Drystone Communications


 

October 15, 2015

When asset markets decline broadly and the proverbial babies and bathwater get thrown out together, there are at least two important lessons to be learned or revisited:

1. Identify investments you should have sold (the bathwater) when you had a better chance, and set or tighten your sell discipline rules for any similar situations in future.

2. Identify investments whose fundamentals are unimpaired and whose prices are now more attractive, and introduce or add to portfolio holdings in them.


July 15, 2015

The point is not that Drystone is always, in each and every investment choice, risk-averse. In truth, every investment choice entails one risk or another. The point is to be risk-aware, to know as best you can what you’re buying, what risks it faces and whether you expect to be compensated for those risks with a sufficiently generous long-term return, and not to be fooled into thinking that, just because an investment sports a seemingly benign label like “municipal bond,” the investment itself must intrinsically be benign and low-risk.

The truer way of reflecting whether a client is risk-averse or risk-accepting, or somewhere in between, lies less in each individual investment and more in the total portfolio decisions: what percentage of a portfolio is in volatile assets like stocks or high-yield bonds, how big is each position as a percentage of the client’s total portfolio, how correlated (i.e., going up or down in price at the same time as each other) are the different investments in the portfolio, how much cash is needed to cover near-term withdrawals without having to sell long-term investments at inopportune times? At the individual investment level, the most pertinent question is: does the entry price/valuation (for a stock) or yield (for a bond) adequately reflect the foreseeable risks?


April 20, 2015

When articulating your investment objectives and building portfolios appropriate to those objectives, we – meaning you as a client and Drystone as a portfolio manager – should focus our first and best efforts on factors we have at least some ability to predict or control and avoid getting distracted by forces over which we have little-to-no control or power to predict. In your case, a primary focus should be to estimate the level of regular ongoing withdrawals, if any, you expect to make from your portfolio; in Drystone’s case, the first order of business is to set target ranges for the appropriate percentages of stocks v. bonds, cash reserves, and other categories in your portfolio’s asset mix.


January 15, 2015

Short-range forecasting is futile. You should not put much faith in such forecasts, especially forecasts of big macro-economic variables – the further an investor strays from known quantities and observable value into the educated (or not) guesswork of predicting future economic growth, future inflation, future interest rates, future government inanities, etc., the shakier the ground. I’ll take a good, high-confidence, clear and present opportunity over a market forecast any day.

My own forecasts (or more expressly, fears) of rising inflation and interest rates over the past three years have been counter-productive or at best unproductive for the non-stock portion of Drystone portfolios, in that my concerns about those macro-economic variables led me first in 2011 to eliminate or at least de-emphasize certain income-oriented investments and since then to keep the proceeds mostly sidelined in low-yielding short-maturity bonds and money market funds.

When I invested more aggressively in income-oriented assets like high-yield bonds, inflation-indexed bonds, and real estate investment trusts in 2008-11, it wasn’t because of some prescient forecast of their future rebound from the panic of 2008. It was because of clear and present opportunities: prices were so beaten down during the panic and the resulting income yields so high I was confident that a diversified basket of those assets could absorb a reduction in income payouts or increase in defaults on individual securities and still deliver generous total returns. Simple-minded perhaps, but I’d rather take a simple approach to the known universe of actual investment candidates than a sophisticated approach to the fantasyland of short-range forecasts.


Drystone LLC investment portfolio manager