Investment
Strategies, Inc.
Strategy Update

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General Market Environment

Monthly Return Table

Notable & Quotable

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September 1987 to November 1987

General Market Environment

This period includes the Crash of 1987.  It is also one of the shortest bear markets in history with only three months from beginning to end.   However, it did demonstrate just how nasty a bear market can get and how emotionally painful a crash can be.  We remained 100% defensive during this entire period and missed the Crash completely.  Few investors can say this.  Most were either in stocks or stock mutual funds, which had increased dramatically in number with the surging market.  Almost no stock fund was able to side-step from even a small amount of the plunge in prices.  The table below tells the story.

Monthly Return Table

Following are net composite returns, in percentage, by month:

† Figures are for various CDA fund indexes that best match our GSA. From May 1982 through June 1989 the figures are for aggressive stock funds. From July 1989 to September 1996 balanced funds best compare to our triple option strategy (which employed stock, bond and money market funds). Starting October 1996 an unweighted index of 5 groups (International, Aggressive Growth, Growth & Income, Bond and Precious Metals) is used. This best matches our global asset allocation approach. CDA's figures do not include acquisition or redemption costs, but do factor internal expenses.

‡ Management Ratio (M/R) measures our ability to out-perform a buy & hold strategy (using the above described CDA Fund Index) for each market type and cumulatively for the various full market cycles listed above. It compares the ending value of $1.00 invested at the beginning of each period. The Management Ratio is determined by dividing GSA's performance by the CDA. A ratio above 1.00 indicates superior performance (and vice versa). Our goal is +1.00 over any full market cycle combination.

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Notable & Quotable

The period just ahead of the 1987 Crash offer many opportunities to learn.  For example, we came our with a Special Client Report  on October 30, 1987.  We quoted the bullish sentiment that prevailed just ahead of the Crash and from a variety of sources.  Here are some examples: 

1. From the Ivory Towers:   "The market should continue to move up, at least until the 1988 presidential election, according to the 30th semi-annual survey of investment managers by Callan Associates.  According to the survey of 82 major investment managers, with more than 228 billion in assets under management, the advance in equity prices should continue, albeit at a slower pace than during the first half of 1987.  ...   Investment managers are reluctant to predict the onset of a bear market, but most indicated that few of the usual signs of a bear are present."  PENSION & INVESTMENT AGE, October 19, 1987 (the exact date of the Crash)  
   
2. From two widely followed mutual fund advisory letters:  "While the possibility of some additional near-term weakness looms, we expect most fund prices to be higher by year end ...both long term investors and switch-fund traders should buy and hold top-rated funds for further gains."  MUTUAL FUND FORECASTER, October 1, 1987    The second untimely quote read,  "The stock market experienced a healthy consolidation of its huge summer gains during the month of September.  As a result, the road is paved for a move to new record highs by year end." THE NO-LOAD FUND INVESTOR, October 1987. 
   
3. From the securities analysts on Wall Street:  "The investor is nervous and that's exactly why I think the market is headed higher."  Greg Smith, chief portfolio strategist for Prudential Bach Securities, October 9, 1987.  The second gem was "We have to get used to the swings in the Dow Industrial Average, but they represent nothing in general."   Larry Wachtel, market strategist, Prudential-Bache, October 13, 1987. 

Editor's note:  the Dow closed at 2508 on Tuesday, October 13, 1987.  It plunged 770 points on the next four days.

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