2012 Investment Preview
Last year we predicted that 2011 would hold some days of pessimism and panic. What we did not predict is that those gloomy times would encompass almost the entire period of August through December, with some days or weeks of relief thrown in for good measure. It seemed almost everyday there was talk of this country or that defaulting, of currencies collapsing, and of financial systems cracking. And then … they did not.

Corporations prospered in terms of profitability. Consumers kept up purchases. Emerging economies kept on building capacity and consuming raw materials. Inflation stayed low. But always there was the overhang — of debt, political concerns, tax policy, deficit reduction. In the end, the optimists and pessimists fought to a virtual draw, with the S&P 500 unchanged for the year.

Not only was volatility high in late summer and fall but the correlations among stocks, how they moved together, was unusually high. It almost did not matter in what you invested, it only mattered how much you had invested. This period of high correlations, increased volatility, and the so-called “risk on, risk off” dynamic appears to be coming to an end. As 2011 drew to a close, what stocks you owned started to matter again. Patterns became discernible as to what was working and what was not.

At year’s end, you could almost hear world investors exhale. After all that 2011 threw at them, including the Japanese earthquake and tsunami, European crises, and U.S. political dysfunction, the economy appeared to be stabilizing in the world's biggest economy, the United States, and that led to the U.S. having one of the best performing stock markets.

What worked best in 2011 was a diversified portfolio of cash generating investments that were attractively priced, cash to provide ballast and ammunition during particularly stressful times, and a portion of industrial and materials stocks that could rise along with the emerging economies of Asia and South America. This was the general strategy of Arrival Capital, as we continue to adhere to our value investing philosophy, along with a commitment to be opportunistic and at times contrarian when circumstances warrant.

It was by no means an easy year, or a magnificently profitable one, but we believe we steered our clients through a tumultuous year with capital intact and ready to take advantage of what may just be better economic times ahead.

For those who think value investing cannot keep up with in and out trading, 2011 was a lesson in the difficulty in trading an up and down market. Headlines from Europe and Asia, often in the middle of our night, moved stocks around before our markets even opened and set the tone for the day once our markets did begin to trade. The market moves themselves often were predicated on unknowable and unpredictable press releases and quotes from obscure foreign officials. All of this made trading a fool’s gold for even the savviest investor.

So Arrival Capital will stick with an approach that has left clients in good stead for almost ten years. We have lived to invest another day and another year, hopefully one with less drama, more predictability, and more chances to invest wisely for ourselves and our families.

Happy New Year!
- posted by Jay @ 10:50 AM