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First Quarter 2011 Quarterly Newsletter

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They Put The Goo In “Market Guru”

If you are getting the impression that we are not too impressed with market prognosticators, you would be correct. We continually remind you of this fact because of our belief that market forecasters inflict meaningful damage to investors’ performance results. For example, as was pointed out in a blog entry* on The New York Times website earlier this year, three different “famous” market gurus have come out with three really, really different forecasts.
* NYT.com – 1/12/11 Bucks blog: The Danger of Stock Market Forecasts by Carl Richards

Robert Prechter, a devotee of the Elliot Wave Theory, made some very accurate calls two or three decades ago. In July 2010, when the Dow Jones Industrial Average was 9,600, he predicted that over the next 5 or 6 years the Dow would plunge below 1000. Nine months later the Dow is over 12,300, which is a lot closer to its all time high than it is 1,000.

Robert Shiller of Yale has put his S&P 500 Index price target for the year 2020 at 1,430, which from the date of his estimate means an average return between now and then at about 1.5% per year. That’s pretty much a “dead in the water” return for the next 9 years.

And then there is money manager Laszlo Birinyi, a frequent CNBC Squawk Box contributor. He believes that the S&P 500 Index can hit 2,854 by September 4, 2013 (he’s a very precise guy). That means, from its current price, the S&P will more than double in the next 30 months.

So there you have it: three respectable forecasters who have some evidence of successful past market calls. Yet one thinks the market will be falling into a black hole, one thinks it will be flat-lining for almost a decade, and the last thinks it will rocket to the moon almost immediately. So, what’s an investor to do? We recommend that you forget that you ever heard about any of these guys. Please! The most dangerous thing about believing in this market guru stuff is that at least once, and sometimes more than once, a forecaster can indeed predict a market move before it happens. And for some reason, investors believe that same person will be able to consistently guess market direction, over and over again.

If you happen to be lucky enough to flip a coin and get heads 5 times in a row, should you make a sizeable bet (investment) that you’ll be able to do it again? Of course not! But how many investors will subscribe to market signal letters or hotlines or email blasts that will give you market timing signals? The answer is: a bunch.

There are some financial behaviorists who believe that the gurus are not really the ones with the power nor should they take the blame. They believe that investors who follow forecasters are simply finding someone who agrees with their stated (or subconscious) market views, or fears. For instance, if you are a pessimistic market bear, chances are you will be closely listening to, and following, recommendations from (you guessed it) a pessimistic bear guru. And vice versa.

This seems to be what is happening now with well known market forecaster Nouriel Roubini, who was one of the very few persons to correctly predict the 2008 market plunge. It appears that “Dr. Doom,” as he is known in the business, now believes the market is not that bad a place to be, as he stated in a recent article: “There is a global economic recovery. There are a number of positives.” *InvestmentNews 3/7/11 “Economy’s Dr. Doom looks to bright side”

So what’s the problem with this? Well, now it appears that his followers don’t seem to like Roubini’s new found optimism. They were used to his negative comments, and now that he is brightening, they aren’t sure they can agree with him any longer. Even his internet popularity is on the downturn, as evidenced by his number of Google searches being down 75% since last spring.

The moral of this story is to forget market forecasters. If they have been lucky enough to make some eye opening market calls in the past, the laws of probability point to some unlucky ones on the horizon. Instead, focus intently on the aspects of investing that you can control:

Time Horizon – By using a long-term time horizon, you can allow growth assets to use their higher volatility to work in your favor, as long as you abide by the next item.
Control Risk – That includes risk that is diversifiable, as in owning broad asset classes instead of individual stocks, and risk that can be reduced by owning less growth investments and more fixed income.
Rebalancing – The only way that an investor can truly guarantee that he will always buy low and sell high.
Costs – The best way to do that is by using low cost, passively managed institutional funds.
Taxes – Avoid some of them by using tax managed and passively managed funds.
Wait a minute! That’s what all of our clients are doing! And all of the success they have
experienced has occurred without, or maybe specifically because, no stock market forecasting was used in managing their portfolios.

We’ve Changed Our Name, But Not Our Personality

On April 1, 2011, our parent - Dixon Hughes PLLC merged with Goodman and Company LLP, which was the largest CPA firm headquartered in Virginia. The new firm is named Dixon Hughes Goodman LLP. Now the 13th largest CPA firm in the US, our company will be bigger and stronger, with even more expertise as they increase their super-regional supremacy in the South. As you can see from our new letterhead, we too have changed our name to keep up with the brand. But our ownership, advisors, locations, investment methodology and our client relationships remain the same.

Here We Grow Again

We are happy to announce that two new advisors have joined our family. Ellen Lindh will head up our High Point, NC office. She has been in the financial services industry for nearly 30 years, the last 15 of which have been in a major money center bank’s Wealth Management division. Ellen was born in Pennsylvania, raised in Bethesda, MD and received her degree in Economics from the University of Maryland. Ellen has two daughters – Sarah recently graduated and Jennifer who is still in college. She lives in High Point where she is extremely well known to the business community.

Billy Bridgeman is the advisor in our Spartanburg, SC office. After successfully owning and selling a regional textile company, he worked with a major securities firm before joining us. Billy graduated with a Chemistry degree (first among our staff) at East Tennessee State University. He holds the Chartered Retirement Planning (CRPC) designation, and has an excellent background in financial planning. Billy’s family consists of wife Debby, daughter Paige and son Adam. He is an accomplished guitarist, which will undoubtedly be the focal point of future firm retreats.

First Quarter 2011 Asset Class Returns

We enjoyed another generous quarter for most equity asset classes. It was the seventh quarter out of the last eight that has experienced positive equity returns. This quarter marked the second anniversary of the bear market bottom on 3/9/09. The ensuing move upward has been the largest percentage move over the first two years of any bull market since the 1930s, and a suitable bounce from the deepest bear market in our lifetimes.

Domestic equity asset classes outperformed International ones in all categories. Emerging Markets, which have been the leaders for most of this bull market, took a breather and brought up the rear, along with the expected weakness from tsunami/radioactivity plagued Japan. Bonds stood still, seemingly trying to decide if rates are starting their expected climb, or not. Interestingly, other than the laggard Large Cap Core (S&P 500), asset class returns didn’t favor large or small, value or growth. This is one more example of why a diversified portfolio is an absolute must during all stages of a market cycle. The outperformance of an asset class’s size or style can be robust, followed by a time of hiding in the shadows, only to emerge again with no apparent reason.

With the powerful upward move over the last 2 years, it would only seem reasonable for the market to take a breather and consolidate or even have a sharp downturn. That type of move would be very typical during a bull market, so be prepared. Of course, the same thing could have been said for the last few quarters, but apparently the markets aren’t reading this report. This bull market has already had 6 different pullbacks of 5% or more, with the average being 8% and the deepest being a 16% drop that ended in early July 2010. Major bull markets always climb a wall of worry, so sit back, have patience and discipline, and allow Modern Portfolio Theory to continue to provide long term investors with the best chance at superior returns.


Frederick F. Kramer IV, JD
Chief Investment Officer