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Minerva Planning
Client Newsletter September 2007
In This Issue
A Question of Market Timing
A New Team Member
Upcoming Web Seminar
Quick Links
I hope you enjoyed the Labor Day weekend. I've always enjoyed having a final coda to the summer before beginning the long stretch until the holiday season.

There is a good bit going on here at Minerva, not the least of which is watching the market trying to regain it's footing. The main column in this issue covers the pitfalls of market timing, as well as a few steps we've taken to protect client portfolios in the event of a market downturn.
We're also welcoming Anne Gunn, our new client relationship manager. We're very happy to have Anne on board, and I think over time you'll find her a welcome addition to the team. Lastly, the response to our initial online seminar was positive, so we've put together another seminar on investments, and details are in the last article below.
As always, any feedback is welcome, and please forward this newsletter to anyone for whom you feel it would be helpful.
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Micah Porter, CFA
A Question of Market Timing
by Micah Porter, CFA

One of the issues that arises more frequently during market downturns is market timing. More specifically, investors ask themselves (or their advisors) if it might make sense to try to time the market. The overwhelming sentiment among professional investors is no, it doesn't make sense, but why? And what are the defense mechanisms we at Minerva use to lessen the impact of a downturn on client portfolios? We'll take a look at each of these issues below.

Why not time the market?

When I talk about market timing with clients, what I mean is trying to time the market to maximize return. In order to achieve the greatest success with this strategy, it's necessary to sell your holdings at the peak of the market and buy them back again at the market trough. The idea is simple enough, but the overwhelming majority of professional investors don't think it's much of a strategy. Consider the following:


"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." - Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter


"Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed's policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can't predict the markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack...." - Peter Lynch, One Up on Wall Street


So what makes market timing so difficult? Buffett and Lynch argue pretty clearly that it's impossible to forecast short-term movements in the market. However, in this time of 24/7 media coverage, it's easy to become convinced of the "obviousness" that the market is overvalued or undervalued or maybe somewhere in between. And your gut instinct may be correct - but for a market timing strategy to work, you've got to be right twice - you've got to know when to buy AND sell.


Moreover, if your timing is the slightest bit off in terms of when you buy or sell it will cost you. For many retail investors who typically sell after the market has dropped, or buy after a down market has turned, by definition they will miss market peaks and troughs. What's the impact of this? Consider the following:


  • Had you put $1,000 in the S&P 500 at the end of 1981, your stake would have grown to $25,584 (including reinvested dividends) by the end of 1998. But if you had missed the 30 best days (defined as the days with the highest percentage gain) of those 4,400 trading days, you would have ended up with $4,549, 82% less. (Source: Dow 100,000: Fact or Fiction.)
  • Had you invested $1,000 in May 1970 and held for 14 years, you would have $3,000. But if you had missed the five best days, you would only have $2,000. (Source: Against the Gods: The Remarkable Story of Risk.)


When you couple the need to guess the direction of the market consistently - no mean feat in and of itself - with the need for pinpoint accuracy in timing, it's pretty clear why market timing is eschewed by most professional investors. Are there some that have been successful at timing the market? There are, but my strong sense is that there are many more professional investors who have succeeded with strategies based on value investing with a buy-and-hold approach.


Note: In giving credit where credit is due, I'd point out that the above quotes and examples are from a column written for The Motley Fool by Whitney Tilson on December 27, 1999.

If I Don't Time the Market, How am I Protected?

Diversification is the first line of defense in all portfolios. A mixture of stocks, bonds and cash has historically held value better than a portfolio of stocks alone in market downturns. Equally important, however, is ensuring the allocation is correct as well. Your portfolio allocation is based on a number of factors, most notably your

Impact of Allocation on Returns

risk tolerance and your return needs. The table to the right demonstrates the impact of allocation.


As we move from top to bottom, we move from our aggressive portfolio (80% in stocks) to our most conservative portfolio (20% in stocks) with allocation to fixed income and money market moving in reverse order. The impact of allocation is clear - the less allocated to stocks, the lower the average return for the past 34 years, but the lower the worst one year loss as well. The recent volatility we've seen has been far below the historical "worst" performance, so if you've found yourself extremely uncomfortable with your portfolio volatility, we might want to reconsider your target allocation.


Beyond allocation, we look to our active fund managers to outperform during downturns. Most of the actively managed funds we've selected have a value orientation, which means that they will tend to look for bargains. A disciplined value manager will hold onto cash until he or she can find a bargain. Mason Hawkins, manager for Longleaf Partners, did just that in 2005. He had trouble finding values in the market at the time, and at one point nearly a third of the fund was in cash.


Bargains are typically hardest to find when markets are overvalued, and market "corrections" occur in response to overvalued markets. Thus, a disciplined value manager is more likely to have a cash stake before corrections to overvalued markets occur. Even if the fund manager is fully invested when a correction occurs, value-oriented investments tend to fall less in value during corrections than growth-based investments.


So how did Mason Hawkins at Longleaf do? 2005 was a tough year for him, as the market was rising but he wasn't fully invested for much of the year. However, his search for bargains paid off, and for 2006, he beat the market by 5.8% and landed in the second percentile for funds in Longleaf's category. Year-to-date 2007, he's bested the index by 2.5% and is in the sixteenth percentile for his category.


In next month's newsletter, I'll examine the question "What if this downturn is different - what if it's much worse?" by analyzing how diversified portfolios would have fared during the worst downturn in living memory - The Great Depression.
A New Team Member
by Micah Porter, CFA

Over the last several weeks, you may have heard me mention Anne Gunn, our newest team member here at Minerva. Anne is Minerva's Client Relationship Manager, and in that role she supports Sandy, Renee, and myself in handling many of the day-to-day tasks critical to the smooth operation of the firm. Her background is well suited to the position, as she has experience in accounting and finance and a degree in Astrophysics with a minor in mathematics from Agnes Scott.


Anne is a lifelong Atlanta resident, and might look familiar to those of you that have attended the DeKalb Symphony, where she plays violin. Her in-office schedule at Minerva is 9:00 am to 1;00 pm Monday, Wednesday and Friday and all day on Thursday.


Many of you should expect to hear from Anne within the week, as she will be sending e-mails confirming beneficiary designations on retirement accounts. The addition of Anne to the team allows us to continue to provide a high level of service to you, and we're excited to have her on board.

Upcoming Web Seminar

As part of our ongoing web seminar series, we will offer a web seminar on Thursday, September 27th at 7:00 pm on investments. As with our initial planning seminar, this will focus on investment basics including the importance of diversification, why market timing should be avoided, and the power of compounding over long periods of time. This is geared towards those in the early stages of planning, but all are welcome to attend. To sign up, just follow this link.