A Real Look at Market Cycles and How to Get Off of the Rollercoaster

Historically, investors experience emotions that correspond to market cycles as illustrated at right. Due to recent events, a number of investors find themselves nearing the emotional trough and consumer confidence is at an all-time low. As a result, investors are making highly emotional decisions just when it is important for them to make well-reasoned decisions. Investors tempted to move to cash right now are not only locking in their losses, they are timing the market. Without a well-planned exit strategy and a well-timed re-entrance strategy, this could produce disastrous results to a portfolio.

For example, less than 1% of trading days accounted for 96% of market gains between 1963 - 2004, and those who missed the 90 biggest days in that period gained only 3.2%, while those who stayed invested through the ups and downs gained 10.84%.

It is important , especially during these unprecedented times in the market, to recognize the importance of keeping emotions in check to help keep calm and maintain a sense of perspective.

If an investor has a portfolio that, upon review, could be re-allocated to include alternative investment vehicles to ease some fear and provide a damper to volatility, it could be a good compromise for someone feeling the urge - due to panic - to pull out of the market entirely. But if have already pulled everything out of the market, then you have nothing to lose by looking at alternatives to securely replace the ultra-low yields offered in banks today.

Do your research on private investments... you'll thank me later.

Warren Buffet, Idiocy, and Alternatives

As fallout from the current economic crisis continues to mount, thoughtful people are beginning to ask what we can learn from this experience. In a post at Harvard Business Online, Bill Taylor highlights a Warren Buffett interview on Charlie Rose in which the billionaire investor responds to the question "Should wise people have known better?" in the affirmative, with the note that there's a natural progression when things go wrong:

* Innovation
* Imitation
* Idiocy

An innovator spots an untapped opportunity; the imitator attempts to capitalize on its merit; finally, explains Taylor, the idiot goes and apes the imitator, and with avarice "undoes the very innovations [he is] trying to use to get rich."

According to Taylor, avoiding this cycle means developing the ability to distinguish between "genuine innovation" and "mindless imitation." In other words, he asks, "Are you prepared to walk away from ideas that promise to make money [when] they make no sense?" Taylor, like Buffett, concedes this is easier said than done when you see competition heading in a particular direction and fear you'll never catch up if you don't join the charge. It takes discipline, notes Taylor, to remain conscious of the difference—taking advantage of innovation without getting caught up in the idiocy.

The interesting note here is that the world's greatest investor, Warren Buffet, reveals this cycle that will never end (hence, cycle...). Why would an investor choose to keep the majority of his life savings in the equity markets when there are private investments available that would allow him to break the cycle and provide returns that overall beat the equity markets without the volatility? The only reason that is logical is ignorance. It is hard for the investor to make the proper decisions if they don't know all of the options.

Do your research on private investments... you will thank me later. If you want more information, please contact the author.

Well-Endowed: Conservative College endowments increase allocations to real estate

Despite the crisis on Wall Street and concerns about worsening commercial property fundamentals, many college endowments feel the current economic environment is a great time to invest in real estate.

"Endowments are somewhat contrarian – they see a downturn as a time when efficiencies are created and an opportunity," says Jimmy Hanson, president and CEO of The Hampshire Companies, a private real estate investment fund manager that works with several large endowments and foundations.

With their long-term investment horizon, endowments look beyond current market conditions and are less likely to make knee-jerk decisions regarding their investments. This strategy has served them well – for the past decade, university endowments have outperformed all the major financial indices, earning higher returns on their investments and beating most of their private and public investment fund counterparts.

The schools have increased their allocations to alternative investments, and in doing so, have invested more of their money in commercial real estate, either through real estate-specific funds, hedge funds, private equity or natural resources such as timber, according to the most recent endowment study from the National Association of College and University Business Officers (NACUBO), a non-profit professional organization representing chief administrative and financial officers at more than 2,100 colleges and universities across the country.

"There are more endowments today who are investing in alternative investments, especially commercial real estate," says Herman Bulls, president of Jones Lang LaSalle's public institutions group. He also serves as member of the board of directors for the U.S. Military Academy at West Point and helps manage the university's $150 million endowment.

"Before we just looked at stocks and bonds, but over the past few years we've opened up to hedge funds, private equity, real estate and even timber," Bulls explains. "Today, West Point has somewhere between 15 and 20 percent of its endowment allocated to alternative investments."

-- excerpted from Global Real Estate Monitor, October 2008

The Future's So Bright...

We're in the midst of unprecedented changes in our financial system. How will it all play out? Impossible to say in the short run.

First, the U.S. government is injecting a massive amount of money into the global financial system to stem the credit crisis. This should provide major support for stocks (although gloomy investor sentiment currently clouds this historically evident conculusion). That's a net positive. This federal intervention, while absolutely necessary, eventually will prove highly inflationary because the money will be created by more borrowing. This will increase the supply of dollars, so each dollar will be worth even less than it is now. This will make investments that beat inflation even more important over the next several years. Third, the huge asset sale by overleveraged financial institutions is gradually running its course but isn't over yet. This is a negative for financial assets now, but the result will be tremendous investment values for the companies that are buying these "good" assets for pennies on the dollar.

We've previously recommended, and continue to do so, that you keep the majority of your investment portfolios in a safer position. But you may want to consider taking advantage, modestly and gradually, of opportunities for higher income and low-risk growth. These types of investments include alternative investments that have been purchasing the ultra high-quality assets from the cash strapped banks for extremely favorable prices. The great thing about the alternative investments is that they are not volatile, provide a return you can spend (cash dividend) or reinvest, and are usually fully secured by the real properties they own.

If you want to beat the recent 10 year stock market averages, you should look into your alternatives to the stock and bond markets. The world's smartest and most conservative institutions have been using alternatives for years. Do your homework... you'll thank me later.

Understanding Alternative Investments - Is your cup too full?

"He with a full cup cannot drink from the better wine." -- Chinese Proverb

Our office continually educates individuals on better ways to structure their portfolios for long-term financial success. We do this by removing as much volatility as possible and increasing the certainty of returns by using more alternative investments.

When I talk to people who are "sophisticated" investors, who know all about P/E ratios, correlation co-efficients, increased alpha, derivatives and other "important" measures, I have the most difficult time explaining the simple concept of alternatives. That is because "sophisticated" investors have a cup of knowledge that is very full. Unfortunately, few individual investors have mastered the basic information about investing. The ratios and pie charts are clouding the whole reason why we invest.

In retirement, we invest for future security and income. These are two things that should not be gambled with in my opinion. I have the "luxury" of being able to work for many more years, but retirees are posed with a completely different problem. What happens if the stock market has another ten years just like the most recent ten? The market has not even kept up with inflation - that spells trouble when it comes to income. And the volatility over the past ten years has removed all sense of security for any investors. So this seems to indicate that the equity markets are not good investment choices for retirees.

Our offices subscribe to the Rule of 100, which tells investors to subtract their current age from the number 100; the remainder is the only percentage amount of the portfolio that should be at risk. For example, take a 66 year old retiree : 100 - 66yrs old = 34%. This means that she should have at least 66% of her portfolio secured and a maximum of 34% in volatile/risk based assets. If she is less risky, then she could have a higher percentage in secured investments and less in the volatile basket. This provides stability and future security.

Why do we like alternatives to the traditional assets of stocks, bonds and cash. To start off, the idea that asset allocation should only involve stocks, bonds and cash came from the Nobel Prize winner Harry Markowitz in 1952. His work became known as Modern Portfolio Theory (MPT). But his studies never included some of the world's greatest assets, including the asset class that has created more millionaires that any other class - real estate. Now, I'm not talking about the crazy real estate market that is imploding right now. I'm talking about the land underneath every McDonald's, which has made Mickey D's the world's second largest landholder (second only to the Catholic Church). Or the buildings that the Federal Government or FBI leases for operations. These types of real estate are owned by individuals just like you.

Other high profile alternative investments could include owning the Walmart building, HCA nursing home or the Lowe's and Home Depot buildings and have them pay you rent. Everyday investors have these opportunities at their fingertips. Do you? Yes! Do your homework and learn from the Yale University Endowment, which has nearly 84% of it's own money in alternatives. They have done remarkably well with their portfolio (if you think 17.2% is good!). They are smart enough to secure and grow their portfolio; can you be smart enough to follow their lead?

We focus our investors on the alternatives that are fully collateralized and secured by real assets that produce real income. An example would be to take the failed company Enron. When Enron went bankrupt the stock holders got nothing back; the preferred stock holders got nothing back; the general obligation bond holders got nothing back; the only people that got their money back were the smart investors that owned bonds secured by the real assets of Enron, like the physical pipelines and property. Now that is security! They got money back from a bankrupt company!

Recently Barclays just bought Lehman Brothers after Lehman failed. Barclays paid $1.8 billion dollars for Lehman, and $1.3 billion of it was specifically for the real properties, real assets, and real equipment. So what type of investor do you want to be? The type that owned Lehman stock, or the smart investor that owned the real assets (which are considered alternative investments) and got paid back? Every day you have the ability to make that choice.

If you have questions about alternatives, please contact me. And be sure your cup of knowledge is not too full to drink the better wine!

Lack of Confidence is a Serious Problem

As congressional leaders debate the merits of the historic bailout package, which
many fear could jeopardize its passage, analysts worry that the country’s economic
fundamentals are deteriorating rapidly. Indeed, many are calling this the worst crisis
since the Great Depression.

With the media latching onto every scintilla of bad news, and the presidential campaign,
by its very nature, highlighting and dramatizing the fallout from a decade of financial
gambling, it’s easy to conclude that the country’s economic underpinning—the very
foundation—is in the process of imminent collapse.

While it’s becoming increasingly clear that we will not avoid recession, it is possible
with appropriate fiscal and monetary response to staunch the severity and duration of
the downturn that is threatening both the consumer and corporate America. Moreover,
the global economy is also in the throes of recession, inhibiting the export boom which
markedly helped fuel U.S. growth. The situation has evolved into a crisis of confidence,
as much as the underlying credit crisis that caused the initial financial dislocation.

The Great Depression, which engulfed the nation’s most intrinsic psyche, produced an
unemployment rate of 25 percent, a mortgage foreclosure rate of 50 percent, and three
generations of Americans who were afraid to spend money, so convinced that prices could
only spiral downwards. Confidence was destroyed, and the collective deflationary mindset
kept optimism at bay. Today, the foreclosure rate, while climbing, is less than 3 percent,
and the unemployment rate, while also set to rise, stands at 6.1 percent.

As never before, Wall Street and Main Street are joined at the hip. The financial
engineering that took the $1.3 trillion subprime mortgage market, and leveraged it up to
$31 on the dollar, has imploded and spread to other asset groups dependent on consumer
health. Auto loans, home equity loans, commercial loans, and student loans also became
fodder for Wall Street engineers. As consumers come under pressure, these assets become
part of the “write down/de-leveraging” process, and the collateral damage continues to
spread, eroding balance sheets and confidence. The vicious circle thrives.

Commercial lending, which sits at the very heart of our economy and is used for paychecks and purchasing capital equipment, is seizing up, impeding the most basic functions of business.
Treasury yields are historically low, manifesting the fear of risk. Americans are worried about the health of money market funds, which hold $3.4 trillion. Fear and risk are functions of confidence.

The economy is at a crucial inflection point. With a recession unfolding, we can endure a mild recession, or something much more severe. During the last 60 years, the longest recession was 18 months. Crucial for Wall Street and the consumer is the housing market. Mortgage rates must come down and housing prices must stabilize. How quickly the housing market recovers will determine how severe the downturn is.

That the Wall Street landscape has been fundamentally altered is a given, a consequence of risk-taking gone bad. But now is not the time to test economic theory. Now is the time for pragmatic solutions that alleviate the economic pain lurking around the bend. Economic conditions are vulnerable, but remarkably solid given the circumstances.

The stock market, perhaps the most leading indicator of all, is watching carefully and prepared to give its vote. Sometimes we have to accept the lesser of evils, the less elegant of solutions as the cure to restoring confidence. Wall Street and Main Street alike are waiting, but the clock is ticking.

Are your assets fully secured to help cushion the blow of the upcoming recessionary period. Maybe you should explore some alternatives to the traditional investments in your portfolio. Do your homework - you'll thank me later.

Do You Remember?

Ask yourselves this – Do you really remember the past crisis like the Asian Flu, New York City’s BK, Mexican Debt Default then devaluation of the Peso?

How about the S&L crisis, 1987 market crash, the Y2K non-event, 2000 tech bubble crash?

Or recall the LTCM fiasco, 9/11 market crash, Russian Debt Default?

Most of the events involved huge amounts of public money to avert disaster and Congressional hearings to assign blame. For the most part ordinary people in the U.S. don’t even remember the particulars because they didn’t end up in a soup line like my Grandparents did in the Depression.

In a widespread crisis of confidence almost nothing works except Time, Time to sort what things are worth and let cooler heads prevail. What is insidious about this particular failure is the way in which declining values have created a vicious cycle of further write downs and failures so the Feds step in and assert a Command and Control economy temporarily.

As I’ve stated before – the Greatest Portfolio is one with a lot of strong “things” that are not correlated to each other. The alternative investments I continually speak about have returned a benchmark average of 10.31% this week - and will continue to pay that 10.31% each week for the remainder of the year. Do your homework - you'll thank me later...