An important aspect of our investing approach involves identifying big-picture trends to help us understand what's been happening in the financial markets and what's likely to take place in the future. To that end, we've outlined what we believe to be a possible "roadmap" to chart out where the financial markets have been and where they are headed in the months and years ahead.

1. Increasing liquidity, leverage, and risk tolerance will drive up most financial assets.

2. At some point, the liquidity, leverage, and risk tolerance will recede and most asset prices will decline. The price correction will be broad and even assets with good fundamentals will be caught in the downdraft as leveraged speculators are forced to liquidate their positions.

3. Deprived of the stimulative benefits that constantly increasing asset prices have provided for the last few years, the US economy will slow down.

4. The federal government, ever in thrall to the Keynesian idea of stimulating aggregate demand, will respond to the economic slowdown in the usual manner: the Federal Reserve will lower short-term interest rates and increase the money supply while Congress steps up deficit spending.

5. Lower short-term rates, higher monetary growth, and increasing government indebtedness will have an inflationary effect and will result in a decline in dollar purchasing power.

6. Dollar weakness will bolster the prices of hard assets and foreign currencies.

7. Reasonably priced, fundamentally sound stocks of companies involved in the real economy of trading goods and services will soon recover and head to new highs. Meanwhile, the stocks of companies that have benefited primarily from the debt-fueled, speculative financial economy will continue to languish (in inflation-adjusted terms, at the very least) for years.

Of course, we can't tell the future. We acknowledge that this is just one of many possible roadmaps and a very simplified one at that. Furthermore, if we were somehow certain that the markets would end up following such a precise series of events, we still wouldn't know the timing involved.

While allowing for the possibility that a different series of events will unfold, we do believe that we have been in Phase 1 for a couple of years now, and that if the leverage-and-liquidity phase hasn't already ended that it could do so at any time. For this reason we have recently been positioned more defensively than at any time in the past four years, having stepped up exposure to cash and high-grade bonds both foreign and domestic. The stock exposure that we maintain is focused on areas around the globe that exhibit strong long-term fundamentals, with an emphasis on producers of hard assets.

If Phase 1 continues, or if the markets manage to avoid a serious correction at all, we will enjoy further gains because we still have a healthy level of exposure to a set of investments with positive long-term fundamentals.

If Phase 2 arrives, on the other hand, we will be in a position to take advantage of any significant price declines by increasing our exposure to fundamentally sound assets in anticipation of Phases 6 and 7.

There is at least a chance that last week's global stock market downturn has ushered us into Phase 2. This particular selloff has been unusually sudden and occurs at a time when economic growth is decelerating, the subprime mortgage derivative shell game is falling apart, and the Wall Streeters are slowly realizing that they have underestimated the aftermath of the housing bubble. However, the markets have recovered from many a brief downturn during this liquidity-induced bull market and they may do so yet again.

We will wait for further evidence before we declare that Phase 2 is upon us. In the meantime, we believe that the best approach for value investors is to be patient and to follow a cautious strategy like that outlined above.