Time for an All-Terrain Investment Portfolio

Time for an All-Terrain Investment Portfolio

May 26, 2016 in Process
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As investors today we feel something like a traveler preparing to drive across an unknown continent. A look in the rearview mirror tells us we should pick a race car, and if the road continues to be as it has been, then our trip may be fast and uneventful. But what if the road that lies ahead is rocky, full of holes and maybe even strewn with giant boulders?

A sports car will not get past the first potholes. What we need is a four-wheel-drive, all-terrain vehicle. This monster will not have the speed or the sex appeal of the shiny red convertible, but it will complete the journey. Its position at the finish line will depend entirely on one unknown — the road ahead. If it is a smooth, unbroken route, then our Land Cruiser will be left in the dust by the Ferraris and Maseratis. It will complete the journey; it just won’t be the first to cross the finish line. But if my prediction is correct, you’re going to be mighty glad to be in the ATV — you might even end up at the head of the pack.

On the surface the U.S. and global economies appear to be growing, and though the growth has been slow, it has been steady. My concern is that demand for goods has been highly inorganic, engendered by quantitative easing and unsustainable budget deficits. I’ve spilled gallons and gallons of digital ink on this subject in past columns.

Today, I want to focus on how to prepare for the consequences of this engineered, inorganic growth. Investing is a forward-looking endeavor. Investors need to build a portfolio for the economy that lies ahead, not the one in the rearview mirror. Unfortunately, the view of the road before us is murky at best. History is not very helpful either, as the QE experiment has never been attempted at its current magnitude. For a potentially Mojave Desert–like countryside, you’re going to need an ATV. Paraphrasing Warren Buffett, “To finish first, first you need to finish.”

When it comes to stocks, let me explain what “all-terrain” means in practical terms. To do this I need to explain my firm’s three-dimensional analytical view of stocks: quality, valuation and growth.

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How buying a cow is like investing in stocks
Tevye from Fiddler on the Roof explains

(Chapter 4 from Vitaliy Katsenelson`s 
Little Book of Sideways Markets)

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