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January 2, 2010
Given the fireworks
and volatility of 2009, it is with some relief we note that
most major asset classes edged higher into the new year with
little fan fare. What is clear to us is that the extreme bargains
that were available in the first quarter of 2009 are not with
us today, and we are acting accordingly and more defensively.
During any time period, but particularly in the short run,
we would re-emphasize our long-term goal – be competitive
in rising markets and outperform in challenging to down markets.
It is our well-researched belief that the “Great Pendulum
Swing” of the last two years has mostly run its course,
and we are now entering into a more normalized world containing
the usual litany of economic and political questions, very
few of which we pretend to have the answer. As economic historian
John Kenneth Galbraith noted, “There are only two types
of forecasters, those who don’t know and those who don’t
know they don’t know.” If 2009 proved anything,
it is that the ability of an investor to reliably pinpoint
major market inflection points and act accordingly is extraordinarily
limited.
The alternative to reading tea leaves is of course value investing,
which we continue to practice and preach at Reed Conner &
Birdwell. We have built an eclectic research team of highly
motivated portfolio manager/analysts who operate in a entrepreneurially
disciplined environment that seeks absolute outperformance
through hard work and superior insight within focused portfolios.
Recognizing the folly of elaborate forecasting, we focus our
attention on the analysis and valuation of specific securities.
When you have done your own work on the intrinsic value of
a company, that is the benchmark with which you can compare
to the publicly traded price of the stock, and this benchmark
helps to keep your wits about you in the swells of popular
opinion. In 2009, the key to success was having faith in this
rational process and not being afraid to lean into what was
obviously a terrifying wind and purchase more of very good
businesses at better and better prices.
“The Lost Decade for Equities” seems to occupy
a fair amount of press time these days and, in our view, represents
possibly the best argument for stock investing today. Besides
the old issue of data mining (starting with the highest point
in history and throwing in the 2nd worst stock market year
in history at the tail end), the time to be worried was exactly
ten years ago when stock markets and investor confidence were
at all-time highs. We cannot recall a single period in our
own investing history during which we have witnessed as much
rank cynicism and disregard of a few hundred years of financial
and economic history as we are seeing today. To quote our
favorite Omaha investor, “Be fearful when others are
greedy, and be greedy when others are fearful.” It is
crucial to understand just how unusual it is for bonds to
outperform stocks over extended periods, and we suggest that
given the current level of interest rates, and the simple
mathematics of dropping the 1999 market peak from the beginning
of new ten year cycles, stocks outperforming bonds is very
close to a slam dunk over the next ten years. (P.S. –
While not crowing by any means, RCB strategies returned between
4.5% to 8.7% gross annualized for the 10 year period.)
As we noted in our previous commentaries there remains a number
of interesting values that can be intelligently purchased
today, but we are going to need reasonable economic activity
to “move the needle” in the broader equity markets
over the next few years. We continue to have a balanced portfolio
of offensive and defensive stocks as relates to the correlation
between investment success and relative exposure to a resumption
of economic growth. Without tiptoeing into forecasting, we
note that there likely is some symmetry between the possibility
of good versus bad economic news on the horizon, yet much
of Washington D.C. and the financial press seem to only allow
for the possibility of Black Swans vs. White Swans. In both
ponds and in the economic history of the United States, white
swans are actually the rule, not the exception. Cycles are
a fact of life and need not be feared, but be priced accordingly.
Disclosure:
The opinions expressed herein are those of Reed Conner &
Birdwell are subject to change without notice. Past performance
is not a guarantee or indicator of future results. You should
not consider the information in this commentary a recommendation
to buy or sell any particular security. These securities may
not be in your account by the time you receive this report,
or may have been repurchased for your account. These securities
do not represent your entire account and may represent only
a small percentage of your account. You should not assume
that any of the securities discussed in this report are or
will be profitable, or that recommendations we make in the
future will be profitable or equal the performance.
Market
Commentary, October 1, 2009
Market
Commentary, July 1, 2009
Market
Commentary, April 2, 2009
Market
Commentary, October 1, 2008
Market
Commentary, July 1, 2008
Market Commentary, April 1, 2008
Market
Commentary, October 1, 2007
Market
Commentary, July 2, 2007
Market
Commentary, April 2, 2007
Market
Commentary, October 2, 2006
Market
Commentary, January 3, 2006
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