Investor

Created 1/18/09

Last year (2008) had tremendous significance on many fronts for investors. This included fast, breathtaking declines in many markets. Examples include the general stock market, as measured by the S&P500, which was down roughly 38%. In many ways it experienced a “crash,” albeit one spread across a longer time period as opposed to the one-to-few days usually characterizing a “crash.” Commodities fell exceedingly quickly; a couple of examples include crude oil, which fell from ~145 in early July to the mid-30s by year end; and the Dow Jones-AIG Commodity Index, which fell from ~240 in July to ~110 by year-end. Various “spreads” and other quality / volatility measures exploded. Many professional investors with stellar reputations experienced dismal losses, and in some cases shut down their funds.

Also of great significance was what didn’t happen - because of government intervention. Many commercial and investment banks, which only the year before were afforded reputations ranging from good to “stellar,” would have dramatically failed in 2008 had it not been for aggressive countermeasures by the government, especially through the actions of The Federal Reserve.

Adding to the malaise was a significant amount, as well as strange character, of what I would consider “odd occurrences.” While the list of these occurrences is virtually inexhaustible – and spread across a broad economic and investment spectrum – collectively they signal “this time things really are different”. An example of this is the stock market’s VIX index – a reading of stock market volatility. It has held above the 40 level since the beginning of October (albeit with a brief dip into the high 30s around the New Year); which is highly significant since throughout its history it has rarely (usually a day or two at most) been above 40.

The VIX action and other “odd occurrences” signals that we are in a completely new environment – one in which previously completely unimaginable occurrences not only may occur – but are more likely to occur.

You may have heard the phrase “don’t confuse brains with a bull market.” Perhaps the adjunct to this should be the following: in a tricky, unpredictable environment, it may be very difficult to make money regardless of how intelligent or skilled one may be. During the Great Depression years, many successful, intelligent investors lost significant amounts and/or all of their funds. I expect this investment environment to be at least (and probably a lot more so) as “tricky” as that encompassed by the Depression years.

This “Investor” section will explore the changing character of the capital markets with a focus on various “key issues” with regard to capital preservation and growth.