Dear Reader and Fellow Investors,
My agent, if I had one, would suggest that I stop being as sadomastic as i am. However, I cannot let the issue that keeps me awake at night away from you, dear reader.
One sometimes needs to write to ensure their beliefs remain engrained in action and not thought alone. "If you don´t have time to research, you don´t have time to invest" is good to say, but better to do.
A few months ago we started a small position in Monsanto stock, a company I have been following for a number of years but refused to look into any great depth in years past due to its ridiculus market price. However, as it dropped past 70USD, 50% below its previous high, I somehow thought I was getting a bargain. How silly one can be.
The reality was I was purchasing the stock assuming a 7/8% per annum growth, and even at this rate the P/E ratio was close to 10/11 in 5 years time. Clearly this is very aggressive for the fund whose general focus is more conservative assumptions on earnings, let alone growth.
The reality was our lack of study meant we didn´t pick up on the changing market structure, especially for its agricultural productivity business. If we knew what we were doing, rather than pretending due to lack of time to do the proper research, we would have included a significant discount in valuing this business line of the company. Yet, we didn´t. The consequence is that we may be holding a position that can bleed a negative marked to market value for a long time, as the seeds business line may not show impressive growth until 2011/12.
If we value the agricultural productivity business at zero, the stock is currently trading at x20 net income not including extraordinary earnings (this is at a stock price of 49USD/share).
Conclusion: always practice what you preach, there should be no off days.
Always use 5 year average earnings as a guideline. Any difference if feel should be higher or lower should come from understanding the market structure and any potential changes. Otherwise, stay away.
Yours sincerely,
Alessandro Sajwani
Thursday 27 May 2010
Sunday 23 May 2010
The General Market Remains Expensive....
Dear Reader and Fellow Investors,
We believe that equity markets in general remain expensive and macroeconomic conditions remain precarious due to the heavy debt load that continues to exist, and indeed is growing due to government borrowing.
We are happy to see that select individual securities are starting to become attractively priced, but this is still the exception as opposed to the norm.
Though we see it probable that central banks will keep rates low for as long as the markets allow (i.e. until government bond yields rise because the market becomes sick of new debt being issued), this can assist the upward rise of risk assets, as can the potential re kindeling of inflationary fears due to the large volumes of printed money being introduced into the financial system.
These two latter factors could well have been the principal drivers behind the increased pricing of real assets (commodities and equities) over the last 12 months. Can they be in the future? Sure they can, but recall that trees don´t grow to the sky.
We have also seen earning results consistently be better than analyst estimates, which were already assuming stong increases relative to previous quarters. There strength overall has impressed me as well as surprised me. I still believe that operating margins will be under pressure over the next few years (due to restricted private credit expansion, which will reduce demand), hence those that don´t increase revenue will generate less profit.
As assets become cheaper, we will be buying more. If they become more expensive, we are likely to hold until they pass our objective value for them, in which case we will be increasing further our cash allocation.
I would like to add that we have no interest in buying 5 year bonds offering 2.5% yields, and have not been buyers of gold. Hence we are principally buying equities, some of which are starting to offer sustainable dividend yields twice the yield of 5 year corporate bonds.
We look forward to receiving your questions.
Yours sincerely,
Alessandro Sajwani
We believe that equity markets in general remain expensive and macroeconomic conditions remain precarious due to the heavy debt load that continues to exist, and indeed is growing due to government borrowing.
We are happy to see that select individual securities are starting to become attractively priced, but this is still the exception as opposed to the norm.
Though we see it probable that central banks will keep rates low for as long as the markets allow (i.e. until government bond yields rise because the market becomes sick of new debt being issued), this can assist the upward rise of risk assets, as can the potential re kindeling of inflationary fears due to the large volumes of printed money being introduced into the financial system.
These two latter factors could well have been the principal drivers behind the increased pricing of real assets (commodities and equities) over the last 12 months. Can they be in the future? Sure they can, but recall that trees don´t grow to the sky.
We have also seen earning results consistently be better than analyst estimates, which were already assuming stong increases relative to previous quarters. There strength overall has impressed me as well as surprised me. I still believe that operating margins will be under pressure over the next few years (due to restricted private credit expansion, which will reduce demand), hence those that don´t increase revenue will generate less profit.
As assets become cheaper, we will be buying more. If they become more expensive, we are likely to hold until they pass our objective value for them, in which case we will be increasing further our cash allocation.
I would like to add that we have no interest in buying 5 year bonds offering 2.5% yields, and have not been buyers of gold. Hence we are principally buying equities, some of which are starting to offer sustainable dividend yields twice the yield of 5 year corporate bonds.
We look forward to receiving your questions.
Yours sincerely,
Alessandro Sajwani
The Currency Question....
Dear Reader and Fellow Investors,
As an investment advisor for a private bank, I am often asked where currencies are heading over the course of the day.
I am happy to say that due to my lack of foresight in such events, fewer and fewer bankers and clients are asking me my opinion on such short term matters.
However, I understand that clients longer term fears represent a meaningful question that any respectable investment advisor cannot pass.
Though currencies do generate a yield, as anchored by the base rate which is determined by the central bank of that currency, we decide not to determine a currencies value by discounting future expected interest rates (as could be taken from the yield curve of, for example, 30 year government bonds). We feel the potential of error is too large to believe in such an approach.
Instead, our currency allocation is principally determined by two factors:
1.An aim to be (close to) currency neutral relative to the clients base currency
2.We aim to buy assets that are available at good prices. If we do this, eventually others will buy them also. To do so, they will need to buy the currency that asset is denominated
Hence in early 2009 we were heavy buyers of USD assets, much like now we are starting to buy EUR denominated assets. Hence security selection guides our currency allocation. It is important to note we also add a macroeconomic overlay to ask ourselves how the macro environment in a particular currency can affect us negatively (we are not concerned with how it may affect us positively, that will be a bonus if it occurs). If we feel relative to another currency there are bigger macroeconomic problems, we would apply a larger discount before buying securities in that currency.
With regards to the current panic on the EUR, I would quote the great research based investors, such as Mr. Jim Rogers, who over a decade ago talked about the potential problems we are now seeing in Euro land. All that has changed is the media has spread the story to every household, creating a panic that is feeding off itself. No doubt, what Mr. George Soros would call a “vicious circle.”
As for my humble opinion on such factors: Though the USA, and therefore the USD, has more political wealth than the EUR due to its greater unity and therefore greater speed of reaction, economically, they are more similar than we care to believe. It is likely that over the next few years we will be involved in a “currency carousel” as the market judges which of the big three currencies is actually in a worst economic position (the contenders being the USD, EUR and GBP). Unfortunately the paper money of each, in my humble opinion, all need to de value relative to real assets.
Yours sincerely,
Alessandro Sajwani
As an investment advisor for a private bank, I am often asked where currencies are heading over the course of the day.
I am happy to say that due to my lack of foresight in such events, fewer and fewer bankers and clients are asking me my opinion on such short term matters.
However, I understand that clients longer term fears represent a meaningful question that any respectable investment advisor cannot pass.
Though currencies do generate a yield, as anchored by the base rate which is determined by the central bank of that currency, we decide not to determine a currencies value by discounting future expected interest rates (as could be taken from the yield curve of, for example, 30 year government bonds). We feel the potential of error is too large to believe in such an approach.
Instead, our currency allocation is principally determined by two factors:
1.An aim to be (close to) currency neutral relative to the clients base currency
2.We aim to buy assets that are available at good prices. If we do this, eventually others will buy them also. To do so, they will need to buy the currency that asset is denominated
Hence in early 2009 we were heavy buyers of USD assets, much like now we are starting to buy EUR denominated assets. Hence security selection guides our currency allocation. It is important to note we also add a macroeconomic overlay to ask ourselves how the macro environment in a particular currency can affect us negatively (we are not concerned with how it may affect us positively, that will be a bonus if it occurs). If we feel relative to another currency there are bigger macroeconomic problems, we would apply a larger discount before buying securities in that currency.
With regards to the current panic on the EUR, I would quote the great research based investors, such as Mr. Jim Rogers, who over a decade ago talked about the potential problems we are now seeing in Euro land. All that has changed is the media has spread the story to every household, creating a panic that is feeding off itself. No doubt, what Mr. George Soros would call a “vicious circle.”
As for my humble opinion on such factors: Though the USA, and therefore the USD, has more political wealth than the EUR due to its greater unity and therefore greater speed of reaction, economically, they are more similar than we care to believe. It is likely that over the next few years we will be involved in a “currency carousel” as the market judges which of the big three currencies is actually in a worst economic position (the contenders being the USD, EUR and GBP). Unfortunately the paper money of each, in my humble opinion, all need to de value relative to real assets.
Yours sincerely,
Alessandro Sajwani
The Role of Asset Allocation in our Portfolio Construction
Dear Reader and Fellow Investors,
We live in volatile times, you don´t need me to get paid to tell you that.
However, this won´t change our approach to investing. Today it is important we plant the seeds for growth over the next business cycle.
We have been strong proponents of the following asset allocation since bonds started to get a little optimistically valued (since end 2009):-
Cash 28%
Bonds 30%
Equities 30%
Commodities 06%
Structured products 06% (selling volatility)
We use asset allocation as a quick means to describe to our clients:-
1. Which asset classes we feel will perform best over the next 3/5 years
2. How macro economic factors influence our allocation of capital
However, asset allocation can be used by the lazy investor to hide the dirty job of security selection.
We strongly feel security selection should guide asset allocation rather than vice versa. When we can´t find the common stock of good companies at good prices, as a natural consequence our equity allocation will drop. The same is true for all other asset classes.
Recently, the big news on everyone’s lips is the precipitous drop in the EUR/USD exchange rate. We are big holders of USD assets, not because we predicted this “macro” event occurring, but because the prices of USD assets were telling us to come. We obeyed its silent orders in early 2009.
Today, much to the disbelief of others, as was the case when we were buying USD assets, we are starting to increase our equity allocation to European companies which are starting to become attractively priced. Most likely we are starting to buy early when judged on when the equity markets “bottom”. But our game is not to buy at the bottom, our game is to buy good companies at good prices. If we do this consistently, we are likely to make above average equity returns over the entire business cycle.
I would like to finish by assisting the lazy asset allocator – or the individual that does not have time to dedicate great parts of their day to security selection and neither wishes to pay an individual like myself to manage their investment portfolio.
If we use the above asset allocation as a starting point in today’s market environment, for every 10% drop in equities, you should add another 5% of this asset class in your portfolio. The inverse should also be true.
A 40% drop in equities should therefore increase your allocation to this asset class to 50% of the investment portfolio. Should it drop another 10% from there, I would add another 10% to have a 60% allocation to equities. This approach can be applicable to other asset classes, but with triggers to action slightly modified.
As always, we invite you to feel free to ask questions.
Yours sincerely,
Alessandro Sajwani
We live in volatile times, you don´t need me to get paid to tell you that.
However, this won´t change our approach to investing. Today it is important we plant the seeds for growth over the next business cycle.
We have been strong proponents of the following asset allocation since bonds started to get a little optimistically valued (since end 2009):-
Cash 28%
Bonds 30%
Equities 30%
Commodities 06%
Structured products 06% (selling volatility)
We use asset allocation as a quick means to describe to our clients:-
1. Which asset classes we feel will perform best over the next 3/5 years
2. How macro economic factors influence our allocation of capital
However, asset allocation can be used by the lazy investor to hide the dirty job of security selection.
We strongly feel security selection should guide asset allocation rather than vice versa. When we can´t find the common stock of good companies at good prices, as a natural consequence our equity allocation will drop. The same is true for all other asset classes.
Recently, the big news on everyone’s lips is the precipitous drop in the EUR/USD exchange rate. We are big holders of USD assets, not because we predicted this “macro” event occurring, but because the prices of USD assets were telling us to come. We obeyed its silent orders in early 2009.
Today, much to the disbelief of others, as was the case when we were buying USD assets, we are starting to increase our equity allocation to European companies which are starting to become attractively priced. Most likely we are starting to buy early when judged on when the equity markets “bottom”. But our game is not to buy at the bottom, our game is to buy good companies at good prices. If we do this consistently, we are likely to make above average equity returns over the entire business cycle.
I would like to finish by assisting the lazy asset allocator – or the individual that does not have time to dedicate great parts of their day to security selection and neither wishes to pay an individual like myself to manage their investment portfolio.
If we use the above asset allocation as a starting point in today’s market environment, for every 10% drop in equities, you should add another 5% of this asset class in your portfolio. The inverse should also be true.
A 40% drop in equities should therefore increase your allocation to this asset class to 50% of the investment portfolio. Should it drop another 10% from there, I would add another 10% to have a 60% allocation to equities. This approach can be applicable to other asset classes, but with triggers to action slightly modified.
As always, we invite you to feel free to ask questions.
Yours sincerely,
Alessandro Sajwani
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