In the cover story “Reassessing Risk” by Olivia Mellan, Bill discusses his views on risk tolerance:

“My experience is that many people’s tolerance is directly correlated with recent market performance, so we shy away from questionnaires. I’m also wary of the way people can misjudge odds due to things like familiarity bias or the structure of questions.”

…

“We then discuss with clients how that [performed] under different market conditions, and look for their wince point to gauge whether their tolerance is lower than their capacity. If their tolerance is lower, we’ll lower the max equity exposure.”

Click here to read the entire story on InvestmentAdvisor.com.

Bill also participated in the Triangle Busniess Journal’s rountables on August 23, 2007 and July 18, 2006.

Please contact our office at (919) 851-8200 for a copy of the full article.

Paid subscribers of the Triangle Business Journal may click here to access the full article through their website.

There is also a risk of bruised feelings due to misunderstandings about repayment expectations.

To reduce the risks and potential damage to an important relationship, clearly spelling out terms and expectations up front is vital.

Virgin Money can help you document a personal loan with their Handshake Basic service.  And their Handshake Plus service can even handle payment processing.  Review their Personal Loan Guide, and pass it along to whomever you are considering loaning to or borrowing from.

The following is a good example of the pitfalls of the sales model:

CIT Debt Sold to Widows Has Fine Print Pimco Resists

Notice that FINRA, the self regulatory authority for brokers says:

“….it’s investigating whether the risks associated with the securities were adequately disclosed.”

Well here is an example of so called disclosure:

CIT Group Inc. Prospectus Supplement

It is our opinion that it is ridiculous to expect most Americans to be able to adequately interpret 72 pages of “disclosure” (and this is only the supplement to the initial disclosure document).

Yet the world of FINRA regulation provides the framework for a Prudential spokesman to proclaim:

“As with all bonds, investors choosing to sell the notes before maturity may sell them at market value to other investors and face certain risks, which are fully disclosed at the time of issue…”

In other words, buyer beware.

The inherent problems and conflicts of interest with the sales model is why we choose to operate as Registered Investment Advisors.  Our regulatory framework is the Investment Advisors Act of 1940, which requires that we act in our client’s best interest.  We believe this is the best framework for client relationships.  The SEC is responsible for supervision under the Act, and they have unfortunately been underfunded for the last several years.  We hope that will be corrected as we feel more of the public should be served by Registered Investment Advisors.

http://www.chartoftheday.com

The rest of the story is that the last 12 months of earnings are not
representative of what earnings will be going forward.  Our best estimate is
that at current price levels, the PE ratio is actually around 13 to 17.  Most
definitely not the most expensive market in history.

Much of our research effort involves separating good data from bad data,
which is essential to gain and maintain a competitive edge against other investors.

Here is Bill’s response:

“The housing market is not going to be the engine leading us out of the recession, but clearly it is going to be less of a drag than it has been or should be.”

Click here to view the original article entitled  Pending Home Sales and Affordability Numbers Jump Higher.

“Too many of them do not do well, and the frenzy that exists when the IPO market is hot makes the problem worse as the average investor tends to significantly overpay when their gambling switch is turned on.”

“Exclusive access also denotes an understanding that Fidelity markets KKR’s IPOs sufficiently, regardless of whether they have an opinion about whether it is likely to be a good investment.”

Click here to view the original article, Fidelity, KKR in Partnership to Sell IPOs to Retail Clients

Hyman Minsky was an economist who developed a theory about financial markets that seems to nearly perfectly describe the path of this crisis. In fact he wrote extensively about it in 1986, right before Greenspan became our Fed chairman. It is too bad that Greenspan apparently hadn’t read Minsky or didn’t put enough weight on his teachings or the problem might not have become so large.

Currently there are countless descriptions, speculations and rantings about the causes of the financial crisis and what should or should not be done. Many are good. Many more are bad, often due to ideological beliefs and/or lack of understanding money and financial systems.

The following article is perhaps the best I have read so far. It comes from Paul McCulley of PIMCO. In it he describes how Minsky’s hypothesis applies to the current crisis.

Under the Hood:
A behind the scenes look at three of your fund managers

Davis VY Venture

Davis NY Venture, which invests in large US holdings, looks for companies that have “wide moats” separating themselves from their competitors. The fund holds a total of 109 positions with some of its top holdings including Costco, Berkshire Hathaway, JP Morgan Chase and ConocoPhillips. The managers look for stocks with solid balance sheets and defensible market niches that trade below what industry analysts think they’re worth.

“When I first started investing, my grandfather gave me a card on which was written,’ You make most of your money in a bear market, you just don’t realize it at the time.’ Although at first blush this saying sounds counterintuitive – after all, in a bear market prices are going down – it makes sense when you recognize that as investors we are buyers and thus should welcome lower prices for the simple reason that lower prices may increase future returns.”

“In today’s bear market, investors are racing for the exits. Cash is pouring into ‘riskless’ securities like short-term U.S. Treasuries with virtually no yield. Although such a choice feels good, it is, given the near certainty of inflation, likely to prove very costly. Meanwhile, investments in high grade common stocks, which feel like a terrible choice, are likely to prove very profitable and are almost certain to outperform cash over the next decade.”

Christopher C. Davis
Davis NY Venture

Baron Growth Fund

Baron Growth Fund could be described as a ‘Homerun hitter’ type of investment. The management here likes to discover stocks that can double their price over the next 4-5 years. They are also fond of quality management, which they evaluate by developing relationships with executives of the companies in which they invest. Some of the holdings they currently like include Devry, Strayer, Dick’s Sporting Goods and Arch Capital Group. The fund has been a solid choice for us in the small and mid-cap area over the years.

“Among the most important beneficiaries of President Eisenhower’s program to build an interstate highway system in the 1950’s were not the contractors and materials suppliers but businesses like roadside restaurant McDonald’s, roadside hotels like Holiday Inns and destination resorts like Disney. When President Kennedy set a national goal for America to send a man to the moon and bring him back before the end of the 1960’s, the beneficiaries were not only the defense contractors who made the rockets and supplied fuel. Communications companies, semiconductor fabs, other technology businesses and something called the Internet were the true long term beneficiaries. Similarly, we think President Obama’s infrastructure, alternative energy and energy conservation programs could provide opportunities for many new industries like electric and battery driven cars, more efficient power grids and producers of new composite materials with unusual characteristics that can be used in windmills and by the turbines that drive them. It is our job to find beneficiaries of President Obama’s program in which we can invest.

We think that when the worldwide economic recession begins to recede, the mountains of cash on the sidelines invested in “safe” government securities providing no yield held until “the coast is clear” will not prove a good idea either. We think it may then be just as difficult to buy stocks as it was to sell them only a few months ago.”

Ron Baron
Baron Growth Fund

Cambiar Opportunity

Cambiar Opportunity is one of our more concentrated funds which generally holds 30-40 stocks at a time. They focus on mostly large US companies that are cheap when compared to their peers and the market. The fund had a rough ride down this latest bear market but holds one of the best 10 year returns in their category beating the S&P 500 by nearly 5% and has been particularly impressive since the November lows. Some of the funds top holdings include BP Amoco, El Paso Corp, Allstate, and CVS.

“There will be no all clear horn sounded when the crisis abates and when risk premiums begin to fall, but markets will quickly take notice. Timing an improvement in the stock market will be very difficult. Nonetheless, an analysis of risk premiums suggests the case for investing is very strong now.

In this and other areas of the market, we have thus taken some advantage of the profound price dislocation to “quality-up” our portfolio at valuations that we could only have dreamed about a year ago. Similarly, we have initiated positions in a number of core franchises within the media, consumer, and healthcare industries who have undergone significant value dislocations. While media, energy, and retailing may not jump out as being uniquely poised to perform owing to varying degrees of cyclicality, and health care may not be uniquely attractive under the auspices of a Democratically-controlled government, the valuation compression is just astonishing. Many energy companies have reverted to 1999-2001 stock prices, and though oil prices have fallen, we are far from the $10-20 level that prevailed at that time. Similarly, while advertising and consumer spending looks sure to contract, profit declines of as much as 60-70% are now baked into valuations – this too seems grossly excessive.”

Brian Barish
Cambiar Opportunity Fund

Special Notes:
* Your portfolio may not contain these specific funds. We recommended the funds in your portfolio based on your risk profile and goals.
* All comments from mutual fund managers were taken from their most recent shareholder letters.