Big Ideas

My post from the other day about prospects for US stock being grim drew a lot of comments on the Seeking Alpha version of the post. I answered several questions including a couple from David Jackson. I thought I’d post the content here, I think the format will make sense;

RN: First as far as the portfolio, when i first started writing in 2004 I was very public about have clients about 30% in foreign with the expectation that it would increase slowly to at least 50% by the start of the new (now this) decade and that is where we are. I expect to further increase the allocation to foreign as we move forward.

To the person who says you can’t hide in foreign while the US is going down that is half right. During panics and otherwise fast declines yes foreign markets should be expected to go down too. However over a longer period of time, not true. In the last decade the SPX went down 24% on a price basis there were countless foreign markets that had normal returns for the decade or better than normal as the US dropped–they carried on without us. If your time horizon is a year then you probably should not own stocks but over a long period this has worked and I believe will continue to do so. Go to Bespoke’s website for numbers on how foreign markets did in the last decade.

DJ: Which foreign markets are you allocating assets to? Are you looking at demographic factors in foreign markets as well?

RN: David, our list of countries we own is long and for now demographics are not the first priority although they contribute to our having underweighted and then avoiding big western Europe (the EMU countries). Canada, Brazil, Colombia, Chile, Israel, Norway, Sweden, Switzerland, UK, Denmark and China. We sold out of Australia recently but will go back in soon I imagine. Countries where I think demographics might be better and worth going into would be Turkey, Vietnam, Pakistan, India, Peru and maybe Mongolia. Interesting note, I believe Egypt’s demographics are too good, that is the population is growing too fast which is an interesting concept.

I think the demographic idea is one that will pick up slowly but then increasingly, making it not crucial for 2011 or 2012.

DJ: Thanks Roger. It’s interesting that your list of favored countries fair well (I think) in terms of demographics.

What’s your rationale for allocating assets to the UK? Are you primarily trying to avoid the euro (which would also explain your exposure to Norway, Sweden and Switzerland)?

On the timing of demographics hitting the market, I think it depends on the mechanism. If it’s about baby boomers selling stocks, your right that it will take a few years. If it’s due to pressure on budgets, then the forecasts for retirement and medical benefits are already starting to impact policy, leading to fiscal tightening.

RN: David, some countries probably do fare well but for now the thesis for the countries includes their balance sheet situations, GDP, unemployment and inflation along with demographics. The other important thing I consider is whether the countries have something that the world must have (usually something in the ground but cheap labor would work too).

I would note that I try to have countries with all sorts of attributes in the portfolio but the stories in Western Europe and Japan are simply too lousy for me to own.

As for why the UK, a long time ago we had BP, Barclays and Diageo. We sold BP in 2006, BCS in December 2007 and still have Diageo which is not necessarily about the UK but as it is domiciled there I consider it a UK company.

8 Comments

  1. Roger, doesn’t valuation count in your investment process? Not mentioned once in your post. Where does the US stand based on valuation?

    Reply
  2. I’m not aware of too many top down people that place a high priority on valuation at the country level which is what this post is about.

    In terms of how I think, I am not inclined to want to go heavy into a country where I think the future prospects stink based on the factors I cited in the post.

    Valuations would be more relevant to me in choosing individual stocks.

    Reply
  3. I didn’t realize that you were making a general call on the country vs. individual issues within the country.

    Thanks for the clarification.

    How is the monsoon season shaping up in Walker. Kind of spotty in Northern Gila County.

    Reply
  4. the second half of July into early August seemed a little dry but it has been wet lately. I think that having two lightning cause tree fires this summer means it has been pretty active–we’ve only had a few of those in the last nine years–thanks for asking

    Reply
  5. 11:37, I saw the articles but did not read them. There is a segment of the investing population that is comfortable going all out with one strategy. To me the behavior toward this strategy is no different than other strategies; “this can’t miss.”

    Not a risk I am willing to take.

    Reply
  6. This is Anon 11:37 and 11:43 (and maybe a third post; the network seems to be slow today). Thanks for the response. I tend to agree with you, though I have trended toward dividend paying stocks as I have gotten older. For income, I have played selling covered calls with a small percentage (about 5%) of my portfolio; it works OK, but the risk is you can get stuck holding stocks that have gone down more than the call premium (and that you lose out on some of the increase in price if that should occur), especially in a downward trending market such as we have experienced since April.

    Reply
  7. I don’t think there is anything wrong with skewing to a higher yield in a portfolio, the exclusivity that some right about in terms of only owning stocks with a narrow set of attributes takes on a risk that may not be quantifiable until something bad happens.

    I don’t feel the need to spend time figuring out what odd event could take down this segment if I am not all in on it–it is enough to realize that some odd event could hurt these stocks which leads me to not concentrate the risk.

    Selling calls is a mixed bag, obviously some folks have great success with it but others do not, unfortunately.

    Reply

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Big Ideas

My post from the other day about prospects for US stock being grim drew a lot of comments on the Seeking Alpha version of the post. I answered several questions including a couple from David Jackson. I thought I’d post the content here, I think the format will make sense;

RN: First as far as the portfolio, when i first started writing in 2004 I was very public about have clients about 30% in foreign with the expectation that it would increase slowly to at least 50% by the start of the new (now this) decade and that is where we are. I expect to further increase the allocation to foreign as we move forward.

To the person who says you can’t hide in foreign while the US is going down that is half right. During panics and otherwise fast declines yes foreign markets should be expected to go down too. However over a longer period of time, not true. In the last decade the SPX went down 24% on a price basis there were countless foreign markets that had normal returns for the decade or better than normal as the US dropped–they carried on without us. If your time horizon is a year then you probably should not own stocks but over a long period this has worked and I believe will continue to do so. Go to Bespoke’s website for numbers on how foreign markets did in the last decade.

DJ: Which foreign markets are you allocating assets to? Are you looking at demographic factors in foreign markets as well?

RN: David, our list of countries we own is long and for now demographics are not the first priority although they contribute to our having underweighted and then avoiding big western Europe (the EMU countries). Canada, Brazil, Colombia, Chile, Israel, Norway, Sweden, Switzerland, UK, Denmark and China. We sold out of Australia recently but will go back in soon I imagine. Countries where I think demographics might be better and worth going into would be Turkey, Vietnam, Pakistan, India, Peru and maybe Mongolia. Interesting note, I believe Egypt’s demographics are too good, that is the population is growing too fast which is an interesting concept.

I think the demographic idea is one that will pick up slowly but then increasingly, making it not crucial for 2011 or 2012.

DJ: Thanks Roger. It’s interesting that your list of favored countries fair well (I think) in terms of demographics.

What’s your rationale for allocating assets to the UK? Are you primarily trying to avoid the euro (which would also explain your exposure to Norway, Sweden and Switzerland)?

On the timing of demographics hitting the market, I think it depends on the mechanism. If it’s about baby boomers selling stocks, your right that it will take a few years. If it’s due to pressure on budgets, then the forecasts for retirement and medical benefits are already starting to impact policy, leading to fiscal tightening.

RN: David, some countries probably do fare well but for now the thesis for the countries includes their balance sheet situations, GDP, unemployment and inflation along with demographics. The other important thing I consider is whether the countries have something that the world must have (usually something in the ground but cheap labor would work too).

I would note that I try to have countries with all sorts of attributes in the portfolio but the stories in Western Europe and Japan are simply too lousy for me to own.

As for why the UK, a long time ago we had BP, Barclays and Diageo. We sold BP in 2006, BCS in December 2007 and still have Diageo which is not necessarily about the UK but as it is domiciled there I consider it a UK company.

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