March 19, 2008 Your Portfolios
Gavage?
ga·vage \ gə-väzh, gä-\ noun
French, from gaver to stuff, force-feed, from
Middle French dialect (Picardy) gave gullet,
crop
While we’re not going to say the American Goose is
cooked, the torrent of dollars flowing from
Washington has got to be swelling its liver. Thirteen
Trillion Dollars and counting, aimed at papering over
bad decisions and intended to make everything
“normal” again. Hard to believe it’s that easy.
It’s not that easy. Among the consequences of our
government’s solution are Trillion Dollar budget
deficits for the foreseeable future. Politically, Trillions
are easy. Nobody can fathom the sum. Realistically,
they imply reduced living standards for us, our
children and their children.
A Trillion is a thousand Billions, which the British used
to call a thousand Million. Now consider the roughly
$20 Trillion loss of household wealth over the past year
and a half. Twenty thousand Billions.
For our next course, look no further than the past
weekend’s latest Trillion Dollar fix from Secretary
Geitner – the “Public Private Investment Program.”
Hedge funds are invited to put up 3 percent, borrow
97 percent non-recourse from the Treasury, and take
a flyer on the riskiest, most toxic securities held by the
banks.
This new scheme does deflect attention from last
week’s admission by the head of the FDIC last week
that the Bank Insurance Fund is insolvent and may
need up to $150 Billion of Taxpayer funds, a
development Richmond Fed Director Mark Vaughan
assessed on Bloomberg last week:
"It's not going to be Armageddon.
But it's going to be bad.''
So we are not yet out of the woods. The amount of
money is out of this world. Words can not describe
the sums being spent in Washington.
Copyright 2009, Farragut Resources, LLC. The material presented is for informational purposes only and is not intended to recommend a specific
investment strategy or the purchase of securities. All opinions are those of the author, and do not reflect the policies of Farragut Resources or Capitol
Securities Management, Inc. Investment advisory services and brokerage provided through Capitol Securities Management, Inc, Member FINRA/SIPC.
[B]e aware that the market does not turn
when it sees light at the end of the tunnel. It
turns when all looks black, but just a subtle
shade less black than the day before.
Jeremy Grantham
We know that stocks are down, and we know at
some point the economy will recover. If we wait for
an all-clear signal from CNBC, undoubtedly stock
prices will already reflect it.
For the most part, our portfolios are where we started
the year, no small victory given the woeful
performance of the broad averages and our peers.
We continue to selectively invest in for defensible
income; we are hedging for the debasement of the
dollar; and by gum, we’re buying stocks.
This is no willy-nilly dash into the breach, rather a
measured reduction in cash, increasing exposure to
securities we believe afford lasting value and
potential appreciation.
Where to Invest?
"I don't want a lot of good investments;
I want a few outstanding ones."
-Philip Fisher
In a word, Quality. If you can afford but one pair of
shoes, make them well built. If you can’t afford to
lose your capital, stick to investments on sound
footings.
We can speculate on the timing of recovery in
certain sectors of the economy, the risk in being
wrong is there will be a longer wait. But investing in
firms and industries fraught with shaky books and
shady principals is treacherous, as well as distasteful.
We play the piano with two hands: Broad Market
and Economic analysis guides us to favored
investment themes, while old-school stockpicking
determines the security selection. We continue to
employ Exchange-Traded Funds (ETFs) and a few
open-end mutual funds, but at this juncture, we are
comfortable with owning companies as well.
We start with the premise that the current deflationary
cycle will not turn on a dime. As we set to restoring
our collectively finances, individual thrift will persist.
However, people still must eat, bathe, and defend
themselves from foreign threats.
A firm must have the capital strength to make it
through this period of slack demand. We have
trouble investing on the premise that the
Government will not let a firm fail. The government
may not let certain firms fail, but the Government will
eventually learn that rescue can and should be at
the expense of the shareowners and bondholders.
Hard Assets continue to appeal to us, and represent a
substantial portion of our portfolios. The GSCI
Commodity Index has lost two-thirds of its value over
the past year as Energy, Agriculture, and Metals have
been marked down to reflect the transient collapse
in demand.
Manufacturers of Capital Goods and some of the
premier Consumer stocks are trading at six- or ten-
year lows. Granted, a prompt return to the highs
of two years ago is remote. But these firms sell
products that remain in demand, that are
competitive around the world, and notably, their
costs are primarily in dollars.
Corporate Bonds continue to present an attractive
risk-reward. We have been investing in select High-
Yield and Convertible bond funds, recognizing that if
we find ourselves waiting for a lasting recovery in
Stocks, we can earn a meaningful income in
Corporates.
What about the Funds?
In theory, Mutual Funds are the ideal investment for
the less-engaged long-term investor. History has
shown us, again and again, that these vehicles are
not always managed in the interests of their mutual
owners.
Many Open-End funds, including some Legendary
Names, are hamstrung. Showing forty percent losses
last year, and down another fifteen or so this year,
they have little prospect of attracting new investors.
Disgruntled current owners are redeeming shares,
and managers have little choice but to sell those
stocks where there’s a bid. Holders of these funds
may well be marooned for the next leg of the cycle.
That’s not to say Mutual Funds are not good. An
Index fund is agnostic; a closed-end fund has
no redemption pressures; and there will always be
exceptionally talented portfolio managers. What we
have learned is there are far fewer good funds than
funds.
Copyright 2009, Farragut Resources, LLC. The material presented is for informational purposes only and is not intended to recommend a specific
investment strategy or the purchase of securities. All opinions are those of the author, and do not reflect the policies of Farragut Resources or Capitol
Securities Management, Inc. Investment advisory services and brokerage provided through Capitol Securities Management, Inc, Member FINRA/SIPC.
Feeder funds, the retail hedge fund products
promoted heavily over the past few years, have little
to show for their fees but repeated failures of due
diligence and mediocre returns. With few exceptions,
truly talented managers choose their clients, and rely
little on third-party mass-marketers.
The lesson with funds is that hyper-diversification saps
value. Where an Index Fund by definition owns a
broad swath of its respective market, and charges
modest fees, active managers are better held to their
top ideas.
“Wide diversification is only required when
investors do not understand what they are
doing. ” Warren Buffett
Retirement Readiness
With the return of the crocuses and the tax filing
deadlines, investors are again beginning to open
their Retirement Plan Statements.
It’s not a pretty sight. If you are fortunate, last year’s
contributions have offset your market declines. If you
are typical, you’ve lost several years of savings and
gains.
Time heals all wounds, but it won’t correct a failed
investment process. Many of the core portfolios in
these plans are the “Flying Dutchman” funds
described in the prior section. Scrutinize your
investment options and ensure your money is going
somewhere productive. Set-and-forget only works
for sundials.
New rules from the U.S. Department of Labor compel
retirement plans to be more forthright about the fees
paid to the companies that run them. Many trustees
and participants will be surprised to see the true
portion of their collective savings siphoned off by
Fees and Commissions.
If your plan has not been benchmarked in light of
recent investment performance and the Section
404(c) fee disclosure requirements, you’d be doing
the participants a great service to call in an
independent consultant. Like us.
Frank J. Ruffing CFP
McLean, Virginia
frank@farragut.us.com
7918 Jones Branch Drive, Suite 800 McLean, VA 22102
Telephone 703-283-5220 www.farragut.us.com