Best & Worst

Too many shadows, whispering voices
Faces on posters, too many choices
If, when, why, what?
How much have you got?
--Pet Shop Boys

By most measures, 2008 will go down as one of the toughest years in market history. Major US indexes down 30% or more. Many overseas bourses down much more. Defaults, bankruptcies, forced liquidations. There were few places to hide.

As such, I feel fortunate to have made it thru this difficult year pretty much in one piece. What worked and what didn't?

Gold. For years we wondered how gold would fare in a deflationary scenario. We found out. Gold weathered this year's deflationary storm well, and actually closed about 5% higher on the year. I also managed to 'trade around' my gold position, as I let a significant chunk fly during the spike to $1000 in the spring. Better lucky than smart...

Cash. Hard to beat this asset class during a deflationary period. My cash positions have ranged from 40-70% over the past couple of years. Cash helped cushion the fall when the markets broke late summer.

Pharma. I began to perceive value in select pharma stocks such as Merck (MRK) and Pfizer (PFE) in late 2007/early 2008. Because of their undervalued condition and high dividend yields, I felt that these names had a good chance of swimming against a deflationary tide. I was wrong. While pharma did go down less than the general market, you can't spend relative performance.

Energy. Historically, my timing has been lousy in this sector and this year was no exception. I began buying oil, nat gas, and select energy stocks after they pulled back 15-20% from their highs in mid/late summer. Little did I sense that the sell off was only beginning. So, here I am once again lugging an underwater energy position into year end.

In summary, I anticipated the deflationary scenario pretty well by carrying high cash positions and paring back some gold near its highs for the year. But I wasn't totally in synch with my own forecast, as I took on risky positions in pharma and energy that went down with the rest during the Fall forced liquidation period.

My hope is that I'll be able to effectively apply lessons learned this year towards what is shaping up to be an equally, or perhaps even more, challenging market environment in 2009.

positions in gold, oil, nat gas, MRK, PFE