See the new issue of our newsletter, The Value Report.
This month’s issue includes:
Log in and read this month’s issue.
Not a subscriber? Subscribe now and receive our monthly newsletter and much more.
Bruce Berkowitz of the Fairholme Funds was recently interviewed by Consuelo Mack WealthTrack. Berkowitz speaks at length about his highly controversial investments in financials such as Citigroup, Bank of America, MBIA, AIG, Goldman Sachs, CIT, and Regions Financial.
Problems viewing this video? Watch it here.
Bill Gross of PIMCO recently released his September 2010 Investment Outlook, “Mr. Gross Goes to Washington.” Gross discusses his recent trip to Washington to discuss the future Fannie Mae and Freddie Mac. This is an excellent read.
Read this commentary and other insights at the PIMCO website.
Paul McCulley of PIMCO recently released his Global Central Bank Focus, “When Unconventional Becomes Conventional.” McCulley discusses the fat-tail possibility of deflation and urges the Federal Reserve to use its recently expanded powers to fight against a liquidity trap.
Read this and other commentaries at PIMCO’s website.
By
Nathan Kawaguchi
IgnoreTheMarket.com
At the Merriam-Webster OnLine dictionary, the first three definitions of value are:
1: a fair return or equivalent in goods, services, or money for something exchanged
2: the monetary worth of something
3: relative worth, utility, or importance
From an investment point of view, these could be combined to broadly define value as, “A fair or equivalent return relative to that for which something can be exchanged.” It is important to understand this fundamental concept of value in order to protect investment portfolios during this period of unusually wide ranges of probable outcomes.
The most basic decision about money is whether to spend it or save it. While people as a whole are irrational in the short-term, we tend to be more rational over longer periods of time. It is fair to assume that in the long run, a rational person’s primary consideration should be the real present value of all future cash flows, which is heavily impacted by the expected rate of inflation. We know this is true by observing hyperinflationary economies.
Even in less-educated developing nations, consumers perform present value calculations, often unconsciously. During hyperinflation, paychecks are cashed and spent immediately upon receipt because people know the money only buys a fraction of the goods later in the day. Unfortunately, many people fail to make the same basic present value calculations when we move from consumer goods to investments.
Because value does not exist in a vacuum, investors must identify a basis for comparison—a common denominator by which to measure relative value. Most long-term investors compare expected returns of various investments to “risk-free” U.S. Treasury securities. Some use rates on 2-year notes, while others use 5-year or 10-year rates.
Treasuries and their “risk-free” rates, however, are not the most fundamental unit of monetary or investment value. Cash is more fundamental than treasury securities because it is 100% liquid and has zero principal risk (treasuries have principal risk if liquidated prior to maturity). As we observed in hyperinflation economies, cash derives its value from the rate of inflation. This makes inflation the most fundamental common denominator. So why is this distinction from treasury securities so important for investors?
This distinction from “risk-free” treasuries is important because the potential for rapid inflation exists due to the expansion of the Federal Reserve’s balance sheet. Yes, inflation is currently being offset by the slowing velocity of money and deleveraging of the private sector. But without increasing bank reserve requirements or other limiting measures, the probability of high inflation will remain elevated.
This particularly makes sense for investors who believe in mean reversion. It makes no less sense to believe that inflation is mean reverting than it does to believe that risk premiums (multiples) are.
Some argue that the current spread of earnings yields over “risk-free” treasury rates suggests a heavy allocation to stocks. However, the historic spread of “risk-free” rates over inflation is historically low. If higher, or even average, rates of inflation resurface, financial markets are likely to fall because inflation has a huge impact on the real present value of long-duration investments such as stocks and bonds.
Currently, it appears that the conservative approach for long-term investors is to hold a significant amount of cash. While it may be frustrating earning essentially zero, the opportunity cost of staying safe in short duration is very currently low. If inflation remains under control or if we experience slight deflation, the non-cash portion of portfolios should perform as implied by market prices. However, if inflation is reignited, it is likely to be accompanied by higher interest rates, which could disrupt markets and present opportunities for those investors patiently waiting with cash in hand.
Disclosure: None
Bill Nygren of the Oakmark Funds was recently interviewed for Morningstar’s Manager Q&A. Nygren talks about the growing macro focus creating opportunities on the micro level. He also discusses H&R Block (HRB) and Apple (AAPL).
Read the interview here.
Thanks to guruek at GuruFocus for finding this article.
Jeff Gundlach’s DoubleLine Capital recently released a commentary on rumors of a “Slam-Dunk Stimulus.” DoubleLine provides its perspective on rumored programs to stimulate a housing recovery through principal forgiveness programs or refinancing programs at the federal level.
Read the commentary here.
Here is an old Seth Klarman article from Forbes, February 17, 1992 titled, “Don’t Be a Yield Pig.” This article could have very have been written today and been extremely relevant. Thanks to Alex Garcia via GuruFocus.
James Montier of GMO recently wrote a paper, “Is Austerity the Road to Ruin?” Montier examines the history of financial crises and some possible outcomes based on GMO’s research.
Access to this article requires registration on GMO’s website, but it’s free and easy.
Jeff Gundlach of DoubleLine Capital and DoubleLine Funds recently gave a presentation at the Morningstar Investor Conference. Highlights include:
See the video here.
This is a short video interview with Warren Buffett. He talks about durable competitive advantages, philanthropy, money, debt and more. Thanks to Alex Garcia via GuruFocus.
Wilbur Ross was recently interviewed by Charlie Rose. Ross talks about his investing career and his current views on economics, politics, investing and the coming displacement of America as the world’s economic superpower.
Watch the interview here. Thanks to Greenbackd, via GuruFocus.
Bill Gross of PIMCO recently released his August 2010 Investment Outlook, “Privates Eye.” Gross revisits PIMCO’s ongoing thesis of a new normal, with multiple headwinds of deleveraging, slowing population growth and aging demographics. Gross’ monthly investment outlook is a must-read.
Read all of PIMCO’s commentaries here.
See the new issue of our newsletter, The Value Report.
This month’s issue includes:
Log in and read this month’s issue.
Not a subscriber? Subscribe now and receive our monthly newsletter and much more.
Bloomberg recently featured Steven Romick of FPA Crescent Fund (FPACX) in an article, “Romick Holds Cash Like Klarman in Top-Performing ‘Free Range Chicken’ Fund.” The article covers Romick’s investment approach and his current outlook.
Jeremy Grantham of GMO recently gave a lecture titled “Move Your Assets!” at the CFA Institute 2010 Annual Conference. This lecture is free from the CFA Institute with registration. Highlights of the lecture include:
Other CFA Institute webcasts and podcasts are available here.
Bill Miller of Legg Mason Capital Management recently released his July 2010 Commentary. Miller says that U.S. large cap stocks represent a once-in-a-lifetime opportunity and haven’t been this cheap relative to bonds since 1951.
Don Yacktman and the Yacktman Funds team recently released their shareholder letter for the 2nd quarter of 2010. Yacktman discusses five top holdings and his current outlook.
Howard Marks, Chairman of Oaktree Capital, recently released his memo, “It’s Greek to Me.” Marks talks about the sovereign debt crisis and revisits some previous thoughts about long-term structural challenges in most developed nations, including the U.S.
Marks’ memos are a must-read. Past memos are recommended and can be found here.
Jeremy Grantham of GMO recently released his highly regarded quarterly letter for 2Q 2010, “Summer Essays.” Grantham’s essays include:
Grantham’s quarterly letters and asset class return predictions are legendary, and are a must-read for any serious investor. Read all of GMO’s papers here.
Edward Chancellor of GMO recently released the July 2010 White Paper, “Reflections on the Sovereign Debt Crisis.” Chancellor covers the history of sovereign defaults and puts it in context of today’s conditions for leading at-risk nations. High-quality read, as always from GMO. Registration is required, but is free and simple.
Investment thought leader Roger Lowenstein was recently interviewed by Consuelo Mack WealthTrack. For those of you who have not yet been exposed to Lowenstein, you are in for a treat. Highlights of the interview include:
Watch the video here if there are any problems viewing.
Paul McCulley of PIMCO recently released his July 2010 Global Central Bank Focus, “Facts on the Ground.” McCulley talks about current fiscal issues facing developed and emerging nations around the world, with a focus on the implications of fiscal austerity. This is an excellent read, as always, and should be a staple in every investor’s monthly reading list.
Bill Nygren of the Oakmark Funds recently released his 2nd quarter commentary. This is an excellent read as Nygren goes through a quick, real-world research exercise and makes a strong case for stocks.
Read Nygren’s commentary here.
James Tisch, second generation leader of Loews (NYSE: L) was recently interviewed by Consuelo Mack WealthTrack. Highlights of the interview:
View the interview here if it is not streaming.