Let the Leaders Lead

Howard Marks, one of the best investors of the last few decades, has a paper circulating around in which he quotes John Kenneth Galbraith. Galbraith once said that there are two types of forecasters: those who don't know, and those who don't know they don't know. Howard Marks makes no claim about knowing what the outcome of the current travail will be. Nor do I. I know that Sen. Shelby's request during the Senate hearings the other day for some assurance that the proposed Treasury plan will work was only a way to block it. There is no way of knowing. But as Marks points out, you can't plan for the end of the world, so plan for getting past this and where would you want to be. Lincoln was able to say during the worst of the Civil War, "This too shall pass." So shall this situation.

The stages of a bull and bear market are the same. The first stage is led by those who see that things might change (for better or worse depending on where you have been). There is a lot to be gained by being early. The second stage is when most realize that things have changed and are changing. Some respectable, and maybe safer, gains can be had. The third stage is when most are convinced things are set in concrete and the world will never be different. Certainly the markets exhibited that attitude in 2001 at the top of the Internet boom. The consensus was we were in a "new" economy and the "old" economy was dead and gone and valuations based on pageviews and clicks was the way to buy stocks. Significant losses followed this level of conviction.

It seems to me that the prevailing view is that our system is broken and not fixable. I think our system is in the midst of profound change, and from change comes opportunity. We have had, says Howard Marks, experienced an unprecedented financial/housing boom. Busts always follow booms. When the busts come, it always feels like the end of the world.

We have consistently relied on the lessons of history for guidance and insight to help us through tough times. We are in a bear market, and since World War II, the average bear market has seen a peak-to-trough decline of 31%. If you include the disastrous1937-1941 market, the average goes to -34%. As of last night, the S&P is off 23% from its October high. At the recent low of 1134 a few days ago, the S&P was off 28% from the high of 1576. We are tracking the typical bear market. When we are in a bear market, it never feels typical. It feels like an out-of-body experience, and we are convinced things are truly different and it has never been this bad before.

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Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.