Drystone Communications

October 18, 2011

Volatility arises from other people’s uncertainty, as a day-to-day struggle between their fear and greed drowns out confidence and whatever objective estimates of fair value they previously had. Other people’s uncertainty and volatility can present investment opportunities, if you as an independent investor can reexamine and remain confident in your own estimates of fair value.

Being a contrarian does not mean simply assuming that the crowd is wrong and stubbornly tacking against the wind; being a contrarian means having solid reasons for seeing opportunities where the crowd sees danger (or vice versa). You’re paying Drystone to provide informed advice, durable portfolio construction and results, to be right more often than wrong and right over the long haul, not to be different just for different’s sake.

July 8, 2011

Almost all investments – stocks, bonds, commodities, currencies, money market – contend with some flavor of political risk. At the very least, your investments will have to face the long-run consequences of government deleveraging. How to mitigate this type of broad-spectrum risk shared by most or all possible investments?

Step 1: Make the situation better, don’t make it worse, with the construction of your portfolio. Tread carefully, if at all, into industries dependent on governments as major customers, e.g., defense, engineering & construction, healthcare; steer clear entirely, unless valuations offer a steep discount to reflect that dependence. Tend toward diversified product or service lines with lower sticker prices and recurring revenue or where demand is less discretionary and pricing more resistant to budget pressures. Don’t go where the austerity ax will fall farthest and hardest.

Step 2: Diversify for better long-term portfolio prospects, but be realistic about portfolio behavior during short-term extremes. In bubbles and panics, different asset categories often rise or fall together, and diversification can fail to dampen short-term swings driven by broad forces like political risk. Over the longer timespans more germane to most investors’ objectives, though, asset categories are less correlated and diversification can measurably benefit a portfolio’s return/risk potential.

Prioritize your portfolio’s most pertinent definitions of risk, e.g., inflation instead of volatility, and make tough choices to reflect your tolerances. If regularly withdrawing large amounts from your portfolio, then volatility may indeed be your #1 risk: don’t base spending capacity on bubble peaks and keep a liquid reserve to cover withdrawals during panic lows. If not withdrawing, though, then you should worry more about long-run risks like inflation: accept more volatility and less immediate liquidity and cast a wide net for assets that may be able to juggle a broad array of risks better.

April 15, 2011

Most developed nations face daunting challenges to national retirement and health schemes. It’s not just Medicare or Social Security and its filing cabinet in Parkersburg, WV full of fake Treasury bonds and no cash. For instance, Japan already feels and most of Europe will soon feel the squeeze of fewer workers-to-retirees, a.k.a. support ratio, earlier than we do. Demographic reality will rain on many parades.

More immediately, the emerging market countries, who have kept their currencies pegged artificially low against the U.S. dollar to promote their own export industries, now feel pressure instead to let their currencies strengthen to offset the domestic climb in food and energy prices. It’s a hideous dilemma, but I believe many of these countries will decide to give up incubating exporters and allow their currencies more freedom to appreciate to help domestic consumers.

So I settled on [an ETF holding the currencies of 12 different emerging market countries] as both an opportunity to benefit from any broad revaluations across most of the 12-currency basket and a modest additional step in hedging against the risk of a further ebb in the U.S. dollar.

January 20, 2011

A priority for Drystone remains defending against potential U.S. dollar weakness. Such weakness is not necessarily a foregone conclusion; of the myriad risks for which portfolios need to prepare, though, potential $ decline remains a perennial # 1 on Drystone’s radar.

Drystone LLC investment portfolio manager