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There are a few old sayings that got us thinking recently. “What goes around comes around” and “the more things change, the more they stay the same” are two. A third is “the only constant is change.” It reminds us of the old Johnny Mercer song “Something’s Got to Give.” So do things change or not, and what causes the change? We guess what we get from this is that things obviously change — whether we want them to or not — but they had to have had substance in the first place to “come back around.”

Let’s take a non-partisan political analysis of relative strength (investing). Politicians constantly poll voters to find out which issues the most people feel the strongest about. In the 1960s and 1970s, national security and Soviet nuclear capabilities were high priorities for voters. Hence, candidates with strong convictions in these areas were like “favored sectors.” In the 1980s and 1990s, Americans were feeling pretty safe with the fall of communism and fear of Russian missiles no longer keeping us up at night. The dangers were still there, they just weren’t as vote-worthy as say, unemployment. Well, look at us today. Employment is strong but we’re taking our shoes off at airports and worried about multiple “nuke countries” again. Like it or not, most politicians will sympathize with your concerns until they lose steam or something new comes along (or something old comes back). That reminds us, “The squeaky wheel gets the grease.”

Americans are just as fickle when it comes to political parties. For sure, both major parties have a core that will never change sides, but apparently party popularity comes and goes like the strength of an issue. Since 1900, there have been 27 presidential elections. The score to date is Republicans 15 and Democrats 12, producing 12 different Republican and seven different Democrat presidents. Apparently, whichever party gets elected is in demand at the time while the other party has to wait to become the “favored sector” again.

Fashion is another area that illustrates this point. If you haven’t noticed, there’s been a certain trend in the last couple of years. It is this: women in their thirties to forties dress a lot like women did in the middle 1970s. Big sunglasses cover the face; high heels are hidden by wide bottom pants; large collars. Could it be that the ‘70s are back? Now, today’s ‘70s look has a definite new millennium influence, but there is no denying that the trendsetters were inspired by the Gerald Ford era. The fashion pendulum swings long in all things influenced by personal taste and public opinion.

Plus, have you noticed that headlines today are eerily similar to 1976? A Republican President is in office with approval ratings hovering around 30 percent (Ford and Bush). Oil prices are at record levels ($9 versus $75, more or less). There is talk of a housing slump (collapse). The Democrats control Congress. And like it or not, bellbottom britches are back.

You may be asking yourself what all this has to do with managing your money. Well, the times we live in and what’s going on around us has a huge influence on how we live our lives. For example, a tenth grader wearing bellbottoms in 1985 would have had a rough go of it. Today, she would be right in step. In the investment world, growth stocks were the darlings during the mid-1990s, but today value stocks are favored. Style and timing matter.

In the late 1990s, large companies performed best while small companies have been the place to be in the 2000s.

Size matters.
International stocks have out-performed domestic stocks by far the last few years, but that has not always been the case. Geography matters.

The market has a way of punishing, in a general sense, investors who own the “out-of-favor” type investments and rewarding those who get it right. The only thing that makes one investment outperform another is simply demand. In a free market system, supply and demand determine the price of everything bought or sold, including investments. If the value of an investment goes down, it’s because supply exceeds demand.

No investing methodology can keep you on the absolute cutting edge of fashion, so to speak, and expecting perfection is unrealistic. There are numerous strategies used by portfolio managers, and we know there are times when one may outperform another. However, over time, a disciplined approach that is in step with the changing trends of the market and utilizes risk management techniques should provide most investors with satisfactory results.

By the way, polyester is back. It’s just called microfiber.



September 2007

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