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Published by: Lyon Capital Management, LLC - A Registered Investment
Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
.... August 21, 1998 Osama Bin-Laden declares war on the U.S. after U.S.
missiles destroy targets in Sudan and Afghanistan.
....First Quarter, 2000 The Dow Jones Industrial Average, S&P 500, and NASDAQ hit
all time highs.
.... May 22, 2000 “U.S. government agencies, local emergency personnel and
disaster relief workers tested their abilities to respond to major terrorism attacks over
the weekend. Some 35 agencies, including the American Red Cross, participated in the
drill.” DisasterRelief.org
....October 5, 2000 “We believe that the development of … strategies to
assault our interests and those of our allies will cause us real problems despite
our military superiority. We believe that some new technologies, benign as they may
be...could have a dramatic leveling effect, allowing an increasing array of states, and
even small disaffected or fanatical groups, to inflict enormous damage on unsuspecting
civilian populations—including our own.” Former Senator Gary Hart speaking
before Congress
... October 12, 2000 The suicide attack on the U.S.S. Cole killed 17 sailors and
injured 39 others.
...March 3, 2001 The Taliban blow up Buddhist religious icons in Afghanistan.
...March 10, 2001 Oil prices open at their lowest levels in two years.
... September 10, 2001 the DJIA is at 9,600, down 20% since it’s January 2000 high
of almost 12,000. The S&P 500 is down 30% and the NASDAQ is down 67% from March 2000
highs.
... September 11, 2001 The terrorist attacks on America occur.
... October 2, 2001 - “There were a lot of signs that there was something going
on...but we never got the fidelity or the information that we would have liked.”
Secretary of State Colin Powell speaking to reporters.
Secretary Powell wasn’t referring to signs in the stock market, but we
believe there were significant signs in the market pointing to a catastrophic event.
Many believe that the stock market is a mirror that reflects events of the past.
Following the market from March of 2000 forward you could say it was reflecting a bursting
technology bubble. You could say it was reflecting the result of an ill-advised government
campaign against the country’s largest company, Microsoft. You could say it was
reflecting massive layoffs and poor earnings announcements. And it was reflecting a
country so divided it struggled for 2 months to elect its president.
We believe the stock market is a leading indicator and that at any moment
in time it contains the collective knowledge, feelings and predictions of its
participants. It is an old tongue-in-cheek saying in the investment business that the
stock market has predicted 10 of the last 7 recessions.
We believe a case can be built that the precipitous drop in the market prior to
September 11 was evidence of an unstable, uneasy global economic and political landscape.
It was also a predictor of something large and catastrophic on the horizon.
On September 10th the market had already taken into account the numerous potential
problems we faced as a nation and a society.
Just review our timetable and keep in mind that many people whose job it is to
participate in the markets all over the globe were aware of these stories and more.
We have some favorite publications that we read religiously. One of them is written by
a graduate of Wake Forest University - Brian Trumbore. It is the Week In Review
column at StocksandNews.com. On a beautiful day in August we were on a pleasant drive
through central New Hampshire. We had printed out Brian’s weekly column before the
trip and were discussing it. Brian mused, not for the first time, that we needed to heed
the many warning signs of trouble in the Middle East and Central Asia. He argued that we
needed to be acutely aware of the challenges faced by moderate Arab states.
We talked about how many countries seemed to hate America, yet at the same time their
very survival and growth depended on America. We philosophized and sighed and continued
our drive. We really didn’t want to be pessimists on such a beautiful day.
In some sense, though, we had factored that information into our investing and our
decision making process. We weren’t, however, sufficiently moved by Brian’s and
other’s advice to jump out of the market. We were in the market then and continue to
stay in the market now. Why? Because we are invested in the market of the most powerful
nation and economy on the planet.
We believe common stocks should be an essential part of most portfolios. Common stocks
are a major holding in all of the balanced portfolios we manage and we believe the
all-equity portfolio is a viable investment strategy. The all-equity portfolio, a popular
vehicle 2 years ago when stocks were widely viewed as a “can’t miss”
investment, is an even a better investment strategy today with the broad market down
sharply from all-time highs, interest rates at multi-decade lows, stock prices discounting
a recession, and more and more investors (professional and amateur alike) pulling out of
the market.
When we evaluate whether or not to invest a client’s money in a stock, trying to
asses where the market is going to go is low on our list of criteria to consider. To do
this is essentially market timing. While one can build the case that the market predicted
September 11, we can find no human who did. We know of no human who knows what that same
market is predicting now.
We do know that many studies have concluded market timing is a losing game. One of
those studies, by Nejat Seyhun, at the University of Michigan School of Business
Administration found that if you sat out of the market for the best 1.2% of all trading
days from 1963 through 1993, you would have missed 95% of the market’s gains. In more
graphic terms, if $1,000 was invested in the market during that period, it would have
earned $23,000. However, if you sat out those 90 best days, your return would have only
been $1,100. The lesson: market timing doesn’t pay and often can be very costly.
Our conclusion is to remain patient and to continue to hold and invest in a
well-diversified group of common stocks of high quality companies with good long-term
business prospects. As always, we continue our sensitivity toward price when investing.
Valuation does matter. It helps reduce downside risk and enhances reward. Our long-term
track record bears this out. And, we are quite confident that the world’s largest and
strongest economy, the free U.S. market, will weather this crisis.
To get detailed information on our stock selection process, please visit our website at
www.lyoncapital.com or call us at our office: (585)-248-9821. $$
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