February 14, 2011 - Vol 5 Issue 7
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Toward an Understanding of Risk
By Robert Huebscher
How should clients think about risk in their portfolios? Advisor Perspectives put that question to a cross-section of prominent advisors and academics. Their answers encompassed diverse opinions and underscored how crucial that question is to the investment process.
Assessing New Tools to Protect Against Tail-Risk Events
By Jerry Miccolis
Protecting against sudden, severe market drops is as crucial as it is difficult. A plethora of approaches to this problem have been brought to market in last few years, and to evaluate them my firm developed a set of rigorous criteria. These criteria led us to a solution that works for us and for our clients.
When Clients Make You Livid
By Dan Richards
A client complained to his advisor about his account performance. The advisor said he didn't like to have his professionalism questioned and they began yelling at each other over the phone. Ultimately they fired each other. Over the years, I've found that several principles are key to breaking the tension before situations like this become catastrophes.
The Stuxnet Paradigm
By Michael Lewitt
Michael Lewitt discusses the situation in Egypt, the economy, rising risk appetites in the market, sovereign debt and municipal bonds. 'It might be very easy,' he writes, 'to be impressed by the 'two years and thousands of man hours' that Ms. Whitney spent researching the fiscal condition of the 15 largest states. What in the world required so much time and effort? It shouldn't have taken nearly so long to determine that these states are in severe financial trouble and that their options for dealing with it are limited. But dealing with their financial challenges they are because they have no choice but to do so'.
David Laibson on the Hidden Challenges of Aging Clients
By Dan Richards
In this interview, Harvard economist David Laibson discusses his research into the challenges of helping elderly clients with their financial planning. He also discusses how to overcome the procrastination and laziness that often result in inferior investment decisions. Both a transcript and a video are provided.
Journey to the Center of the Average
By Mariko Gordon
Averages, while comforting in their simplicity, often do more to hide the truth than reveal it. This article is inspired by a recent conversation with author and statistician extraordinaire, Kaiser Fung, who shares my suspicion of this often-abused mathematical construct.
Highlights from Market Commentaries
Below are the three most widely read commentaries during the last week:
How to Play in 2011
At the start of every year I remind myself that each individual year has its own story. For example, 2007 taught us that it never hurts to take profits after the market doubles and that if something is too good to be true (housing and credit bubble) it probably is. The 2008 lesson focused on capital preservation strategies and the urgency of managing downside risks. 2009 it was vital not to overstay a bearish stance in the face of massive fiscal and monetary stimulus. Last year's lesson was how to handle the many post-stimulus market swings that are inherent in a post-bubble credit collapse.
How to Play in 2011 by David Rosenberg of Gluskin Sheff
Muni Market Bargains? A Closer Look at Municipal Debt, Deficits and Pensions
Although real, pension problems will not lead to an immediate debt crisis this year or the next five years. A default by Detroit, for example, would not precipitate bankruptcy filings by large cities across the nation. The municipal market will continue to migrate from being a low-risk asset class to a credit asset class.
Muni Market Bargains? A Closer Look at Municipal Debt, Deficits and Pensions by Christian Stracke and Joseph A. Narens of PIMCO
The famous quote attributed to John Maynard Keynes - "the market can remain irrational longer than you can remain solvent" - is a favorite of speculators here. Actually, I very much agree with this observation, provided that it is correctly understood. Solvency is always a function of debt, and it's extremely important for investors to recognize that when you take investment positions by borrowing on margin, you'd better use stop-losses, because the debt obligation stays intact even if the investment values decline.
Misquoting Keynes by John P. Hussman of Hussman Funds