Observations

The last issue of the year. One more year under the belt. Trying to understand what is happening. Looking at the data over and over again, attempting to recognize trends, opportunities, and risks.

After a while, it should become quite boring. Unless you are fascinated by the logic with which events intertwine. Cause and effect relationships. Some old. Some new. Staying ahead of the crowd.

The big lesson I learned is that the investment process requires several outlooks for the economy and the financial markets. Each outlook is given a probability that it will become reality.

As new data become available, these scenarios are updated and new probabilities are assigned. The job of the portfolio manager is to select investments (asset classes, stock sectors, and stocks within those sectors) to take advantage of the most likely outlook.

At the beginning of the year I was mostly in commodity based stocks because of low real short-term interest rates. As the economy continued to downshift in the first half I became more cautious about hard assets. The surprising strength in business activity after the hurricanes surprised me. I was looking for continued weakness. I responded by keeping a substantial allocation to hard assets and commodity based stocks.

I continued to diversify, as it was clear that the market was heading higher and redeployed the cash I raised as the market corrected in August-September.

It is essential, in my view, to respond quickly when new trends emerge and adjust the portfolio accordingly. By following this approach, our typical equity account (up 8-9% year-to-date) keeps outperforming the market.

(This Observations appeared in the 12-29-2005 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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