By Daniel A. Barnes, CFA

Recently
Today the Dow Jones Industrials fell 600 points, capping an impressive 1900 point slide over the last 20 days.  If somebody tells you they saw it coming, ask them how much money they made on their keen insight.  I’d like to say something definitive, either “this is a buying opportunity” or “a vicious circle has engulfed the developed world’s financial markets”; but I can’t.  Nothing is definitive or clear.  The perception of risk has increased.  For a more in-depth view on the questions at hand, take a look at Barnes Capital’s Insight Newsletter in the next weeks.

My Outlook
What’s my outlook?  Expect investment returns in stocks and bonds to be modest.  Own some gold bullion or the equivalent, and expect real estate returns to be negative over the ensuing decade.

The Social Contract
As we rewrite the social contract between the young and the old, the rich and the poor, in the course of the next many years, the current imbalances and joblessness will become more balanced.  The stage for a great decade of prosperity is being set.  Just don’t hope or assume this decade might still be economically great, that’s statistically virtually impossible.

What I hope, is that the politicians can act with greater courage, imagination and creativity, to develop solutions.  I’m discouraged by their lack therein.

Gaming
I have biases.  I’ll explain…I have a confession to make.  I play board games.   Always have, always will.  Other people escape to the challenge and tranquility of bass fishing; I re-fight WWII on the top of a table. A silly escape?  Perhaps.  But I’m more exhausted by a marathon 14-hour game than I am managing investment portfolios.  So while the ratings agencies were downgrading debt and European and U.S. markets were melting down, I observed these happenings within the bubble of a bunch of hobbyists at WBC (World Board Gaming Championships) in Lancaster, PA.

At WBC, I had some insights that offer me hope as to why we should not fear the challenges of this era.  Have you ever seen a bunch of serious hobbyists?  War gamers re-enact the grand conflicts of the ages, refighting the last war or the Crusades, trying to put themselves in the positions of the leaders of those days and times.  Why do they do it?  I think it’s 1) to escape, in a way that consumes the mind and spurs creative thought, 2) to have social fun and 3) to compete.

What does gaming have to do with portfolio management and wise investment counsel?  Answer: everything!  I play two types of games. One type is economic expansion games, which have few or no luck elements.  The other games I play are strategic war games. What economic business games and strategic warfare games have in common is that each are fully focused on marshaling your resources and managing risks – and those are the very same things we are doing when we handle real-life investment capital.

Recently, the investment markets have been reacting to well-known risks. In the headlines this week, this movement was manifest in the move to take risk “off the table.” This means that all “risk” assets declined.

Your investment portfolio and asset allocation is a complex business game.  How your assets are allocated constitutes many strategic decisions designed to avoid all the many risks.

The Next Generation: The Millennials
I think that this new generation is learning — through things like all-night role-playing games– practical, communicative skills that they will ultimately use to be creative, imaginative and optimistic.  They will see solutions to the great financial and economic problems of our time.  The world is getting ever richer, but ever more competitive.  Creative solutions and pragmatic approaches are mandatory. While the decline of Rome, err I mean Pax Americana may seem at hand, I’m inspired by the communicative intelligence and mental agility of the next generation.

The problems we face are the financing of health care benefits and retirement entitlements.  I know we can adjust to this reality. And I believe in the power of a billion middle-class consumers worldwide to get up every day and figure out what they need to do to make money and pay the bills.  Capitalism has been embraced worldwide.  If only politicians could employ more imagination, optimism and courage.  Maybe they should play more games in their free time?

Barnes Capital LLC is a Registered Investment Advisor.  We manage trusts and retirement income portfolios. Financial planning is an integral part of our process. We protect client capital using municipal bonds, high-quality dividend-increasing companies and precious metals, which have protected wealth in every epoch spanning five millennia of bankruptcies, inflation and other forms of attrition. Call 925-284-3503 and visit www.barnescapital.com.

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Tuesday, August 9th, 2011 at 1:32 am and is filed under Monthly Column. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.