Insights into the world of high- and ultra-high net worth investing
January 26, 2010- Vol
4, Issue 4
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The last decade severely tested investors' belief in the value of diversification and strategic asset
allocation, leading some in the financial media to assert that
diversification and asset allocation failed and were worthless during the
crash of 2007-2008. Now is an ideal
moment to look back and assess the carnage.
Traditional asset classes may no
longer provide sufficient portfolio diversification, but there's a new wave of mutual funds that offer alternatives
strategies previously available only to large institutions.
Robert Hussey of Natixis Global Associates describes how alternative
strategies can be used in a mutual fund package. We thank them for
Merton is a professor of
finance at the Harvard Business School and the 1997 winner of the Nobel Prize in economics for his work on pricing models
for options and derivatives. In this interview with Dan Richards, Merton explains the role of derivatives in creating the financial
crisis, and what steps regulators should take to address them.
We are again privileged to publish
the current issue of Michael Lewitt's
newsletter, titled The Potemkin Market. Lewitt updates his
forecast for the S&P 500, criticizes
the current financial reform efforts and the ongoing GSE bailout and Fed
Chairman Bernanke. Lewitt argues that risk is overpriced
in many segments of the market.
Dan Richards says we're dealing
with a more fundamental issue than the recent market turmoil.
"We're going through one of those rare periods of ground-shaking
change that have taken place throughout history, something that was in the
works well before last fall's market excitement," he says, and
explains how advisors should deal with
more demanding customers, new technology and global competition.
Warren Buffett's valuation of Burlington
Northern and his use of arguably cheap Berkshire Hathaway stock
to purchase it have created a bit of a cacophony among analysts. It seems
to some very un-Buffett-like to pay top dollar for an asset and to use
precious equity currency to get a deal done. What does Buffett see that others do not? Oddly, the
argument made by gold bugs for
their asset of choice may hold the answer.
A few weeks ago, Kristen Luke was
speaking with an advisor about the types of marketing his firm does.
He listed several standard marketing campaigns, and then went on to tell me
that his main marketing strategy is to
help others first with their needs. Business tends to
follow, and he calls his strategy "Karma
In our letters to the Editor, readers comment on recent articles about Paul Krugman, health care, John Cochrane and the
need for trust in advisory relationships.
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Geoff Considine uses a test case to examine whether diversification and
strategic asset allocation failed. By comparing the performance of
diversified portfolios that he proposed well before the crisis to that of
the S&P 500, he quantifies the value of true diversification.
Diversification Really Does Pay Off
Using Alternative Investments to Build a Stronger
is evolving to accommodate an ever-expanding investment universe, and
investors are only now beginning to explore and gain access to new and
alternative sources of diversification. In this environment, financial
professionals are shifting their focus to a more pressing question: is
Using Alternative Investments to
Build a Stronger Portfolio
Robert Merton on Regulating Derivatives
"It is important to understand that there is no financial institution
in the world, including all the central banks, that can function without
using the mathematical computer models of modern finance or without using
derivatives. So the issue is not that these are some side items that
are new and fancy and no one understands them and maybe we ought to get rid
of them or minimize them. That is not reality."
Robert Merton on Regulating
"For it is abundantly clear that the financial crisis has led to
absolutely no alteration in thinking at the Federal Reserve, Treasury,
Congress or inside the White House that would lead to a sounder path of
economic policy management. With respect to every aspect of economic
policy that matters, our political and business leadership is failing to
come up with the proper long-term answers."
The Potemkin Market
"Whenever you see changes coming down the pike at the magnitude we see
today, there will inevitably be winners and losers. The only way to
guarantee that you'll be on the winning side of the equation is to be
willing to embrace change by discarding the business models of the past in
favor of the new business models of the future."
it possible that Buffett saw an inflation threat and merely chose a
different asset to protect the huge pile of cash in his company's coffers?
Stocks, after all, are a claim on the assets of a corporation and are in
that respect as real an asset as gold. The logic behind the decision to buy
the railway and the decision to buy the shiny metal may be same.
The key to Karma Marketing is to be genuine. Don't be overly eager to
see a return on investment for your time and effort. You never know
when or where business will come from these efforts. Just enjoy
doing good deeds for other people and positive outcomes are sure to result.
Letters to the Editor - Krugman, Cochrane, Health Care and
In our letters to the Editor, readers comment on recent articles about Paul
Krugman, health care, John Cochrane and the need for trust in advisory
Letters to the Editor - Krugman,
Cochrane, Health Care and Trust
Highlights from Advisor Market Commentaries
Hussman's commentary falls into four sections: (1) an 8-step
"blueprint" for financial reform, in response to Obama's proposed
bank regulations; (2) a tongue-in-cheek plan for how to spend $1.5 trillion
without Congressional approval; (3) an update on the impending wave of
Alt-A mortgage resets; and (4) a discussion of the market climate. In
regard to the last point, Hussman says "Despite last week's decline,
the Market Climate remains characterized by overvalued, (intermediate-term)
overbought, overbullish and rising-yield conditions."
"A Blueprint for Financial
Reform" by John Hussman of The Hussman Funds
"Neither prop trading nor the size of the largest banks are the causes
of the financial crisis. Instead, opaque over-the-counter (OTC) markets,
deliberately deceptive structured financial instruments and a general lack
of disclosure are the real problems. Bring the closed, bilateral world of
OTC markets into the sunlight of multilateral, public price discovery and
require SEC registration for all securitizations, and you start down the
path to a practical solution."
"The Volcker Rule & AIG:
Hedge Funds and Prop Desks Are Not the Problem" by Chris Whalen of
Institutional Risk Analyst
"M2 growth currently is extremely weak. It likely will remain
relatively weak through 2010 as credit creation by depository institutions
will be impeded by capital constraints. If investors remain risk averse,
their demand to hold federally-insured bank deposits will remain relatively
high. This implies that velocity of the M2 money supply will not increase
rapidly. Weak M2 money supply growth in combination with weak M2 velocity
growth implies a sluggish economic recovery in 2010."
"If M Does Not Pickup, Will V
Save Us?" by Paul Kasriel of Northern Trust
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