Taking on Ballast
Ballast: a heavy substance placed in such a way as
to improve stability and control (as of the draft of a
ship…) Merriam Webster Dictionary.
In an investment portfolio, cash can act as effective
ballast providing a degree of stability in the face of
turbulent economic and market conditions. Since economic
and political conditions deteriorated over the summer,
we raised cash in the last quarter by selling our
weakest equity positions. Taking on ballast.
Trouble in the Euro zone banking system related to
excessive public debt has the potential to stifle future
economic growth, exacerbating high unemployment and
forcing additional austerity across the European Union.
Possible default of sovereign government debt hangs like
dirty weather over investors. Many are concerned that
trouble in Europe is beginning to spread to other parts
of the world economy.
In the US, sharply differing visions of the role of
federal government have blocked agreement between
Republicans and Democrats on effective fiscal policy to
deal with a sluggish, potentially recessionary economy,
high unemployment and looming debt. Indeed, some
consider the Euro crisis to be a window on our own
Other parts of the world continue to prosper though
concerns are increasing that growth may subside
somewhat. After outperforming many developed country
stock markets over a 3 to 5-year period, most stock
markets in emerging countries have fared much worse than
the US over the past year or so; perhaps they have
adjusted to moderating expectations of future growth.
On a more optimistic note, we believe that stocks are
inexpensive. From a valuation perspective, we consider
equities to be the most attractive asset class, in part
because of the recent five straight months of decline.
Dividend yields in many cases exceed the yield on the
10-year Treasury bond. Trailing 12-month P/E ratios are
not historically high, especially relative to bond
yields. Corporate balance sheets, in many cases are as
strong as ever. Though the short-term outlook for the
market may be uncertain (September-October can be a
difficult period), odds are increasing that investors
with a little patience and fortitude may enjoy a
During financial turmoil such as we experienced in
2008-09, investors learned that cheap stocks can get
even cheaper. In a crisis, stocks become commoditized;
panic selling can drive prices down in the short-term
with little regard to future earnings, cash flows or
dividends. Our strategy is to maintain positions in high
quality equities and those with a particularly
compelling narrative. Furthermore, we intend to be
buyers at lower levels should the market get irrational
as it did in 2008-09. However for now, tactically, we
have additional ballast in portfolios, having raised
cash as storm clouds gathered on the horizon.
Please read our important notice
about these letters and the securities they mention.