Rip van Winkle

Had you laid down to take an extended nap 2 1/2 years ago and recently woken, you would have noticed very little change on the surface of the stock market. The DJIA hit a high of 12,000 in June of 2008 and just the other day managed, for the first time since, to exceed that benchmark. Since June 2008 however, we experienced a wild ride with the Dow falling 45% only to turn around and gain 85%.

I have fielded several inquiries regarding the market’s round-trip and how it does or does not translate into portfolio performance. Let’s use C (Citigroup) as an example: C hit a (recent) high of $23 in October 2008 and then plummeted to $1 by March 2009 – sustaining a loss of over 90%!

Now, for those with the intestinal fortitude to buy C at $1, there were, in hindsight, rewards to be reaped as C is now trading close to $5 – a 500% return…However, those that rode it down from $23 are still sitting on a loss of 85%. Not to speak of the poor souls who paid $57 a share in December 2006…

The disciplined approach to investing that I bring to the table strives to exit the market, a sector or security, in the very early stages of a decline. Assuming success in this endeavor, this action will preclude us from owning a security at ‘the bottom’. After a decline, when demand is returning, we strive to invest in sectors that are exhibiting positive strength versus the broad market. We select sectors as opposed to individual companies because of an important study by Benjamin F. King, titled “The Latent Statistical Structure of Securities Price Changes”, which concluded that “Market and sector forces typically cause 80% of the price movement in a stock while company fundamentals usually account for less than 20% of a stock’s price movement.” Investing in sectors as opposed to individual companies helps shelter us from unfortunate situations like Exxon-Valdez & BP’s oil well.

On an uplifting note, 19 out of the 30 Dow members recently closed above their June '08 levels. On a more somber note, 6 of the worst performing stocks are still sitting on double digit losses. Home Depot, Inc. (HD) was the best of the best as it rose approximately 45% since June 2008 however, one can easily argue that a lot of HD’s outperformance was due to the fact that Building stocks had already declined substantially from the April 2006 high; the DWA Building Sector had already declined over -45% by June ‘08.

Bottom line, the DJIA recently hit 12,000 again after 2 1/2 years and during the aforementioned time period, net of dividends, the DJIA returned 1.4%, the S&P 500 lost 2.33% and EFA (Europe, Far East & Asia) lost 14.45%.

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