“Wide diversification is only required when investors do not understand what they are doing.” Warren Buffett What is diversification? How does it apply to being a prudent investor, a smart investor, or a “high risk” investor? For instance, you can be diversified in start-up companies across numerous sectors in multiple countries, and make a reasonable return if “only” 2 of 20 succeed….as long as they are blockbusters! If, however, none of the 20 “hit”, then your portfolio ends up in tatters. That is a high risk strategy, and while some are adept at it---most are not.
“My policies are based not on some economics theory, but on things I and millions like me were brought up with: an honest day’s work for an honest day’s pay, live within your means, put by a nest egg for a rainy day, pay your bills on time…” Margaret Thatcher Policy matters. Simplicity trumps complexity. Transparency trumps opacity. Savings trumps debt. And freedom trumps all. We live in a world, however, where policy-makers have embraced a paradigm that is anathema to lifting the human spirit…and the negative results are becoming more apparent. This is not strictly an American phenomenon. Across the globe, governments are enacting policies that at best give pause, and at worst give reason to question their collective judgment.
“That was then, this is now.” Author, S.E. Hinton The Dow Jones Industrial average hit an all-time high this week, and while we are happy stocks have continued their four year rally, there are still some things that make us go hmmmmmmm. Let’s compare the investment landscape to when the Dow last hit an all-time high in October of 2007.
“Any idiot can face a crisis…it’s day-to-day living that wears you out.” Russian author and physician Anton Chekhov Anton Chekhov must also have been an investor at some point. While we are grateful for recent the “crisis free” market, the uneventful “day-to-day” on Wall Street likely has many analysts scratching their collective heads in confusion. To see why, let’s take a quick survey of the landscape….starting with the positive.
"Sooner or later we all sit down to a banquet of consequences." Robert Louis Stevenson However you view the prospect of increased taxes, there is no way to get around the fact that they will reduce general savings. If you reduce savings you reduce the capital available for investment in current and future businesses. If you reduce capital formation, you’re going to reduce future growth. The current fetish among the economic thought leaders is that consumption is the driver of GDP growth. But GDP growth is ultimately a reflection of increases in population and productivity. And if you want to increase productivity, you must increase capital available for investment.
"Sooner or later we all sit down to a banquet of consequences." Robert Louis Stevenson Consequences, of course, can be both good and bad…and we suspect there will be several high profile “banquets” in 2013. Predicting what will be served in the coming year is the subject of this missive and, as usual, it will have its fair share of both optimism and pessimism.
“The nearest thing to eternal life we will ever see on this earth is a government program.” Ronald Reagan President Reagan humorously (and accurately) saw the future. We at Talbot Financial, however, are not quite as prescient. One year ago, we boldly made our predictions for 2012---and the results were mixed. Some predictions were quite accurate and fell into the “We’re geniuses” category. Unfortunately, other predictions disqualified us from Mensa membership and can be placed squarely in the, “What were we thinking?!” column. Finally, there were some “tweeners” where we were neither right nor wrong---as of yet. These can be placed in the “Time Will Tell” slot.
“We all know what to do, but we don’t know how to get re-elected once we have done it.” Jean-Claude Junker—Luxembourg’s Prime Minister It is not hard to predict much of the news that we will hear in the month of December. The “fiscal cliff” will dominate the headlines in the US and Greek/Spanish/Italian/French bail-outs will headline the daily news in Europe. Sprinkled amidst the financial/political talk, we’ll get the usual holiday sales projections and the 2012 “in review” stories.
Mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose wisely! -–Woody Allen We had to chuckle when we read Woody Allen’s quote. After all, watching the 2012 campaign ads, you would think that despair and extinction are the choices facing Americans as they go to the polls today! And while trillion dollar deficits, a tension-filled Middle-East, an emerging China, and a dysfunctional Europe will confront the “winners” on Wednesday morning, the fact is there are also powerful positive counterbalances in play.
“I think there is a world market for about five computers.” Thomas J. Watson Jr. of I.B.M. 1943 The common belief in the investment world is those with the best information made the best decisions. We don’t adhere to that adage. While quality information is incredibly important…it’s what you do with that information that makes all the difference. What we’re looking for are CEOs and management teams that can take the information on hand and, through time, see “around the corner” (or “over the horizon”) accurately enough to build strong, sustainable businesses. There are plenty of historically relevant inspirational successes-- and monumental failures-- around this theme. For example: