Summer 2013 Investment Letter {Part IV}

Part IV of our latest investment letter.  The conclusion will be published on Monday.

In general investors dislike volatility and the longer bear periods when stocks show broad losses.  Stocks may go up 75% of the time but investors still remember the last decade’s two large declines. It’s easy to abstractly discuss market corrections.  However, they are painful when they occur, particularly that bear market variety where stocks just grind lower month after month. Investors used to only be able to access equity exposure through individual stocks.  Then, investors had to deal with the prospect that some part of their investments could go to zero.  But the world has changed.  Today investors can approach equities through diversified products such as mutual funds or ETFs. The issue of diversified funds with a track record going out of business is largely off the table.  If one accepts the argument that these kinds of investments shouldn’t be able to go to zero, then market declines become more about volatility.  Volatility is the ticket to admission if you want to play in the modern investment arena.   As long as humans are a part of the market equation you will have the eternal conflict between fear and greed.  Markets cycle between bullish and bearish periods. During the investment year we call these cycles volatility.  The chart below courtesy of JP Morgan and the website Zerohedge.com** shows the historic yearly record of market volatility going back over thirty years.  

**Zerohedge.com:  07.02.13  The Real Roller Coaster of Investing In Stocks

*Long ETFs related to the S*P 500 in client and personal accounts.