letter to his Berkshire Hathaway shareholders as one of the culprits to blame for
... A typical headline from early March read: Buffet's Letter Warns Of Economy "In
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Market Update First Quarter 2009
Market Commentary After staging a modest recovery at the end of 2008, the stock market began the first quarter with another dramatic decline. From the first week of the year through early March the Dow Jones Industrial Average plunged from just over 9,000 to below 6,550 – a staggering 27% drop. As we have seen throughout the recession and bear market, good news was in short supply with the financial media continuing to fuel the sense of doom and gloom. As the stock market dropped to 12 year lows during the first week of March, many news sources mentioned Warren Buffet’s annual letter to his Berkshire Hathaway shareholders as one of the culprits to blame for investor pessimism. A typical headline from early March read: Buffet's Letter Warns Of Economy "In Shambles" (NPR). Having actually read Buffet’s letter however, I was stunned at how it was reported. Each year, Buffet writes a letter to Berkshire Hathaway shareholders discussing the company’s results for the past year, as well as providing his musings on the markets and the economy. The letter is eagerly awaited by both shareholders and non-shareholders who look forward to the insights and wisdom of the “Oracle of Omaha”. The letter was certainly sober in its tone; however, there was also a good deal of optimism and bullishness about the future of our country. Discussing the current crisis, Buffet had this to say: “Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1/2 % prime rate in 1980; and the Great Depression of the 1930’s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges. Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900’s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.” A bit of optimism finally made its way into the stock market as well with a trickle of good news during the second week of March in the banking and housing sectors. After hitting a new bear market low point on March 9, the market began a head spinning rally that lifted the Dow 21% in just
13 days – the fastest 20% rebound since 1938. The impact on investments was dramatic. Even though March experienced a horrible beginning, the month was one of the top 5 best months for many of the investment funds that we use. The table below compares the month-to-date return for some of our equity funds as of March 9 to where they actually ended the month. 2009 Performance Fund DFA U.S. Large Company DFA U.S. Large Cap Value DFA Small Cap Portfolio DFA Small Cap Value
Month Ended 9-Mar -7.86
31-Mar 8.77
Return 3/103/31 16.63
Month
Total #
Rank 4th best
Months 219
-12.01
9.83
21.84
4th best
193
-12.05 -13.11
10.30 10.40
22.35 23.51
5th best 4th best
204 192
It is interesting to note that if the monthly returns had ceased on March 9th, these same funds would have experienced top 10 worst monthly performances in their history. This demonstrates the futility of trying to time the market as rallies are often unexpected and dramatic. Although sitting on the sidelines may provide some temporary comfort during market declines, as Buffet noted in his letter: “clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long” as your purchasing power will be eroded over time. As we begin the second quarter we are technically in the midst of a new bull market (historically defined as a 20% or greater increase in market value). Whether this is a “bear market bounce” or the beginning of a sustained recovery remains to be seen. The economy is still in bad shape and many challenges remain. However, we are finally starting to see a few glimmers of optimism on the horizon that could bode well for long-term investors. Please call us if you have any questions or comments regarding the markets or your portfolio. We greatly appreciate your continued trust and confidence. Sincerely, DAVIDSON CAPITAL Stanley P. Dyl President
