As a quick follow up to our quarterly newsletter, I thought I would take the opportunity to update you on our investment thoughts in light of what appears to be a regime change in monetary policy expectations. To recap, we said that:
We expected inflation to become more of a concern than it has been in the recent past given the coordinated global growth we have seen.
Given the “goldilocks scenario” of ideal investment conditions, investors were bound to be surprised by a change in inflation expectations and potentially monetary policy.
All assets are priced from US short-term T-bills (we call this the “risk-free” rate). If these rates move up rapidly, asset prices may come under pressure. This pressure is further magnified by the fact that valuations are extremely high.
2017 was a great year for our portfolios. And while the rising tide should hopefully raise all boats, we feel exceptionally proud of what we owned last year and where returns came from.
But change is on the horizon and an evolution is beginning in the portfolio that we are both excited about and preparing for. Jeremy Grantham, the co-founder of GMO, highlights this change that Nick will dive into much deeper in his report:
“Be as brave as you can on the EM (emerging markets) front. Be willing to cash in some career risk units. Bravery counts for so much more when there are very few good or even decent alternatives.”
We are preparing our portfolios to respond well whether we continue to muddle along or see inflation rise quicker than most are forecasting.
Global coordinated growth seems to be back and stock markets are up. This is in line with what we have expected. As discussed in last quarter’s letter, we expected the majority of returns to come from international and emerging markets and that has definitely been the case. Of course we will see volatility in the markets, so we must be prepared. With all of this growth, interest rate normalization is at the forefront of our minds.
As the current bull market continues, more investors are starting to predict the day it all comes to an end. Instead of trying to predict a market top, according to Mark Hulbert (of Marketwatch), investors should view market tops as a “gradual process in which equity exposure is slowly and deliberately reduced over time.” Predicting tops is not only unproductive, but it is also impossible to be accurate. Trying to pinpoint the precise date of a market top cannot be done because markets all reach their tops at different times.
Because we didn’t have enough to worry about already, earlier this week we learned of a massive data breach at Equifax, one of the nation’s three major credit reporting agencies. Hackers stole names, Social Security numbers, birth dates, addresses, and in some instances driver’s license numbers and credit card numbers.In light of this unprecedented breach, we want to provide you with the necessary information to lessen your risk of being a victim of identity theft:
Venture capital has become an important driver of the economy and investment returns for many institutions. Even mutual funds have joined the party with the likes of Fidelity and T. Rowe Price having acquired the shares of pre-IPO companies in the private market within their mutual fund products. Now we are finding that these highly valued, venture backed companies may be as much as 50% overvalued.
Buffett was on CNBC yesterday (8/30/17) discussing the tragic disaster in Houston. Naturally, he was asked about Berkshire Hathaway's reinsurance exposure and his comments highlight the idea he espouses, "Be fearful when others are greedy."
Often times in this business, firms and individuals spend an incredible amount of time and resources trying to sell and market to prospects. And completely overlooked is the actual research: the foundation of a thesis and the guideposts to build a portfolio. This isn’t to say that nobody does the heavy lifting in this industry, but more and more often, we see "really smart people” with “complex portfolios” who, at the end of the day, are simply passive investing. In other words, they are tracking an index. Whether it booms or busts. Ignoring the future prospects.
I recently read the autobiography of Sam Zell, an extremely successful real estate investor known for his uncanny ability to buy low and sell high. In the book he tells the story of his father’s foresight and decisive action that preserved his family in Pre-world-war-2 Poland. As a successful grain merchant, his father kept apprised of political and social happenings in Europe through his extensive travel and interest in short wave radio. While some people looked at this “hobby” of international politics as a complete waste of time, it gave his father a unique outlook on the world. With this perspective, coupled with decisive action, the Zell’s were able to start a successful new life in the United States.
If you are like most people, you have 75% or more of your stock market investment in US equities. The truth is, it’s not just the lay investors that are subject to this “home country bias.” Most financial advisors and money managers are equally prone to this bias. With the US accounting for only around 50% of global output and at historically high prices, a diversified portfolio should consist of a much greater allocation to foreign stocks.