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Jeff Saut: Lessons of 2009 and Beyond


But no prediction for the year ahead.



Year-end letters are always hard to write because there's a tendency to talk about the year gone by, or worse, attempt to predict the year ahead. Therefore, I'm titling this year's letter "Lessons" in an attempt to share some of the lessons that should have been learned over the past year. We begin with this quote from an Allstate commercial featuring Dennis Haysbert:

Over the past year, we've learned a lot. We've learned that meatloaf and Jenga can actually be more fun than reservations and box seats. That who's around your TV is more important than how big it is. That the most memorable vacations can happen 10 feet from your front door. That cars aren't for showing how far we've come, but for taking us where we want to go. We've learned that the best things in life don't cost much at all.

Charles Dickens' classic novel A Tale of Two Cities begins with the quote, "It was the best of times, it was the worst of times." That quote is certainly reflective of the stock market in the year gone by as 2009 should go down in the books with that moniker. To be sure, the first quarter of '09 was ugly with the S&P 500 surrendering nearly 30%. From those March "lows," however, the SPX has gained some 69%. For those that targeted the "lows" it's been a great year. For those that didn't, it has truly been "the worst of times," for after losing ~58% in the SPX from the intra-day highs of October 2007 into the intra-day lows of March 2009, they haven't come close to recouping the monies lost in that downdraft. The lesson that should have been gleaned is that if participants would have managed the risk (read: not allowed positions to go too far against them before taking some kind of action; i.e., hedge, sell, etc.), they would have missed much of the SPX's 2008/2009 downside debacle and in turn done pretty well over the past two years. As often referenced in these missives, investors need to manage the risk, for as Benjamin Graham espoused in his book The Intelligent Investor, "The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept."

Investors should keep that quote on their walls so they don't forget the major lesson of 2008/2009. Yet, there are other lessons to be remembered. To that point, Merrill Lynch lost two of its best and brightest in 2009 as Richard Bernstein and David Rosenberg left for less constrained environments. During their final weeks at Merrill they wrote about lessons they have learned. To wit:

Richard Bernstein's Lessons

1. Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important than are capital gains.

2. Most stock market indicators have never actually been tested. Most don't work.

3. Most investors' time horizons are much too short. Statistics indicate that day trading is largely based on luck.

4. Bull markets are made of risk aversion and undervalued assets. They're not made of cheering and a rush to buy.

5. Diversification doesn't depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

6. Balance sheets are generally more important than are income or cash flow statements.

7. Investors should focus strongly on GAAP accounting, and should pay little attention to "pro forma" or "unaudited" financial statements.

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

9. Investors should research financial history as much as possible.

10. Leverage gives the illusion of wealth. Saving is wealth.

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No positions in stocks mentioned.

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