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To our clients and friends:

In late October, I attended a Fidelity Investments conference in New York City. The majority of the sessions at the conference focused on the concept of risk. One session was particularly captivating. The speaker, Dr. Ren Cheng, had placed five metronomes on a wooden plank. A metronome is a device used in music to keep a steady beat—it produces regular, metrical ticks and is used to set a melody. The plank holding the metronomes was then laid across rounded cylinders arranged in a row on a flat table.

Dr. Cheng then manually started up all the metronomes on a staggered basis. He first wound up and then triggered each one—purposely starting each one out of sync with the others. Thus, all five were ticking in irregular patterns at first. But after a few minutes passed, each one began to slowly synchronize with the others. And moments after that, all five were fully synchronized with one another—and therefore ticking in unison.

The audience of advisors and investment managers was baffled. What was the point of Dr. Cheng’s demonstration and what did it have to do with risk?

To our clients and friends:

Let me begin with an anecdote. Upon my arrival on campus as a freshman at the University of Notre Dame several decades ago, I initially opted for a major in chemistry. Shortly thereafter, I realized my mistake and switched to liberal arts—more specifically, psychology. To this day, my roommate (who I am still close to) remains convinced that the reason I switched to psychology was because the psychology building was the closest building to our dorm room! In any event, I am thankful that I majored in psychology.

Emotions play a major role in investing. From a psychological point of view, one of the biggest mistakes investors make involves a cognitive bias known as the “recency effect.” This bias rears its head whenever we place exaggerated importance on what has just happened, while downplaying the significance of historical data. It’s a common trait, which is why it’s so important to always subject our hunches to statistical scrutiny.

To our clients and friends:

As we enter October, we’re now three quarters through a surprising 2012. In this letter, I hope to offer some insight into this year’s performance thus far, and what we might expect going forward. In that vein, I’ve decided to take some lines from a legendary investment guru who passed away earlier this year after 40 years in the industry—Barton Biggs. Before we get into his views, here’s a summary of 2012 to date.

To our clients and friends:

"When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then when there is chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so." —Howard Marks, author of “The Most Important Thing Illuminated” (Jan.2013)

 First, a personal note: A few weeks ago, I had the privilege of attending the 2nd annual Elite Private Wealth workshop in Orlando hosted by Private Wealth magazine, an industry leader catering to the clients of wealth managers. I use the term “privilege” because I was one of about 50 or 60 advisors from around the country in attendance who were fortunate enough to witness the brightest minds in our industry discuss timely and cutting-edge topics for the affluent investor.

Among the personal highlights for me was meeting two individuals well-known to the investing community. The first was Dan Fuss, the legendary manager of the $23 billion Loomis, Sayles bond fund and former Morningstar Manager of the Year. Many of our clients have profited from owning his bond fund over the years. It turns out that Mr. Fuss graduated from Marquette University with my father in 1955—he’s also a Red Sox fan—two tidbits you’d never find in the financial press. As Morningstar so aptly put it:

“We think [Manager Dan] Fuss is one of the best bond fund managers in the business, with his nearly 50 years of investment experience providing an invaluable perspective on the markets. He is a disciplined, patient, and independent thinker, willing to stand apart from the market consensus when his analysis indicates it will be profitable to do so.”

The second highlight was meeting Ron Paul (you’ve all heard of him before). Dr. Paul spoke at our luncheon of the “big picture” (as opposed to focusing on the stock market per se) and spent most of his time emphasizing the importance of protecting personal liberties in our society. Whether you agree or disagree with his brand of political philosophy, he conducted himself in a gracious and open-minded manner with those of us who had the opportunity to speak with him personally. It was an honor to hear him speak.