Sunday, January 2, 2011

The Shoemaker’s Children and the Empty Cookie Jar

Day of reflection

We had a particularly long New Year’s Day which started with a 5:30 AM drive to the airport with the last of our house guests. During the day my wife, Ruth, filled me in as to the various tuition bills we were going to pay for the family. While this is a good tax planning move, it requires cash. Normally I spend time analyzing the various needs of my client accounts. As with the old tale of the Shoemaker, I do not focus on my own portfolio. For a professional investment advisor to admit a policy of benign neglect is not wise, but similar to many other managers that I know well.

The resulting analysis on my own equity (stocks and funds) showed a 40% commitment to international (excluding US) securities. This was not the result of a plan, but rather individual selections which happened, on balance, to produce good results (or at least better than my so called domestic choices). Looking at the current investment environment I am not displeased with this commitment, but I probably would not start a new client with this allocation today.

The very act of investing beyond one’s likely spending arena is hedging against seen and unseen domestic problems. In the past, when one market declined sharply others held up, and in some cases went up. Today I believe this approach is simplistic. First, when I look at my so-called domestic stocks, T. Rowe Price, Goldman Sachs, Franklin Resources, NASDAQ and Raymond James through a long term focus, each of them expects its foreign activities and clients will produce earnings growth faster than the domestic ones. (These are the five largest positions in the financial services hedge fund I manage as well as being in my personal domestic portfolio along with other stocks.) Second, stock and bond markets around the world are much more correlated today than they have been in the past. For the moment at least, commodity markets march to a whole band of different drummers. Third, the largest single economic and investment locomotive is China. While there is no sign that the management of China is making serious, long-term mistakes, if one was to actually happen (or perhaps worse, rumored about to happen) the market recuperations would be swift and unfortunately dramatic. Fourth, most of the world’s high quality fixed income markets are not yielding enough to be attractive as a holding vehicle.

The empty cookie jar

At least while they were waiting for their own new shoes the shoemaker’s family could rely on a stocked food larder often with a full cookie jar. Today, in a worst case scenario the cookie jar would prove to be empty. Thus, my various reserve elements or if you prefer hedges, could prove to be insufficient to meet our needs.


In terms of historic investment patterns, for all practical purposes there is nothing new under the sun. While our various Judeo-Christian leaders urge us to read and take to heart the lessons of long ago, in terms of investment thinking most of modern society does not. A significant number of those who are active in the market have been doing it in the present positions under ten years. Notice when many investment funds and ideas are presented as back tested that the length of the test is ten years. (Many machine readable data banks only have or make available ten years worth of data.) Sales managers tell their recruits and younger sales people that their targets have short memories and once a set of prices start to accelerate people will join. Unfortunately, they are probably correct.

Completing the circle

I began this blog post with the need to provide cash for various tuitions. I note with interest that in the Holy Bible, which is a great economic text book, coins were referred to as "talents." Having despaired about the ultimate safety of various reserves, the purchase of knowledge for succeeding generations seems to be a higher and perhaps safer long term return than my other investments. Undoubtedly, the new world we are creating will be different than today, but those with the appropriate talent, energy, and most importantly integrity, are likely to be winners.

What do you think?

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