“Déjà vu, all over again”

Dear Clients and Friends,

“Déjà vu, all over again”

Our apologies to the great Yankees’ catcher, Yogi Berra, but that’s what it appears to be. We are being told that consumer confidence is plummeting and that the “weakening economy” is “rattling consumer and investor confidence.” And why not? There is a housing recession (notice I said housing recession – no one knows if we are in a recession or not), the stock markets seem to keep falling and there appears to be a deterioration in the overall economic environment.

“Poll ratings on President Bush’s handling of the economy fell last week among the American voting public. Global investors’ opinion of his stance toward Iraq dropped at least as much. With both of these constituencies turning nervous, stocks and the US dollar declined hard in a mutually reinforcing manner, dragging the stock gauges into the red for the young year. . . . Perhaps as worrisome, many company conference calls feature grim talk of slim revenue growth opportunities. Companies such as AT&T, Caterpillar, McDonald’s and Merrill Lynch all tempered their outlook for revenues this year— more proof of how tough it is to manage in a low nominal growth economy, in which demand isn’t strengthening much and prices are tough to increase. . . . There’s something to the idea that the stock market is safer because so many fear it. But in the absence of better economic and profit performance, who’s to say how indifferent or fearful investors can get before a lasting market rise emerges?” (Santoli, Michael. “Stocks Tumble Along With Bush Approval Ratings.” Barron’s, January 27, 2003.

What is interesting about this quote from a Barron’s article is that it was written on January 27, 2003. Yes, January 27, 2003. It is interesting to see how things have changed since 2003 and yet how eerily familiar the not-too-distant-past seems to be (see George Santayana’s quote “those who do not know history are doomed to repeat it.”) The truth of the matter is this: basic economic history concerning capital economies and capital markets shows us that economies expand and economies contract. It is just as true that stock markets go up and stock markets go down – and then back up again.

How does this relate to what we are talking about?

On January 31, 2003, the S&P 500 was at 855.7. On January 31, 2008, a full five (5) years later, the S&P 500 closed at 1378.55. This is an annualized rate of return of 10.0%. Now, when you think about it, to have averaged 10% per year over the past five years is pretty nice, isn’t it? In 2003, the S&P 500, after a horrible first quarter, actually finished the year with a 28.69% return.

When we look at our portfolios from the beginning of 2007, the returns are quite positive for the year (our all-equity Standard 97 returned 9.91% as compared to the 5.49% of the S&P 500). However, some of our clients experienced negative returns for 2007. Why, then, is your statement showing negative returns?

There are two main reasons as to why you may have seen negative returns in your portfolio. The first depends on the timing of when the original investment was made. For example, if you made an investment in the S&P 500 on January 1, 2007, you would have seen a 6.96% return through the month of June (an annualized return of 14.4%). Conversely, had you made an initial investment on July 1, 2007, the second half of the year, you would have seen a -1.37% return (an annualized return of -2.72%).

The second main reason is that the strategy employs the use of relatively large positions in both small cap and value equities, both in the United States and international developed markets, as well as in the emerging markets. Simply put, this strategy did not do well in the second half of 2007. Unfortunately, this happens sometimes. Fortunately, the portfolios are built to withstand this type of landscape, given enough time; the last time this strategy was “out of favor” was 1998. The very next year this strategy outperformed the market by over 7%. While I am not guaranteeing that this will happen, we go to great lengths to make sure that we maintain discipline in the long-term approach to your portfolios.

When we look at the returns of some of your portfolios, we are disappointed. However, because of the way that we manage investment portfolios, we are positive and upbeat about the future. While it is important to see positive growth (and we would like to see that growth in the plus 10% range on an annual basis), it is very important that when we encounter times like the second half of 2007 and the rough start to 2008 that we’ve seen, we must be patient.

It is proven time and time again that there are three (3) determinants of success when it comes to money and investing. The first is to have a plan. If you are working with the Aubry Group, you definitely have a plan. The second determinant of success is proper asset allocation. We have taken the years upon years of data and developed, through scientific means, the types of portfolios that are going to allow our clients the opportunities to achieve the highest levels of returns with the least amounts of risk over time. The final, and probably most important, determinant of success is behavior management. We know that the markets go up and down; we just don’t want it to be true. So we need to have self-control, faith in the future of the capital markets and trust that the people at the Aubry Group are doing the right things for you and your family.

Here’s to a successful 2008 and beyond,

Aubry Group, LLC

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