Emotional torsion: Bringing our daughter to college and the current market craziness

Author: Tom Yorke, Oceanic Capital

Covestor models: Global Diversified Conservative, Global Diversified Moderate, Global Diversified Aggressive

Earthquakes in DC, hurricanes in Vermont and extreme volatility in the financial markets!  They’re all bound to stir up feelings of fear, anxiety and some real emotional torsion… all of which are eerily similar to the emotions my wife and I experienced when we dropped our oldest child off at college last week. After 18 years of blood, sweat and tears, it was just “goodbye.”  I personally felt like I was getting a double pummeling, since this event was happening for me at the same time as all the markets’ recent turmoil.

In times past, I might have felt like hiding under a rock during this kind of craziness (or visiting the school medical center for some pain killers). The mantra I adhered to – both while leaving Colgate and sitting at the trading desk – was first to take a deep breath, and then focus on the higher reality: we had planned for this and we were in a pretty good place.  Let’s be honest here: I didn’t like leaving my daughter at college, but it had always been a part of the plan and the plan remained a good one.

So too with our investments in times of turbulence.

OCM has made an exhaustive effort to study correlations between asset classes and sub-classes. We understand how they behave during periods of high stress. And we hung tight to what we knew and believed. We had allocated our investments across multiple asset classes and mitigated our “headline exposure” to pure equities. We knew that the dust stirred up by the extreme volatility would settle soon, and that the work we had done to select non-correlated assets would protect us. And it did. All three of our Covestor portfolios managed positive gains in August, outpacing their benchmarks.

Here’s the thing about a hurricane: you can’t really win.  But with planning and discipline you can be a lesser loser, and that should stand you well, because the hurricane will pass sooner or later.  (I say you can’t really win, but there could be a pure-play hurricane investment out there unknown to me – you know, a company that makes plywood, candles, batteries and peanut butter!)

The past few weeks have probably been as wild a ride in the equity and bond markets as we have seen since the global economic collapse of 2008. It’s trying at times to divorce oneself from the random noise of the various business news networks constantly blathering about nothing.  Unfortunately, blather can be self perpetuating in a way that gives it pseudo credence. And that makes reading the real trends of the market that much harder.

Right now, certain macro trends seem to be holding up: the Yen still seems unreasonably strong for an aging Japanese population, the Euro hasn’t broken down as much as would seem possible, given that Greece will in all likelihood be driven from the union by frustrated and over-burdened Germans. Fed Chairman Bernanke will battle to avoid the third round of Quantitative Easing (“QE3”) and get Congress to focus instead on fiscal policy changes.

If you want to see how really warped things are in Washington, and how terribly out of touch they are with reality, read this: “New CBO Numbers Confirm Modest Spending Restraint Can Balance The Budget” by Forbes’ Daniel J. Mitchell 8/24/11 (http://news.yahoo.com/cbo-numbers-confirm-modest-spending-restraint-balance-budget-215625965.html). In essence, we can balance the budget in the USA without any spending cuts by 2017! Yes, that’s right, because in Washington a spending cut is actually not getting the raise you expected, not an actual cut you might experience by, say, losing your job.  It’s amazing we elected these guys.

Although Wall Streeters like to joke that you can’t eat relative outperformance, some of the recent changes we made have held up. Conoco has helped the Oil & Gas sector, Gold has done better then Silver, Annaly Capital has paid another dividend and the Pacific Ex- Japan fund helped offset the larger decline in the International sector.

Some of the best moves are often the things we didn’t change when we felt the pressure. Staying exposed to the U.S. Dollar and U.S. Treasuries when there was an overwhelming consensus their day had come was clearly the right decision.

We shall watch carefully, but stay the course we charted and not be too surprised to encounter more squalls along the way.

Thomas Yorke