News & Insights
Row Your Boat
Ed Easterling of Crestmont Research in Texas is an authority on stock markets. One of the themes he articulates is the concept of "sailing" and "rowing" markets. A "sailing" market is one that is modestly valued and occurs when the fundamental backdrop is improving or expected to improve. A "rowing" market is characterized by elevated values and an ambiguous economic backdrop. In a sailing market an investor just invests in the market, deploys his or her sail, and the prevailing wind propels the portfolio and the investor enjoys strong returns.
As you can guess, a rowing market presents investors fewer opportunities with less promise as well as less easily detected risks. In this environment, investors must use skill and judgment just to preserve value, exploiting small temporary mis-pricing but especially avoiding unseen risks. Preservation of capital is paramount. Our intrepid investor must row away from risk and toward opportunity, which may be fleeting.
In our opinion, the current situation places a premium on rowing skills. As we approach 1400 on the S&P 500, the U.S. market's underpinning of value is wearing thin, presenting very few truly underpriced investment opportunities. Those who espouse a rigidly orthodox method (i.e. always buy growth, always buy value, small is better, big is better), could be unintentionally moving closer to the rocks. During times like these we think a pragmatic approach works best. We believe this means staying invested in the most attractively valued markets and holding good quality securities within those markets. It also means holding higher than normal levels of cash as a bulwark against risk and as fuel to be used to row towards emerging opportunities.
While the resilient U.S. market flirts with richer values and U.S. Treasuries plumb ever lower levels of yield, overseas unsettled conditions and falling prices are creating the kinds of opportunities associated with smoother sailing. One precondition, modest prices, is being realized today. Stocks in sclerotic European markets and those of faster growing emerging markets are selling at discounts we estimate of 30% to 40% to their U.S. analogs. To us this justifies a measured increase of exposure to these areas, particularly the companies that are best set up to serve the rising consumer class in Asia. Medium grade U.S. corporate debt and modestly valued municipal bonds offer some of the upside of equities and some of the safety of higher rated bonds. We see opportunity in rowing towards these areas.
The Altavista Investment Team - Summer 2012