The Markets

Arthur Zeikel was President of Merrill Lynch Asset Management from the mid 1970’s to the mid 1990’s. He was also an Adjunct Professor at the Stern School of Business at NYU. He was very well known in the financial world and applauded for a letter he sent to his daughter, Jill, in 1994 when she was starting out in the world and he was near retirement. It outlined some interesting principles that have stood the test of time.

He felt strongly that personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined goal by balancing one’s risk tolerance level with the desire to enhance capital wealth over time. He felt that good investment management practices are complex and time consuming, requiring discipline, patience and consistency of application. He felt too many investors fail to follow some simple, time-tested tenets, that improve the odds of achieving success, and at the same time, reduce the anxiety naturally associated with an uncertain undertaking.

He then offered the following advice to his daughter, which I would like to present here with my commentary following as warranted.

  1. A fool and his money are soon parted. Investment capital becomes a perishable commodity if not handled properly.

No argument here. Over my career, I have seen some people unfortunately also lose a great deal of money. As Warren Buffet’s partner Charlie Munger once said, “People are trying to be smart. All I am trying to do is not be idiotic, but it’s harder than most people think.” Discussing this subject he also said, “The desire to get rich fast is pretty dangerous.”

  1. There is no free lunch. Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns should relate to inflation. Better be safe than sorry. Most investors underestimate the stress of a high risk portfolio on the way down.

Underestimating the stress also leads more often than not to erratic and emotional behavior which becomes self-defeating. Buying high and selling low is not a good strategy, but it does become a habit when under stress.

  1. Don’t put all your eggs in one basket. Diversify. Asset allocation determines the rate of return. Stocks beat bonds over time.

Well said. Stocks can be a hedge against inflation. Bonds are generally a hedge against deflation. Over time, we have experienced way more of inflation rather than deflation. This does not mean that bonds should not be in a portfolio. It acts as an excellent shock absorber in times of high volatility.

  1. Never overreach for yield. Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun.

If a yield is too good to be true, it usually is.

  1. Measure results on a total return basis against your own objective, not someone else’s.
  1. Don’t be afraid to take a loss. Mistakes are part of the game. When in doubt, get out. The first loss is not only the best, but it is usually the smallest.

Amen!

  1. Watch out for fads. Hula hoops didn’t last. There are no permanent shortages (or over oversupplies). Every trend creates its own countervailing force. Expect the unexpected. Plan for it.

That’s what we try to do in the Multi-Asset Strategy (see 2008!)

  1. Act. Make decisions. No amount of information can remove all uncertainty. Have confidence in your moves. Better to be approximately right than precisely wrong.
  1. Take the long view. Don’t panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesn’t work. Recognize the rhythm of events.

Of all the tenets, this I feel is the most important. Warren Buffet once said that when he came into the business the Dow Jones Industrial Average was 100. Now it is 20,000. He asked how anyone could lose investing. But, he said, most people do. The basic cause – emotional decisions.

  1. Remember the lack of common sense. No system works all of the time. History is a guide, not a template.

Amen (Part II)! This, Zeikel said to his daughter, is all you need to know. I tend to agree.

That’s it for now. We want you to know we are trying to follow all events closely and doing all we can to be good long-term stewards of your money. As always, feel free to call us as needed. We are always delighted to hear from you. All calls will be returned promptly as you know (usually within 24 hours).

We are eagerly looking forward to working with you in the quarters and years ahead and thank you for all your referrals to date. Also, as always, should the markets dictate an interim newsletter, we will do so.

OUR PHILOSOPHY

Successful investing is a marathon, not a sprint. Sometimes investing is like watching paint dry, marking time, boring and with not much movement. Sometimes it is chaotic and fear based. Greed and fear are often present. We are long-term investors. We believe four to five years is the appropriate time frame to assess risk and reward. At the end of that time, another four to five year time frame takes place. This keeps happening until one is in the distribution phase of life and needs to live off their assets. Therefore, of course, it is where we are at the end of the race that counts. Although no guarantees can be given, our goal with all our clients is to get to the end of the race in as good a position as possible given their particular life circumstance.

Disclosure Statements

Dow Jones Industrial Average

A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing.

Risk and Return

The views expressed are not necessarily the opinion of Royal Alliance Associates, Inc. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results.

This newsletter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice and is subject to change without notice. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.

Investors should be aware of additional risks associated with international investing due to factors such as greater economic and political instability, increased volatility, currency fluctuation, and differences in auditing and other financial standards and that these risks can be accentuated in emerging markets.

Important Consumer Disclosure

This newsletter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice and is subject to change without notice. References made herein to the market indices are for illustrative purposes only. An investor cannot invest directly in an index. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will be profitable. Certain information contained herein has been derived from third party sources. Although believed to be reliable, we make no representations as to the accuracy or completeness of any such information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore. Additionally, certain statements that indicate future possibilities are forward looking statements. Due to known and unknown risks, other uncertainties and factors, actual results may vary materially from those portrayed in such forward looking statements. As such, there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

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