31 July 1998

My benchmark account, which started trading at the beginning of March 1997, finished the year up 39.22%. The results for 1998 are still being determined�

I have said for a while now that the market is way overvalued and, at some point, will correct the situation. Hence my stance this year has been extremely cautious and, when the correction comes, cash will be king. I am not interested in beating the market (or other funds) by performing relatively better than they do (especially in bad times). I am only interested in absolute performance for you, my clients. I know from past experience that relative performance is of little comfort when you're losing money. Hence, I expect to lag the indeces if 1998 proves a continuation of the bull market and I expect to make a profit even if the market has a serious correction (30-70% drop from the top).

As a result of my outlook, our accounts are heavy on cash (profitable positions were liquidated when they reached their targets). The few positions we still maintain, are either value plays which I am confident will pay off in spades (but expect will take time to achieve those returns) or are option plays which will expire later this year (most of the return on options comes in the last few weeks before expiration). I expect to close the gap on the indeces this year but with significantly less risk than the market as a whole. Should a serious correction happen, we are well positioned to profit from the fall, have a hoard of cash to buy up any bargains (should they present themselves) and I do not expect our long positions to be hit badly as they are already cheap. Should they fall further, I shall gladly add to the positions.

The market has corrected about 7% and subsequently bounced back from that low. Most people see this a temporary hickup in the continuing bull market. I see this as possibly the (long overdue) start of the bear market which I know is ahead of us, although exactly when it will begin in earnest, no-one can accurately say. To those who think me pessimistic and believe in "making hay while the sun shines" I say that if you haven't noticed the grey clouds accumulating, it's not long now till your hay gets wet! I have a very defensive posture right now and look forward to the correction when it comes. I take on short positions at times both to gain from the extreme overvaluation of certain stocks and as a partial hedge against our remaining long positions.

A final word of caution to those managing their own money or invested in mutual funds - given the risk of a serious decline in the markets, I would advise moving your money to cash. Cash is boring but it does protect your capital. Over the next 6-24 months, I am convinced that anyone showing even a 0% return will look wise (to those who will be caught long) when the market heads lower. If you don't understand precisely why you hold a particular position, then rather stay on the sidelines. Most people are worrying about missing out on the next 10% profit instead of worrying about the potential 30-70% downside that awaits us all ahead. If you think you are protected by virtue of the fact that you are invested in mutual funds, THINK AGAIN! The rules make it hardest for them to liquidate to cash when the market is falling so, again, without a very good reason to be invested, I would advise liquidating to cash as a strategic move. You have been warned�

Wishing you all a prosperous 1998.

Trevor Bennett-Cohen