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Investment Strategy Update

The market has moved into the treading water phase of this cycle with slight ups and downs waiting for news induced moves of any magnitude. From a technical standpoint, its tedious to discuss.

But, the good news is that it presents an opportunity to look at the fundamental side of our process and reassess our strategy. Much of the past year has been a beta driven bounce higher off the market lows – the proverbial rising tide lifts all boats.

Now, however, we are at the point where not all investments will go up together. That means that investors need to have a plan that includes various catalysts for the investments they hold. Fortunately, we have such a plan and I am in the process of writing our next Investment Strategies newsletter to mail out that explains what our major investment themes are and how we will apply them.

In this blog, though, I wanted to give you a preview. Resetting a strategy based upon a fulcrum in the market is a big undertaking as it requires analyzing what trends are developing that will impact the markets, determining what companies and investment types fit the strategy, and implementing them across the various portfolios we manage. That explains why I’ve been blogging less than usual, but gives me much fodder for future blogging.

Here are our investment themes for the post-crash-mid-recovery market we are in:

Third World Demographics – the strongest mega trend that we follow is the shift of over a billion people from subsistence living to the middle class in the Mercantile Economies.
Cash Flow – the focus is on companies that generate excess cash that will begin to add to bottom line income as interest rise later this year and on companies that distribute cash flow to investors in the form of above average dividends or partnership distributions
Credit – at the beginning of an economic recovery corporate credit investments are a good alternative to traditional equity investments as they generally provide similar capital gains plus a stream of cash flow in the form of interest which tends to make them inherently less risky
Cyclical Economic Recovery – the developed markets will see a slow growth recovery while the developing markets with their Mercantile Economies will see above average growth. Combined, investments that focus on this concept combine characteristics of value investing with growth investing – a balance that is successful after the initial stage of an economic recovery
Mercantile Economies – Ludwig Erhard was the architect of the German Economic Miracle that brought its economy out of the depths of its post-WW2 lows. He focused on developing a strong currency, an export driven economy, and repayment of national debt. Applying his economic theory to investing in coming years, the winning economies will be those that follow his economic strategy: Brazil, China, India, Taiwan, South Korea, Hong Kong, Singapore, Vietnam, Malaysia and Indonesia.
Sound Monetary Policy – very few developed economies have weathered the economic crisis with a strong currency, monetary policy and banking system. We focus on three that did: Canada, Australia, and Switzerland.
Inflation Hedge – our forecast is for inflation to become an investment issue in late 2010 given the easy monetary policy in this country. Inflation is a portfolio killer and you have to be prepared to deal with it.
Innovation – given our forecast for slow economic growth in the US, investors need to focus on companies and investments that will grow faster than the economy in general. To do that they must have an innovative product or service that will produce earnings growth in spite of an economic malaise.

Making changes in strategy is a cathartic thing. The themes above – which you’ll hear more about when you read the full analysis in the newsletter – touch on the major factors that will impact investment performance in coming months. As always, we will keep you updated on how things are progressing and provide you with our analysis of both the fundamental and the technical aspects of the market.

In the late 80’s I saw Bowie in concert. It was billed as the concert where he was going to play all of his hits, no new album to promote, and then never play them in concert again. I have to say, it was one of the best concerts I’ve ever been to – lots of energy and everyone singing along with him at the top of their lungs. It was really one big party – but in my late 20’s life was one big party no matter what I was doing.

Return of Trivia 🙂

I know its been a couple of posts since we had a trivia question, so I thought I’d give you a couple of them just for kicks.

First, today is the anniversary of the murder of a famous historical figure. In 44 BC, this politician was killed by a close associate and the act has given us a colloquialism that is used extensively today to mean an act of betrayal. Name the historical figure, his killer, and today’s colloquialism.

Second, David Bowie partnered with a big 70’s band for a song that became a top hit in the UK and (as I saw on a VH1 retrospective of 80’s hits) one of the top songs of the 80’s. The base line for the song was sampled by rapper in 1989 and its inclusion in his record became an even bigger commercial success for him, at least until the lawsuits hit. Name the song, the 70’s band, the rapper, and his song. To give you a hint, below I’ve included a cover of the song by one of my favorite modern rock bands, My Chemical Romance.

I’ll be back more frequently at the blog once the changes to the strategy have been fully implemented.

Mark