The first quarter of 2008 was a potent reminder for investors that investment success is not guaranteed over the short term. March was the fifth straight month markets declined. The S&P 500 lost 9.9% in the first quarter, the worst since 2002. The average large cap growth mutual fund lost 11.55%. Arrival Capital clients fared better, with an average decline of 5.7%. Outperforming the S&P 500 continues to show that the Arrival approach of building a diverse portfolio of the best value investments we can find and then managing that portfolio with a constant emphasis on long term wealth creation can still add value to clients’ financial lives even in tough market conditions. Negative returns are never welcome, but will nevertheless occur from time to time. The key is how to handle such a setback. Do you abandon the best vehicle for long term wealth creation and retreat into a pile of cash until it is safe to get back into the market pool? Or, do you reassess each and every investment position to see if long term promise has eroded, raise enough cash for emergency situations, and then ride out the storm with the knowledge that time and value are on your side?

Not surprisingly, Arrival Capital follows the latter approach. It would be nice to get out at the top and get back in at market bottoms, but there is no alarm that goes off in either situation. Instead, absent clairvoyance, all we can fall back on is discipline and analysis. Analysis to identify long term trends and undervalued opportunities and discipline to buy when it is hard and stick to the flight plan when headwinds are at their fiercest.

Arrival’s continued outperformance can again be tied to our emphasis on energy and materials companies. One might ask why an even greater portion of client assets were not targeted to these and related areas? The answer is that even though diversification is itself hard when certain market sectors seem like sure winners and others are so obviously out of favor, it would not be prudent to risk a client’s entire portfolio on even the strongest belief. On the other hand, we were perhaps too early on initiating even modest positions in the financial sector. But diversification, particularly in the context of value investing, demands exposure to areas that have underperformed and are widely loathed by the larger investment community. In this way, undervalued securities are opportunistically added to portfolios, increasing diversification, providing downside protection, and paving the way toward long term gains when sectors come back into favor.

2008’s second quarter has gotten off to a better start and we remain confident in Arrival Capital’s ability to safeguard client assets and put clients in a position to reap sizeable gains in wealth as the economy inevitably improves. We know Arrival clients are concerned about market conditions, but we continue to offer Arrival as your personal chief investment officer and, if you like, your chief worrier about financial matters. Feel free to give us a call to discuss investment issues and to recommend us to those friends, relatives or colleagues who could stand to have their own chief investment officer and chief economic worrier as well.