We have long held that for us personally retirement was not a goal. Restylement, with its ability to give you more time to pursue the things that are most important to you, is what appeals to us. There is something that we don’t like about retirement- there is a connotation of withdrawing in the word that does not appeal to us. We know retirement will still be the goal for many, but others will increasingly choose restylement as their goal. The ability to do the things you are passionate about and spend less time doing the things that you don’t enjoy.

This past week we were on “vacation”, but it did not work out that well. We found there were pressing work issues that needed to be dealt with during our time away. So, it occurred to us to re-think vacation a bit also. It seems to us that “vacation” is a corollary to “retirement”. The root word “vacate” has to do with leaving, emptying, etc. Our goal when we go away is really not vacating, but recreation. We want to re-create, not merely empty. Our goal in getting away is to refresh, step back, enhance, get new ideas flowing, etc. So, we did not really have our “vacation” spoiled by having to do a bit of work while away. We were still able to enjoy all the benefits of the time away and have it serve us well in “re-charging” for the road ahead. So- no retirement and no vacation, but bring on restylement and recreation. They both sound good to us.

Their approaches are extremely different (Jim is certainly the more offensive of the two to us), but ultimately they both share only one goal-self promotion. They are the anti-fiduciaries. They do not put your best interests first. They are all about promoting themselves. If you perish as fodder in their self promotion scheme, they will not miss a meal nor feel a moment’s sorrow.  I am pretty sure if Warren Buffet listened in daily to Mr. Cramer and followed all his advice he could have had his home foreclosed upon by now. Cramer uses the shotgun approach, trying to hit a home run by taking 100 swings in every direction. So, he usually has a home run or two to remind you about. The other ideas strike out and are replaced by another hundred swings for the fences.

Suzie’s approach is far more demure but just as lacking in ultimate usefulness. She likes to make sweeping generalizations (“X is a bad thing to do as an investor”). The problem is she has not taken the time or effort to understand your unique situation and needs, so her “advice” might be right for over 50% of listeners but dead wrong for you. You become the fodder in her fame.

A fiduciary, plain and simple, is charged with putting your interests first. The person may be inept and may not give you good counsel. However, they at least must attempt to give you good counsel. That would seem like a good first step in evaluating who you should listen to.

We know it is a little late for New Year’s Resolutions, but………..How about it! Why not tune out Jim and Suzie and devote that time to something that will add to the quality of your life?

Charlatan then proceeds to give you more info on their marvelous returns going back to 2004. When you come to the disclosures at the bottom (you know, the small print that nobody reads), things start to get a bit alarming. First is this potential problem- “ The performance data represents a combination of hypothetical and actual past performance.” Oh? This isn’t all their actual performance? That could be a problem.

“Returns are presented net of an assumed annualized investment management fee of 2.75%, deducted at a rate of 0.6875% quarterly.” Wow, they do have these terrific returns after fees, but that sure is a high fee for money management. We would say they are more than double what fees should be in order to be a fiduciary and put the client’s interests first. But still, they made you all that money in a horrible market after their fees!

Then much further down in the disclosure is the explanation of the combination of hypothetical and actual past performance. “All results prior to October 2009, rely on backtesting. Backtested performance is purely hypothetical and does not reflect actual trading in clients’ accounts. Results were achieved through retroactive application of a strategy that was designed with the benefit of hindsight. Accordingly, these results should not be viewed as indicative of the adviser’s skill.”

Oh my God! From 2004 to now, the actual data started in October of 2009. All the rest of that skilled approach we can pay an outrageous fee for- “purely hypothetical”. Any idiot can put together an investment program that is marvelous for any past period. Hindsight-always 20-20. How will it work in the future? Probably not too well, judging from our hypothetical projections!

Our question is-if the SEC is supposed to protect clients (and advisors who don’t read well or think clearly), why is any Registered Investment Advisor allowed to send out any data that isn’t their actual performance. Performance means, according to Merriam-Webster, something “accomplished”. Hypothetical performance seems like a contradiction in terms. Something accomplished, but in this case we are just pretending that we accomplished it. Come on, SEC. Let’s protect somebody!

Despite the fantastic finish of 2009, the S&P is still off 24.9% from its October 2007 peak. That is still a huge drawdown (i.e. loss from peak to now) that investors cannot afford. That is why we still believe that active investment management using a wider playing field than the traditional stocks, bonds, and cash is required in order to help you achieve your financial goals. Our management style has worked well through this period and we feel it will continue to produce results in 2010 and beyond.

In terms of what to expect in 2010, we do not know what the market will serve up. There is still momentum in the equity market and lots of money on the sidelines that could push prices higher as it comes into the market. It is our feeling, however, that it is a time for caution. While very high quality investments seem to be priced around their historic averages, poor quality companies seem very expensive and at risk of a large tumble. So, we believe that quality large companies are the area to overweight going forward and low quality investments should be underweighted.

We expect there to be some opportunities to enter into investments at low prices as the year goes on. As always, we will try to take advantage of inefficient market pricing of assets.

Lastly, we want to thank each and every one of your for your loyalty and faith in us over the years. As we look at the millions and millions of your dollars that we are entrusted to manage, we are truly honored by your commitment to us. Every day we feel fortunate to be where we are in this difficult environment and seek to continue to earn your continued loyalty. We really mean it- Thank you!!  

It was a year that came in like a bear and went out like a bull. All told, that left us with a surprisingly strong bull year. When the days were darkest, we think investors panicked and sold when assets were the cheapest, best buys we will see for a very long time. How else can we explain investors dumping GE stock for less than $6 a share? Oh, but that was months ago and memories are short. We now have investors willing to drop their money on assets that look very risky to us. What will 2010 bring us? We think it will most likely bring us some more big ups and downs on the roller coaster.

Is it time to hold ‘em or fold’em? As an intelligent gambler, that should depend on what you are holding. It is, in our opinion, no time to bluff when you don’t have much in your hand. Look to take some profits in areas like high yield bonds and stocks with little or no earnings. If you are holding some aces, we would stick with them for now. Keep your eye on the game however. If is turns against you once more, don’t be afraid to fold ‘em and live to fight another day.

It was a terrific year which did much to restore account values. However, it appears unrealistic that this bull run can go on too much longer. As we move from underpriced back to overpriced, the odds start to stack up against us in the short run. Be careful and thankful as we welcome in a new year!

Now, Advisor Perspectives has published an interesting study showing that the Morningstar Star Ratings fail to predict performance through a market cycle. So, moving from a “3 star” fund to a “4 star” fund is no better than flipping a coin to decide which fund to hold. Russel Kinnel of Morningstar admits the star rating is “not a forward looking measure”.

This finding does not surprise us at all. Investing with style boxes and star ratings using a rear view mirror approach is a losing concept, particularly in a secular bear market. You need strategies and tactics that make sense moving forward, emphasizing return of capital as well as return on capital.

That is, reducing your level of investment in high yield bonds and/or low-quality stocks. We would not advise abandoning them altogether but taking some reasonable profits. If, on the other hand, you are late to the party and are now thinking about taking money from the sidelines and placing it back into the market we would suggest you do that with caution. Specifically, you don’t want to chase gains that have taken assets to above fair value. Many parts of the market are currently overheated and likely will not produce above-average results going forward.

Looking at it in another way, you need to determine whether the odds are on your side or against you going forward. They certainly don’t seem to us to be strongly in your favor. On the other hand, we certainly have no reason to be sure that the market will not continue to run from here. A plan to cautiously reinvest might be the most prudent. You could plan to buy into the market monthly for the next six or eight months. If we did then see a market correction, you could use that opportunity to alter your plan and  purchase more aggressively into the market.

Your focus should be on buying high quality assets on which you have conviction that they will do well for years to come. That should be a recipe for success as we move forward through turbulent waters.

On the flip side, we also expect the higher quality stocks to outperform should this market continue to escalate. These companies have good earnings, fair pricing, cash on hand, etc. Their future is bright, they have to wear shades! On the flip side, we continue to have a negative outlook for the Russell 2000 stocks.

In currency, we think the dollar may have a short rally in coming months, followed by a return to weakening against emerging market currencies. While we hope to participate in this area, we are not rushing into it with guns a blazing as we think the dollar may rally for a bit first.

Lastly, do we think the economy is fixed or sinking? That seems to be the topic that everyone is weighing in on. Our belief is that it was not as bad as most thought last November and isn’t as good as many think this November. We think things are getting worse more slowly and that the turnaround will be slow and muted from here. That seems to us to denote a period of slow growth and small returns, not the continuation of a huge bull market that   will make us all rich.

Modern Portfolio Theory basically states that the selection of assets (stocks, bonds, and cash) is the major factor in determining risk and return for a portfolio. It was developed in the 1950s by Harry Markowitz. That is over 50 years ago. Is it time to re-consider whether we need something even more “modern”? Markowitz, of course, never talked about the style boxes that have become part of the orthodoxy of financial services. Style boxes were invented by Morningstar in the early 1990s. So, a marketing scheme that was invented more than thirty years later has come to be considered by many financial advisors to be an essential part of “modern portfolio theory”. What else has transpired since this modern theory was published?

Hawaii and Alaska became states the year that Markowitz’ book was published.

WalMart was founded in 1969, a decade later.

The NASDAQ stock exchange began in 1971.

The first color television broadcast was in 1974, 25 years after the “modern” theory.

The term personal computer was first coined in 1975.

Enron did not come into existence until 1985.

The World Wide Web was invented in 1989.

So, we shouldn’t throw out Markowitz’ theory because of its age, but we need to consider whether or not it still applies and perhaps tweak it a bit if it is to be relevant in the 21^st century. A few things may have changed during the past 50 years! Perhaps most importantly, his message has been transformed to mean what the financial services industry wanted it to mean rather than what he actually said. He never told anyone to fill a bunch of artificial “style boxes” and hold on to overpriced assets in a bear market. That would not be a Nobel Prize winning concept.

At the turn of the new millennium, stocks were priced extremely high compared to historic norms. The return, not surprisingly, has been pathetic so far this decade. We have had a secular bear market and investors would have been better off choosing almost any other investment vehicle for the past 9 years. Commodities and gold have led the way, offering an excellent return on investment during this period. The low return on equities makes perfect sense by fundamental standards.

We believe that this fundamental truth has been lost on investors and that we are at a crossroads. The highest quality stocks are priced near historic norms and we believe you can make the case that owning them going forward is a rational decision. You stand to receive a larger income stream on your investment than in safer instruments. According to the Wall Street Journal, the Russell 2000 stocks (an unmanaged index of smaller companies) has an expected Price to Earnings ratio of 55 as of this morning. So, if everything goes well (no small feat in this economy), an investor should reap an earnings stream of less than 2% for the next year from investments in the Russell 2000 stocks. Why would an investor make the choice to buy these stocks at this time with a lower stream of income than in any other investment? We believe another wave of punishment will arrive for those who choose to ignore the fundamental fact that these companies are not currently a prudent investment. Perhaps then investors will come to grips with the fact that buying stocks is a rational decision based on the choices that exist when you make an investment choice.