I know that much of the money management business sets target prices for buying and selling, particularly value managers, and sell-side analysts.  I don’t set target prices.  Why?

Think of what a target price means.  It says that at a certain price you are willing to exchange securities for cash (sell), or vice-versa (buy).  The trade-off between an individual security and cash is difficult to calculate.  Even if you have a really good dividend discount model, the target prices are very sensitive to model inputs.  I think the question of whether I would rather have cash or an individual stock or bond is a difficult question.

So why don’t we focus on easier questions?  It is simpler to rank stocks versus other stocks at least in broad, and bonds versus bonds.  I am not saying that you have to optimize.  You can’t be exact in ranking the desirability of stocks or bonds, but if we can’t identify a group of stocks outside the portfolio that are better than a group of stocks inside the portfolio, there is not much sense in trading.  Same for bonds.

With bonds, the tradeoff is more obvious, because you can consult yield relationships, and make all of the adjustments necessary to decide whether a trade is a good one or not.  Even then, there had better be a good yield advantage after all adjustments, or the trad will not make sense.  As an example, back in the first half of 2002, I engaged in a wide number of trades that gave up some absolute yield, but improved the portfolio’s credit quality dramatically at a time when credit spreads were narrow.  Though overall yield went down, the portfolio was in better shape.  This was the opposite of what we did after 9/11 — buy distressed bonds while spreads were very wide, accepting more credit risks when it paid to do so.

Thus, most of my portfolio management is not so much “Aim for the best.”  I’m not sure I can do that.  “Aim for something better than what I currently have” is achievable.  In cases where I can find no clear improvements, sitting on my hands it the best strategy.  After all, time is on the side of a portfolio representing great relative value.

This is not to denigrate those that are better than me, like Seth Klarman.  He has a strong sense of when he would rather hold cash versus taking any risk, and so he manages value in an absolute sense, even giving back money to clients when  he doesn’t have anything to do with it.

I’m still finding some attractive assets to buy, though not many.  Later this month, I will do my formal quarterly reshaping of the portfolio, where I will trade away a few stocks I like less for those I like more.  And if I can’t find any that I like more, I don’t have to do anything, because if I’ve got a really good group of stocks, doing nothing may be the best idea of all.

PS — If you want more, some of the details are in Portfolio Rule Eight.

This is a hard time to be managing fixed income.  Yes, if you are at a big shop with access to deal flow, not so bad — but when you are small like me and have limited tools for a small client base (less than 10% of my assets are fixed income… smart people, because I am better at equity investing) it is really difficult.

Everyone knows interest rates have to rise.  That is why I own long Treasuries.  If the certainty level were truly that high, we would have sold off a lot more by now.  As it is, oldsters, their intermediaries, and pension plans are investing in longer fixed income to provide long-term income.  The need for income, at least for now, holds rates down.  If price inflation kicks up, my view will change, and so might the view of millions of others.

I call that position “ice.”  What will do well if the global economy goes cold?  That’s 20% of the portfolio.

Then there is “fire,”  credit risk in mild and stronger forms.  40% of assets in short investment grade bonds.  20% in bank loans.  20% in short-dated junk.  What will do well if the economy expands?  “Fire” will do well.

What I did wrong last year

My big mistake last year was owning emerging market bonds, both dollar-denominated, and local currency.  That market fell apart after Bernanke uttered the word “taper.”  I held, thinking there might be some recovery, only to sell in November, ahead of the first real taper.

I forgot what I knew, that immature/emerging financial markets are disproportionately sensitive to changes in monetary policy from developed markets.  Michael Pettis’ book, The Volatility Machine, makes that point ably.

On the bright side, maybe I missed the second half of the losses.  As for now, Fire and Ice is working, and providing returns to the small number of clients that use me for fixed income.

The Volatility Machine, or, Developed Markets Sneeze and Emerging Markets Catch a Cold


  • Record Cash Leaves Emerging Market ETFs on Lira Drop http://t.co/KSVS4qlrGb Sold mine b4 the 1st Fed taper; China’s fin’l sys vulnerable $$ Feb 01, 2014
  • Calm Broken in Markets Amid Concern of Emerging Contagion http://t.co/VnMtRrqXgs Emerging mkts decoupling from developed mkts wrong way $$ Feb 01, 2014
  • Basci No Rebel as Elections to Dictate Turkish Rate Moves http://t.co/EFVGB1LbMD Raise rates to defend the lira, watch exporters sag $$ Feb 01, 2014
  • Rajan Warns of Policy Breakdown as Emerging Markets Fall http://t.co/zW9QR49nRu Good guy, but fighting from a weak position $$ Feb 01, 2014
  • Argentina 105% Stock Return Proves Illusory as Peso Sinks http://t.co/4T0LdDhPM7 Make high returns in Arg pesos, but what can they buy? $$ Feb 01, 2014
  • Fragile-Five Selloff Cuts Rupee Issues to ’07 Low http://t.co/7anEAHc6Qd Volatility machine feeds tightening policy to weakest emerg mkts $$ Feb 01, 2014
  • The Price of Argentina’s Devaluation http://t.co/WwCrpf8urI More devaluation 2 come, black market price of $$ 50% above official price $IRS Jan 30, 2014
  • China Bank Regulator Said to Issue Alert on Coal Loans http://t.co/9w51A1v6RS Wealth management products embed significant credit risks $$ Jan 26, 2014
  • Fernandez Ditches Argentina for Cuba Summit Amid Crisis http://t.co/3nH9dIC0vT May what happened to Khrushchev happen to Fernandez $$ $IRS Jan 26, 2014


Companies & Industries


  • Amazon’s Boundless Spending Tested as Sales Growth Slows http://t.co/HPMVaVRDpV & http://t.co/ByiTZvlPLj $AMZN needs to raise its prices $$ Feb 01, 2014
  • How IKEA Protects the Environment and Sofa Margins http://t.co/x1rGegBzm5 IKEA is a very clever company that sells furniture cheaply $$ $FBN Jan 30, 2014
  • Walmart Expands Same-Day Grocery Delivery Test to Denver http://t.co/YrsuV006Zs Will b interesting 2c if this works profitably $$ $WMY $KR Jan 29, 2014
  • Billionaires Fuming Over Market Selloff That Sinks Magnit http://t.co/ZD1uUx0J0M Never confuse trading value w/intrinsic value $$ $SPY $TLT Jan 29, 2014
  • Branson’s Butanol Heading to U.S. as Ethanol Substitute http://t.co/8JAturnMXg I’ve been waiting for this; this is big & good. $$ $SPY $XLE Jan 29, 2014
  • Ethanol Exporters Search for a Port http://t.co/h9oUb7aRne Key Problem: Industry’s Distribution Network, Built Around Domestic Market $$ Jan 29, 2014
  • Apple’s $160B Mystery http://t.co/emZzU9mJ4d It is a mystery. What could you buy for $160B that would yield something like 10%? $AAPL $$ Jan 29, 2014
  • With a Shortage of STEM Graduates, Accenture Hopes to Grab Them Early http://t.co/lH3cam3h9U Clever idea by $ACN getting real thinkers $$ Jan 26, 2014


Financial Sector


  • Mortgage Volumes Hit Five Year Low http://t.co/IdgUULArJf Once policy accommodation ebbs, the housing mkt normalizes. 2 many houses $$ Feb 01, 2014
  • Futures industry: A story of crisis and opportunity http://t.co/CGShQoC93M Interesting history of how the Chicago futures exchanges grew $$ Feb 01, 2014
  • Sudden Swings in HSBC, Diageo Spur Trading Error Concern http://t.co/1Krn50FkYx “Fat fingers” can be a problem in computerized markets $$ Jan 30, 2014
  • Wall Street Attracts Chop Shops 20 Years After ‘Wolf’ http://t.co/qkYgenUF49 This isn’t as large as it used 2b. Now more fraud online $$ Jan 30, 2014
  • Companies Shift Strategies as Pension Funding Improves http://t.co/MhGhBFABc6 Smart to immunize pension liabilities when fully funded $$ Jan 30, 2014
  • Friday Was a 90/90 Day and What It Means http://t.co/lhm2LQeWN0 @Ritholtz tells us there has been a sea change & this is a correction $$ Jan 29, 2014
  • Delinquent Debt Seized by Lehman Alum Seeing Recovery http://t.co/SsbGLA5Lh2 Hedgefund doesn’t own homes, but owns debt interest on homes $$ Jan 29, 2014
  • The Hidden Risks of Bank Loan Funds http://t.co/AEe7kicHul A good piece by the estimable @davidschawel . U might need 2play defense $$ $BKLN Jan 29, 2014
  • How the Safe Havens Stack Up http://t.co/csOSokPPWR For now nothing beats long US Treasury bonds FD: Long $TLT Jan 29, 2014
  • SEC Accuses Legg Mason of Some Accidental Fraud http://t.co/5Gl2I0B0S9 Given the complexity of law, much fraud is boring $$ $LM $SPY $MDY Jan 29, 2014
  • Puzzle for CFOs: Fixed or Floating-Rate Debt? http://t.co/vWxLEq6k8d Here’s the easy answer, do half fixed & half floating. Easy. $$ $BKLN Jan 29, 2014
  • Mary Jo White Wants SEC to ‘Rethink’ Corporate Disclosures http://t.co/VFLKGGnTfM Overthinking it; many people don’t read risk factors $$ Jan 29, 2014
  • BlackRock’s Fink Warns of ‘Too Much Optimism’ in Markets http://t.co/lkZYCY32HQ Fink is on target, vs the wishful thinking of bureaucrats $$ Jan 26, 2014
  • Former Phone Psychic Fit Right in as a Quant Trader http://t.co/Eq8iyYE2Tv Very weird. Making money by selling illusions can b profitable $$ Jan 26, 2014
  • Gold Mint Runs Overtime in Race to Meet World Coin Demand http://t.co/R7tjxZfTU3 Notable demand 4 physical gold amid falling prices $$ $GLD Jan 25, 2014
  • Is Momentum on Your Side? http://t.co/x0Z3r64Lix This strategy works well, if u can handle the volatility. 2007-2008 flameout. $$ $SPY $MDY Jan 25, 2014
  • How to Fine-Tune Your 401(k) Account http://t.co/0Q6N5NG0JP Worth a read if u have a 401(k). Consolidate, review allocations & savings % $$ Jan 25, 2014
  • That last article is one reason interest rates should remain LOW. Retiring baby boomers turning assets into streams of income. $$ $TLT $TBT Jan 25, 2014
  • Two Words: Private Equity http://t.co/E485SlKnn1 Private equity is still a risk asset, and goes through booms & busts, stick w/quality $$ Jan 25, 2014


US Politics & Policy


  • Christie Knew About Lane Closings on Bridge, Ex-Ally Says http://t.co/2YLuAOewGb If true, Chris Christie is toast, in the US & New Jersey $$ Feb 01, 2014
  • Meanwhile, Back in America… http://t.co/J8LsjPtWNw It feels more like grief, Like the loss of something you never thought you’d lose $$ Feb 01, 2014
  • The Republican Presidential Contender Everyone’s Overlooking http://t.co/FVMViawn5b I find John Kasich 2b unlikely, but so are the others $$ Jan 30, 2014
  • Only the Foolish Pay the 45% Estate Tax http://t.co/bnMuQp6P55 @ritholtz tells truth on estate tax, rewards accntnts, lawyers, actuaries $$ Jan 30, 2014
  • Minimum Wage Laws Kill Jobs http://t.co/Rfc8Ef174z Sad but true. From first principles this should be obvious 2 all $$ Jan 30, 2014
  • The Unspoken Reason Obama Can’t Raise the Minimum Wage http://t.co/WlqxZtBxK3 Public opinion does not think poverty is important $$ $SPY Jan 29, 2014
  • No Babies, No Stimulus http://t.co/4995BoqbER @asymmetricinfo says it well; if your population gets older, policy should be more austere $$ Jan 26, 2014
  • How the U.S. Helped Win World War I http://t.co/X4nLdNHZcj Intensified our bad habit of meddling in conflicts that are not ours $$ Jan 25, 2014

Rest of the World


  • For Europe’s Youth, Minimum Wages Mean Minimal Employment http://t.co/T9ZfsM8oGu Youth unemployment is higher in nations w/minimum wages $$ Feb 01, 2014
  • El Nino May Return as Models Signal Warming of Pacific Ocean http://t.co/YAbrSpm3Tx El Nino – the adult version of the boogeyman $$ $SPY Jan 29, 2014
  • Snowden Nominated by Norway Lawmakers for Nobel Peace Prize http://t.co/PShW1dmpv9 Well deserved. He ruined his life 4 the good of all $$ Jan 29, 2014
  • Slop-Bucket Reality for Aboriginals Missing Canada Boom http://t.co/pNftiUwjsZ Tribal cultures tend to fail in a capitalistic world $$ $SPY Jan 29, 2014
  • Japan Beyond Tokyo Luring BlackRock With Overseas Money http://t.co/r2YOyDyvMw Abenomics will fail, & Japan will b the first casualty $$ Jan 29, 2014
  • South Sudan Military Says Rebels Breach Cease-fire http://t.co/1YYa7rLVi7 After separating from the North, tribal animosities dominate $$ Jan 25, 2014




  • Food Festival Pageants Open Up Competitions to Attract Candidates http://t.co/8Zcv61Znor Offering larger scholarships to food ambassadors $$ Feb 01, 2014
  • Why National Football League players go from rich to broke http://t.co/oIsMpnxgis Injuries shorten careers & fancy living depletes the $$ Feb 01, 2014
  • Super Bowl Prostitution Digitally Mapped by Data Trackers http://t.co/ivD5pKBVBM Wonder how many female slaves they can help to free? $$ Feb 01, 2014
  • The Employee of the Month Has a Battery http://t.co/zrmb0TgqS1 Minimum wage hikes r accelerating trend toward automation & fewer workers $$ Jan 30, 2014
  • Bitcoin Figure Is Accused of Conspiring to Launder Money http://t.co/MuFqZLMABH Governments care if u r trading w/evil people $$ $TLT $SPY Jan 29, 2014
  • Infertility, Diabetes, Obesity and the Mystery of PCOS http://t.co/tylcTdjKET Messy. Overweight & Diabetes correlated with infertility $$ Jan 29, 2014
  • How You Might Be Tracked for Ads in a Post-Cookie World http://t.co/cYhBKa5oS7 Worth a read. After all, you want to protect your privacy $$ Jan 29, 2014
  • Frigid Super Bowl Recalls Ref in Wet Suit With Few Penalties http://t.co/k9EeVc1WI3 When u r struggling 2 survive, few penalties issued $$ Jan 29, 2014
  • Burning Question: Does Rinsing Fruit Make a Difference? http://t.co/Xr4lNk8lCq If organic, YES! If not organic, yes. $$ #microorganisms Jan 29, 2014
  • 4 things to know about Warren Buffett adviser http://t.co/jRlt81kULk Tracy Britt Cool is slow beginning of more centralized operations $$ Jan 28, 2014
  • Pregnant Texas Woman, Marlise Muñoz, Removed From Life Support http://t.co/esBxk1xLdz Many people would have adopted the child $$ Jan 27, 2014
  • Maryland Shopping Mall Shooting Leaves 3 Dead, Police Say http://t.co/FGcrU7q3sn Biggest Mall near me. I’ve shopped at the Sears there $$ Jan 25, 2014



  • Wrong: China PMI Ascends as Global Barometer With Market Sway http://t.co/gSD8QQewZy Should examine China’s financial system soundness $$ Feb 01, 2014
  • Dumb: Obama Announces New Retirement Accounts http://t.co/E20AA2F3vX Providing investment options 2 those who don’t invest is a waste $$ Jan 30, 2014
  • Weak arg: Congress Has Never Allowed Unemployment Insurance Extensions 2Expire With Long-Term Unemployment So High http://t.co/2IVPLXTDKr $$ Jan 29, 2014
  • Wrong: Obama Offering Retirement-Savings Plan for Workers http://t.co/jpOEBTeT66 Getting poor people 2 invest in Treasuries is criminal $$ Jan 29, 2014
  • Wrong: Yellen Faces Test Bernanke Failed: Ease Bubbles http://t.co/ys4I4iOFWy That is not her inclination; she will inflate bubbles $$ $SPY Jan 29, 2014
  • Wrong: Senator Schumer pushes plan to undercut tea party http://t.co/cpN3PQKBid Far better to end gerrymandering http://t.co/uQx2ZdtSlF $$ Jan 27, 2014
  • Wrong: What’s Behind the Emerging-Market Meltdown http://t.co/FoG5yOAUpW Kooky Keynesian prescriptions: ruin long-run 2 help short-run $$ Jan 26, 2014


Comments, Replies & Retweets

  • Reading: Whatever happened to the feature which allowed us to customize news sources for stock portfolios? http://t.co/8sdnIF0FeS $$ $YHOO Feb 01, 2014
  • Whatever happened to the feature which allowed us to customize news sources for stock portfolios? http://t.co/vnmO5Hlhnt #YahooAnswers $$ Jan 31, 2014
  • Commented on StockTwits: Clever, thanks. http://t.co/YweRBtoTe8 Jan 29, 2014
  • RT @Pawelmorski: Financial media basically rubbish at covering EM. Jan 29, 2014
  • Commented on StockTwits: The word was “tend” not “must” http://t.co/r11cBZsTRp Jan 29, 2014
  • @TTownsend4969 Blessed are you, Tina Townsend. May you always be grateful for the work that Jesus has done in you. Jan 29, 2014
  • RT @M_C_Klein: .@mark_dow on EM: “Don’t try and fight the old school and their anachronistic biases. They are bigger than you are.” http://… Jan 28, 2014
  • @pdacosta @bySamRo Grateful I exited my closed-end EM funds in November prior to the first taper. Michael Pettis’ volatility machine runs $$ Jan 26, 2014
  • RT @StephenKing: Memo to Justin Bieber: For the young celeb, life is a banquet of free food. What they don’t tell you is that you are often… Jan 26, 2014