2600 Tenth Street, Suite 607 • Berkeley, CA 94710 • (510) 368-
December 30, 2011
The past year has been tough for all kinds of stocks, with record volatility and
major indices down or barely breaking even at year’s end. The S&P 500 was essentially
flat in 2011, while the Russell 2000 index, the most prominent small-
Rather than buy up categories that have moved up the most (or even those that have
declined the most), my goal is to create a diversified portfolio that takes advantage
of the stock market’s long-
These are simple lessons, but hard for most investors to implement. When stocks and the economy are rockiest, investors start trading furiously, thus the volatility this year. This isn’t surprising: when things aren’t working, people tend to switch things up. A baseball player in a slump will alter his swing. A failing political campaign fires its management team. And investors sell stocks when they fall. The problem is that whether a stock rises or falls in the short term (less than five years) is usually not closely related to its underlying value, or where that stock will be years in the future.
Many studies have shown that frequently changing course in one’s investing strategy does more harm than good (I’ve cited quite a few of them in past letters). It’s natural to get anxious when stocks are falling 1%, 2%, or 3% per day; of course, these are the times we should remind ourselves, just as Warren Buffett would, that the human inclination is to panic exactly when we should be profiting.
So, all that said, we can still look at where we are right now, and make some general statements about what I expect from the markets in 2012.
I expect that volatility will continue, because it looks likely that the European debt crisis will not resolve quickly. It has become clear that Germany would like to use market pressure to gain concessions from other nations on EU treaties. For this reason, I don’t expect Germany to endorse any of the measures that would quickly resolve the crisis. The European Central Bank (ECB) has begun to inject cash (about $650 billion so far) into the banking system via very cheap loans, so it does look like Europe is moving in the right direction, it just looks like a very slow process, with lots of probable bumps along the way. There is still the possibility, now more unlikely, that Europe will go into a credit freeze; I will continue to monitor this and I will create a hedge in your account should a freeze become likely.
My other expectation for the new year is that the U.S. economy will continue to improve. Economic data have been stronger than forecast for the second half of 2011, and it’s very likely that trend will continue. New jobless claims are trending down, getting into the territory needed to sustainably lower the jobless rate. Consumer confidence is approaching a post recession high. Retail and manufacturing are trending upwards. Sales of existing homes are at an 18 month high, offering signs of a tentative housing recovery. Oil has rebounded, but remains in a range that is unlikely to pressure inflation. Of course, as I noted above, the economy could change quickly and unpredictably, and I will continue to update you on conditions as we move forward.
As always, I’m available to answer any questions you might have.
Wishing you a happy and prosperous 2012.
Regards,
Aram Durphy
| December 30, 2011 |
| September 30, 2011 |
| June 30, 2011 |
| March 31, 2011 |
| December 31, 2010 |
| September 30, 2010 |
| June 30, 2011 |
| Compound Interest |