Preservation of Capital

The cornerstone of our investment services has always been our dynamic approach to protecting assets in times of high risk or very weak investment conditions.  Although our systems have changed dramatically over the years with constantly changing technology, our focus on minimizing investment losses during the most challenging times has served our clients very well for over three decades.

The foundation for our belief in protection of accounts is rooted in simple mathematics.  Here is an example…If you lose 50% in a bear market, it then takes a 100% rate of return to break even.  Why?  Because after the decline, you only have half as much money to work with.  It could easily take 5-10 years to recoup your losses.  However, if you lose only 10% in a bear market, you could then recoup your losses with an 11% return, which is possible in a relatively short period of time.  We had two bear markets in excess of 45% between 2000 and 2010, and that is why it was called the lost decade.  However, we feel it was not lost for our clients, as they did not experience the full impact of the the bear markets, making the recovery time much shorter.  The bottom line is that, mathematically, it is far more important to be really good at minimizing big losses than being really good at capturing gains.  Obviously, we try to do both exceptionally well.  The concept of proactively protecting accounts is something that we believe most firms, especially large ones, are unable to execute and, therefore, do not promote the philosophy.

Since the inception of our firm in 1981, there have been numerous bear markets (greater than 20% declines).  Here are the statistics on some of the worst declines that we successfully negotiated with our defensive strategies:

Largest Bear Markets in 30 Years (S&P 500)

 

 

 

 

 

Description

Specific Time Frame

High

Low

Decline

 

Primary Factors Causing Decline

Crash of 87

8/25/87 - 10/19/87  (55 days)

336.77

224.84

-33.2%

 

High trade deficits

Bear Market of 1990

7/16/90 - 10/11/90  (87 days)

368.95

295.46

-20.0%

 

1990 Recession &  Iraq invaded Kuwait

Bear Market of 2000-2002

3/20/00 - 9/30/02  (924 days)

1527.46

800.58

-47.6%

 

Tech. bubble &  9/11 terrorist attack

Bear Market of 2008

10/9/07 - 3/10/09  (518 days)

1565.15

719.6

-54.0%

 

Real est. bubble & failure of Lehman Br.


As you can see, some of the declines are over a relatively short period of time, while others are over years.  It is also noteworthy, that the the recent period since 2000 has been one of the worst periods of time for investing, unless you were defensive oriented.  Our firm goal, for our client accounts, is to avoid at least half of any individual bear market.  Again, the advantage of this system is that by losing less than the markets, we can recover much sooner and, therefore, enhance the overall rate of return.  A secondary benefit is that from a client’s emotional standpoint, our process tends to be less stressful and easier for our clients to stick to the long-term game plan.  We apply this strategy to all accounts, whether conservative or aggressive.