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4th Quarter 2017 Commentary

Conference Call Replay   Listen to the Podcast

For the first time in quite a long while, clients have been asking about whether their portfolios contain any inflation beneficiaries, whether there’s much leverage. Really, these questions are about practical, functional diversification (as opposed to what the mind recognizes as ‘lip service’ diversification). There is a sense that all the investments are crowded into the same place and are more and more governed by a few shared risks. And perhaps there’s an unasked question, what happens when the music stops, whichever music it is that has made it all work so far.
We can’t know when the music stops or what exact shape events will take when it does. But the concentration of the crowd on the dance floor does facilitate the existence of the types of securities that answer the aforementioned questions. Our portfolios have been pre-positioned for some time in a variety of hard-asset and counter-cyclical securities that are remarkably cheap, have substantial optionality and often remarkably strong balance sheets. They can only provide these virtues because they are not popular with the dance crowd. Paradoxically — but entirely in accord with the realities of market behavior — the best time to purchase an inflation beneficiary, for instance, such as a gold royalty company, is when investors have yet to become concerned about inflation and are generally unenthused about the prospects for gold or gold mining.
This review describes the variety of less-systemic-risk securities in the portfolios, including the penultimate non-systemic exposure — because it’s entirely outside the system — consensus money (cryptocurrency), along with some Q&A around the latter topic, of which there’s been quite a bit.

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3rd Quarter 2017 Commentary

Conference Call Replay

In presentations to various sophisticated investment professionals, one of the most surprising revelations has been that many have far less knowledge about the systemic risks embedded in the broader markets than do our clients. While they are increasingly aware of well-respected investors voicing increasing discomfort with various structural excesses, such as the national debt, they are not cognizant of the very real and specific threats posed to them or their clients.

Unfortunately, the odds just shifted for the worse. A far greater threat has arisen: of technological disruption from outside the major indexes, with the potential to be destructive to large sectors within the indexes, in particular the Financials and Information Technology. This is the emergence of cryptocurrencies such as Bitcoin. The potential disruption to the status quo is sufficiently great, in our view, that all investors should, at the least, be exposed to this topic. It merits serious discussion.

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2nd Quarter 2017 Commentary

Conference Call Replay

It’s always nice to pay a lower fee for the same product. Who wouldn’t? But what if it’s not the same? The Nasdaq 100 ETF (QQQ) fact sheet says it is filled with growth companies and only trades at 22x earnings, the same as the S&P 500. They don’t tell you that they exclude any companies with losses. They don’t describe how they effectively eliminate the impact of companies with very P/E ratios, through a rather abstruse formula known as the Weighted Average Harmonic Mean. In the absence of having an MBA or statistical degree, if you calculated the P/E ratio of the Nasdaq 100 the way you know how, by simply averaging the P/E ratios of the 91 profitable companies, then the P/E is over 40x. It’s One Thing to Not Know, It’s Another to Be Told What Isn’t So.
As with every quarterly commentary, we’ll review just how indexed products that purport to be low volatility or low risk or provide exposure to a given country or industry actually are not or do not. You don’t get something for nothing, particularly on Wall Street.

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1st Quarter 2017 Commentary

Conference Call Replay

In past reviews, we’ve titillated you with some of the more startling and story-worthy examples of the distortions caused by the indexation vortex. We have chosen far flung examples in order to direct one’s attention, through all the noise of conflicting information from the financial news media, toward the bubble conditions that ETFs have wrought. But, because those examples have been drawn from more marginal sectors on the market, many of you might have wondered whether they are relevant to their portfolios. So, in this quarter’s letter, we go mainstream, to see what’s going on in the most basic portfolio building blocks, the bread and butter asset classes: first, the S&P 500 itself, and then a typical mainstream growth fund and a mainstream value fund that an everyman or everywoman would use. The kind of fund that is relevant.

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