Here is part I:

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Technorati Tags credit crisis, deflation, Economic Indicators, Economics, housing, Housing Market, Inflation, investing, markets, monetary policy, Risk, subprime

Technorati Tags consumer spending, Economic Indicators, Energy, Inflation, the economy

Trying to get defensive? The Wall Street Journal notices some of the same things we have been talking about that make it difficult, while the New York Times picks up on another theme of ours, the relative attractiveness of growth stocks. I take issue with these statements:

defensive-minded value stocks

growth stocks, which are riskier and throw off less dividend income than value shares?

Value stocks are not necessarily less risky, nor a better value. Value investing may be less risky, value stocks however may or may not be a value. By most measures value stocks have never been so highly valued, especially relative to growth stocks. Nor can it be said value stocks are less volatile. Some are, some are not. I am a value investor, but growth stocks, especially high quality (low debt; high, stable profit margins) look like more of a value to me. The rest of the article supports that contention despite these clichés.

Barry Ritholtz looks at the markets and sees parallels with the “Five Stages of Grief.” I think he probably has that about right. He also points us to this interesting graphic on volatility (click on the image for a larger version.)

Source:
http://www.nytimes.com/imagepages/2008/01/05/business/20080106_soapbox_graphic.html

In looking this over one sees that despite the increase in volatility last year, it seemed much more volatile than it was because we were at historically low levels. I am a glass half empty guy on this. I think we will see volatility increase even more.

At Abnormal Returns the question is asked, how did you do last year?

If you can’t conduct this exercise, what are you doing? Surfing the investment blogosphere for stock tips or economic forecasts? Those will in all likelihood not make you a better investor in the coming year. Knowing how your mutual funds, ETFs, investment advisors, or your own individual stock picks did against a reasonable benchmark should tell you a great deal about your investment process.

Frankly, few people I meet have any idea how they did last year. Statements do not provide time weighted rates of return, and most investors I meet think they did better than they really did. James Picerno makes the point:

While such a goal [superior risk-adjusted returns] isn’t impossible, it’s devilishly difficult to achieve for the long run. Ironically, most investors probably have no clue just how difficult the task. Why? Because one can only recognize the depth of the challenge by routinely analyzing a living, breathing portfolio over the course of time. Daily analysis is ideal, although weekly or even monthly data will suffice over long periods. In any case, unless you’re crunching the numbers regularly, and comparing your results to a benchmark, it’s easy to overlook just how elusive successful investment strategy can be.

We make few changes in our portfolios once we set things in motion each year, but I dig into the details on a daily basis, and we discuss it at our weekly Investment Committee meeting in detail. The details of how and why performance is achieved are crucial in the decision about what comes next, and whether ones strategy is really properly aligned, or whether active risk management is really what one should be doing at all.

An area we will be discussing with great vigor at our yearly investment conference is the direction of the dollar. One of our more profitable themes has been the decline of the dollar. The New York Times finds many people have decided that theme may have run its course. I look forward to our own debate on this.

To finish up let us look at some suggested blog world reading. Steven at Value Blog Review lists his favorite investment blogs for the year, some of my favorites are included. The same goes for Steve Waldman’s list.

Thanks for visiting Risk and Return. Please feel free to contact us with any questions and/or comments. Please note our disclaimer.

Technorati Tags Dollar, Economics, exchange rate, finance, growth stocks, investing, returns, Risk, today's links, value stocks, volatility