PERFORMANCE ANNOUNCEMENT
As Of: October 8, 2003
Put Your Money In, Take Your Money Out
Perhaps the hokey-pokey really is what it's all about.
The Wall Street analysts want you to put your money in. The short sellers want you to take your money out. The Bush administration wants you to put your money in. The gold bugs suggest you take your money out. And Elliot Spitzer wants the market players to turn themselves about. Chaos reigns!
If you look hokey-pokey up in the dictionary, you will find that it is a derivative of hocus-pocus, with the reference being to trickery or magic. Is that what the markets are all about? Between September 18th and September 30th (over eight trading days) the Dow Jones Industrial Index dropped 432 points, or about 4.5%. Then, over the next three trading days, the market reversed course and rose 436 points. Certainly there is some confusion regarding the proper value of equities at this point in time.
To the extent that the government seeks to manage the economy, investing is certainly a rigged game. The Federal Reserve can make the markets spin on a dime. Fiscal policies and securities regulations can also have dramatic effects on market pricing, not to mention a magisterial pronouncement from a major wirehouse analyst. But at the same time, the global markets are much larger than any one entity. Even the governments of Japan (which recently pushed more than one hundred billion dollars into foreign exchange support), or the United States, or the European Union cannot dictate market prices. So knowing government policy does not guarantee success in the market.
Is the hokey-pokey really what it is all about? The answer is, of course, both yes and no. Certainly there is smoke and mirrors and a lot of misdirection in the marketplace. But the markets (at least the U.S. markets) also function very efficiently with a high level of integrity and trust. The quality of trade execution should not be confused with the unpredictability of market prices. In spite of the obstacles, an intelligent professional approach to investment management will succeed over time. But for every disciplined professional that is successful, there are many amateurs that lose money. Behavior that emanates from emotion is what destroys most individual's portfolios. For example, where studies show that the average individual investor's performance is significantly less than the posted return of the mutual fund the investor participated in, the conclusion is that the investor bought and sold at the wrong time. A lot of investors are dancing the hokey-pokey!
The answer is to stick with the fundamentals. Chasing performance is less important in the long run than a disciplined, diversified approach that seeks consistent absolute returns regardless of the excitability of the markets. The lesson of the 1990's is that a lot of investors gave back more than five years worth of gains because they got pulled into a momentum play (a concession to greed) instead of managing their risk. Now that the stock market has enjoyed more than six months of historically above average gains, a lot of investors are at risk of repeating the same mistake. The problem is aggravated even further by the recent volatility in the bond market and some of the commodity markets. Investors are confused about where to go to satisfy their greedy cravings. It is during times like this that the art of the game is to manage risk, and let the gains take care of themselves. As for the siren song of the hokey-pokey broadcast every day by analysts and the media, ignore it!