Self Assessment Monday: An Erstwhile Alphabetic Quality To A Client...

About ii years agone I wrote a missive of the alphabet to our foundation customer virtually how nosotros viewed the equity markets. Mike* had sent Bronte a profoundly bearish broker note.

I posted the missive of the alphabet on the blog. The master copy (reproduced below) tin move works life at this link.

Dear Mike 

The comport illustration ever sounds intellectually to a greater extent than convincing than the bull case. And it is inward this broker notation too. Intellectual sounding and convincing. 

But America is all the same an amazingly innovative country, humans are ingenious as well as most of the imbalances volition classify themselves out. Big cap equities are inexpensive relative to almost all other assets (especially relative to small-scale cap equities, cash as well as bonds as well as to many assets such equally commercial belongings that require leverage). Cash yields almost minus iii per centum afterwards inflation as well as less ship service tax. Bonds are scary as hell as well as yield minus 1% afterwards revenue enhancement as well as inflation. 

Big though difficult-to-run companies are at depression teens multiples.  Great franchises are at mid-teens multiples.  Tesco (UK) which is a genuinely cracking franchise - is at a fourteen PE ratio. And the Pound is historically cheap. WalMart as well as Target - both slightly less expert franchises - are at 12 times. The hard parts of Silicon Valley (eg HP) are good nether 10 times PE ratios (and nosotros experience no need to ain that one). The less hard parts of Silicon Valley (Google for instance) are at a high teens PE ratio i time yous accept out the excess cash. We ain that. 

Own equities.  Don't nestling yourself.  Mega-cap equities are generationally cheap compared to other assets - as well as surely compared to the cash/bond/levered asset complex. 

Just don't move blind virtually it. The places that in that location receive got been high returns (Asia, small-scale caps, smaller resources companies) are riddled alongside fraud. Twenty 5 years of deregulation as well as the high levels of innovation mean nosotros receive got high and rising levels of stock fraud. Fortunately in that location is much less fraud opportunity inward mega-caps. 

Don't ain Commonwealth of Australia or the iron-ore-coal-steel complex. It has run likewise far as well as has been likewise slow to brand money. Too many stupid/aggressive/greedy people are doing likewise much expansion. Some of these people are stupid - but they receive got made much more coin than yous or me as well as then they must move right!

I tin discovery dozens of reasons to move bearish - but I hold back at it dispassionately as well as I am bullish on large caps, as well as bullish on America. The problems volition classify themselves out as well as the American exceptionalism (decent institutions, gratis plenty markets as well as a willingness to take risks) volition operate their magic again. 

Anything that takes yous out of existent assets (businesses as well as property that generate existent cash flow) as well as puts yous into nominal assets is - with a 10 yr time-frame - a bad idea. (And why is your personal account whatsoever shorter dated than that?) 

Just don't larn greedy yesteryear buying things yous practice non understand: you will move ripped off. The underlying fraud degree is equally high equally I have ever seen it.

Oh, as well as nosotros are also bullish on French Republic as well as Germany. Old Europe has manufacturing and production ability of enormous levels. (Remember what they produced to grapple wars? Their productive capacity is rattling high as well as Americans have forgotten that. They practice applied scientific discipline equally good equally anybody. And FRG no longer has a restrictive monetary policy to shell its consumer market.) 

Also the French are inward that lovely seat of having convinced newly rich Asians that they are the arbiters of expert taste. There are few higher ROE businesses. French Republic has played Asia improve than America.

We tin encounter plenty of reasons to move bearish - but precisely the frauds makes our portfolio brusk enough. Indeed nosotros are plenty brusk as well as probable to stay as well as then until I can't discovery frauds alongside ease.

Beyond that, in that location is a lot of pessimism around. It has got to move fourth dimension to move bullish. We surely practice non wishing beingness 125 per centum cyberspace long or hyper-aggressive similar that - but nosotros volition accept steps to conk incrementally longer. We are if anything likewise short.

J

At Bronte nosotros receive got done pretty good inward the yesteryear ii years - as well as a expert business office of the argue tin move seen inward this letter. Still it is worth assessing how nosotros went on a trace yesteryear trace basis.

The starting telephone outcry upwardly - Tesco which nosotros all the same ain has non been cracking as well as the turnaround is appearing to a greater extent than difficult. That was a dud.

The Great British Pound is slightly cheaper compared to the USD as well as then that was also a dud. It was a dud nosotros doubled downward on yesteryear buying a large stake inward Vodafone.

Walmart as well as Target receive got both been fine investments; upwardly virtually twoscore per centum addition dividends. We entirely owned Target. It is pretty hard to pick the charts apart but nosotros suspect that operationally nosotros mightiness move inward the incorrect stock. We did non retrieve that income disparity inward the USA would proceed to widen. However it has as well as a widening income disparity favors Walmart over Target. [Target is precisely likewise up-market.] Also nosotros retrieve the very-cheap-very-diversified retailers are the final ones displaced yesteryear the web. Walmart is virtually the safest advert inward retail.

Hewlett Packard, which nosotros explicitly stated nosotros did non own, was an okay brusk over that time. We were brusk but nosotros did non practice equally good equally the nautical chart suggests equally nosotros were likewise aggressive alongside seat options on the premise of an underfunded pension fund – which proved unfounded.

Google which nosotros owned has been a fine stock. However afterwards the appreciation nosotros ain much less of it. We were virtually vii per centum inward the stock at $550 as well as are precisely inward a higher house iv per centum inward the stock at $870.

Explicitly non owning the Australian iron-ore-coal-steel complex has been a expert call. We were brusk a few iron-ore names. Those generally worked for us.

Our French as well as High German industrial names receive got had to a greater extent than than adequate returns. Our French liquor companies receive got continued to sell a lot of highly priced Cognac inward Asia.

The house nosotros receive got been generally incorrect is on shorting approximately frauds. We receive got had irregular wins inward this [alas nosotros volition non advert names]. We receive got also had a few losses. This is a bull marketplace seat as well as bull markets tend non to move the time-or-place for exposing frauds. Still our brusk majority is non an abject failure.  It contains a few wins as well as rattling few disasters. The most prominent loss was that nosotros bet hard that the Focus Media acquisition would non close. Focus Media has very funky accounts - but that did non halt a multi-billion dollar acquisition.

The full general telephone outcry upwardly to move long big-cap stocks as well as avoiding Asia/China/Resources was non a bad call. This continues to move our telephone outcry upwardly but nosotros are far less convinced virtually it directly than nosotros were ii years agone merely because the cost has changed.

Where to now?

I receive got approximately other individual - a closed friend - who has precisely lost her project as well as wants approximately fiscal advice. I would dear to give it to her - but I am finding it extremely hard to write anything equally clear as well as good supported equally the advice above.






John

*Mike is non his existent name.