67 WALL STREET, New York - January 13, 2012 - The Wall Street Transcript has just published its SRI Investing and Other Investing Strategies Report offering a timely review of market trends to serious investors and industry executives. This SRI Investing and Other Investing Strategies Report contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Impact Investing Strategy - Limiting Market Risk - Quantitative Investing - Volatile Market
Companies include: Amazon (AMZN); Berkshire Hathaway (BRK-A); Ford (F); General Electric (GE); General Motors (GM); Google (GOOG).
In the following brief excerpt from the SRI Investing and Other Investing Strategies Report, interviewees discuss their portfolio focus, investment strategy, and outlook on the current market climate.
Geoffrey Gerber, Founder, President and Chief Investment Officer at TWIN Capital Management, Inc., is responsible for overseeing the management of the firm and the entire investment process. Recognized as a specialist in institutional quantitative investment management, he has been quoted in the financial press and his opinions are often sought by his peers in the industry. Dr. Gerber is also a Faculty Member for the Aresty Institute's Wharton Executive Education Program on Pension Funds and Investment Management. He serves as Chairman of the Pittsburgh UJF Foundation investment committee, Chairman of the Burroughs Wellcome Foundation investment committee and Member of the Burroughs Wellcome board of directors. He has a Ph.D. in economics and finance from the University of Pennsylvania and a B.S. in economics from the University of Buffalo.
TWST: What sectors do you like right now and why?
Dr. Gerber: For the past year, we've really liked consumer staples and utilities due to their ability to provide growing dividend payments and greater price stability. Although we tend to overweight these less risky, higher income producing sectors, TWIN still diversifies by investing in all sectors.
TWST: Looking at the macroeconomy for a moment, what do you see as the most important factors driving your investment ideas over the next year or so?
Dr. Gerber: In TWIN's 2011 mid-year report, sent to our clients in mid-July, we discussed how low risk was in the first half of the year and how stock market returns were very positive. We were concerned that volatility, particularly stock dispersion, would increase in the latter half of 2011. In the first half of 2011, the VIX was at a high while the S&P 500 was at its year-to-date low. In the report we stated "if this pattern continues and volatility spikes in the latter half of 2011, we would expect a more negative market environment." Unfortunately for investors, our call was quite accurate. We predicted heightened volatility and a negative market environment in the latter half of 2011 and that's certainly what we got. Going into 2012, we're still concerned about spikes in volatility. We continue to maintain low levels of active risk in our portfolios and to focus on companies that have consistently grown their dividend payments over time and have the ability to pay their current rates. I wish I could be more optimistic about less volatile markets in the short term. I think the market will perform better in 2012 than it did in 2011. Certainly, companies in the U.S. are doing better, and investors seem to be a little bit less concerned today about what's going on in Europe than they were a few months ago. However, that still doesn't preclude something from happening in early 2012 that could cause market volatility to stay high.
TWST: What is the best advice you would give investors right now and what do you believe is the biggest mistake investors make?
Dr. Gerber: My best advice is to stay diversified and to keep a lower risk profile. The biggest mistakes investors tend to make is either to chase past performance or to take too much risk at the wrong time. Many investors don't appreciate how increased volatility will reduce their compounded - geometric - returns or ending wealth levels. Just to give you an example, if an investment loses 20%, you need a 25% return going forward to bring you back to square one. Unfortunately, the S&P 500 was down much more than 20% during the past two bear markets, the first from 2000 to 2002, the second and more recent from October 9, 2007, through March 9, 2009. In both cases the S&P 500 declined 55%. In order to make back a 55% decline, the S&P 500 needs to increase by 122%. It certainly did that from 2003 through the third quarter of 2007, offsetting the losses from the earlier bear market. The S&P 500 came close to making back the losses incurred in the more recent bear market at the market peak at the end of April 2011, but didn't get all the way back and still hasn't. My other advice for investors is to recognize that it's very difficult and can be very costly to make changes to an investment program during highly volatile times. TWIN has tracked the daily price-only return to the New York Stock Exchange since January 1966. Since then, there have been about 11,500 trading days. By highlighting just the 20 best days or the biggest updays for the New York Stock Exchange and 20 worst days or the most negative return days, we found that 28 of those 40 extreme days had occurred since Lehman went under in September 2008.
Four of them occurred in August 2011. So in the last three years, the market produced the most volatile days that we have seen in 45 years. If an investor tries to implement any change during one of these volatile days, they could end up on the wrong side and lose significantly. Also and I have told this to clients too, it's very possible that the last half-hour or even the last 10 minutes of a trading day can determine whether the market's up or down for the year. The entire year's return can be made in one day. When the market moves up 8% in one day, that's equivalent to the expected market return for a full year. It's important to recognize that these days are bunched, meaning good and bad extreme days tend to surround each other. Look at August 2011 again as an example. This month had two of the best days and two of the worst days. In other words, you can't try to time the market during volatility swings. You can't say "Oh, this is a worst day, I'm going to get out" because one of the market's best days will likely follow shortly - but it could be two days later or five days later. Accurately predicting the timing of best and worst days is really, really difficult. So I'd advise investors to be aware of this phenomenon when trying to make changes to their investment program; it's a better bet to make big changes with tranches instead of in one fell swoop.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with Money Managers. This SRI Investing and Other Investing Strategies Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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