From the October 01, 2010 issue of Futures Magazine • Subscribe!

Market Upside Down

Market Upside Down: How to Invest Profitably in a Shrinking Economy
By Vinh Q. Tran
FT Press
$29.99; 321 pages

Vinh Tran has more than 20 years of experience as a money manager advising high net worth clients and institutions. As an expert in global economics, his credentials and knowledge are clearly displayed in this well-written, enlightening book on profitable absolute return while investing in these upside-down times.

According to the author, both the U.S. government and its citizens are deeply in debt, and this situation is much worse than that faced by Japan in 1989. Therefore, investors need to actively manage their market risk because they face an uncertain future where huge government debt can cause the next crisis.

Tran begins his discussion with a thorough review of the conditions leading to the government policy initiatives after the 2008 stock market and real estate crash. The author believes that these events are comparable to Japan’s crises in 1989-1991. He then provides a clear and comprehensive explanation of the Japanese stock market and real estate collapse. This is followed by the reasons for the 2008 housing collapse and stock market crash that resulted from unprecedented risk taking and leveraging of the economy caused by the unraveling of the subprime mortgages.

Investors need to assess and deal with systemic risk, have liquid assets and keep a cash reserve. He stresses that stocks are neither a reliable source of liquidity or income nor an investment offering quick payback as experienced in years past. He is not a fan of mutual fund investing and points out, according to Standard & Poor’s, that almost 71% of equity funds underperformed the market in 2008.

Interestingly, Tran observes that in the Dow Jones Industrial Average’s 112-year history, it has treaded water and done nothing for 65 years. He then spends considerable time reviewing the devastation caused by the market crashes in 2000-2002 and 2007 to early 2009. There was no place to hide in this last crash except for selected bond funds.

Tran emphasizes that the risk from stock market losses needs to be better managed to avoid future market collapses and loss of principal. He mentions that black swan events occur more often that investors think can happen by describing the unexpected events of October 1989, October 2002, and October 2008 when the equity markets were in turmoil.

To protect themselves from future black swans and stock market volatility, Tran recommends that long-term investors and savers focus on an “absolute return” strategy. This he believes is the key to building wealth.

A typical absolute return portfolio could contain both laddered fixed income vehicles as well as professionally managed bond funds to increase returns and minimize interest rate risk. Municipal bonds are also feasible investment vehicles. Moreover, inverse ETF bond funds (for example, ticker symbols PST, TBT, and TBF) can be used to protect against interest rate risk. Accredited investors can use hedge funds that focus on absolute returns.

Tran recommends that conservative investors consider a hedge fund that manages a fund of funds for fixed income. He urges investors to check out any potential hedge fund very carefully before investing, as not all of these funds have performed well. To make his point, he mentions that of the 1,732 hedge funds rated by Morningstar in 2008, 615 disappeared because of poor performance. Moreover, 1,847 hedge funds closed between January 2008 and the first quarter of 2009.

The author provides readers with a realistic assessment of the economic and financial implications of existing government policies going forward, as well as the turbulent stock market history and performance. With this knowledge, coupled with the author’s recommendation of an absolute return strategy, investors will the insight necessary to set appropriate financial goals and manage their assets in the upside-down stock market.

Leslie N. Masonson is the author of “Buy DON’T Hold” and “All About Market Timing.” Reach him at lesmasonson@yahoo.com.

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