Tabell’s Market Letter – August 14, 1992

-……….. – TABELL'S MARKET LETTER 5 VAUGHN DRIVE. CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS. INC (609) 987-2300 ;. August 14, 1992 There is little that is proprietary in the field of financial commentary. Nor. In a sense, should there be, since market analysts sameare, essetially-;Call commenting onth -phenomenon. -Manyfate,-amOnthor 5'0ago -we did a studyf the percentage decfis – of individual issues between their highs of the first quarter of 1992 and their lows of the second quarter Quite frankly that project was stimulated by reports in the press of a similar study done by Bob Farrell at Memll Lynch. Not surprismgly, our own results were similar. Our numbers showed that the average such decline for the 3699 stocks we looked at was 27.3—31.3 for the 1738 over-the-counter stocks in the survey. 37 of the stocks in our UOlverse had declined 30 or more, including almost half the GTC Issues. A good deal of media comment on this particular phenomenon has emerged in the past couple of weeks. Essentially. all this comment can be summarized by noting the simple fact that a lot of stocks have gone down a lot. The question. however, is of just what use this particular piece of knowledge IS likely to be for the investor. It IS probably no accident that the manifestation of widespread interest in the occurrence of numerous individual stock declines has taken place coincident with somewhat improved performance by the Standard and Poors 500, which. after lagging dunng the first half of the year, finally started achieving new all-l1me highs The S & P Composite has become, of course. the benchmark by which portfolio performance tends to be judged. Thus the managers of portfolios which were not close to ali-time highs acquired a vested interest 10 provmg that the market was not really doing all that well. Thus the notice given the phenomenon of many deep declines. All of which raises a number of interesting questIOns How do we measure performance And If performance is not all that great based on comparison to one average. does It make sense to find another less-well-performing statistic to which one can compare and look better The answers are not simple They are made yet more complex in our VIew by the fact that a valid performance comparison will, or should. be different, dependlOg on the investor who 15 maklOg the comparison. The reason for the popularity of the S & P 500 as a benchmark IS that it probably is. in fact. a valid gauge for the large institutional investor. The reason for tlus IS its capitalization weight. If one accepts thaLlargecapitalizatton mphes aJareJloating-supply–ndthusa hrladand liqUid market, thel,uesthaLpos.e..thegreatest welght – in the S & P wll1 be those easiest to buy in the quantlttes that the large investor will need to hold. Indeed. for many such Investors, only a subset of the S & P can be considered for potentIal investment In meamngful amounts. In the case of the individual Investor, even the relatively large individual investor, precisely the opposite is the case. Certamly every one of the 500 Issues 10 the Composite IS available to him as a potential purchase candidate. So IOdeed are a large number of others. It IS our own View that, as we move into the 1990's, thIS sort of flexibility may well prove an advantage to personal portfoiios enJOYlOg the rewards of competent management. Yet It IS hardly valid enttrely to discard the S & P as a performance measurement For. after all, the larger-capitalizatIOn Issues are III fact readily available to the smaller investor. If there is reason to suspect that such issues may be among the better performers. there IS no reason not to make them the core components of an individual portfolio. Indeed just such a strategy was. we know by hIndsIght. the correct one dunng most of the 1980's. Unttl a year or so ago. at least. the better relative performance of large-capitalIzatIon issues was a favorite tOpIC of discussion in market letters. Even gwen the spurt In smaller stocks in the latter half of 1991. secondary-Issue performance over the past year has not yet become dramatically better than the achon of higher-quality Issues If the S & P IS where the action IS, III other words, it is, arguably, the place to be Another complexity of performance measurement anses from the necessity for nsk adjustment A major contnbution of modern portfoho theory to the lllvestment process has been the recogruhon of the necessity for such adjustment and the formalization of quanutatlve techniques for perfonnmg it. This IS not to say that the concept of nsk has not been around for some time. Benjamin Graham many years ago paid a great deal of attentIon to risk, although he defined It quite differently, belIevmg it was essentIally embedded In a given company's financial statements rather than, as today's theonsts would have it. a product of price volatility Our own favorite explanation of risk in the investment-decision-making process is embodied in a story we heard years ago It Involved an elderly widowed lady and her IOvestment advisor. The lady in question possessed a highly limited amount of capital whIch. If IOvested conservatIvely, would just barely prOVide a sufficient IOcome for her to survive in extremely modest circumstances for the rest of her days Theadvisor persuaded her to take her entire stake and bet it on a horse runrung that day. a horse. moreover. that was a l00-to-l shot. And the horse won! r r The little old lady was now nch beyond dreams of avance and spent the rest of her years liVing In luxury At that pOint. the teller of the tale would pause and ask hiS listeners to reflect on whether the adVisor had, In fact. acted to the lady's best mterest Mathematical models, of course. also tell of he pitfalls In achIevmg perf01 mance via fIsk-taking. but the fable IS. In our vie\\-. perhaps more IllustratIVe All at thiS is simply by way of suggesting that mearnngful assessment of investment performance is not as easy an effort as It appears on the surface. Indeed It is a highly complicated task. and its results wl11 vary from indiVidual to todlVldual. This IS not to suggest that performance measurement IS a less than useful exercise. It requires. however. a fair amount of thought and preCISIOn ANTHONY W TABELL. CMT DELAFIELD. HARVEY. TABELL Dow Jones Industnals (12 00) 331462 Standard & Poors 500 (12 00) 21908 Cumuiall\'e Index (8/13/92) 755282 No statement or expression 01 Optnlon or any other matter herein contained IS, or IS to be deemed to be. directly or indirectly. an offer or the soliCitation of an offer to buy or sell any secUrity referred to or mentIoned The matter IS presented merely for the convemence of the subscnber Wh!le we beheve the sources of out Informat!on to be reliable we!n no way represent or guarantee the accuracylhereof nor olthe statements made herein Any actIon to be taken by the subSCriber should be based on hiS own !nvesllgat!on and InformaMn Delafield. Harvey, Tabellinc. as a corporallon and Its officers or employees. may now have, or may laler take, pos!llons or trades In respecllo any secUrities mentioned In thiS or any future Issue. and such pos!tlon may be different from any vIews now or hereafter expressed In thiS or any other Issue Delafield. Harvey. Tabellinc which IS regIstered With the SEC as an Investment adVisor. may give adVice to Its Investment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further Information on any security mentioned herein IS available on request