Commentary

An important aspect of our investing approach involves identifying big-picture trends to help us understand what's been happening in the financial markets and what's likely to take place in the future. To that end, we've outlined what we believe to be a possible "roadmap" to chart out where the financial markets have been and where they are headed in the months and years ahead.

By 2001, San Diego had enjoyed a nice housing boom. Since bottoming out in 1996 after a nasty housing downturn, the price of the typical single family home had risen by 74 percent. As of 2001, adjusted for inflation, San Diego homes were more expensive than they'd ever been (at least since the 1970s, which is as far back as the available data goes).

At this point, one might have expected home price growth to slow down or even flatten out. But the show was only getting started. The typical home, already somewhat richly valued, would go on to nearly double in price in just a few years.

It is often noted that in the long-run, stocks are the best asset to own. It has also been noted that “in the long-run we are all dead.” So the question becomes how long an investor must wait for that attractive long-term performance to be realized. If one is not careful, it could be a long time.

Our investment objective is simple. We strive to outperform the market indices over longer time periods, after all fees, while taking less risk. While it’s easy to spot bubbles or buying opportunities in retrospect, there is no such clarity “in the moment” and we are forced to make prospective decisions about where to be invested. Without the benefit of hindsight, market risks are of paramount concern to us.

Holders of cash and its equivalents (CDs, T-bills, and the like) may not earn much in the way of interest, but they are at least certain to get all of their principal back. For this reason, many people assume that holding all cash is the safest and most conservative possible investment stance.

But there is a hidden threat to cash holders: while they are assured of getting all their money back, the money they get may be worth less than it was when they first deposited it. This is what's known as "purchasing power risk."

We believe purchasing power risk to be a serious issue for today's cautious investors.