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2011 Year in Review

Renowned American economist (and Warren Buffett’s mentor) Benjamin Graham described decades ago that the market behaves like a “voting machine” in the short run, but a “weighing machine” in the long run, ultimately translating the continuous trading noise into meaningful intrinsic value.

In 2011, there was no shortage of market-moving events. Massive tornadoes tore up Tuscaloosa, AL and Joplin, MO. A devastating tsunami hit Japan. Washington, DC clashed over the debt ceiling, which was followed by Standard & Poor’s downgrade on US Treasury debt. Then Congress’ Super Committee failed to reach any kind of agreement on deficit reduction. To cap it all off, MF Global filed for bankruptcy, the eighth largest in US history. All the while, Europe has been falling apart financially.

The result was extreme market volatility, here and abroad. Of the global equity categories, only US large company stocks finished the calendar year slightly positive. Small US companies, international large and small companies in developed countries, as well as emerging markets were all down, most in double-digit, negative territory.

Even a glance at last year’s wrap-up headlines confirms that 2011 markets were defined by their uncertainty. For example, a December 27th InvestmentNews column, counted some of the ways that 2011 was “one of the most volatile years on record.” And that’s without even considering the wilder, global news that made our domestic events seem relatively tame. Among the article’s observations:

  • “Stock swings that reached twice the five-decade average.” (That’s decades, not years!)
  • “Eighty-five companies [in the S&P 500 Index] fell 20 percent or more, compared with 11 in 2010 and 15 in 2009.”
  • “The Dow Jones Industrial Average alternated between gains and losses of more than 400 points on four (consecutive) days for the first time ever in August.”

Certainly, it is understandable that these global events and subsequent market gyrations can test our attitudes, emotions and expectations. It can be daunting to keep a long-term perspective and faith that Benjamin Graham’s “weighing machine” is expected to work in the end, if we ignore the noise and preserve patience in the market’s intrinsic values. Graham’s student, Warren Buffet, once said:

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.“

Buffett has also publicly stated that an investor should never confuse short-term losses reflected by quotations (and short-term performance data) with the permanent erosion of capital. He realized it’s impossible to consistently predict where the squiggly lines of short-term global market returns are headed in a world of unpredictable events. But we continue to believe as he does, and continued evidence seems to substantiate, that your best odds for building your wealth according to your unique goals and risk tolerances remain the same as they’ve ever been. A patient, disciplined approach to investing through a broadly diversified portfolio unique to your personal cash flow needs remains the most prudent approach to preserving long term wealth.

Though the last year has certainly seen its share of uncertainty and volatility, there are encouraging economic signs. Globally, we find price-to-earnings ratios of equity indexes around the world well below historical averages. Technology continues to advance in both developed and emerging markets with the rapid growth of cloud computing and handheld devices such as smart phones and pads. Even as the global population surpassed 7 billion, the middle class demographic in emerging market countries around the world continues to expand, adding to the number of global consumers.

Here at home the labor market is improving, with 200,000 new jobs gained in December as the unemployment rate dropped to 8.5%. Last quarter’s corporate earnings reports were strong, and consumer spending as well as personal income, have been trending upward in recent months. Housing starts and single-family homes sold have also shown gains of late.

Did I mention this is an election year? I suppose time will tell as to what impact the election will have; let’s just hope nothing too crazy happens between now and then. Overall things seem to be improving. There certainly will be some bumps in the road along the way, and I’d be the last one in the world to make any sort of a market call or prediction, but the fear seems to be receding, and dare I say that confidence is returning?

On a personal note, I was able to attend conferences in New York, Los Angeles, and Salt Lake City during 2011. As much as I enjoy rubbing shoulders with others in the financial world, I was also able to enjoy the companionship of my wife,Valerie, on two occasions. She chose to accompany me to NY and LA, go figure.

I also became the proud father of a teenager, as my eldest daughter Kayla turned 13. I often find myself talking with clients about their long-term financial future, so it’s typical for me to approach my world in the same manner. With Kayla, I find myself visualizing life with a teenage daughter and beyond. What comes after 13…driving, voting, college, dating, marriage and grandchildren?!?