Active Money Management

History demonstrates that although market averages move erratically on an hourly, daily, or weekly basis, market averages experience long term trends with respect to valuation based on the present value of future expected aggregate cash flows to the investor. Understanding the state of the market averages with respect to this persistent trend of overvaluation or undervaluation is the primary key to implementing an effective active management investment strategy.

Surprisingly to most individual investors, the tendency of equity markets to trade persistently in the form of extended bull and bear markets has been shown to exist during the course of persistent states of both market overvaluation and undervaluation with respect to present value calculations of expected cash flows. Significantly, the persistent trend in overvaluation or undervaluation is independent and separate from the persistent bull or bear trend. In other words, these two types of trends are not necessarily correlated. Click here to view a graph of these extended trends. Link to “major bull and bear markets diagram” PDF

Even with the advent of modern portfolio theories in the early 1950s, the Modigliani & Miller Capital Structure Theory in 1957 and the general use of the Fed Model for valuation in the 80s, the market is still demonstrating an ability to trade for extended periods in either an over-valued or under-valued mode. (As this graph demonstrates: Link to “Emergence of modern theories diagram.”)

An understanding of the state of the market with respect to these trends allows the portfolio manager to be more defensive during bull markets that persist during periods of overvaluation, and more aggressive during bear markets that persist during periods of undervaluation. The basic strategy of active money management is to reduce the risk associated with bull markets during periods of overvaluation, respect the value of dividends, especially during periods of undervaluation, and still enable clients the opportunity to fully participate in the long-term growth the markets have historically provided the equity investor.

Active Portfolio Management does not conflict with the concepts of long term investing. Most of MSWM's clients are in fact long term investors dependent on income and growth from their portfolios.

The goal of active money management is to protect the client from major downtrends resulting from the collapse of an overvalued market, and still allow the investor the opportunity to participate fully in the growth in value and income that the equity markets have historically provided.

George Shannon
Chief Investment Strategist
Portfolio Manager