December 2009 Issue: Key Points

This month's feature article is our year end review. We look at the most important lessons we've learned over the past two difficult years, our outlook for what lies ahead, and what we can do to prepare ourselves to adapt quickly when we are inevitably surprised by unexpected changes. The main point for readers to take away is that we anticipate a rough ride in 2010, with a return to the High Uncertainty regime. We conclude that many equity markets are probably substantially overvalued today, due to strong momentum effects that likely reflect the increasingly important role of short term algorithmic trading as much as human errors caused by strong emotion, social effects, and cognitive shortcomings. Given the strong financial incentives that many professional asset managers have to maintain gains (and their bonuses) through the end of this year, we believe that this provides a window for portfolio rebalancing away from equity exposures, and into either liquid reserves (given the uncertainty, think 12 -- 24 months of expenses) or increased allocations to undervalued asset classes.

We also emphasize that next year will be a particularly challenging one for financial advisers, with many markets set for dramatic regulatory changes (e.g., the end of commissions and the shift to fiduciary responsibility for all), existing clients increasing their demand for more frequent value added communication and reassurance, and new clients seeking out professional advice as their circumstances become more challenging. In short, we believe 2010 will be a time of crisis in the Chinese sense: a combination of danger plus opportunity.

This month's product and strategy notes cover a lot of ground, from gift book ideas to more on municipal bond market problems, the separation of alpha from beta investing, and a quantitative analysis of the return, risk and correlation of direct oil and gas investments, an another analysis of how the inclusion of timberland benefits a portfolio. We also summarize many interesting research papers that didn't make it into other issues of our journals this year.

| Overview of Our Valuation Methodology | Global Asset Class Valuation Updates Detail | Uncorrelated Alpha Strategies Detail | Global Asset Class Valuation Updates Detail | Global Asset Class Returns | Table: Market Implied Regime Expectations and Three Year Return Forecast | Feature Article: End of 2009 Review: Learning From the Past, Anticipating the Future, and Adapting Quickly in the Present | This Month's Letters to the Editor: Followup on Luck, How Does One Get Lucky?; Deloitte's Study - Skill versus Luck; Vanguard's New ETFs | Table: Fundamental Asset Class Valuation and Recent Return Momentum | Product and Strategy Notes: Four Gift Book Ideas, Muni Market Update; Commodity Futures vs. Direct Oil and Gas Investments; New Research on Alpha/Beta Allocation; and Highlights from Research Studies | December 2009 Issue: Key Points | Investor Herding Risk Analysis | A Year-End Overview of Major Asset Class Valuation Drivers and Best Regimes | December 2009 Economic Update |