Investor's Corner for January 30, 2004

Investor's Corner Newsletter

By Will W. Woodard, III, CFP®
President, Dare Capital Management & Advisory
January 30, 2004

"The person born with a talent they are meant to use will find their greatest happiness in using it."

...Johan Wolfgang von Goethe, from the "Early To Rise" e-letter

Happy 2004 to all! With the annual retiring of one calendar and the adapting of a new one comes the chance to reconcile a year's work, gains and losses (economic, emotional, you name it) and assess the current status of Projects, Dreams, Goals, etc.

Please don't sell yourself short for 2004-take the chance, live the dream. Identify what makes you happy and go about achieving it!

If something is holding you back, consider getting rid of it, or approaching it from a fresh angle, or at the very least minimizing its impact.

If someone is holding you back, tell them as much, then make adjustments.

If you just don't believe in yourself, ask yourself, WHY NOT? There's a big old world of positive experiences out there just ripe for the taking, if you'll simply step up to the plate and make the effort!

There, got that off my chest.

Since my last report we've had quite a rally in the equity markets. 2004 turned out to be an "Up 25%" year for the broader averages, with foreign and qrowth stocks besting that number. Expect some sector rotation but continued equity market strength over the near term, with economic data and earnings reports providing guidance as to how strong and for how long the upward move can continue.

Practice Note: Dare Capital Management & Advisory will remain open to new investors/clients until we reach our near term goal of $20 MM in assets under management, slated for 12/31/05 or sooner. Investors and potential clients seeking to establish a relationship with a fiduciary, client-centered investment firm that does business in a fee-only manner are invited to inquire about the firm's services while the firm is still open to new clients.

In this issue of Investor's Corner:

2003 Performance data, by Ben Warwick
"What is Market Efficiency?" by Reem Heakel, with my comments
MarketLights™ Charts introduction
Worthwhile links

1. 2003 Performance Data Chart--This chart was sent by Sovereign Wealth Management's Ben Warwick. It applies to calendar year 2003 market data.

2. "What is Market Efficiency?" by Reem Heakel

Note-this article is from the Investopedia website, (www.investopedia.com) with my emphasis underlined and my comments in italics.

When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return but also to outperform, or "beat," the market.

Market efficiency, detailed in the efficient market hypothesis (EMH), which was formulated by Eugene Fama in 1970, suggests, however, that at any given time prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price since no one has access to information not already available to everyone else.

Non-Predictability

The nature of information does not have to be limited to financial news and research alone; indeed information about political, economic and social events, combined with how investors perceive such information, whether true or rumored, will be reflected in the stock price. As prices only respond to information available in the market, and, because all market participants are privy to the same information, no one will have the ability to "out-profit" anyone else. In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful. As you might expect, I have a problem with this-Will

This "random walk" of prices, commonly known in the EMH school of thought, results in the failure of any investment strategies that aim to beat the market consistently. In fact, the EMH suggests that given the transaction costs involved in portfolio management, it would be more profitable for an investor to put his/her money into an index fund.

Anomalies: The Challenge To Efficiency

In the real world of investment, however, there are obvious arguments against the EMH. There are investors who have beaten the market--Warren Buffett, whose investment strategy focuses on undervalued stocks, made millions and set an example for numerous followers. There are portfolio managers that have better track records than others, and there are investment houses with more renowned research analysis than others. So how can performance be random when people are clearly profiting from and beating the market?

Counter arguments to the EMH state that consistent patterns are present. Occurrences such as the "January effect," a pattern which shows that higher returns tend to be earned in the first month of the year, or "blue Monday on Wall Street," a term that discourages buying on Friday afternoon and Monday morning because of the "weekend effect," the tendency for prices to be higher than the rest of the week, are just examples of some of the predictable anomalies thrown in the face of the EMH.

Studies in behavioral finance, which look into the effects of investor psychology on stock prices, also reveal that there are some predictable patterns on the stock market. Investors tend to buy undervalued stocks and sell overvalued stocks, and, in a market of many participants, the result can be anything but efficient. Paul Krugman, MIT economics professor, suggests that because of the mass mentality of the trendy, short-term shareholder, investors pull in and out of the latest and hottest stocks. This results in stock prices being distorted and the market being inefficient, so both no longer reflect only all available information in the market. Prices are rather being manipulated by profit-seekers.

The EMH Response

The EMH does not dismiss the possibility of anomalies in the market that result in the generation of superior profits. In fact, market efficiency does not require prices to be equal to fair value all of the time. Prices may be over or undervalued only in random occurrences, so they eventually resort back to their mean value. As such, because the deviations from a stock's fair price are in themselves random, investment strategies that result in beating the market cannot be consistent phenomena. I am going to make the case that the deviations are not in fact random, and that proper interpretation of certain market indicators can help an investor in making a sell decision (or not making a buy decision) when market headwinds exist. What we're trying to avoid is low probability opportunities for capital growth-Will

The hypothesis continues that an investor who outperforms the market does so not out of skill but out of luck. EMH followers say this is due to the laws of probability: at any given time in a market with a large number of investors, there will simply be those that over-perform, those that under-perform, and those that maintain the average.

How Does A Market Become Efficient?

In order for a market to become efficient, investors must perceive that a market is inefficient and possible to beat. Investment strategies intended to manipulate inefficiencies are actually the fuel that keep a market efficient. There is undeniably some truth to this-Will
A market has to be large and liquid. Information has to be widely available, in terms of accessibility and cost, and released to investors at more or less the same time. Transaction costs have to be cheaper than the expected profits of an investment strategy. Investors should also have enough funds to take advantage of inefficiency until, according to the EMH, it disappears again. Most importantly, an investor has to believe that she or he can outperform the market.

Degrees Of Efficiency

Accepting the EMH in its purest form may be difficult; however, there are three identified classifications of market efficiency, which are aimed at reflecting the degree to which it can be applied to markets.

1. Strong efficiency - This is the strongest version, which states that all information in a market, whether public or private, is accounted for in a stock price. Not even insider information could give an investor an advantage.

2. Semi-strong efficiency - This form of EMH implies that all public information is calculated into a stock's current share price. Neither fundamental nor technical analysis can be used to achieve superior gains.

3. Weak efficiency - This type of EMH claims that all past prices of a stock are reflected in today's stock price. Therefore, technical analysis cannot be used to predict and beat a market. "Beat" is a big word…again, my case is that certain technical indicators can identify "low probability for positive outcome" scenarios-.-Will

Conclusion

EMH propagandists will state that profit-seekers will, in practice, exploit whatever abnormally exists until it disappears, leaving markets eventually to correct themselves. In instances such as the "January effect" (a predictable pattern of price movements), large transactions costs, moreover, will most likely outweigh the benefits of trying to take advantage of such a trend.
In the real world, markets cannot be absolutely efficient or wholly inefficient. Markets are essentially a mixture of both, and daily decisions and events cannot always be reflected immediately into a market; moreover, if all participants were to believe that the market is efficient, no one would seek extraordinary profits, the force that keeps the wheels of the market turning. Bravo! Will

In the age of information technology (IT), however, markets all over the world are gaining greater efficiency. IT allows for a more effective, faster means to disseminate information widely. In the meantime, electronic trading allows for prices to adjust more quickly to news entering the market; however, while the pace at which we receive information and make transactions quickens, IT also restricts the time for the verification of information used to make a trade. Thus, IT may inadvertently result in less efficiency if the quality of the information we use no longer allows us to make profit-generating decisions.

And so, on to #3:

3. MarketLights™ -- Preface: Everyone seems all too willing to focus on BEATING the market, when what it seems we really should be focused on is AVOIDING BIG LOSSES. MarketLights™ is the graphical representation of a methodology I developed to identify the technical strength or weakness of a stock, sector, or market…the goal being to HAVE THE OPTION OF having money off the table and/or avoiding new investment in the stock, sector, market, etc. when it is technically weak-thus attempting to PROTECT DOWNSIDE RISK of loss of capital when market headwinds are blowing.

I have attached a copy of a MarketLights™ chart on the next page of this newsletter. (It just so happens to be green across the board-rest assured they will not always look like this!) Dare Capital Management & Advisory clients can elect to receive this on a weekly or monthly basis as a part of the firm's professional services. See end of web page below.

4. Worthwhile links:

CERTIFIED FINANCIAL PLANNER™ Board of Standards - http://www.cfp.net/default.asp

NAPFA, the National Association of Personal Financial Advisors - http://www.napfa.org/

The FPA's Hampton Roads chapter - http://www.fpahamptonroads.com/

Dare Capital Management & Advisory home page - http://www.darecapital.com/

Whew! That's enough for this issue. Feel free to call or write with questions or comments, or to inquire about my firm's services as they relate to your individual situation--Remember, you deserve to have a positive, rewarding and fulfilling relationship with your financial advisor. If you do not have that, consider making a change!

Best wishes for a rewarding 2004 for you and your loved ones, and good investing,

Will W. Woodard, III, CFP®
Dare Capital Management and Advisory
PO Box 1138
Kill Devil Hills, NC 27948-1138
252.480.0156
will@darecapital.com
www.darecapital.com

Will W. Woodard, III, CFP® is president of Dare Capital Management & Advisory, a Registered Investment Advisor and fee-only financial planning firm based in Kill Devil Hills. Dare Capital Management & Advisory is committed to providing independent, objective, and professional financial advice, specializing in ongoing investment management and comprehensive planning. Mr. Woodard, his firm, or his clients may own the investments mentioned herein. Contact Will at (252) 480-0156 or e-mail Will@darecapital.com

MarketLights™ Indicators-01/29/04
Assessing Near-Term Financial Market Health from a Technical Standpoint By Will W. Woodard, III, CFP® - President, Dare Capital Management & Advisory

S&P 500:	S&P Mid-Cap 400:	Russell 2000:

Dow Jones:	NASDAQ 100:	MS REIT Index:

DJ-AIG Commodity Index:	Developed Markets International:	Emerging Markets International:

Key:
Green Light-Go-Market is healthy.
Yellow light-Caution-Market is showing signs of weakness.
Red Light-Stop-Market is weak.

About MarketLights™: MarketLights™ were developed to help assess the near-term technical health of a particular equity market or market sector. Like any technical indicator, MarketLights™ looks at where a market has been, not where it is going, and does not take into effect many important factors influencing the equity markets, including but not limited to volume, market breadth, and the health of the bond markets, currency markets, or broader economy.

THIS TOOL IS FOR INFORMATIONAL PURPOSES ONLY and is IN NO WAY meant to override client-specific investment goals identification, risk tolerance evaluation, and asset allocation.
For further information, contact Dare Capital Management & Advisory at (252) 480-0156.
Copyright 2004 Online Investor Services, Inc. all rights reserved.

The fine print: This newsletter can be reprinted or forwarded--however, it is requested that reprints of any material in this newsletter include credit to Dare Capital Management and Advisory (252)480-0156 and an email link to will@darecapital.com. Thanks for spreading the word!

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Mr. Woodard, his firm, or his clients may own the investments discussed in this newsletter. Past performance is no guarantee of future returns.

The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons.