The 'Light of Conviction' and 'The Path'

"Doubt everything.  Find your own light."  Buddha

When in doubt, it is crucial for the prudent investor, whether passive or active, to stay true to the conviction of their objectives.  Passive investors are one in the same with their objective as there is little action required to maintain the prudent course.  The "auto-pilot" nature of this investing style all but completely removes emotion from the equation.  Active investors, however, must find doubt in everything, often in themselves, especially amidst increasing uncertainty in the financial markets.  The prudent active investor can "find the light" by focusing only on what is certain -- their investment objective, risk tolerance, and time horizon.

By focusing on our "light of conviction" we leave the "shadow of doubt" to others.  That shadow is arguably at its darkest moment now in the financial markets as at any moment over this current economic cycle.  As I always attempt to do here at TFP is shine "light" on the doubts, make benign observations, then reinforce the prudent advisor's conviction with some perspective... 

I'll begin with a few select excerpts from an article I ran across at The Big Picture:

"Strong stock market returns following an initial Fed rate cut have historically come from some combination of low valuations, an upward sloping yield curve, and falling long-term yields (with low valuation trumping the others).  The S&P currently trades at 17 times peak earnings, so the low valuation component is missing.  And the yield curve has been inverted since July [2006].  Will stocks get a boost from lower long-term rates?"

"Investors should keep in mind that the stock market's reaction to Fed cuts has historically been dependent on... conditions that don't match the present very well."  Here's the full piece.

There certainly is no shortage of "media noise" surrounding the Fed meeting this week.  I found it exceedingly difficult to find perspective; therefore, I settled on a few pieces of information that made sense to me for our knowledge today:

• What would be the "unkindest cut?"  Although steadily diminishing, the greatest number of investors expects a 50 basis point rate cut.  Anything less will be disappointing to that crowd.  Logic will say, however, that a 25bp cut, followed by reassuring words from the Fed, will go the farthest with calming financial markets without appearing accommodative;  A 50bp cut may bring some initial cheers but, in my view, would signal that the broader economy is in danger or the Fed is overly-accommodative.  After coming to their senses, most investors would find negativity in that result as well, especially noting that stock prices moved higher last week hinging upon a 50bp cut... 
• Now that slower inflation appears to support Fed easing, a rate cut can be justified... 
• I believe it to be prudent, however, to be aware that lower inflation (as it appears now) is not automatic going forward (remember, we "doubt everything").  There are still inflationary pressures, such as higher oil and gas prices, rising health costs, and higher food prices with wheat, corn, soy beans, and orange juice.

For final perspective, the prudent investor chose the course of their investment strategy or "path" long before the onset of the current financial crisis.  I do not support the use of computer models, dynamic charts, or short-term trends to determine a long-term path.  If you follow TFP posts, you are likely familiar with my "Invest Like a Philosopher" series and, specifically, my "Socratic Model."  That model had a long-term investor (longer than 10 years), with moderately-high to high risk tolerance, at around 100% invested in stocks at the beginning of 2007.  Now, the same model would have that investor at around 85% stocks 10% bonds and 5% cash today.  The key point is that I set out on that "path" several months before any "crisis" was immanent.  In fact, I pointed out in January of 2007 that there were "nary quite contrary" investors at the time and "baby steps away from the crowd" was prudent...

As the quote of the day from Buddha supports my "light of conviction" reasoning, one of my favorite Zen sayings supports "the path" of the prudent investor, which is largely unchanging...

"You cannot tread the Path before you become the Path yourself."

TFPAuthor, Kent N. Thune, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Advisory firm located in Mount Pleasant, SC.