2011 Cabot Investor Conference - Lining up for Zero

1. Presented by:
William Larkin, Jr., Portfolio Manager
LINING UP FOR ZERO PERCENT!

2. The United States has $2.637 trillion (US$)
in money market mutual funds.

3. RISK INTOLERANCE, a term used in Behavioral Finance,
is defined as ‘market conditions when investors refuse to
take risk to earn a return’.

4. #1 Reason: FEAR!
Application: Bell Shape
Natural Science Gaussian Distribution Normal Distribution
Social Science
Central Limit Theorem
Mean
Outlier
Standard Deviation – a measurement of variability. Variability is used to measure confidence in
statistical conclusions. This is important math for finance where the standard deviation on the rate
of return on an investment is a measure of the security’s volatility.
Measures the probability of a random variable taking certain values. The
application of this process underpins the discipline of probability and the science
of statistics.

5. The Normalization of Deviance
(a change from normality)
Normal Life Experiences Financial Decision Making
 A Leaky Faucet  Low Interest Rates
 A Door that Sticks  Cheap Foreign Imports
 A Neighbor’s Barking Dog  Inexpensive Fuel
Humans are resilient and learn to live with their changing environment, which can cause
critical errors when making financial decisions. Investors tend to anchor their future
expectations in their recent past. Seldom do investors think that new developments or
changes in economic conditions will create a new course.
Fear – Preserving Capital
Falling
Rising
Greed – Return Focused

6. Natural changes caused by the economic cycle
can be underestimated.
Peak Financial System Imbalance
Early Recession
Late Expansion
GREED – Focus on Return
FEAR – Focus on
Protection
Late Recession Early Expansion
Trough

7. Effective decision making requires a recognition of change and
understanding the complexities involved in forecasting.
THE FUTURE STRATEGY LIMITATIONS

8. Developments in a Changing Economic Cycle
Causes Conflict between Simplicity and Reality
Human Comprehension Vast Complexity
New developmentss always emerge as the economy moves from the old business cycle to
a new business cycle. The framework or drivers of change are always slightly different and
often significantly unique. How should investors deal with such complex amounts of data
and the factors that drive change?
Diversification Strategy
SELECTION STRUCTUR VALUATION
E

9. Scenario Building – Weak, Moderate or
Strong?
Weak Economy
 Long-Term Bonds
 High Credit Quality
Low Growth Economy
 Intermediate-Term Bonds
 Medium Grade
Moderate Growth Economy Robust Growth Economy
 High Yield  Money Market Investments
 Short-term Corporate Bonds  Ultra-Short Bonds
 Mortgage-Backed Security  Short-Term Bonds
 Floating-Rate Securities  Variable Rate

10. 5 Simple Fixed-Income Principles
1) Think outside of the box!
2) Use every investment
option.
3) Avoid negative real returns.
4) Diversification can weaken
uncertainty.
5) Strategy shifts should be
gradual, not reactionary.

11. QUESTIONS?