2008 Review
    To have said 2008 was going to be a challenging year for investors would have been a drastic understatement.  2008 started out where if you put your money in savings or CD, your returns would have been lower than the rate of inflation.  At the same time, putting money elsewhere has proved to be horrendous for investors with massive volatility in nearly every asset class making an investment objective of “conservative” nearly nonexistent.  From stocks, both domestic and international, to real estate and commodities, nearly all have suffered huge losses in 2008 with the exception of few. 

    Fear and uncertainty have brought plenty of crashes and rallies; some record breaking in percent terms this past year.  It has been a game of constant decision making with thoughts and questions that included “to late to sell now” to “better sell now and cut losses” to “what are the opportunities now?”  In the end, 2008 has proved to be just too unpredictable to have made more correct decisions than wrong and our investment returns have been subpar for 2008 regrettably so. 

    It is estimated that approximately $30 Trillion in global stock market wealth has been lost in falling share prices in 2008.*  The total Value of Stocks around the world sits now around the low $30 trillion range after reaching as high as $63 trillion in October of 2007.  Literally half of the stock market wealth in the world has been cut in half. 

*Source: http://209.157.64.200/focus/f-news/2153952/posts

    The consequences of such a calamity of wealth destruction in the year 2008 is having great consequences in the overall economy for 2009 and beyond as which I will discuss in my 2009 outlook.
What happened? 

I went into 2008 with an investment ideology that:

1.  Real estate and real estate companies, financial companies and retail companies, in the US in particular, would continue to have problems and whose shares I would most certainly avoid.

2.  I believed that the actions of the Federal Reserve Bank, lowing interest rates and encouraging a “borrow and spend” domestic economic policy, would  cause for the US $ to continue to weaken, thus making other foreign currencies and commodities more expensive to buy in US $.

3.  I believed a strong global economy, driven by the BRIC countries; “Brazil, Russia, India and China” would continue to drive demand for basic commodities such as oil and base metals like Copper, Zinc, Steel etc. 

    I wanted to avoid US stocks or be very selective with them and be invested in companies that would benefit from a weaker US $ and high commodity prices to best help us preserve and grow our capital.  

Despite periods of heavy volatility in the first half of 2008, this strategy was working ok.  The fundamentals of the thought process were working very well.  The global economy looked to continue to be booming with oil demand high enough to send oil prices to as high as $147 a barrel.    Financials and real estate continued to collapse, but we still managed to find some degree of safety in commodity and international related stocks. 

As the Fed and Treasury began to show a policy of being willing to borrow tax payers money to make bailout deals, (i.e. Bear Sterns $29 billion in March) the US dollar continued to weaken as seemed rational.  Despite the $ already being down as much as it was, it still seemed rational to avoid dollars to best preserve purchasing power.  i.e. be in precious metals and international stocks or other foreign currencies and out of US cash.

    The strategy unfortunately took a turn for the worse beginning in the month of July.  At this point, the US $ began to strengthen and commodity prices began to plunge.  Commodity related stocks and international stocks also plunged. 

    What had appeared to be the worst of this crash in September turned out to be only a brief and short lived rally.  Despite massive efforts from our Government via bailout plans to save banks and help the economy, those efforts proved far too week and we experienced during the months of October and November volatility and panic we have not seen since the early 1930's. 

Here is a chart of the Dollar Index which measures the strength or weakness of the US $ Vs a basket of other foreign currencies.
Here is a chart of the S & P 500 Index for the past 12 months:
    Reasons for why the US $ strengthened and the stock markets crashed were most likely due to a tremendous flight to safety.  Investors sold stocks and bought Treasury bonds.  The demand for bonds sent yields down to rates well below the going rate of inflation giving investors negative real rates of return, but it better than the heavy losses taken holding stocks or real estate.

Click this link to see chart of yield on 10 Year US Treasury Bond.
    With all this going on, your advisor, yours truly, was trying very hard to remain rational and avoid mistakes.  Albeit, easier said than done in a market place that was never rational to begin with.

    Conventional investment wisdom, quoted by history’s greatest investment minds say to buy stocks when fear is highest. 

Nathan Rothschild is said to have coined this phrase, “Buy when there is blood in the streets and sell to the sound of trumpets.”

Warren Buffet puts it like this, “The secret to getting rich on Wall Street is to be greedy when others are fearful and fearful when others are greedy.”

    How can we measure fear and are these times for taking “conventional wisdom?”

    The simplest tool used to measure fear in stock markets is what’s called the VIX or volatility index.  It measures how much investors are willing to pay for insurance on the S & P 500 stock index if it were to fall.  The more an investor is willing to pay for insurance on his investments, the more fear he must have.

    Here is a chart of the VIX during the past year.  Time will tell if this recent 4th quarter panic will have proved to be the buying opportunity of our life or not. 
    Will the 4th quarter of 2008 be the time to have been greedy as per convention wisdom?  Warren Buffett actually wrote an Op-Ed piece in the NY Times on October 17th you may have read where he said he was not only buying shares of stocks in US large cap companies but would continue to do so if prices continued to fall during this panic and fear episode.  He wrote: “Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.” (Bold emphasis mine)

It’s hard to disagree with the man who became the richest man in the world by investing in stocks yet would be foolish to follow any one blindly. 
By Jason Tillberg  Jan 11, 2009
Disclosure:   This newsletter is not a means to solicit any of the securities mentioned nor does it recommend it for any person before they speak with a licensed professional investment advisor for their own suitability.  Investing in Equities bears risk of capital loss.  This newsletter is strictly the opinion of Jason Tillberg, President and founder of Tillberg Capital Management, Inc. and shall not be held responsible for investment loss from this newsletter.