2010 Begins -- Investment Thoughts
A calendar year is a slightly peculiar way to assess investment strategy. After all, our financial needs — retirement, college education, a new home — require years of saving and investment. Trends and themes we may see for investing, such as the rise of developing markets, the aging of America, the mobile technological revolution, all will take more than one or two calendar years to play out. Yet we are bound by convention to assess how we performed in a specific calendar year and make predictions for the coming twelve months.

By absolute measures, 2009 was a profitable year for investors who stayed invested through the troubled times of winter and were not shaken out by incessant fears that the rally of Spring was a market mirage destined to pull investors in and then cascade to lower lows. If there was any one thing that Arrival Capital was able to do for clients it was to keep then involved in the financial markets and not fall victim to the unrelenting fear and panic that gripped much of the financial world during the financial crisis’ darkest days.

Staying in the market was the one step required to re-build wealth. It almost did not matter what stocks were held, indeed, the riskiest, most leveraged companies were the ones that soared the most. Arrival Capital saw its mission in the later half of 2009 to find stocks that could go up in value as the crisis receded but had the cash flow and/or balance sheet strength to keep losses to a minimum in case the nascent recovery foundered. Value investing again being our touchstone to find opportunities where potential reward meaningfully outweighs the potential risk to precious client capital.

What then to expect in 2010? First, more of the same as asset values shrug off the last of the panic inspired sell-off of last winter. U.S. debt levels, incipient inflation, the dollar, unemployment, and corporate earnings will drive prices from day to day. A more longer term approach that we have developed is to figure out what economic and industry trends that existed before the credit crisis were victims of the crisis and which trends were momentarily arrested only to resume anew in late 2009.

For example the game of leverage that spurred real estate and related financing and building industries higher is gone forever as we knew it in 2007.

So too may be gone the bidding up of troubled but asset rich companies by private equity firms loaded up with cheap credit.

The growth of developing countries, however, appears to be resuming its upward trend, favoring investors who can figure out what these countries need to increase their development (energy, industrial products) and what the growing middle class in these countries will want to consume (brands). Another thing the financial crisis did not stop is the aging of America and much of the developed world. Drugs, medical devices, medical technology, all can be investment winners at the right price. Finally, technology continues to change our world and finding value oriented ways to participate in these changes will undoubtedly lead to meaningful investment returns.

Of course, times change, imperceptibly at first, and then, with benefit of hindsight, clearly. We cannot know the future, but we can calculate the probabilities of how things might change, for specific companies and the world at large. Here’s to a successful 2010.
- posted by Jay @ 4:00 PM