There is too little
enthusiasm about investments these days despite the fact that we have just
slightly breached the old highs on the popular US stock market indexes. This
weekend I seem to be besieged by too many worries to enjoy either my market price
gains or a wonderful concert by the New Jersey Symphony Orchestra playing three
Tchaikovsky pieces very well, plus a spirited encore. (As my wife Ruth is
Co-Chair of the NJSO, it should have been exhilarating for me.) Somewhat like
Tchaikovsky’s tragic to triumphant Fifth Symphony, my investment worries
obscure the good results we and our clients have achieved, and what should be
an attractive long-term future.
Worries
I find it difficult to
rank worries as any one of them could be the proverbial canary in the mine shaft.
Thus, I am just listing them in the order that they hit me.
1. The
demand for US $100 dollar bills is up, particularly in Europe. I take this to
be showing a concern about the value of various European currencies rather than
a money transfer tactic of the global underworld.
2. Most
of the financial press is devoted to the problems of Cyprus and some of the
other peripheral economies rather than paying attention to the remaining parts
of the world. China now has reserves of $3.44 Trillion which is about the same
size of the entire economy of Germany. Interesting the last time China
published its gold holdings was 2009.
3. Due
to the fact that governments are trying to dictate to their economies through
the banking systems, financial transactions including loans are moving out of
the depository banks and into “other’ financial institutions, often called the
shadow banking sphere. In China for instance the growth in commercial and
personal credit is greater than in the regulated banks. In the US a portfolio
of bank stocks has been recovering, but is still behind the other financials’
stock price performance.
4. The
current chatter of the talking heads in the financial press is focused almost
exclusively on the pace of the expanding economy. People seem to have forgotten
that in every decade there is at least one economic recession and often two.
Where this plays a role is in the “happy talk” emanating out of Washington about
reaching a balanced budget over the next ten years. According to John Mauldin, there
is not any suggestion that the period will include one or more recessions which
could balloon government social spending.
5. A
recent census report adding all the levels of US government spending per household
concluded that the average is approximately $50,000 and the median household
income is about $49,000. No wonder that there is not enough consumer saving to
pay for the physical infrastructure needs and intellectual infrastructure needs
to create the knowledge and work habits to fuel this economy.
6. The
price, volume, and shorting actions in Exchange Traded Funds (ETFs) suggest to
me that an important part of the trading in these vehicles is being conducted
by short-term traders similar to hedge funds. If more individual investors were
using them I would be worried by a recent study by Mark Hulbert as published
online in Barron’s on Thursday. Mark compared the performance of a
number of ETFs to actively managed funds within the same organization. He found
that, on average, the active managers out-performed their less expensive stable
mates. This may be particularly important in the next major market decline
where the active managers can either raise some cash and/or get out of some of
the larger volume stocks that are leading the market down. (Of course when
there is a rally, as they say “cash is trash” and can hurt performance.)
7. This
weekend some of us will be watching the Asian markets and later the opening of
the European markets to see what the price of gold will be doing after a major
fall at the end of last week. As a well-known and respected non-gold bug said to
me this weekend, “The reason to own gold, in some form, has to do
with fundamental concerns about the continuing value of paper money; it is just
as present today as it was last week month or year.” The purpose of gold is as an insurance policy
within a portfolio of other assets. For generations European private bankers
have urged their wealthy clients to own 5-10% of their portfolios in some form
of gold. Just as I don’t like to drive on the road with drivers that do not
have appropriate auto insurance, I hope that a few do not use the drop in the
price of gold as an excuse not to pay their “value of money insurance policy.”
Analyzing
your long-term investments
As indicated, the list of worries above is obscuring
what you and my fellow long-term investors should be focusing. I am an advocate
of dividing one’s portfolio into different time horizon and special pocket
investments. At the moment I want to focus on the longer-term time horizon
bucket. This is the bucket to fund multi-generational needs for both families
and charitable institutions.
One useful exercise is to look at the current market
weighting of each of your investments and assign them into these somewhat
distinct categories:
Category
one: The portion of your portfolio which
is the result of the accident of gains. One never expected this to be such a
big winner, even if it was the family company. Now one has a very large
unrealized capital appreciation = tax and/or disposal issue.
Category
two: Holdings that are selling at very deep discounts compared with other
market indicators. The future price potential is large and if successful in
later years could be moved up into category one.
Category
three: Some investments that are selling substantially below what a
knowledgeable buyer would pay for the company, particularly if a new management
could be installed. Dell?
Category
four: There are some very high quality companies whose shares most of the time
reflects their quality, but not all the time. This weekend I read the very long
proxy and annual report of Goldman Sachs, a stock that is owned in my private
financial services fund. For some this may be a controversial firm, but I find
in general in most of their varied businesses they do conduct their activities
in a high quality fashion according to the ethics of the business. I own other
high-quality names but I was using Goldman just as an example.
When you get all
through assigning weights to these
and/or other categories see whether they are in an appropriate mix for your
long-term needs. I would be pleased to discuss this exercise with you if it
helps to bring some additional clarity to your investing.
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