This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, December 28, 2009

Lessons from a Lost Decade

Very rarely does any one person receive the best and worst the life can throw at someone. Even more rarely is anyone exposed to completely opposite ends of the spectrum at the same time. I guess Fed Chairman Ben Bernanke must just be lucky.

While being chastised by Congressmen and loathed by a large portion of Americans, Bernanke has somehow been blessed with the love and admiration of many of his colleagues – big bankers – and the media, most notably Time Magazine, whose cover his visage recently graced.

Though Time praises the professor-turned-bureaucrat for his apparent victory over the free markets, a sense of foreboding is in the air. Well-read individuals will, of course, recall at the cover of Time once depicted the face of another banker – Alan Greenspan – right before the economy turned sour and the sky started falling.

Ben Bernanke’s tenure has Chairman has coincided with the second half of what may very well prove to be the worst decade in stocks in recorded history (Lauricella, Wall Street Journal). You read write; even the 1930s, home in history to the Great Depression, can’t hold a candle to the decade we’re just exiting. Great Recession, they say? Ya, sure.

But fear not, there’s still good news, for the last decade, terrible as it may have been, is now ending. And as any good investor knows, odds are that terrible decades tend not to gather in groups. Put more simply: expect better times in the 2010s.

Like the 2000s, the financial markets had a very difficult decade in the 1970s, culminating with Jimmy Carter. However, after a final shakeout in the markets during the late ‘70s, improvement came swiftly in the 1980s under Ronald Reagan – after all, they don’t lend popular economic terms like Reaganomics to just anyone.

While we can bet there are better times ahead, hopefully we can emerge from this decade with a few lessons learned; lessons that will make the next decade all the more bountiful. If the 2000s have taught us anything at all, hopefully they have left no doubt in our minds that the theory of buy-and-hold as an investment strategy is deader than a doorknob.

Hopefully investors can leave the 2000s with a greater respect for the financial markets, and for the knowledge required to use those markets to one’s advantage. Hopefully advisors, in their downtime, have finally gotten around to reading the last chapter of Markowitz’s pioneering work on diversification, Portfolio Selection: Efficient Diversification of Investments.

The chapter I’m referring to, as boring and academic as it is, specifically mentions that the principles discussed were not intended for real-world application.

Of course, the appeal of Markowitz’s work to the masses is at least partially due to laziness. Using concepts laid out in Portfolio Selection and developed even further by academics, the investing public fell in the love with the idea that they could somehow build a diverse portfolio spread across several classes of assets, and then stuff it in the back of a drawer until tax time.

Unfortunately for investors, this simply isn’t the case. The financial markets are not a beast that can be understood withr only occasional review. They require constant study and continual maneuvering in order to achieve any kind of profit. Anyone who thinks otherwise will likely experience many more decades of poor performance going forward.

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