I first entered the business at the height of the dot-com boom. Admittedly, I came into the business with a competitive advantage as I had just left a failed tech startup that I was involved with during my college career and knew that most publicly traded tech companies were garbage. Our startup idea was simple but revolutionary at the time. MetroZip.com was a website designed to provide restaurants, hotels and other entertainment venues with a destination to advertise their businesses. Most establishments at that time did not have a website and we thought it would be a great idea to house them in one location, making it super easy for the end user. Our vision board had such ideas as allowing users the ability to leave reviews, book reservations and possibly even order food to be delivered to their home. Needless to say, we were a few years early in our ideas and I learned my first lesson in just how important timing is.

While I brought countless lessons into my finance career from this failed venture, one nuance I remember vividly was how we booked revenue. You see, if we sold a restaurant on an ad package for $100 per month, we would book $1,200 in revenue despite only receiving the first month’s check. This was common practice among startups at this time and this pro-forma type accounting was how so many looked to be growing so quickly. What I never understood, however, was just how the accounting would change if businesses cancelled their services at any time before fulfilling their contract. Well, we quickly learned how that played out as the economy finally stumbled, stocks took a beating and one by one, tech darlings of the time went up in smoke.

I remember starting in my career and relaying to people my thoughts on just how worthless I thought their portfolio was as they were loaded in tech names that are no longer here today. Not only did I survive the dot-com crash, but it laid the foundation for my tenure going forward.

2008/2009 was a different case altogether but mandated a similar disciplined approach to risk management. As we neared the end of 2007, a disconnect transpired within the market where financial stocks began to significantly underperform the broad averages.
This concerned me a great deal as history told me that without strong financial stocks, it was only a matter of time before the rest of the market followed. I took these cues seriously and near the end of 2007 began selling, thus underperforming the broad averages that year by a substantial amount. I even recall losing a few clients due to this.

When 2008 began, as you will remember, all heck broke lose as the general market began to succumb to the financial pressures of the banking issues and mortgage crisis. It was a horrendous year, with the S&P falling over 30%. I’m glad to say we effectively sidestepped this decline and thus solidified our presence in the investment management world.

Since the bottom in 2009, a new phenomenon has taken place which I’d like to call the ‘dart board investment strategy.’ Basically, if you threw a dart over the last few years, hit a stock, bought that stock, odds are you’ve made money. In fact, over the last 10+ years the markets have become so correlated that the by far the best investment strategy has simply been to buy an index fund and go to the beach.

Unfortunately, too much of a good thing can easily become a bad thing and it is my belief that is precisely what we see happening now.

Over the years, passive index funds, which have raked in literally trillions of dollars in investment money, have focused on only a handful of stocks. Take the S&P 500 for instance, which is a market cap weighted index. The bigger the company, the more money is allocated to that company. As more money pours into the index, more money is allocated to these larger companies, thus…you guessed it…they become larger and the cycle repeats.

But what happens if those companies, the largest of the group, begin to struggle? What happens if the companies driving the entire boat begin to see their businesses slow or, for whatever reason, maybe the environment, higher interest rates, doesn’t favor their particular investment theme? Well, if that were to happen, my guess is that these indices would also struggle and maybe, just maybe, give rise to having to work at investment management rather than throwing a dart.

From my vantage point, for the first time in well over a decade, I believe very strongly we’re entering an environment where a tactical management overlay is going to be of critical importance when it comes to investment management.

Take Gold for instance. As I write this, Gold is up over 2% on the year with the S&P 500 down over 6%. That’s an 8% difference! How about Emerging Markets, now an overweight for us. I’m happy to report that the Schwab Emerging Market Index is now up over 3% for the year, more than a 9% difference versus the S&P.

So why am I saying this? Because it’s easy to look at the general market right now and make big broad assumptions over what may or may not transpire. There seem to be two very loud camps with one camp predicting the end of the world while the other espousing the same old ‘buy and hold’ thesis. What if, in reality, what ends up happening is other investment areas end up doing quite well while others struggle? Rather than being able to throw a dart and achieve a return, one may actually have to dig in and do some homework to determine the appropriate asset allocation and investment vehicles. This is an environment I love and was made for!

At this moment there are areas of the market I like and there are areas of the market I do not like. We’re taking action to sell down areas that are underperforming and looking to buy the areas that we feel are poised for outperformance. I truly believe we’re in an environment where strategic diversification will prevail and I’m excited to be the one making those decisions.

In the coming months, my read is that the markets will remain choppy as money begins to move away from broad averages and into more sector specific themes. Volatility will give rise to these opportunities and we have cash at the ready to deploy. I do not believe we’re entering a broad-based bear market but, as mentioned, an environment that will mandate applying our hard work and most importantly experience.

In other news, I have appreciated the comments, positive thoughts and questions regarding our partnership with Bluespring. We anticipate being able to send out a formal announcement in early March, which will require your approval for us to keep acting as your advisor. With the opportunities on the horizon, we’ll want to nail this down quickly with no gaps in service. Should you have any questions, please feel free to reach out and I’ll be happy to chat with you directly.