Monday, March 10, 2008

What a difference six months makes

For a period of about four years from late 2003 through to the peak of the equity markets in October 2007 (give or take a bit depending on which market you are talking about) it seemed that every investment decision I made was a good one. The only bad (i.e. loss making) investment I made during that time was a Vietnam equity fund. In the six months since the equity markets peaked, the reverse has been true. Most of the investment decisions I have made have been poor ones, either losing money (at least in the short term, and fortunately not much) or taking money off the table in a rising commodity market. Some of my earlier investments which had made me money in the bull market have turned out to be not as good as I had once believed (actively managed funds which I have hesitated to sell due to high entry/exit costs).

It's been something of a wake up call in a number of respects:

(i) markets can move against you quicker than you think;

(ii) high entry/exit cost investments are much less likely to be sold than investments with low entry/exit costs;

(iii) the value of diversification and cash flow has been proven;

(iv) the previous four years of excellent returns were as much due to good luck as good management. In other words, I may have been guilty of overrating my investment management skills.

In spite of the zero cash strategy (driven by inflation concerns) having served me exceptionally well during the bull market, I have begun to doubt at least the short term wisdom of that strategy in the face of falling equity markets.

In a sense, I have been fortunate that the decline in value of my equity portfolio has been partially offset by favourable currency movements, positive cash flow from properties and rising commodity prices. In effect, the lessons of the last six months have been learned with relatively little pain.

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