A case for risk/reward assessment By Vaughn Antley Senior Investment Officer Argent Trust

 Leading up to the war, the stock market continued its slide from the last three years. Concurrently, the Bond market maintained its place as the investor favorite driving interest rates down even further than the 40-year lows we experienced in 2002.  Optimism about the war set off a rally on March 12^th  and by the time the conflict began on  March 19^th, many of 2003’s losses had been erased.  It’s pretty clear this market is being driven primarily by daily events and their emotional impact on investors.    

The last five years have been among the most amazing in financial market history. Not only have we witnessed a greed-driven “bubble” environment on par with any in history, we’ve also watched its collapse. Many of the excesses that led to this collapse are now being addressed.  Corporate scandals and abuses, high debt levels and the excess capacity present in many segments of the global economy are in various stages of reversal. 

 Whether these improvements along with a successful war in Iraq will lead to immediate market gains is unknown, but given these trends you have to like our longer-term chances.   The real risk from here is that our economy continues its struggle after the war has been completed. In the short-term, the debate remains whether the slow economic growth is “structural” or totally war related.  

As we’ve watched this period unfold, the evolution of investor psychology has been fascinating.  Emotion is alive and well and being fueled not just by the financial media, but also by the internet and e-mail.  We have seen unsubstantiated stories and rumors spread like wildfire.  It is quite amazing to think about the number of talking head “experts” in the media that were not concerned about market risk in early 2000 but were only concerned about keeping up with the market averages in a wild bull market.  Now, these same “experts” are concerned about risk and are recommending that investors reduce their exposure to the stock market.  Perhaps this recommendation will prove to be wise, but, the quality of their assessment has to be questioned.  Especially given the fact that at the start of the bear market (when risk was highest) they were bullish, and they have now become risk averse after the stock market has lost almost 50% of its value and the NASDAQ is down nearly 80%.

In light of the events of the last few years this is a good time for all investors to be thinking back to their own view of risk and return in early 2000. If your views were detached from reality back then, what does that suggest about the wisdom of trusting an emotional point of view today? This is exactly why we believe it is  important for investment decisions to be made in the framework of a process that is far removed from emotion.

Emotion causes investors to buy at the top and to sell at the bottom.  A market top is typically characterized by unbridled optimism that trees really do grow to the sky (as in 1999-2000).  The bottom reflects great pessimism that is brought on by uncertainty.  Over the last few years we have witnessed corporate scandals like Enron/WorldCom, continued terrorist threats, a recession, a market meltdown second only to The Great Depression, and now a war with Iraq.  Given these events continuously occupy investor’s minds,  one has to wonder how much more uncertainty can find its way onto the menu. 

Vaughn Antley is Argent Trust’s Senior Investment Officer and is located in Monroe. You may call him  (318) 324-8000 or send an email to vantley@argentmoney.com