Each year at this time, Jeff and I like to reflect on the year that was with some hope of gleaning wisdom for use in the future. With the caveat that this unusual year was a complete and utter mess for the markets, here are some observations.
- If the returns seem too good to be true, they probably are. Madoff's clients learned this the crooked way, while those invested in all things oil related learned it the honest way.
- During a typical recession, diversification across multiple asset classes and economies may help investors avoid some pain, but when accompanied by a liquidity crisis, all bets may be off. All asset classes, other than cash and treasuries, tended to move together this year -- down.
- The names we bought in our portfolio this year as a whole did better than the names we sold, suggesting that our confidence in such decisions may have been appropriate. Unfortunately such confidence would be misplaced as a decision to sit in cash would have been far better.
- While our performance was neither better nor worse than our peer group this year, the bills of a business cannot, unfortunately, be paid with relative performance dollars. As a smaller firm, this is tough - though deserved - medicine.
- Leverage is an ugly, two edged sword. It's use may juice returns for all on the upside, but it can lead to bankruptcy on the downside. Those who use leverage to invest lose the ability to think and invest long term. Not only that, but they leave dangerous secondhand smoke behind, which can drastically affect the health of average joe investors in their wake. I suspect this topic will be a subject of future regulation.
A year like this one is tough to stomach and in the search for meaning I am reminded that there may in fact be none. What matters most isn't that my wants go unfulfilled, but that the harvest of what I truly need is always in abundance.
What's under your Christmas tree?