I found this article written by Minyanville’s Peter almost exactly a year ago on January 8, 2008 titled “The Courage To Choose:”

Having been asked to provide my thoughts regarding 2008, I am going to stray a little bit from my usual Buzz & Banter messages and share what I see as the most important theme for 2008 – making choices.

So as we approach 2008, I wish the Minyanville community the wisdom to prioritize well, the courage to make the hard, and often painful, choices, and, most of all, the strength and conviction to follow through.

As we are entering 2009, these words no doubt are as valid as they were a year ago. The country continues to struggle from a sharply deteriorating economy, along with increasing job losses that are unfortunately bound to change the lives for many.

While we can’t change circumstances over which we have no control, we can enter 2009 with the knowledge that we have at least an investment plan in place that has survived the market disaster of 2008. Furthermore, it will provide us with the necessary guidance to deal with another treacherous year in the market.

If the first nine days are any indication of what’s in store, we may see much of a repeat of last year; that is sharp rallies followed by mind numbing drops interrupted by periods of sideways meandering.

In my view, only those investors with an exit strategy, who are big enough to admit when they’re wrong and don’t mind taking small losses in order to avoid large ones, will survive this bear market with their portfolios intact. I hope you will be one of them.

The past year has shown that even professional money managers of mutual funds with an impeccable past record are not immune to failure. MarketWatch reported that “In a bad year, these funds were the worst:”

Investors reeling from the 39% plunge of the Standard & Poor’s 500 Index this year should console themselves that it could have been worse: three of the worst mutual funds of 2008 have racked up losses of more than 60%.

“Not that you can magically exclude bad years, but prior to the past year, the fund maintained a strong long-term record, even with periods of weakness mixed in,” said Hughes.

Legg Mason would not comment directly for this article, but in a statement Mark Fetting, president and chief executive officer, said, “Chairman and Chief Investment Officer [of Legg Mason Capital Management] Bill Miller has built a tenacious team of long-term investors. Thus far in their 26-year history, any period of underperformance has been more than offset by subsequent outperformance. We fully support their thoughtful action plans for improvement.”

I am not bringing this up to dwell on negatives, but to see if lessons can be learned. It appears that even professional fund managers don’t seem to be able to recognize a bear market if it hits them squarely in the face. To continue buying and holding stocks that were in obvious downtrends based on the very questionable assessment that they represented “value” surely backfired big time.

While I don’t have much sympathy for fund managers, I am concerned about the effects on the individual fund investors who, based on Legg Mason’s reputation, followed these funds blindly into abyss. How else can you describe a loss of over 60% when the market as a whole declined “only” some 40%?

Read the highlighted paragraphs again, in which Morningstar is desperately trying to put some lipstick on that pig. Sure, the funds may recover and do well in the future, but look at the damage they have done to not only an investor’s portfolio but his psyche.

If you were unfortunate enough to have your portfolio “diversified” in all 3 funds, you’re down a horrific 60% for the year. Look at the long-term consequences. Your $100k portfolio is now worth $40k. For you to get back to $100k, you need make 250% on the balance.

How likely is that and how long will that take? Given enough time, it’s likely; the question is whether you will still be alive to see it. Let’s say, given the current state of the economy, you could manage to compound your entire portfolio at a rate of 8% from hereon forward. That means it would take you 9 years to double your money and bring the balance to $80k. You’d then need another 3 years to get back to your original $100k.

So you’ve spent 12 years of your life making up losses assuming that you can consistently compound at 8%. If the market has another bad period, the time frame could easily increase to 15 years.

And all this could have been avoided with the proper use of a sell stop discipline. Makes buy-and-hope look kind of ridiculous, doesn’t it?

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The bears got the upper hand this week as poor economic data killed all bullish ambitions.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -8.70% thereby confirming the current bear market trend.



The international index now remains -18.41% below its own trend line, keeping us on the sidelines.

The market took one on the chin yesterday with the result that the gains for January were just about wiped out.

The sell-off accelerated as many traders realized that it was impossible not to forecast a recession. While that is hard to believe, it seems that reality had not fully sunk in. The trouble started the night before as Alcoa announced major lay-offs of some 13,500 employees, which was followed by earnings warnings from Intel and Time Warner.

Crude oil plunged as falling demand caused oil inventories to rise. ADP’s payroll survey put down any remaining bullish hopes for the day as December’s whopping losses of 693,000 wrapped up one the worst years in history. This will not bode well for Friday’s jobs report, which also may turn out worse than expected.

It was a day of no positives as now India got rocked by its own version of the Enron debacle. As was to be expected, our Trend Tracking Indexes (TTIs) slipped and are confirming their position in bear market territory:

Domestic TTI: -8.44%
International TTI: -18.17%

I can still see more upside potential as part of a bear market rebound, but I still believe it’s better to stay away from any outright long or short positions.

Lately, I have received quite a number of emails asking my view about 2009 and how one can establish some positions early to participate in upcoming market opportunities. Reader Ken put it this way:

Thanks Ulli for doing this great service, and writing all that you write with a lot of honesty, simplification and cutting through the noise-clutter.

In all of the above, I sound like I have read everything that you have published, but that is NOT the case. So, my apologies in advance if you have answered it, and I have not gotten to it. Please point me there and I will definitely read it.

First, let’s look at the dollar scenario. Sure, on the surface it would seem that all the bailout and stimulus packages of the past and future along with zero interest rates will eventually be devastating for the dollar. However, if you view this scenario globally, you’ll note that this current recession is a worldwide one and most other countries are forced to play the same games to prop up their ailing economies. So a potentially lower dollar may be offset by the actions of others. As the recession deepens and broadens, the ECB, BOE and China will eventually lower rates as well, which will be dollar positive.

Second, I am set against taking a wild guess by allocating a portfolio “before” it’s time. It’s simply not wise to try to outguess the market and establish positions now in the hope that one can get an early start.

It is far better if you wait and let the market come to you. In other words, wait for trends to develop before you jump aboard. You can easily follow that by watching the momentum numbers in my weekly StatSheet. Especially, be aware when prices cross their long-term trend lines, which you can follow in the column labeled %M/A, which shows you how far above or below its long-term tend line a fund/ETF is currently positioned.

2009 may very well be a continuation of the similar scenarios as we’ve witnessed in 2008. Sharp rallies will be followed by sharp collapses, and the jury is still out as to how long this bear may last. I think it’s far from being over, so capital preservation and avoiding overeager investment decisions are paramount to surviving with your portfolio intact.

From time to time, I have quoted Al Thomas, author of the book “If it Doesn’t go up, Don’t buy it!” Al wrote another column this past weekend worth paying attention to:

A year ago I wrote in this column, “I don’t know what mysteries 2008 will bring, but I will predict that anyone without an exit strategy is going to have a bad year.”

Start shopping now for a new fund, broker or money manager who knows how to protect clients’ money.

It’s a pretty safe bet to repeat Al’s prediction for 2009 that anybody without an exit strategy will have a bad year again.

I agree with his notion of a rally in the near future before the markets will head south again. It doesn’t really matter if this prediction comes true or not, what matters is that you have a plan in place for dealing with the uncertainties of the market place. That requires you having a reason for entering into a position as well as a plan to exit should your decision turn out to be wrong.

Remember, taking small losses is part of investing; watching your portfolio go down 40% is inexcusable.