Advice from a sensible investor

I like to follow a handful of professional value investors. Tom Gayner of Markel Corporation is one of them. The 2009 Q2 conference call included some pearls of wisdom that I thought I share with the readers of this blog. Here it goes...

I think it’s worth commenting that many financial market participants are focused on questions like, is the economy bottoming out and getting better? Is the stock market up too far and too fast in the last few months? Or is it foretelling better conditions in underlying sales and earnings? Will we have inflation? Will we have deflation? And so on and so on. These are all terribly important questions and they will have a huge impact on future investment returns. The fact is I don’t know the answer to any of them. And I don’t believe anyone who claims that they do. Consequently, since we do not and cannot know the answers to these important questions, we tried to invest in equities and fixed income securities that should be all-weather craft and able to provide appropriate returns no matter what unpredictable conditions we will face.

Specifically we own high quality and short duration fixed income securities so that we can be assured of both the return over our money and the ability to re-invest quickly should interest rates rise due to inflation or concerns about the dollar and various currencies. We own a prudent amount of equities in companies with pricing power, valuable brand names, and solid balance sheets. They should be able to grow and produce shareholder value at steady and attractive rates whether the economy re-ignites or [inaudible] out; if oil prices are low or high; if deflation continues or inflation returns or any of the other important and unknowable big picture economic forces manifest themselves. As an added bonus, these types of firms sell at historically reasonable valuations.

Owning interest in durable businesses with growing intrinsic value at reasonable valuations should produce returns we will enjoy as Markel’s shareholders. That remains the guiding principle for our investing activities and I look forward to your questions in the question-and-answer session.

Disclosure: I own shares of Markel corp. at the time of this writing.

Light at the end of the tunnel

[Source: KAL's Cartoon]

Questioning inflation

Being a value investor requires one to think critically and be open to ideas that aren't clearly obvious. I have been a proponent of the "economic recovery will come and will bring inflation with it" camp. However, this article made me think about it a bit more critically. Here is an excerpt:

Bond investors do not sit passively and wait until governments cheat them. One startling statistic that emerges from the UBS note is that 55% of US government debt is due to roll over during the next two years[...]. If investors think inflation is on the way, they will simply raise the nominal interest rate they desire. Worse still, they may also increase the real interest rate they demand. Higher real interest rates (which discourage business investment) are associated with lower economic growth. And slower growth of course makes it much harder to reduce debt-to-GDP ratios.

I'd love to get my hands on that report from Paul Donovan of UBS; but I don't have an account at UBS.

Chinese Bubble

Vitaliy Katsenelson has posted an excellent article on the chinese currency bubble. I have previously talked about this impending issue. Vitaliy's explanation is well articulated and is an enjoying read.

To add my comments to it, it appears that the newspapers do not stress enough about this topic but they really should. This is something that will likely be the cause of the next market upheaval. Unfortunately, the media and government is more interested in creating short-term consumption demand rather than to look at the real long-term problem out there.

American Economy: A Short History Lesson

If anything, this recent crisis has shown us that macroeconomics matters. Here is an instructive and short video on the history of the American economy since WWII. Enjoy.

Eclipse and Mr. Market

Graham's infamous Mr. Market persona is evidently even more insane than Ben Graham may have assumed.

In the three days around the date of an eclipse, three of the four stock indices exhibited lower-than-average returns. The depressive effect of the eclipse was slight—around a seventeenth of 1%—but it was there. Moreover, if an eclipse took place on a weekday, when the stockmarkets were open, its effect was larger than if it occurred on a Saturday or Sunday. And the greater the magnitude of the eclipse—that is, the bigger the percentage of the sun covered by the moon, or of the moon covered by the Earth’s shadow—the more likely it was to have a demonstrable effect on stock returns.