October 17, 2016
If you despair at the sight of your country scraping straight through the bottom of the political barrel and into the sewer beneath, I understand but, as your investment counselor, I sincerely advise you not to let despair drive radical, risky overreactions in portfolios. Even with anti-trade, anti-business, anti-markets histrionics now rife in both major parties, the urge to adopt a bunker mentality or chase a perceived safe haven or single-shot solution, e.g. gold, can lead to worse financial outcomes than just continued vigilance and readiness to make prudent, pragmatic changes only as necessary to reflect whatever actual threats arise inside and outside the markets.
July 20, 2016
Yesterday’s heroes become today’s goats and vice versa. Yes, the forces [driving returns on international versus U.S. stocks] are of course more complex than my pithy soundbites, and yes, the past five years have seen some legitimate fundamental reasons why international stocks would underperform U.S. stocks so dramatically. Stock markets very much march to their own internal drummers, though, and relative investment returns and the relationships between different asset categories have a very powerful and internal tendency to reverse themselves over longer periods of time. You should not underestimate how a healthy dose of contrarianism, i.e., a willingness to consider the asset categories currently out of favor, can add value to an overall portfolio when those reversals occur...nor underestimate the risk of investing an entire portfolio exclusively in those assets which are most popular at present.
And, even if the dollar doesn’t suffer a permanent impairment in your portfolio’s lifetime, I consider it a minor side benefit of international stocks that their share values and dividends originate in a wide array of non-dollar currencies – a minor insurance policy, or inflation hedge so to speak, in portfolios still predominantly invested in U.S. securities. At the very least, I think it less likely that the dollar will continue to appreciate dramatically over the next 5-10 years, and perhaps more likely the dollar will relinquish some of its recent gains. If so, the headwind of currency translation would turn into a tailwind for international investments.
Perhaps if U.S. stock prices were down in the bargain basement like the panic of 2008-9, I’d be more inclined to forego international diversification and invest exclusively in U.S. securities. U.S. stocks are not in the bargain basement, however: the S&P 500 index reached a record high in recent weeks. I do not consider U.S. stocks to be overvalued (they are still the single largest asset for most Drystone clients), but nor do I consider them to be the only prudent or potentially rewarding opportunity out there. Diversification still matters.
April 21, 2016
An old stockpicker’s adage is “When the story changes, sell.” As a highbrow (joking) re: semantics and a disciplined (not joking) portfolio manager, I like to think that, when selecting stocks, Drystone doesn’t buy “stories” but rather a stake in businesses that are well-managed and well-positioned in favorable industry landscapes. In a sense, Drystone tries to buy good business models, defined here as the overall way a company chooses to do business, the strategic direction it takes, the pattern of operating decisions it makes to get there, and the way its industry’s competitive forces allow that company to set prices, etc. I also try not to overpay for those attractive business models, in terms of stock price versus Drystone’s estimate of a stock’s intrinsic, a.k.a. fair, value. So, the adage rephrased for my refined tastes is: “When the business model changes, sell.”
Two other Drystone tenets at work:
1. Each investment’s size, as a percentage of total portfolio value, must not overstretch the bounds of prudence. By design, the Concentrated Investments portion of your portfolio does contain just 12-20 individual stock positions, some fairly sizable. Academic studies have shown that the added diversification benefit from owning more than 20 stocks tapers off quickly, and in my experience there is a demonstrated advantage to owning a short list of sizable holdings which you can follow closely. There is a limit to all good things, though, so in each client Statement of Objectives I include a cap on what percentage of a total portfolio the Concentrated Investments portion should represent, which in turn means that any one single stock among those 12-20 Concentrated positions has only rarely exceeded 8% of a total portfolio.
2. Permanent loss of capital – defined as big bets that drop in price and don’t rebound, or at least don’t rebound until after manager/client lose patience and throw in the towel – is a more pertinent definition of risk for most clients* than the textbook definition of risk as volatility, i.e., the month-to-month swings in an investment’s price. *except clients who need to make sizable recurring withdrawals
January 15, 2016
Drystone’s expectation for the S&P 500 stock index over the next ten years is at least 3% average annual price change + the current 2% dividend yield = an average annual total return of 5% from 2016-2025. Over the five years 2016-2020 I won’t claim the same degree of confidence in any spot-specific prediction, but I do expect approximately 0-to-3% average annual price change + the current 2% dividend yield = an average annual total return of 2-to-5%.