Opinion: Take losses, gains for year-end tax advantage

Although it has been a less-than-stellar year for the overall equity markets, there have been both value and growth sectors and individual issues that have provided well-above-market returns, many of which should have been sold as they reached valuation levels exceeding the norm.

That is especially true for those that qualified for long-term capital gains treatment. (If only the good old days of buy and hold forever were with us, but alas, the reality is that valuations move to extremes, both undervalued and overvalued, far too rapidly to be ignored. Profits not taken can become profits lost.)

Each month we write a cover letter that accompanies our clients’ investment reports. Sometimes it deals with the economy, sometimes with the markets, sometimes with whatever strikes my fancy.

Our most recent correspondence covered a number of items that we want to share with you. Although it is general in nature, it presents the basic backdrop against which we believe 2005 will play out. We would draw your attention to paragraph four, one of the foundation stones in our business and investment philosophy:

Finally! Elections are over and the airways are clear of those grating political commercials. No more claims by everyone running for office on how he or she was going to fix every conceivable problem.

The uncertainty of the presidential election has been removed from the market concerns and oil has not blasted through the much-predicted $60 a barrel. That means that the pessimists will have to find a new worry.

My guess is that it will be about the weak dollar and how it will impact the balance of trade and therefore lessen the desire of foreign investors to own U.S. Treasury obligations and American equities. For some, interest rates will probably also be a worry factor as the economy improves and the Fed raises short-term rates in order to boost the dollar’s value relative to other countries’ currency and thereby maintain foreign investment in our securities.

There is always something to worry about, but I don’t know any pessimists who have been successful investors. As a good friend of mine said, “There haven’t been any foundations established by people who sold shares short.” American optimism, energy, and innovation have been our hallmarks. There’s no reason to doubt, and many, many reasons to believe in, our economy.

How that will translate into investment returns is, as it always has been, open for discussion. As my dad loved to say, “A difference of opinion is what makes the horses run.” (When it came to applying that to actual horse races he was less successful than Mom, who based her selections on a more scientific method – placing her bets based on the color of the silks the jockeys wore.)

We expect a good, but not great, investment climate through 2005, barring any unforeseen events. Returns in the mid- to high-single digits are more likely than the double-digit rates of the period that preceded the tech bubble bursting and the horrors of 9/11.

Of course, any number of surprises could derail that outlook. Such as what? Beats me. That’s the way surprises are – unpredictable. So your guess is as good as mine.

Next month’s column will review the accuracy of what we have written about the markets during 2004 and give more specific recommendations for 2005. It’s our annual “tell it like it is” review of where we were right, where we were wrong, and where we should have kept our opinions to ourselves.

In the meantime, happy holiday season just doesn’t cut it with me. Politically correct though it may not be, accept my wishes for a very merry Christmas!

Clark Davis is a 34-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.