The Fear Continues

The events in the financial sector have been truly remarkable over the past few weeks, and the drama and fear continues. A healthy and growing economy needs a strong financial sector, and that is something we are not likely to see for some time. We do not think the market will show a sustained rally until the worst of the financial problems are exposed. From our perspective the fear in the market has gotten very pronounced and the selling pressure has intensified. On Monday the market traded down a astronomical 8% before paring losses in the last hour of frenetic trading. Large money flows have been moving out of the stock market and may not return for some time. Despite the volatility and large market losses, now may be a good time for individual investors to begin selectively reinvesting some of their cash that has been sitting on the sidelines. Make no mistake, there is still significant risk that the market could fall further and we do not see the economy bouncing back any time soon, as the financial sector woes and global slowdown will take months to reverse trend. However, the market is down significantly from last October highs and there are high quality companies that have been beaten down to compelling price levels well below what even a poor economy would justify. Investors that are willing to take the risk and that can be patient over a longer holding period will likely be rewarded. Our goal is to beat the market, which we are currently doing despite overall portfolio losses YTD. No one likes to lose money, but investors will gain in relative wealth even if they are losing money as long as they lose less than the market. The best measure to watch is how your portfolio does long term relative to the market, as short term swings are less reliable. In our case, when measured over longer holding periods, all of our portfolios have positive gains and are beating the market by exceptionally large margins.