investing in uncertain markets

Don LansingAAII Baton Rouge Chapter MeetingOctober 6, 2012INVESTING IN UNCERTAIN MARKETS

DON LANSING ([email protected])

DON LANSING ([email protected])*


DON LANSING ([email protected])*At the highest level, we value assets with this formula:

Cash Flow / Risk = Asset Value


WHAT DRIVES MARKET PRICES?DON LANSING ([email protected])*Fundamentals Economic Cycle; Corporate Earnings (S&P 500 at $100/share in earnings)

Investor Sentiment Enthusiasm drives P/E ratios for stocks; Yield spreads for bonds

Liquidity Availability of capital; money flow; Fed policy can influence this (HAS influenced this!)



Corporate Earnings x PE Ratio = Market Prices


MARKET CYCLESDON LANSING ([email protected])*Most stocks follow the market

Markets move in broad cycles driven by a combination of fundamentals and sentimentSECULAR cycles last 15-20 years, typically Sub-cycles last 2-3 years, typicallySecular cycles peak when investor sentiment (good or bad) reaches a fever pitch pushing prices well beyond norms.

Sub-cycles change more on events/fundamentals e.g. perceived economic expansion/recession


SECULAR MARKET CYCLESDON LANSING ([email protected])*Secular bull cycle i.e. 1982-2000 for stocksInvestment rarely loses moneyPricing reaches very high levelsP/E ratios for stocks are a good general barometerSecular bear cycle i.e. 2000-today for stocksInvestment struggles to deliver real returnP/E ratios gradually slope downward to under 10


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MARKET CYCLESDON LANSING ([email protected])*Global finance and economics becoming increasingly intertwinedIncreased systematic riskDomestic cycle influenced by global cycle, but still distinctEurope in recessionChina Slowdown falling commodity demand weakness in Brazil, Australia, Russia, other Em MktsThese areas are in a clear bear marketU.S. growth sluggish but best of neighborhood


THE IMPACT OF GLOBAL DEBTDON LANSING ([email protected])*Living in Reinhart/Rogoff World:Research by Reinhart/Rogoff widely sited for concerns about U.S. debtStudied financial situation of 44 countries over two centuriesFound that debt to GDP >90% was a tipping pointLed to reduction in growth of -1% for years on end (20+ years)Why? Limits governments ability to investResources going to pay down/support debtInterest rates spike as markets demand more compensation


THE IMPACT OF GLOBAL DEBTDON LANSING ([email protected])*Is the U.S. different?Yes for now. Almost unlimited ability to borrow, and very cheaply!Reserve currency and related Treasury bond market provide important buffer size of markets without peerDebt has been transferred from private to public lowers net interest expense in the systemDebt supporting investment is preferential to debt supporting consumption hello GreeceIt gives us the freedom to be irresponsible


U.S. BUDGET FISCAL CLIFFDON LANSING ([email protected])*Upcoming fiscal cliff discussions could create substantial market uncertainty increasing volatility and riskInvestment community believes:A deal will be struck to smooth out impact of tax/spend changesSometime between late 2012 and 1Q 2013Election has bearing on which areas are most targeted, but impact may be limitedAny related selloff in dividend stocks should be a good buying opportunity


DON LANSING ([email protected])*Corporate Earnings x PE Ratio = Market Prices

BULLS:PE Ratios are cheap, especially with interest rates so low. The worst has passed and the future is brighter than the past.

BEARS:The global economy is buried under the weight of debtDeleveraging (reducing the debt) cycle will keep earnings and investor sentiment downEurozone workouts and China slowdown are big known risks.U.S. budget issues and related debt are a big potential risk.


BUILDING AN INVESTMENT STRATEGYDON LANSING ([email protected])*ObjectivesLong-term (retirement) vs Short-term (project)

Personality ProfileKnowledge MaintenanceStomach (Ability to Handle Volatility)


DISCUSSION OF RISK*What is risk? A result that is different than expected investors focus on worse than expected. Volatility is the enemy of successful investing (though it also creates opportunities)Deviation is dangerous because it pushes emotional buttons in individual investors makes them anxious, induces fear, Deviation from account peak what we call drawdown is a key focusInvestors emotionally own an asset valueThus, the goal is to minimize drawdown and hold on to the bulk of gains offered


DON LANSING ([email protected])*2-3 Years Up; 1-2 years Down


DEALING WITH UNCERTAINTY:PERMANENT PORTFOLIOEstablished in 1982, in an era of stagnant economic growth and rampant inflation, Permanent Portfolio seeks to provide a sound structure and disciplined approach to asset allocation. The Fund was born in an environment where investors didn't know where to turn. Regardless of what an investor did, they were losing money. Harry Browne, one of the founders of the fund stated, "It's easy to think you know what the future holds, but the future invariably contradicts our expectations. Over and over again we are proven wrong when we bet too much on our expectations. Uncertainty is a fact of life." No one can accurately predict the future.



DEALING WITH UNCERTAINTY:PERMANENT PORTFOLIOSolution: Invest in 4 uncorrelated asset classesPrecious metals, cash, stocks, U.S. Treasury bondsFund (PRPFX) got off to a bad start, losing over -10% in its second yearHas since lost money 3 times in almost 30 yearsExpanded charter to include non-U.S. stocks and real estate



PERMANENT PORTFOLIO SLOW START, GOOD DECADEDON LANSING ([email protected])*


PERMANENT PORTFOLIO FLAT YEARDON LANSING ([email protected])*


DEALING WITH UNCERTAINTY:LOW VOLATILITY INVESTINGAnother reaction to secular bear market ending in 1982Study shows that buying and holding low-volatility stocks = market return with 2/3 the volatility.Calls into question fundamental tenet of investing researchOne is compensated more for taking more riskRecent: S&P creates a low-volatility index SPLV



DEALING WITH UNCERTAINTY:SETTING VOLATILITY TARGETSRather than focus on return, focus on measuring and adjusting portfolio based on market volatilitySet target volatility example 15%Divided Volatility Target by S&P VolatilityResult sets % allocated to equitiesAs market volatility increases, equity allocation decreasesEx: 15% / 20% = = 75% equity allocation



*DEALING WITH UNCERTAINTY SIMPLE TIMING


DEALING WITH UNCERTAINTY:PORTFOLIO CONSTRUCTION COMBINING IDEASCarry a low-volatility core portfolioCan be low-volatility stocks and/or bondsBonds can be adjusted for risk target e.g. HYAllow allocation to higher performance/volatility pieces when applicableWhen market trending up own higher-beta piecesMarket volatility increases cut high-beta positions



COMBINING LOW VOL + SIMPLE TIMINGDON LANSING ([email protected])*


DON LANSING ([email protected])*Avoid the bad times.Keep vol low.


DOWN/UPSHIFTING A PORTFOLIODON LANSING ([email protected])*We can also take half-steps in making our portfolio more tacticalReduce our risk by adding more yieldMove from stock index position toHigh yield stock ETF (DVY/SDY or HDV)Preferred stock ETF (PFF/PGX/PGF)Note: mostly financial companiesHybrid yield ETF (PCEF/INKM)High yield bonds (HYG/JNK, VWEHX)Corporate bonds (LQD)

Decreasing Risk


MANAGING INCOME PORTFOLIOSDON LANSING ([email protected])*Relative versus Absolute Risk

Importance of Duration+1% move in interest rates = -D% move in bond price

Managing spreads instead of ratesSpread = Difference between rate of bond & Treasury rateHigher the spread, the more compensation being demandedLower spreads = nearer to end of cycle


TO SUMMARIZEDON LANSING ([email protected])*Understanding where we are in broad market cycles helps frame our investment strategy.Investors have been given new tools to manage portfolios based on risk/volatility.Volatility likely to increase over next 12 months as U.S. fiscal cliff becomes focus Europe and China remain uncertain with difficult passages aheadBut we are building to a rich period for stock investors its just getting there thats painful! There are ways to substantially lessen volatility while still achieving solid returns.



Be LONG insanity and SHORT common sense

- @parhedge



THANK YOU BATON ROUGE!


*A year ago when I was here, the stock market had just finished a horrendous August with Septembers performance offering no respite. It appeared that the combination of Eurodebt troubles were combining with a slowdown in U.S. economic growth to bring about an end to the rally that began in March 2009. After a typical snapback rally in October, stocks resumed their slide in November of last year. Being a trend-follower, I, along with many other professional managers, were shorting the stock market. We were showing gains for November as the market fell. Then, as some intrabank markets were beginning to falter, global central banks stepped in with coordinated action for the first time really. They stopped the bottom from falling out, turned my winning month to a losing one as the S&P 500 gained +8% over two days. Had my daughters been younger and known what had gone on, Im sure they might have offered this comment... *Such is the nature of markets these days having to navigate a veritable quicksand of underlying forces. 2012 has, surprisingly, brought a rather normal year in retrospect. There has been a general positive trend, a typical -10% correction, and, were the year to end today, It would be viewed as a success with double-digit, above-average, returns. Despite the markets rather benign year, the myriad fears and concerns out in the world have kept mutual fund and hedge fund managers on the sidelines, leading them to underperform their benchmarks (such as the S&P 500) by the most since 1937. Through this presentation, we will wander through some of the concerns afflicting investors, how those concerns fit into a larger picture of the markets, and what steps we might take to stay in the game despite the waves crashing all around us.*This formula is how we talk about valuing assets. Youve got cash flows which come from dividends, expected capital appreciation, corporate earnings, all the money generation goodness in the numerator. We discount that goodness with risk. The market reflects risk everyday through interest rates, in broad strokes, pushing that number up or down as the individual riskiness of the asset dictates. The wonder of finance is that I will raise and lower that risk using different assumptions than you will. Its the intersection of all those varying assumptions and viewpoints that makes a market. This formula is very important these days because central banks are proactively trying to drive risk down in an effort to pump up asset values. In simple terms, that is all the central banks of the world are trying to do. If they can convince investors that market risk is reduced, money flows into riskier assets, investors make more money, take more chances, and stimulate more growth. *This is a slightly different way to think about markets than the prior formula. Markets are the intersection of these three inputs. We usually expect that fundamentals: corporate earnings, economic growth, etc. are the primary force behind the market. Thats true to a degree, but its limited. Liquidity is just the amount of money flowing into or available to stocks. This is where the monetary policy of the Federal Reserve plays a role, which has certainly been nominally trying to prop up stocks (and succeeding to lesser degrees each time). The real money gets made when investor sentiment turns upward and people get excited about stocks. Thats what we really want, and what the Fed has been trying to influence. Excitement causes P/E ratios to expand and the compounding effect of investors paying more per dollar of corporate earnings at the same time that earnings are growing pushes stocks sharply higher. *With corporate earnings at record levels, certainly the fundamental part of the equation is doing its part. The Fed has been supplying the liquidity piece in their effort to juice sentiment by reducing interest rates and perceived risk. These two things should be driving investor sentiment and stocks well higher. And by some measures, notably the VIX volatility measure, investors would seem to be rather content. However, as stocks have been rallying over the past 3.5 years, investors have been pulling money OUT of stocks and pouring that money INTO bonds, despite record low bond yields. Thus, investor sentiment is a far cry from where it could be. And thats the missing piece of the rally puzzle at this point and the piece that really kicks the market into a higher gear.. . *There are any number of reasons why investor sentiment remains in the dumps. Id argue that regardless of whats going on in the world today, this decline in sentiment is simply a normal course of events; a reaction to an overly enthusiastic bull market period that culminated in the internet and tech stock bubble of the late 1990s. Sentiment went too high then, and its likely to overshoot on the downside going forward. *When we look back over decades of stock market history, we find that this slack attitude toward stocks is nothing new. Investors go through these sort of regular cycles of bullishness and bearishness. .These long, secular cycles last for a good while 15-20 years, typically. During a bullish cycle, a buy and hold strategy wins the day as stocks rarely suffer any notable yearly loss though they certainly have bad days and months. However, during the bearish secular cycle, markets really swim upstream, struggling to hold on to gains.. *The defining characteristic of these secular cycles is investor sentiment. The fever pitch of the late 1990s marked the latter stage of the most recent secular bull market. We have been living since early 2000 through a secular bear market. Markets will have a few good years, followed by some heart-breaking declines. The net effect is rather little progress. The investor sentiment can be fairly easily seen in whats called a PE 10 ratio. The PE 10 ratio divides stock prices by a 10-year rolling average of earnings. This smooths out earnings over the regular economic cycle, leaving us with a clearer view of investor behavior/sentiment. This ratio has consistently found its way under 10 at the end of these long secular bear periods. Today, we sit at around 20, roughly half of the ratio at its all-time high in the late 1990s, and about twice where we need to get to in achieving a bottom that coincides with history. *The reason why understanding these secular market cycles is important is that the market acts so differently. in these two environments. During a secular bull market, we cannot go wrong sticking with stocks. 96% of the time we are having decent years with most of those winning years being solidly double-digit. Thus, buy and hold is a decent strategy through secular bull periods. In secular bear markets, however, markets gyrate a whole lot more, sometimes dealing us quite negative returns, other times, quite good returns. The watchword during these times is flexibility and paying attention. Recalling my experience from last November, I was short but had to quickly exit my short positions and shift to following the stock market upward. This despite the fact that Europe appeared to be on the verge of financial disaster and few things economically seemed to be going all that well, We cannot let our own bias or view of what could happen drive our investments. We must listen to the market In order to be successful. Because we can be certain the market will not heed our advice and is more than happy to leave us behind! *Here are a couple of pictures of the secular market cycles. The lines at the bottom show the PE 10 ratio and how it trends up or down to drive the expansion or contraction of stock prices. You can see that weve come down a good bit since the peak. Recent stock price action has pushed the ratio back upward, however. *This is Fidelitys view of same chart, simply showing the periods of flattish returns followed by extended periods of very good returns. Fidelity argues that we are quite near the end of this secular period, so they are trying to get people to hang in there for better times ahead. *Heres a more detailed look at their view. They are believing that weve seen most of the major swings and are in for an extended period of choppy markets as seen on the right side of this chart. This chart shows the average trajectory of bearish market cycles, looking at many countries over multiple decades. They are considering the 2008 market crash as the beginning of this downward sub-cycle. Note that they think we could have as much as 3-4 more years of choppy sideways markets with a nearly 40% trading range. Thats plenty wide to make and lose lots of money!*Another way to examine how far we have left to go in this secular bear market is to look at the average PE ratio contraction. This chart just shows the % change /decline in PE ratios as they contract through a bearish cycle. Compared to the average of past cycles, our current secular bear market is generally tracking the path downward. We are marching pretty close to the average here. However, Id point out that the starting point of the current secular bear market, in terms of PE ratio, was far higher than normal. Will that mean we fall further than average? The bottom line is that investor sentiment is a serious drag on stock values these days and that is unlikely to markedly improve anytime soon. *So we do not expect a big upward swing in PE ratios to take place during this bearish sentiment phase. Lets shift gears a little bit and take a look at some of the things causing all that investor angst right now. *At the highest level, we have a global debt problem that is unwinding. The effects of this elevated debt were captured most notably in a book by professors Reinhart and Rogoff. They looked at the experience of many countries over a long period of time. In general, they found that once the debt exceeds 90% of the nations GDP, economic growth really suffers underperforming by 1%, on average, for many years as government investment is diminished and bond investors become concerned. The western world is wrestling with this problem right now. The U.S. sits with in excess of 70% of GDP in debt, still somewhat away from the tipping point here, but uncomfortably close. A good chunk of Europe along with Japan are all beyond this 90% number, which limits their ability to expand in turn limiting global economic growth. With Europe largely acting as one, Germany must send money to Southern Europe to cope with the debt thus limiting one of the worlds top 3 economies in fact, Europes growth is under 1% right now as it battles all these issues and developed global economies are projected to grow at only 1% as a group. The good news, perhaps, is that everyone in Washington D.C. is aware of this study. They are seeing it play out in Southern Europe and are motivated to take action. Whether they will actually do so is the question.*While some people like to equate the U.S. with Greece or Argentina of the laste 1990s, there are enormous differences that lessen the immediate impacts when compared with those scenarios. The U.S , as the global standard currency, has unique advantages other countries do not. Lack of understanding these advantages leads to erroneous assumptions about the timing of negative events such as debt-induced higher interest rates, etc. Thus, global debt and the resulting deleveraging cycle are a serious hurdle to global economic growth, and one that should pervade for awhile to come. Still, the U.S. is a long way from a crisis brought on by this, if only because the alternatives/competitors are in even worse shape. *The corporate earnings piece of our fundamental input has been very good with the S&P 500 generating over $100 in per share earnings this year. Corporate earnings are at record highs. But growth is slowing as global economies face myriad headwinds. The margin gains driving early gains have all been used up leaving revenue gains as the only source of earnings growth. Thus, 2013 looks like a sluggish year for earnings gains and one in which the global economic sluggishness does come home to roost. . *Finally, when talking about fundamentals, we must consider the so-called fiscal cliff. The U.S. government generates about 20% of our GDP. Businesses are clearly holding off investment due to concerns about how this problem gets resolve. The fiscal cliff is a collection of tax increases and spending reductions that bring that roughly cut the budget deficit in half. The all-at-once approach incorporated in these actions are projected to have a seriously negative impact on our economy. The good news they dramatically fix the domestic budget troubles and have a material impact on our debt reduction. The bad news theres plenty of pain to accompany it. *Most finance folk expect that some sort of deal will be made that will smooth out the impact of the changes, resulting in something JP Morgan calls the fiscal ladder. The dark bars and line are the fiscal cliff scenario. The blue ones are the more expected fiscal ladder. *This slide from PIMCO provides detail of the fairly common assumption among investment folks that the election impact will be minimal on the overall magnitude of the budget actions.. *Regardless of what happens here, I would anticipate that markets will become more volatile as the end of the year approaches. The election will have some bearing, but unless there is some sort of sweep of Congress such as one party taking complete control, which looks unlikely I would expect that we will have some type of compromise. Some amount of tax rollbacks, some amount of spending reductions, all of them phased in so that the economic impact is smoothed out. One aspect that is important to note is that the expected impact of any change in dividend taxation should be minimal. * Stepping back from all of this we have no shortage of uncertainty. That is keeping our PE ratio/sentiment piece of the equation relatively low despite the Feds efforts to make stocks more attractive.. Going forward, the global economy continues to work through a series of big issues. One of the challenges we have as investors is deciphering how much of this is already priced into stocks. None of these issues is new or unknown to the broad investment public. *When we build an investment strategy we have a short list of questions to ask ourself. Its really important to understand yourself and be honest about what you can handle with investments. Use this to guide what strategy works best for you. If we can master the emotional part of investing, we have a much greater chance of success. For most people, the emotions are triggered by market and stock volatility. If we can reduce this volatility, we in turn reduce the likelihood of our having an emotional reaction that leads to a poor investment decision. Were going to survey in the next few slides some investment strategies built around reducing volatility. .*We talk about volatility as equaling risk because its that volatility that creates our mental view of gains and losses and drives us to actions and reactions. *Based on studies of individual investors, most of us can identify with not one, but both of these individuals. We buy high, after hearing news reports, friend testimonials, et al. telling us of great riches being made, riches that we are missing out on. It feels safe to invest during these times. We dive in headlong not realizing the bulk of the market gain has passed. The market inevitably rolls over, heads sharply downward, and starts to feel dangerous. We eventually get tired of seeing our balance falling month after month and throw in the towel just before or after the bottom. The market comes roaring back upward without us in it. If we can overcome these emotional reactions to the market, primarily through building a portfolio that minimizes the volatility, we have a better chance of succeeding. *So, imagine how those guys would fare in this sort of environment. This is the last secular bear period from the mid-1960s through 1981, A nightmare for investors. A market that wrings out their emotions with the volatility. And back then, almost no tools were available for individual investors to protect their portfolios, and youre running almost every trade through an expensive broker. Theres not much you can do. As a reaction to that, some folks tried to figure out different ways to invest.Harry Browne was one of those people. The secular bear market had clearly left scars on him as you can see from his quote in bold. So, he created the Permanent Portfolio an uncorrelated group of assets that will lessen the volatility and generate decent returns. *This is what Harry did. He got off to a bad start and his timing was poor also. For in 1982 a new secular BULL market got underway and all the volatility and lack of return Harry was trying to protect against went away. Markets got better. And his new fund was built for the bear market, not the bull. **Looking over the past 20 years, however, we see that despite falling way behind during the 1990s bull market, the Permanent Portfolio was immune to the 2000-2002 market crash and suffered relatively little in the 2008 financial crisis. Now, over this 20-year period, the fund has rewarded those who stuck with it. Its made good on its low-volatility design while delivering solid returns.*In the shorter-term, since the 2009 rally began, the fund has continued to do well, though its been flat for the past year. Also coming out of the 1960s and 70s secular bear market was a study showing that investing in lower volatility stocks actually rewarded investors far more than academic theory would suggest. Academic theory argues that investors should be compensated for taking on greater risk. If taking less risk still delivers equal returns, however, what does that mean? It means its a good investment! **The S&P Low Volatility Index underperforms during strong secular bull periods, and its not immune to the market forces that caused the 2008 financial crisis crash. Still, for stock investors, this index offers a smoother ride and will approach market performance much of the time. *The index is regularly rebalanced to the sectors that are exhibiting the least amount of volatility. Utilities routinely comprise about 20% of the index. However, we can see that financials became a heavy part of the index only to be whittled down as volatility in that sector increased. Currently, healthcare and consumer staples, along with utilities account for the bulk of the index allocation.Recent variations on this pursuit of low volatility have been to manage volatility and risk as the primary objective. Another approach to managing volatility which is a bit more sophisticated is to set a volatility target and let the allocation to equities float as volatility in the market rises and falls. If market volatility rises above a deviation of 15%, then you automatically reduce your equity exposure. You can measure this ratio daily-weekly or monthly as you like. And of course, theres an ETF for that this one offered by Direxion Funds. **Heres a pictorial view of how this might work, reducing your equity exposure as market volatility increases. *Finally, returning to our simple approach from last year. I spoke then of simple timing mechanisms to give your portfolio a tactical approach, minimizing your exposure to market downsides which allows you to build more wealth over time. This chart shows how that works going to cash when timing indicators, such as a simple moving average approach, tell you to exit the market. We can expand on this simple timing approach by combining some of the ideas weve covered. We can essentially buy and hold a low-volatility core portfolio using some of the possibilities weve covered here stocks and/or bonds. When the market is healthy, in an upswing, with low volatility, we press the pedal down a bit by adding some higher performance positions. As volatility increases and/or our timing indicators flash red, we reduce these higher performance positions. You see that this approach is ALL about reading the market. There really isnt any stock analysis required. Its a rather low-maintenance investment approach which can be accomplished by just following a few indicators e.g. market volatility, simple price movement, moving averages, etc. **Heres a more visual view of one of the ways we approach this. We have a low-volatility fund for investing in global bonds (PIGLX) along with a high-yield bond fund (VWEHX) as our core positions. You can see these positions generally march upward with the only real pause being the 2008 financial crisis. And we saw before that there were any number of indicators which could help us avoid most of that. We then manage the Emerging Market and Nasdaq 100 positions using our more short-term timing indicators. We have to be more diligent with these positions because they can drop so quickly and sharply inflicting serious damage on our portfolio; the type of damage we are doing everything to prevent! *Heres the performance of such a portfolio. You could also buy and hold more defensive market sectors such as healthcare and consumer staples, or a low-volatility ETF anything that has a volatility profile thats substantially less than the market. We focus on the Nasdaq 100 and emerging markets as our high-performance sectors. You can also incorporate energy and other more cyclical sectors really anything that has a good amount of performance to offer and which you can fairly easily time. And some metrics associated with this approach. We receive less of the return when the market is going up, which we expect, but endure far less drawdown when the market is falling. The net effect is far better returns with half the volatility and a fraction of the drawdowns. **More incremental ways to modify your portfolio during uncertain times is what we talked about last year downshifting in steps. There are any number of ways to do this. The list shown here is just one way to reduce risk incrementally. *Though weve spent much of today talking about stock market trends and investing, I wanted to say at least a few words about income investing. These days, the Fed has increasingly been trying to push investors to view stocks and similar higher risk investments e.g. MLPs, utilities, dividend stocks as a better place to put money than regular bonds. The Fed has made us actively consider the relative risk of being more aggressive . For example, by purchasing high-yield bonds instead of triple-AAA corporate bonds, by purchasing municipal bonds instead of U.S. Treasury bonds. They have tried to decrease the absolute risk of those investments by making money so cheap for corporations and municipalities that the risk of default goes way down. Weve seen that in the high yield bond area where defaults are almost non-existent, well below historical averages, because the interest payments are so much lower than typical and the market so hungry for refinancing their debt. But as rates start to tick upward, and they must at some point, managing duration becomes the key. Basically, duration is just a quick way to see what our price risk is with the bonds. If the duration is 10, then our bond/bond portfolio/fund will drop by -10% in price for every +1% increase in yield. Yields go from 3% to 4%, we lose -10% in price. If the duration is only 2, then we only lose -2% for that same move in yields. Its important to pay attention to that when buying bond ETFs, or whatever fixed income instrument youre buying. Also, you want to understand that spreads tell the tale of risk in the market. If the spreads are at historic lows, as they were in the summer of 2007, it means investors are underpricing risk relative to history. *Shifting back to the big picture of where the market is. Ill leave you with an optimistic slide from Fidelity. Here, Fidelity outlines some of the positive potential drivers of a higher stock market in the future. Both Fidelity and JP Morgan have been rather bullish this year in spite of all the noise and angst surrounding us. Its been a good call. *So, back to one of our tenets the key is to let the markets be your guide. Its perfectly fine to be a value investor and have a strategy where you buy stocks when everyone is fleeing. Thats just an approach that requires a bit more fortitude than most investors have. It requires going against the crowd, which human nature is not naturally inclined to do. The current market dynamics can be tough to figure out. As one hedge fund manager describes it:**

investing in uncertain markets

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