The housing crisis and credit market upheaval that began last year have been creating a roller coaster ride for market participants with equity markets down across the globe by 30% or more in the last year. During times like these, emotions can overwhelm sound decision-making as investors panic and flee to the exits.
The entire credit market is frozen as market anxiety has reached alarming levels which is resulting in significant government intervention. This abnormal credit cycle has been exaggerated due to lax underwriting standards for residential mortgage loans and other debt and by the heavy use of securitization over the last few years.
Ironically, this market also leads us to believe that there are now excellent opportunities in the markets for investors that can remain disciplined and take the longer-term view necessary to see beyond the current economic problems.
I wish I had some eye-opening quick fixes for advisors, but frankly that’s exactly what got Wall Street into this crisis. We believe that turbulent times in the market are the most important times to stick with disciplined, conservative investment principles that have worked well over numerous market cycles.
This conservative approach to investment led us to be more defensive as credit standards deteriorated in 2005 and 2006 and kept us out of the new structured debt products that were proliferating on Wall Street. By similarly following the basics, investors can position their portfolios to outperform when the fear in the markets ultimately subsides. The flip side of volatility is opportunity for patient investors who are focused on finding undervalued assets with good growth prospects that the market will recognize in the next three to five years.
This investment philosophy grew out of managing pension assets for the last three decades during a number of market cycles. We have also been focused on finding value opportunities. Value has historically outperformed growth over the market cycle and provided downside protection, as we are seeing so far this year.