices could deflate rapidly. In
the upcoming year, we anticipate neither a “V” nor “W”
shaped correction in the markets. Instead, we expect something which
looks more like a jagged lightening bolt. Should investors panic,
as they often do in the face of economic crises, the issue of liquidity
will come to the forefront. The absence of liquidity (that is, ready
cash) during such panic could force investors to sell their stocks
at a substantial loss against perceived value. Stock prices, in
turn, could plunge to new lows as buyers are either unable or unwilling
to step into a free-fall in the market.
We are well positioned in highly liquid cash equivalents, so we
may begin to invest in the markets as equity prices adjust downward.
As confirmation of our decision to enter the stock market, we would
like to see evidence of critical components to complement our long-term
strategy. First, after years of internal hard work in many businesses,
we would like to see a resumption of corporate profitability, reflecting
improved margins and better managed finances. Second, after years
of insolvencies and bankruptcies, we would like to see a resurgence
in both industrial and personal consumer demand for goods and services.
Over the past few years, businesses and households have been paring
back their inventories, and the shelves and cupboards are looking
rather bare at the moment. Any up-tick in demand should translate
favourably into higher sales revenue for corporations. Third, after
years of lay-offs and plant closures, we would like to see an impetus
for companies to create jobs and hire workers. Favourable government
tax policies for business development and employee benefits could
foment a solid improvement in employment. All of these components
should translate into a resumption of solid corporate earnings,
which in turn, should provide solid returns on investments.
Tried and true disciplines are the hallmark of long-term investing.
Meticulous financial analysis and methodical economic research are
the cornerstones of the preservation of real assets. The key is
to purchase the stock of well-managed and well-positioned companies
when the price-to-earnings ratios reflect reasonable trading ranges.
Not for naught do our clients consistently benefit from “Buy
low, and sell high.”
George A. Leylegian
President and Chief Executive Officer
|