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Stephen High
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Richard Flohr
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We’ve experienced many dark days on Wall Street in the past quarter. On September 29, 2008, the DOW experienced its worst single-day point loss of 777 points. In terms of one-day percentage loss for the DOW, it is the eighteenth worst trading session, but there are reasons to be optimistic.
To put the day in perspective, remember that there were 17 trading sessions that were worse. Prior to this one, the market had suffered six major downturns in the past 28 years (two in the 1980s, two in the 1990s, and two in this decade). Clearly, the market has been able to withstand particularly brutal days in the past and the market should be able to withstand them in the future.
Recently, investors fled in droves to the safety of Treasuries, forcing one-month yields to historic lows. The key for investors is to make sure they do not derail a sound investment plan in reaction to short-term market fluctuations, no matter how painful these fluctuations may be.
The collapse of financial giants like Lehman Bros. and AIG only reinforces the prudence and soundness of our investment approach at Kraft Asset Management. Our clients’ portfolios take on a consistent amount of investment risk commensurate with their willingness, need, and ability to take that risk.
Rather than being concentrated, this risk is diversified across thousands of individual stocks, more than a dozen asset classes, and the three risk premiums that drive portfolio returns: size (small market capitalization), value (low price to earnings ratio), and beta (a measure of the stock’s relative risk to the market).
We choose passively-managed asset class mutual funds, as opposed to active funds, because they are the most cost-effective and efficient way to capture the risk (and therefore return) of a given asset class. The academic evidence is overwhelming, showing that passively-managed funds capture higher returns than most actively-managed funds.
There are other reasons to be optimistic. Commodity prices are collapsing, which essentially amounts to a big tax cut for everyone. KAM’s rebalancing strategy was effective in capturing the gains from commodities before their decline. In fact, many prudent investors are rebalancing their portfolios and buying stocks at record lows in anticipation of the market’s recovery.
Inflation is slightly negative as of late, which may give the Fed the justification it needs to lower interest rates further to stimulate the economy. The Central Banks around the world have every incentive to work together to do whatever it takes to keep the global economy afloat, as they did recently, freeing up $200 billion to ease liquidity in the marketplace.
There could still be difficult times ahead of us. In these types of markets, the words of renowned investor Warren Buffet strike us as particularly prescient: “The stock market is designed to transfer money from the active to the patient.” At Kraft Asset Management, our job is to keep our clients on the receiving end of that transfer.
If you’d like to discuss your personal wealth management needs, please contact Stephen High at (615) 782-4286 or Richard Flohr at (615) 782-4288.
