Every investor should strive to achieve the largest possible return on investment given a certain tolerance for risk. Although this axiom seems obvious, during periods of economic turbulence it is critical to focus on the risk side of the equation. How safe is the principal value of my account? Am I well positioned to weather a market correction and rebound fully when the investment climate turns favorable? Intellectually, we understand that long term appreciation and income are equally important. But, as markets fluctuate, falling prices can blur the investor’s vision and raise the question: Is my money safe?

Our current economic difficulties stem from the financial crisis that began in 2008, when consumers, financial institutions and businesses recognized the dangers of the explosion of debt that accompanied the “housing bubble.” Not surprisingly, investors raced to the sidelines seeking safety for virtually every financial asset. Today we are replaying a different version of the same story. Europe, the federal government, and even our own states are coping with the reality that deficits and aggregate debt is simply too high. This is not merely an intellectual discussion or even political argument, but the reality is that the investment community is speaking with its pocketbook. Investment capital, collectively your money and mine, recognizes the debt problem and is fleeing this risk. Money and confidence are the oxygen and energy that sustain capital, whether it is businesses, government or even our own credit cards. We can anticipate continued market volatility until debt is addressed in a meaningful fashion. When this occurs, it will likely bolster investor confidence and help to restore order to the markets.

If debt is the root source of our problems, it is logical that those economic segments least afflicted by debt should provide a safe haven and be well positioned for long term recovery. An analysis of various sectors reveal mixed results. Consumers, battered by unemployment, lower real wages and a housing slump which wiped out a significant portion of net worth, reacted by significantly increasing savings and reducing debt levels in every category, from mortgages, to credit card and automobile installment paper. Another major creditor, the U.S. government, proclaims it is prepared to begin the process of deleveraging the U.S. government’s balance sheet. Whether actions accompany strong rhetoric is likely to be debated through the 2012 presidential election, thereby postponing a true solution to our national debt issues until 2013. Today, across the ocean, some European governments refuse to admit there is a series of imminent problems that threaten their entire Euro currency infrastructure. Major European banks and governments are grappling with serious debt and liquidity issues while other debtor nations stick their heads in the sand, hoping the problem will just go away. Of one thing I am certain: this strategy will not work.

How have the companies in which we have invested our client funds dealt with the current series of crises? Larger companies have already reduced debt and employment levels and have achieved remarkable productivity gains, which have enabled record or near-record earnings and profit margins for 2011. The earnings outlook for 2012, although uncertain, appears capable of being sustained at high levels relative to historic norms. Multinational giants have followed a similar course, but additionally have amassed vast amounts of cash for both safety and future investment. In my view, these strong results, combined with their exceptional physical and intellectual capabilities, places multinational corporations in a very strong position for what is expected to be an unsettled world in the future. When the world economies recover, the larger well-managed companies are poised to profit handsomely, and this has generally been accompanied by strong share price appreciation.

HCM has consistently provided above average returns, particularly during periods of market stress. Our focus on seeking undervalued companies that dominate their competitive markets, and integrating these two variables into an asset allocation strategy, has produced good investment results over many market cycles. I hope and expect that record can be extended in the present circumstances.