Letter to Our Clients - July 2008

July 2008


Dear Clients and Friends:

“I can see clearly now,” it seems to me, were lyrics of a song from my youth. The words and what I think was the melody have been with me ever since an investment conference I attended the last week of June. Morningstar hosted this conference, and it featured famous and well-respected speakers with a wide range of expertise, perspective and affiliation.

One speaker, a portfolio manager at a well-known investment company, said something to the effect that “clearly, the stock market will start upward in the second half of 2008,” and then she cited the data which led her to this belief. Two hours earlier one of the legendary names in the investment world said something to the effect that “clearly the market will get worse for at least the next 12 months, maybe longer.” I may not have all of their words correct, but that was the gist of their statements. I do remember distinctly that each began their predictions with the words “clearly.”

The speaker who felt the markets will be down for the near future laughed about a previous market call he had made, about 1998. He had felt the market was “clearly” (his word, not mine) overvalued, and so he sold 100% of his stock positions and sat in cash - for 30 months. He admitted he was a bit early. The consequence of being early, for him, was that over 50% of his shareholders closed their accounts with him. And yet, there he was, again revered for delivering such great returns to his investors.

Speaking of “clear” signals, the July 7th edition of Barron's had a lead article with this sentence: “If it's any consolation, the elite billionaires as well as we poor investment peasants have been roughed up by this year's cruel and vicious market.” The article goes on to say that only 4 of “55 mostly famous (and usually rich) investors including the likes of Warren Buffett ... bought stocks that collectively scored a gain.” For me, the most interesting name of those who did not “score a gain” was Bill Miller. Bill Miller is a famous portfolio manager who beat the S&P 500 index 13 straight years, making him an icon in the industry. After all those years of success, I am sure he was also seeing “clearly” as he reviewed his portfolio at the end of 2007. As of July 7th, Barron's said he was down 38% year-to-date.

Also, I have read and heard how oil will either go to $200 a barrel by the end of 2008 - or to $80! Interest rates must go up, or, they won't go up. If the individuals at the head of their classes in the world's financial markets cannot see clearly, what, then, are we to do?

The answer is quite simple, really, but before I give it away, let me talk about one more economic issue. The stock market goes up, and down. We cannot control the direction or the extent. However, inflation has been going up relentlessly since World War II. While the pace of inflation fluctuates, we should not miss the key fact - inflation itself has consistently gone up, meaning the dollar has been buying fewer and fewer goods and services, year over year, for over 60 years. As with the financial markets, there is nothing we can do to control this. (In 1968 a first-class stamp cost 6 cents. In 1968 baseball great Pete Rose wanted to re-negotiate his salary so that he could be the first non-home run hitter to be paid -- $100,000 a year! If this continues, a $30,000 car will cost over $210,000 in 40 years!)

What we can control about the investment world are these things:

1. Develop an investment strategy designed to deliver the income we need, or to position us for the growth we want, consistent with our ability to tolerate down markets.

2. Do not change strategy when it seems like things are going well. (Don't be greedy!)

3. Do not change strategy when it seems like things are doing badly. (Don't be frightened!)

4. Make major changes in strategy when health or financial situations have changed dramatically. 5. Focus on long-term results and do not get distracted by quarterly, annual and even three-year investment cycles.

What we can control about inflation and the loss of purchasing power are these things:

1. Plan ahead, knowing that things will cost more in the future. (Medical costs are increasing at approximately four times the rate of “core” inflation.)

2. For your consumer spending, buy what you can pay with current assets, and do not count on continued salary or borrowing to pay down short-term obligations, like credit card debt.

3. For long-term purchases (homes and autos), stay within your means so that you can avoid foreclosure or repossession if there is job loss, long-term illness, or if your investments go for extended periods without gains.

4. Accumulate and then spend your money at a rate that will allow your funds to last until Age 100. You might not live that long, but it is more likely than most imagine. Running out of money too soon can result in a very undesirable quality of life.

5. If you spend more than 5% a year of your accumulated capital, you will be very lucky if your money lasts 25 years - and that is with no emergency lump-sum withdrawals. Less now can mean more later. Once it is gone, it is very difficult to rebuild financial security for people in their 70's, 80's and 90's.


Ted Haley has joined the firm on a full-time basis and is learning the business “from the ground up.” He is also our official photographer, although occasionally I get lucky with a photo. We welcome him and hope you will as well.

As I get ready to sign off, I will say that “clearly” the coming years will be unpredictable. Whether they are the cause of angst, or joy, or emotional neutrality, will depend upon how well we follow the numbered points listed above. I hope I can continue to be a part of your journey for the next several decades.

Best wishes,

Robert K. Haley, JD, CFP®, AIF®