Value Library

The following is an excerpt from the ABC Perspective - January 2001 - Pg. 1

Capital Preservation

To say that the year 2000 was an investment roller coaster ride is probably the understatement of the year. We ended 1999 in the midst of high tech investment euphoria as media and Internet reports all had lofty expectations for the new millennium. As we entered 2000, who could fault investors for painting an extremely rosy picture for the New Year ? We had just successfully weathered the Y2K meltdown paranoia and the burst of incredible stock market strength of late 1999 was carrying into 2000.

Unfortunately, the old school of hard core investment analysis had been cast aside as inexperienced and greedy investors felt that they had discovered the motherlode. By the first quarter of 2000, substantial paper profits were scored by individuals truly believing that "trees could grow to the sky". Moreover, the new paper wealth of unsophisticated investors was used to pyramid further into more new economy and dot.com assets, as well as a multitude of discretionary purchases such as new homes, cars and vacations.

But there was nothing inherently different with this apparently glittering investment cycle that investors hadn't seen over the past 500 years. This included the tulip-mania in 17th century Holland, pre-1929 stock market speculation or even $800 ounce gold in 1979-1980. However, widespread fear and greed leading to vastly over-valued common share valuations by late 2000 eventually culminated in tremendous investor disappointment and financial loss.

In the investment world, capital preservation or protecting one's basic cash pool is paramount. The loss of this sum is tantamount to being knocked out of a boxing match or fouling out of a basketball game. The fact is that capital preservation was all-important for 2000, in a year of trillions of dollars of North American investment losses.

As an observation, I find it very peculiar that we hear very little about the extensive 2000 losses in comparison to investors' cocktail party braggadocio of their previous winnings. Perhaps investors have been suffering in silence, are too embarrassed to discuss their extensive losses or are in denial. This point brings me back to capital preservation or "saving your backside" during a time of incredible investor duress. On this subject I offer several inferences:

1. Always expect the unexpected, especially in light of the early year 2000 "can't miss investment environment".  Unanimous investor euphoria often leads to certain unexpected disappointment.
   

2. Above all, investors must protect their investment capital. It is far more important to forgo an investment opportunity than to gamble one's capital in the midst of an illogical investment feeding frenzy. Such manias often result in major financial losses.
   

3. While year 2000 could have made investors considerable profit if they were very, very nimble, most investors are not so agile. Clearly, a defensive, low risk, Y2K value portfolio, to preserve one's capital, was probably the best investment strategy during this extraordinary, tumultuous period.

Irwin A. Michael, CFA