Walls are Not Perfect August 12, 2015 by Jerry Wagner of Flexible Plan Investments I spent part of this summer on a family vacation in four of the six nations that were once republics of the socialist state of Yugoslavia. Many have asked me Why, and I simply replied that I had heard it was beautiful and had always wanted to go there. It didn t hurt that my barber of 40 years and my employer during law school, Marv Esch, a congressman from Ann Arbor, MI, were both of Yugoslavian heritage. Amazingly, while I was in most of the countries, the most common question I would get from the natives was Why did you come here? They, too, seemed to find it most incredible that we would be visiting there. It turns out that except for the cruise ships that stop in Dubrovnik, not many areas of the country get American tourists. I fear many still relate it to the nineties struggle. Yet while Bosnia, and especially Sarajevo, still show signs of the war (ruins from the shelling and bullet holes remaining in most buildings), the four countries do not show any signs of the conflict. It was a beautiful area of the world, with varied sights and friendly people. The lower-priced local currencies and Euro made it a relatively inexpensive place to travel to as well. As you travel through the Dalmatian coastline of the region, Croatia and Montenegro principally, the ancient towns cluster along the sea. They ve been there since the time of the Greeks and probably earlier, and they have seen many empires come and go. Nearly every town along the coast was protected by a wall. Chief among these fortified enclaves was Dubrovnik. It has been enshrined along the shores of the crystal clear, aqua-blue Adriatic for centuries. Once known as Ragusa, an empire that rivaled the Venetians in sea power, Dubrovnik remains every bit a walled city. It is surrounded by ramparts that fully encircle it, stretching 1.24 miles in total. The bastions range in thickness from 13 to 20 feet thick and were of rounded construction on the outside, causing cannon balls to simply bounce off. These walls were important. They protected the inhabitants from the Romans, the Venetians, and the Turks over the ages. In fact, they were in large part responsible for Dubrovnik s survival of a sevenmonth siege in the recent conflict. (Unbelievably, this 1979 UNESCO World Heritage site was shelled in 1991 over 600 times by the Serbs with a loss of over 100 citizens, earning the Serbian General, Page 1, 2018 Advisor Perspectives, Inc. All rights reserved.
Pavle Strugar, a seven-and-half-year prison sentence for his role in the attacks.) Yet, they also failed. In the early 1800s, Napoleon was able to wait out a siege and capture the town. And, of course, the Italians and Germans had no trouble overcoming its defenses in World War II. Still, for over 400 years the walls protected the town. But it s interesting when you dig into the history. Many times the walls were simply a deterrent. Often the diplomatic skill of the people allowed them to use the walls to mitigate the damages that befell many of the towns and villages of the time that were less fortified. The Venetians were discouraged from invading and treaties with them, while not entirely in Ragusa s favor, did allow the town to survive and prosper. Similarly, during the hundreds of years of Turkish expansion, the fortifications provided a part of the reason why the Turks settled for tribute instead of attacking. Even though these walls were built to keep out invaders, they served other purposes when the odds of defeat were overwhelming. As usual, I was struck by the similarities to our business here at Flexible Plan Investments. We erect walls for our clients investment portfolios all of the time. Diversification provides a first line of defense against a bear market attack in terms of asset classes that our investments are spread among. This tends to average returns, while providing better-than-average reductions in portfolio losses. A second line of defense is engaged when we employ multiple dynamic, risk-managed strategies within each portfolio. These methodologies have all been developed to seek higher levels of return for the risk taken and, like the thick ramparts encircling Dubrovnik, seek to stave off enemies, in our case the black swan events that can wreak havoc on investments. Still, like the city walls, our defenses can only do so much. Despite our testing and operations over many years and market cycles, it is always possible that, like Napoleon, an enemy can come along that is able to defeat the defensive plan. More likely, though, even in the worst of times in the declines of 2000-3 and 2007-8, these defenses have proven able to ward off the enemies or mitigate the damages. We could not do this without first building the walls. Without the walls, only devastation lies in the path of the enemy. We must build the walls, even though we know that they may not always work. We build the walls because most of the time they do work. Hopefully, like in Dubrovnik, that will lead to peace and prosperity in our portfolios for multiple generations. Recently, the enemies of such peace have been banging on the walls of most investor portfolios. As I demonstrated last week, the various types of asset classes have sustained varying degrees of damage so far this year as they all are below their high water marks. Page 2, 2018 Advisor Perspectives, Inc. All rights reserved.
Last week was no different, as the major stock indexes declined. Yet perspective must be brought to bear. Both the S&P 500 and the NASDAQ Indexes have posted gains for the year and the current quarter. So far the cannonballs are bouncing off of the walls! Many of our strategies have remained profitable, as well. Yet some, like most commodities and bonds, have seen declines year to date. It has been a difficult year and now most daily, short-term trend indicators are showing a decline in the trend. Still, as a view of the weekly and monthly numbers shows, the primary trend remains upward. Today s rally, while it has some indications of just being a respite, is still encouraging given its magnitude and breadth. Page 3, 2018 Advisor Perspectives, Inc. All rights reserved.
Economic indicators last week were not as strong as has been the recent trend. And the flat employment report and some indicators of price increases in some sectors of the non-manufacturing report last week seem to support a Fed increase in rates in September. Page 4, 2018 Advisor Perspectives, Inc. All rights reserved.
Still, interest rates have actually decreased so far this quarter (and month). This calls into question the September Fed timing consensus and is supportive of moves like today s in the equity market. Investor sentiment is supportive of this conclusion as well, as the ratio of bearish sentiment to bullish sentiment has risen to heights not seen since 2013, and bearish sentiment has spiked higher. Both of these have usually led to higher stock prices. Still, seasonality and pattern analysis are pointing in the opposite direction. Hopefully, today s rally will at least improve the prognosis of the latter. Finally, we are closing in on the end of second quarter earnings reports. Only 500 companies have yet to report. So far, more than 60% of reporting firms have registered better-than-expected earnings numbers. Like revenue reports, they are on track to improve on the previous quarter s results. Again, this is bullish for stocks. While the walls of Europe s fortified cities were made to keep invaders out, they had another purpose. By providing walls, the city guardians also kept their populations together. People stayed because even though the walls were not perfect, they made people feel secure enough that they remained to grow their families and business. Portfolios that include dynamic, risk-managed strategies serve a similar purpose. With the vigilance of their quantified, disciplined computer surveillance, these strategies seek to counter the enemies from without and allow investors to weather the shelling that can come even during a bull market. Using these tools, we were able to keep our clients fully invested in our suitability-based core strategies during the run up to new market highs since 2012. Walls may not be perfect, but they serve a purpose. All the best, Jerry "Dubrovnik crop" picture by Michaelphillipr; cropped and edited from the original - File:Dubrovnik 042.jpg. Licensed under CC BY-SA 3.0 via Wikimedia Commons - https://commons.wikimedia.org/wiki/file:dubrovnik_crop.jpg#/media/file:dubrovnik_crop.jpg http://www.flexibleplan.com/market-hotline/disclosures Flexible Plan Investments Page 5, 2018 Advisor Perspectives, Inc. All rights reserved.