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4th Quarter 2018 Commentary

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Falling stock prices, swings in stock prices, a December like this December. They hit all of our buttons. The big red buttons hard wired to the emergency exit centers in that part of our brain closest to the nape of the neck. It’s what we do when he have patterns (data and statistics to our forebrains, shapes moving in the dark to our hindbrains) instead of information (qualitative context, or a light in the hand). That’s when we react and make decisions as opposed to exercise judgment. We’ve seen it before, and we’ll see it again.
To help illumine the landscape before us, we’ll compare the events and reactions leading up to the Internet Bubble of 1999 and its aftermath (and how and why we positioned our portfolios to be so far away from that party) to the events and reactions leading up to today’s bubble (and how and why our portfolios are again so far away from the index benchmarks). The parallels are quite clear and, once seen, the path (or paths, for there are many alternatives) are much clearer.

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3rd Quarter 2018 Commentary

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As a prelude to this review, we revisit a theme that has long informed our research: cognitive limitations in investment analysis. Reasonable minds may differ on what is or is not a good investment, but exceedingly few of those minds study or are even aware of the many ways our brains deal — automatically and without our conscious permission — with an excess of data (which certainly defines the securities markets). The shortcuts we unknowingly take amidst this onslaught of information can lead to the most unfortunate conclusions. Herein, some of our strategies for wading through the facts to address some client questions we received about inflation, U.S. debt levels, and the potential for continued corporate earnings growth. And a couple of new positions, CACI International and Science Applications International, that we believe add functional diversification to our portfolios.

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2nd Quarter 2018 Commentary

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A number of clients have been asking about inflation: are the recent numbers, 2%, benign? Encouraging? Cause for concern? Some of the answer depends on whether the reported inflation data are even real. The changes, over time, in the way that the sausage that is the Consumer Price Index is made seem, repeatedly, to have the effect of lowering it. Either way, it’s well neigh impossible to avoid earning a negative rate of return from the various bond ETFs, after taxes and inflation. We provide a brief survey.

Then there is the failure with, now, a 20-year record, of the equity ETFs to provide the expected 10% rate of return. To avoid a continuous loss of purchasing power, which adds up pretty quickly, investing has to take place differently and elsewhere.

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1st Quarter 2018 Commentary

Conference Call Replay   Listen to the Podcast

The value of the entire stock market relative to GDP – perhaps the most fundamental valuation measure – is pretty much at an all-time high; interest rates aren’t much above their recent all-time lows; the Federal debt/GDP ratio, despite one of the lengthiest economic recoveries on record, is at a high exceeded only in the immediate aftermath of World War II. Yet, despite this traffic jam of systemic risks, and for whatever reason, investors feel sufficiently at ease that they don’t require a real interest rate above zero, or lower stock valuations, as if there financial markets rest in a comfortable equilibrium.
But one of the systemic risks to the stock market, the continued rapid expansion of large scale passive investing, rests on such a faulty – and unexamined – foundation that it might raise eyebrows upon a little reflection. A basic presumption of indexation – its use of the free-rider principle, of the price discovery function that active management provides – is that indexation’s share of float, of the shares not held by insiders, remains a minority of the available shares in the market. Not so. The definition is methodologically wrong, and in a way that can (and, we’ll suggest, has already done so) seriously distort major-company share prices.
The indexation community is likewise operating under a serious methodological error in their security weighting approach. And also in a way that can (and we’ll suggest has) seriously distort major-company share prices.
Also, a review of some additional inflation-beneficiary, non-correlated holdings in our portfolios.

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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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Our musings on the current markets: valuation anomalies, capital flow trends, and the risks and opportunities facing investors.
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Our outlook on the Asia markets, including macroeconomic events and valuation commentary.
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