Money Management - Gaia Capital Management, Inc.

Road Map for the Next 8-10 Years

The current era so closely parallels the 30's - it's uncanny. First the drop from 1929-33 led to the lowest low, though markets were volatile for the ensuing 9 years (until 1942, when the War's end was less in doubt). The interval between 1933 and 1942 is best described as a roller coaster, with a major rally until 1937, when government largesse faded mightily and the Federal Reserve began raising rates. This led to another low in 1938, followed by more lows from 1939 - 1942 as war clouds gathered. War is neutral to positive for financial markets, but the prelude to war, as we saw in late 1990 and early 2003, is often rocky.

No epoch is exactly the same. For example, the U.S. is currently the only "superpower" and the world is still more economically connected than it was in 1933. Furthermore, there is solid evidence of lasting economic progress in emerging countries such as China, India and Brazil.

Our "tactical" style of management - which moves client money around in advance of likely market moves - is designed to take advantage of the cyclical volatility we see ahead.

But don't expect new highs anytime soon. This does not mean that the coming decade won't be profitable - it will be. But buy and hold will not make it so. We believe that one must be more activist in approach to do well in the upcoming term.

We greet the 10's with enthusiasm.

updated 8/17/09

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Management Style

Gaia Capital Management aims for excellent long term results for clients, consistent with their risk and reward expectations. We align accounts with long term and medium term trends,while placing considerable attention on consistency and reduction of volatility. We use our 20 years of experience to help us define an environment; then we select securities which we believe will do well in alignment with the dominant trends.

Research has shown us that many people and the popular press tend to focus on the past in their expectation of the future. We are quite contrarian in the belief that one must look upside down, as it were, and select for the future. That which has done well cannot continue forever, and that which has done poorly will turn around . The significant amount of research to which we subscribe supports us in identifying turning points.

At such turning points, we use a process called asset allocation to shift the focus of client portfolios to that which has a high probability of outperforming in the future. Such contrarian investing is quite contrary to human psychology, ours included. Yet, over and over, research shows that the price you pay for something determines in great measure the results you will achieve.

We are global in the scope of our work. Though most people are more familiar with domestic U.S. investments, we often find great value in other locations. We take great care in learning as much as we can about "intermarket" relationships, for they tell us how to find investments for a trend we see unfolding.

Our investment style requires significant information and research. Thus, we devote much time and attention to understanding the world around us. It is in this understanding that we shape an investment view, and with that view we select appropriate investments. The process is quite circular - it goes on and on ad infinitum.

Asset Allocation

Asset allocation is the way we add value and can outperform the indexes and other benchmarks. The concept of asset allocation is quite simple; the execution quite difficult. Every security is in some phase of a cycle - up, sideways or down. Asset allocation attempts to recognize the upper and lower limits of these cycles. In so doing, we have a guide to buying or selling so that we may always be positioned optimally for risk and reward.

Our asset allocation issues involve the placement of new and existing client money. We know the effect we want to achieve, as we have risk and performance parameters for or various investment strategies. We use the asset allocation process outlined below to guide us in making decisions about how we will reach our targets. Our process goes something like this:

Step 1: Understand investment forces at work
This involves a lot of reading and research and results in a global understanding and identification of major themes affecting investments.

Step 2: Spotting trends
Through the use of charts and other technical tools, we identify areas that are trending upwards, downwards and sideways. This is the first step of refinement It is important to note that we seek medium length trends in cycles of several months to a year or more. We feel that the long-term investor is best served by our attention to this intermediate area.

Step 3: We compare the themes with the trends
Specifically, we seek to understand the reasons why the trends exist. Sometimes we just don't know, but we don't usually argue with price movements. After all, the market can remain irrational far longer than your money will hold out if you oppose it.

Step 4: Latching on to the trends with specific investments
This process involves finding good quality mutual funds, exchange traded funds and other managed investments which support a particular trend or theme.

Step 5: Place investments and monitor
All of the research in the world matters little unless one is willing to commit resources. Herein lies the largest area for judgment in the entire process; how much to allocate to what and exactly when to step in? It is our style to be somewhat early so as to get most of a move, but we cannot be so early as to have dead money or be proved wrong by a false start. That said, if we waited until a trend was very well established, we would not get it's full fruit. Monitoring is critical. We continually repeat the research process to give us warning that a trend may be in danger of breaking. We also look carefully at the price action of our investments in search for clues about success or failure.

Step 6: Rebalance periodically
We believe that diversification reduces risk but we are not so diversified as to gain little because we have so many opposing forces at work in our portfolios. We will often take some profits in an area that has had a bull run for some time and allocate them to areas which have done less well but show promise of a turnaround. This process reduces risk and locks in gains.

The process is supposed to work well in just about any environment. We find that it does - except in periods of great ferment when fear or greed get outlandish. Then we use other means to protect portfolios. In times of great fear, we raise cash awaiting the point of maximum downward pressure. Then we step in with both barrels and stay until some sort of greed begins to show. It's a fascinating process.

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Investment Strategies

Investment strategies maximize our effectiveness by creating easily differentiable cohorts, each with slightly different risk. We offer three distinct investment strategies to accommodate the varied needs and tolerances of our clients. Clients select the strategy that best suits them and we do the rest.

Income Builder
Wealth Builder
Capital Builder

Income Builder
Consistent with the empirical observation that stocks outperform bonds by about 2:1 over periods of at least 30 years and that high dividend yield stocks outperform the stock indexes over long periods of time, we have constructed the income builder portfolio. The portfolio is global, yields about 6% in dividends and aims for an annual compound growth of 9% to 11% over a rolling 3 to 5 year period. Income Builder is designed with the retiree’s interest in mind, but may also be attractive to the conservative person who needs a high performing yet stable account. Income Builder invests primarily in high yield stocks which pay a dividend in excess of 4% per year. We may, at our discretion, augment income with covered call writing when, in our opinion, doing so will help to preserve the value of the account.

Wealth Builder
Wealth Builder has a global focus and aims for capital growth first and income second. It will appeal to those who do not need income and who are willing to accept moderate volatility in return for an opportunity to make above average returns. Wealth Builder invests mainly in larger stocks with proven records but which may have temporarily lost a competitive advantage, been unnecessarily reduced in price by a jittery market, suffered a quarter or two of sub-par earnings or which may otherwise have become undervalued in comparison to their intrinsic value. We target a compound annual return of 10% to 12% over a rolling 3 to 5 year period for Wealth Builder.

Capital Builder
Capital Builder aims for growth of capital with little reference to income. It may be the most volatile of our portfolios, as its stocks are not cushioned by dividend yields. We may invest in companies of all sizes, anywhere in the world. We want to own portfolio stocks for a long time and hence subject each candidate to a rigorous examination. If we are not willing to put substantial amounts of our own money into a stock, it may not be appropriate for Capital Builder. Like the other two portfolios, we look for stocks which present high uncertainty but low risk. Risk is defined as a permanent impairment of capital. We strive for a compound annual return of 11% to 13% over a 3 to 5 year rolling period for Capital Builder.

Individualized Accounts
We will design an account around a client’s needs not satisfied by our three portfolios. There is no extra charge for this service. We strive for client satisfaction and we realize that the investment strategy is the most basic of account building blocks; it must fit the client as a suit would the body.

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