Fourth Quarter 2011
Intelligent Investing

Major Index Returns

"In time, the savage bull doth bear the yoke."

- William Shakespeare, Much Ado About Nothing

Much ado about nothing indeed. Despite massive natural disasters in Japan, the slaying of Osama bin Laden, an unprecedented downgrade of US Treasuries, the ongoing European debt crisis, and a third quarter plunge of 17% over the span of just eleven trading sessions, US stocks finished 2011 almost exactly where they started. Our hypothetical Rip Van Winkle investor awoke from his year-long nap, saw no meaningful change in his portfolio, and peacefully resumed his slumber. He experienced no stress, no worries, and no panic. He simply embraced the confident serenity that comes from knowing that in time, the savage bull of equities will bear the yoke of his financial needs.

In the spirit of the New Year, let us all take a page from Mr. Van Winkle's book by refusing to waste one ounce of our time or energy on the uncontrollable in 2012. Instead, let us resolve to:

Have a Plan:

Take the time to develop a sound comprehensive Financial Plan that addresses your specific goals, income, expenses, assets, liabilities, cash reserve requirements, and income/asset protection. Invest only within the context of your Financial Plan. Review and update the Plan on a regular basis.

Control Spending:

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Charles Dickens' fictional character Wilkins Micawber eloquently prescribed fiscal security for a government, a business, or a household. Spending less than you earn and wisely investing the difference will result in nothing less than long term financial happiness. Spending more than you earn, even ever so slightly, eventually results in financial misery…as our friends in Athens can attest.

Avoid Speculation in the Exotic, Risky, and Expensive:

Hedge funds. Oil Fields. Limited Partnerships. Tax-Sheltered-Whole Life-Variable-Commutable-Enhanced-Annuities. The first step in successful investing is identifying where NOT to invest.

Invest Intelligently

Utilize a sound investment approach, backed by centuries of academic, historical, and real world data.

Utilize an Appropriate Asset Allocation:

Fixed income investments have historically failed to preserve purchasing power, net of taxes and inflation. By contrast, the rising earnings, dividends, and share prices of equities have historically increased purchasing power, making them ideal for both accumulation (saving) and distribution (retirement). Determine an appropriate mix of each within the context of your Financial Plan.

Maintain Discipline:

Commit fresh capital to your investments on a regular interval during the accumulation phase, regardless of market fluctuations. Distribute a pre-determined amount or percentage from your investments during the distribution phase, regardless of market fluctuations.


Diversifying equity investments across multiple securities, market capitalizations, investment styles, countries, and economic maturities is the closest thing we will ever achieve to a free lunch. Re-balance portfolios periodically to maintain the benefits, especially when it seems counter-intuitive to do so.

Reduce Costs:

Favor institutional quality investment vehicles with the rock bottom expense ratios.

Minimize Taxes:

Place assets strategically amongst taxable and tax-deferred accounts, own tax-efficient asset classes, employ tax-managed strategies, and avoid/defer taxes whenever possible.

Ignore the Noise:

We must realize that the media has incentive to create the illusion of crisis. Never, ever, ever give in to the fool's consolation that somehow "it is different this time."

Here's to a healthy and prosperous 2012 and beyond!

Don Davey
Senior Portfolio Manager
Disciplined Equity Management, Inc.