Knall: Investment choices are lacking

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I have been helping families, foundations, and endowments manage their money for over 41 years (as of July of this year).  Of course, I was not doing much “managing” in the early years because I did not know enough for any serious investor to hire me.

I have always felt that cautious optimism is the only way to help build and maintain wealth, and I am still confident of this.  But there are numerous headwinds out there, and they are quite daunting and hard to refute.  The list is too darn long, so I’m not going to depress you with it.

In my opinion, it just seems like we have no good choices.  We are down to bad and very bad choices.  The very bad choice is to keep running these deficits.  The not so bad choice is to reduce the deficit gradually over time.

Unrelated, but also important, much of the developed world wants a 35 hour work week while individuals in many emerging market countries are working to improve their standard of living and will work a “35 hour work day”.

Obviously, we are constantly looking for ways in which to help build client’s wealth with a low to moderate degree of risk.  Keeping in mind past performance is no guarantee of future results, for over 40 years, I have been able to find stocks or other assets that were undervalued.  So, rightly or wrongly, I chose to be more eclectic in my approach.  Whether it was banks, savings and loans, oil, gold, cyclicals in 2000, etc, there was always something to do.

One of the areas I’ve been thinking about lately is something I had not focused on very much since the 70’s and early 80’s.  High quality, great global franchises. The “Nifty Fifty” was the name they went by in those days.  They were the 50 stocks that were most favored by institutional investors.  Companies in this group were usually characterized by consistent earnings growth and high P/E ratios.*

When I started my career in July of 1969 I was lucky enough to be with a firm that was competitive with institutional clients.  Pretty quickly, I was assigned to call on our three local Indianapolis-based banks.

In the early days these banks had a good group of senior trust officers.  These individuals were full fledged “card carrying” Nifty Fifty proponents.  In 1974 or 1975 I was not managing enough money to really participate, but I was an observer.

Today, for the first time in 40 years, we are buying some of the old Nifty Fifty, and a few of what I would call the “new Nifty Fifty” (great global franchises not based in the U.S.).  There is a growing list of leading businesses that have strong shareholder-oriented management, and good corporate governance.  These companies are in parts of the world such as Brazil, Asia, Africa, and Europe.  They are relatively more attractive than they have been for the first time in years (the exception was the recent market low in March of 2009).

I also still invest in some of those eclectic stocks (i.e., do my usual “stock-picking”).  About 30% of our managed accounts are made up of these great global franchises, and we are thinking about increasing the amount where appropriate.  We also have a healthy exposure to gold, and have for the last eight or nine years, about 16%.

To conclude, it’s really challenging, but it usually is.  Bottom line is that greed and fear are still alive so there will be plenty of opportunities.


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