3rd Quarter 2009 Client Note

It has been one year since the seismic events of last fall – the collapse of Lehman Brothers, the near bankruptcy of Merrill Lynch and the government rescue of AIG. Six months ago there were fears of a return to the Great Depression. The rally off of what appears to have been the March 9 bottom continued in the third quarter. The S & P advanced 15.67%, for the quarter, which makes the total move a remarkable 56%; retracing a good portion of the losses over the past year. Investors who had the courage to rebalance in the spring have been particularly rewarded.

Interesting is talk of an impending correction — because we have come “too far, too fast” with the 50% upward move. That certainly wouldn’t be surprising. But such talk displays a high degree of confidence in the precision with which one might judge at what level the market “should be” at any given moment. Possibly, due to the enormous amount of emotional selling last spring, the market over-shot where it might have landed if all investors had rationally and dispassionately accounted for the clearly deteriorating fundamentals, rather than following the herd. (Not so easy.) In that case, maybe the market is exactly where it “should be” right now – 30% off the October 2007 highs. Of course, I don’t know where the market “should be” or where it is headed in the short term and nobody else does either.

In any event, having retreated – apparently — from the precipice, it is a good time to take stock of some lessons learned. One is that the world is only going to end once. Meaning that on all the other inevitable occasions of extreme global financial distress, losses suffered in a broadly diversified portfolio are not going to be permanent. By the same token, stocks can be extremely volatile in the short term and consistently timing correctly exits and entries is nearly impossible. So, the most important thing for investors to get right is how much exposure to this risk they need to achieve their goals and how much risk they can stomach so as not to dismantle their plans at the moment of maximum pessimism and capitulation. Manage that balance reasonably well and you’re a long way toward being a successful investor.

We’re in that funny season here in the high country. One day it’s sunny and mild. The next it’s snowing and cold. Rather like the market.

Be well,


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