Miscellaneous Notes
When I wrote for RealMoney, I would sometimes do Columnist Conversation [CC] posts that would be entitled “Miscellaneous Notes,” or “Odds and Ends,” etc. Occasionally my editor would chide me saying that I should be able to come up with better titles. I don’t know; I have a wide vista of interests in investing. It is hard to make me focus on a single issue for a long period of time.
So here are some miscellaneous notes. It is my website, after all.
1) A recent comment on the piece On Vanilla Products: David, doesn’t Vanguard and Fidelity offer a low fee VA product using in house funds? At some point I another low fee insurace offering was out there (under 50bps+fund fees) for no fee planners, but cannot remember the name for the life of me. I think they worked with Rydex to grab traders assets.
I agree it’s a great way to retain sticky assets.
A dear friend of mine told me that Jackson National was offering such a product. No jealousy from me; any product that I think should exist makes me grateful when it comes into existence.
2) A reader commented on the the piece, Recent Portfolio Actions: It sounds as if you’re more bearish now than in 2003. Why? It is doubtful that the Fed will remove liquidity any time soon. While there may be headwinds in terms of value, the consumer, and real estate, the appetite for junk bonds keeps growing. As long as that’s the case, the likely-to-become-insolvent crowd will be able to meet short-term payments, and asset bubbles could continue to grow.
That’s a very good question, and it is one that makes me wonder in the present environment. The comparison should not be 2003, but 2001-2003. It is rare for the fixed income market to have a V-shaped recovery. More often than not, the recovery is a W, or a pair of Ws.
Also, in 2003, when I looked at the credit troubles remaining, there were few of them. in 2009, there are a lot of them, in residential housing, in commercial real estate, in junk bonds, etc. I don’t care about the current speculative wave; bear market rallies are sharp and severe. Big as it is, I believe that we have experienced a humongous bear market rally.
3) Because I am a fan of James Grant, that does not mean that I have praise for him on his recent WSJ op-ed. If you had said this 6-10 months ago, when I recommended buying junk bonds, I would be impressed. But most of the rally has already happened, and bear markets often have multiple bottoms. This bear market has only had one bottom, and there are many more defaults to come in this recession.
4) One reader said to me regarding this piece: David, I know what you mean. But I’m curious in this context about the role of absolute valuation strategies in what you recommend. Is it a) no role (relative valuation rules!), b) plays a role, but only within the 10% stretch band, c) matters, but one can always find a portfolio’s worth of low absolute valuation stuff (if one doesn’t worry about the implied adverse selection bias that when everything else is pricey, the cheap stuff is much more likely to be cheap for a good reason), or d) something else?
I don’t have a good answer here. I use a blend of absolute and relative valuation criteria. I would like to use absolute valuation all of the time, but that does not give enough opportunities. I live in an era where the competition is much higher than it was for Ben Graham, or Warren Buffett, when he was starting his partnership.
I will say this, though: absolute valuation can be an excuse for investors that are not willing to do the digging necessary to unearth more complex values.
That said, I like to buy companies below 2x book, and below 14x earnings. Multiplying them, as Graham did, most of my companies trade below 22.5x book times earnings. That helps protect against companies that manipulate earnings or the balance sheet, if one relies on a joint criterion. Behind that, I review the cash flow statement. Clever companies can fuddle two of the three main statements; no one can fuddle all three. Accounting fraud usually can be seen from the cash flow statement being less positive than the income statement.
October 2nd, 20098:22 am at
Following up on the valuation question, my experience has been that the relative plenty/lack of attractive absolute valuation opportunities is a pretty good market timing indicator, especially when one factors in the point that the optimal timing for any given investment style/portfolio may be somewhat different than for the broader, capitalization weighted U.S. or international market.