Ed Note: With volatility rampant and markets in 2011 and a wide range of markets all down whether its the Stock Markets in Greece -45%, Hong Kong 25%, Denmark -24%, the TSE -20 % or a sharp collapses in Silver -40%, Gold -15% and Copper down suddenly -30% it’s a painful time for investors who’ve been caught in the turmoil.  With this backdrop Michael Campbell asked  Danielle Park how she and her firm has managed exceptional results since the markets began going haywire in 2007, and how an ideal portfolio ought be constructed to cope with and ultimately buy the bottom of this bear market.

Michael Campbell: A lot of investors must be wondering if they should have sold at or near the markets highs this summer. For those that are caught in this decline, what kind of advice would you give those individuals?

Danielle Park: These cycles are not “buy and hold” environments. You can’t just ride things up, and expect dividends to be as sufficient protection on the down aside. I think we are probably half way through what we could end up seeing in this particular down turn. This is like a déjà vu of about February of 2008 for me when markets had come off a bit and the main stream was still not pricing for a recession but all of our indicators were suggesting extreme risk warnings, net cyclical decline and when you are in a secular bear market cyclical declines tend to last 18 to 24 months and you tend to get a 45% drop in the stock market. So those are the facts that the we have to cope with and I think that it’s a mistake to think you can just hold through. Just one other thing, volatility is a word that I think is used to mask the reality of what’s going on here Michael, this is not just volatility this is capital destruction. The trend has been fully down since April you know major markets like the venture exchange is off +40%. Copper is down more than 30% the Canadian market is off about 20%. I mean this is not volatility I think that’s a misnomer, that’s the word people say to say “Oh well you should just ignore it.” I don’t think you should ignore it you should raise cash. You should have done it already but I still don’t think it’s too late.

Micheal: Danielle why don’t people act?  If I look at an equity portfolio and it’s an uncertain time I say “Well you sure have a lot more certainty than I do.” I am just wondering so why don’t people take action from your experience?

Danielle: I think it’s not being aware of how bad the declines can be in this type of environment and since the investment management business never give advice that’s proactive, they never tell people at the peak they should start selling. I think its programming from the investment management business that tells people they are never supposed to panic or react and when people start to sell in the down turn their always told that they’re panicking,  that they shouldn’t do anything. This programming results in people becoming trend following sheep and fall right off the cliff and no sane person reacts well to big capital losses. The whole idea that people can just buy and hold and not worry about the big declines is absolutely not my experience. The trauma comes whether you want to admit it or not. At some point people just start to panic, they get insomnia, they can’t sleep and the capitals destruction that happens Michael takes years to recover and that’s I think the point that is so glossed over when they say “Oh, it will come back”. I have heard that lately a lot. People will say “My advisor says not worry because it will come back just like it did in ’09.” But I think that people have a very short memory because ’09 was this really anomalous bounce back in stock markets that happened because of all the money coming in from governments but it’s not the normal experience to see a stock market bounce back 80% in a matter of months. In fact this time once this decline happens and governments are now pretty much out of bullets I wouldn’t be surprised to see a recovery that takes a five or six years from here before people see perhaps the April highs revisited.

Michael: I hate the question when someone asks me “What do I do now?”because I am thinking “Well you should have done it before.” Regardless Danielle, if an investor is loosing sleep, the uncertainty is killing him or her, what would you tell them to do right now?

Danielle: You know at Venable Park we haven’t lost any money in this down turn, and we didn’t lose money in 2008. It’s not necessary to go through this god awful cycle every couple of years, that’s the first thing I try and explain to people. Unfortunately they think that they are strapped on a rollercoaster and they don’t know there is a belt buckle so you can actually get off of the damn thing. You don’t have to just stay there frozen in spot. Most peoples reaction is “What? I thought you’re supposed to just stay with it.”  Right now we are getting a lot of calls from people that are fully long at your typical brokerage and investment planning houses. Unfortunately they have already lost a ton of money and we are not through the secular bear yet. So this is the third cyclical decline in the secular bear. If we are lucky this one will go in long enough and deep enough that we will finally squeeze the excess out of valuations, squeeze the over leverage out of the system and we we’ll get another really amazing buying opportunity sometime in the future, perhaps within the next 12 months. But here is the thing, you still have to know how to manage risk going forward from there. So yes it would have been better if you would have sold your equities any time in the last 12 months but in my view the right time to get on the correct risk controlled method is still today. So when people are calling me today saying here is my portfolio and they got a bunch of the usual suspects, Canadian portfolios that are full of energy and resources and all the high beta stuff. I say “Listen, you probably will see further declines here and the point is that we need to get your account structured correctly now.”

Michael: Danielle, pick any age group or characteristics you want but what should an ideal portfolio look like?

Danielle: Well I can tell you how we have made money in year to date and how we made money in 2008,  it’s amazing it’s almost exactly the same. Basically we got a sell on all the equity units in late 2007 and that happened to us in 2010 as well. So no equity exposure presently here year to date. We found bonds sold off last December giving us a great buying opportunity to add back come high quality credit. Some of those bonds are up 6 to 10% already on top of the income.  In addition the US dollar broke out in our work and we’re expecting that we could see the Canadian dollar fall considerably further in this particular cycle in which case you could make excellent very low risk returns. We made 20% on that trade in 2008 and we’re up several percent on it already in 2011. So the ideal portfolio is 50% high quality credit, 25% US T-bills and 25% Canadian cash. That is not something I am talking about holding for a few years, I am talking about holding it while things sell off and make whatever bottom they are going to do this time, so that you have optionality to buy things when they are on sale and everybody else is panicking.

Michael: Thank you Danielle. Danielle Park is the President and Portfolio Manager of Venable Park Investment Counsel Inc.  and author of the book Juggling Dynamite and blog by the same name.