June 2, 2009
Death of a Dream, Birth of a Trader
I recently had a good “ah-ha” moment in relation to The Kids Fund that I want to relate to you.
It is difficult for most folks to appreciate what I accomplished this past year with the birth and death of my dream to run my own mutual fund, The Kids Fund. I not only had a significant financial investment in the project, I was emotionally invested in it too. It was my dream.
Although the project was trying to get off of the ground at the worst possible time, and died in the flames of the market crash this past winter, it was clearly a success in ways that I am still discovering. The concept proved sound. Most of the time the performance was market-beating in both up and down markets. I survived running the regulatory gauntlet to get it up and running, and The Kids Fund got rave reviews from every direction; the media, individuals and investment advisers.
But I was not in the reviews business, I was in the business of raising and managing money. With the market in its deep, deep funk, I simply could not raise the assets needed to make the fund viable.
As I approached the painful decision to shut the fund down, I went through a whole litany of rationalizations. “I’ve got the performance to be a star.” “Everyone loves the concept.” “The dirty work of getting the fund up and running is already done.” With those thoughts in mind it would have been easy to continue on – and flirt with the crippling effects of $20,000 – $25,000 monthly expenses.
But the investment manager in me won out. When I looked at the project I could see many reasons why this should eventually succeed as soon as the market recognized my wisdom and skill, but the bottom line was that it was not working, and there was no guarantee that it would work as time went on. And the risk was huge if it did not.
As I would with your investments, I got my emotions out of the way and acknowledged that The Kids Fund was just not performing, and cut it out of my portfolio.
Although I did not realize it at first, I now see that this decision process was a coming-of-age experience for me, a tremendous validation of my work as an investment manager. The ability to make investment decisions with little or no emotion is critical to being successful in this business. Without realizing it at the time, I proved that I had what it takes to make it to the top of my industry.
Could there be a connection to my firm providing for you two of the best performance months in its history, back to back, right after I made that decision? I don’t know for sure, but what I can say is the clarity and confidence I have in my investment decision making has never been stronger, and I credit much of that to my experience with The Kids Fund.
Stay tuned. I think there are great things to come.
After a powerful upsurge in late March and April, the stock market has entered a sideways trading range defined by the high and low of the first week of May. Since then it has bounced up and down within that range, but not made any real progress.
There is no way to know whether the market will break down or up when it finally makes its move out of its trading range. The market could just be taking a breather in a huge bull market, or it could be a topping process that precedes another big decline.
But with the extraordinary price volatility of last winter fresh in our minds I decided not to take the chance of being too exposed to another sharp drop. So, two weeks ago (as of this writing on May 29th) I sold some of our big winners in banking, technology and retail and added a hedge to reduce risk in our growth portfolios*.
As you may remember, hedges are those investments that go up when the market goes down, and with thoughtful use can greatly reduce the risk in a portfolio without us having to get totally out of the market to do so. The result has been slow but steady gains this past month with only a small fraction of the risk.
Current holdings in our growth models* include gold stocks, oil, pharmaceuticals, emerging markets and high yield bonds along with some cash and the hedge.
Our Flexible Income accounts* also had another very strong month, with the model indicating an all time high in account values. Surprisingly, high yield bonds have outperformed the stock market** over the past 45 days, so we continue to be fully invested in high yield bond funds.
I think you all will be very pleased when you get your statements next week.
Be sure to tell your friends.
More Thoughts on Gold
As you read, above, our growth model* currently holds about 10% in gold stock funds which are approaching their old highs again. But I have some concerns about gold in general.
First of all, just about everyone is expecting high inflation and rising gold prices due to government bailout actions which could weaken the dollar. When it comes to investing, if everyone expects the same thing it rarely happens that way. When things don’t really happen as one would expect, I have learned that there is normally something else, which can’t yet be detected, happening in the background. Unfortunately, if you wait to read about it in the newspaper, it is often too late to act, investment-wise.
The strength of sentiment toward this inflation/runaway-gold outcome really has my sixth sense twitching.
In addition, although gold has been going up for the past 4 weeks, its rise has been weak when compared to the sharp decline in the dollar during that same period. Normally we’d expect a closer correlation between the two. This shows a relative weakness in gold – it is just not acting as strong as it should be.
Is this a reason not to invest in gold? No, gold is going up, which is when I like to be invested. But I would not bet the farm on gold quite yet, because there is something going on with gold that does not quite make sense.
I’ll be watching it for you.
Riddle of the Week
Question: You remove the outside and cook the inside. Then you eat the outside and throw away the inside. What did you eat? (See the answer below)
An Insider Tip: The Mustang Café
The new Mustang Café is sort of hidden away out at the Prescott airport, and as a result may be one of the best kept secrets in town. I’m guessing it won’t go unnoticed for long.
The lunch menu is full of specialty items. There is not an ordinary sandwich or salad in the bunch. Cathy and I have eaten there twice since they opened earlier this year, and each time the lunch was superb. We haven’t tried the breakfasts yet, but they look like they would be great also.
On the way into the airport turn right onto Clubhouse Drive and follow it around to the café. I think you’ll find it will be worth the trip.
College Class Schedule
Last Chance to Register for Basic Investing for Retirees
FIN100 Basic Investing for Retirees
Wednesdays and Thursdays, June 3 to 11, 2009 1:30-3:30 Class #S050 $75
FIN101 Advanced Investment Analysis Using Charts
Wednesdays and Thursdays, June 17 and 18, 2009 1:00 PM – 4:00 PM Class #S051 $70
For details or to register call Yavapai College 717-7755 Or visit www.yc.edu/ce
This Week’s Riddle Answer
An ear of corn
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.