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Line of Safety – This Chart Says It All

20100307_debts_deficits

The chart above comes from Colin Twiggs and in my opinion best illustrates my affinity for Canada, Australia, Switzerland and South Korea as sources of investment ideas.

The chart compares projected 2010 deficits to net public debt, both expressed as a percentage of GDP. Nations below the diagonal line risk falling into financial distress and present more risk for their equity and fixed income investments than those above the line.

The diagonal represents two risk factors as a single measure: (1) the larger your public debt, the more precarious your position, and (2) the greater your current deficit (below zero) the faster your financial position will deteriorate.

The US, for example, with net debt below 60 percent is in the same risk category as Italy, because it is running larger deficits. Greece and Japan are obviously in the worst position, but the UK and Ireland*, with deficits greater than 10 percent, risk joining them within the next five years.

I have had a few questions from readers of the blog asking why I have been writing about Canada in particular but other countries with sound monetary policies so frequently – and why Bank of Montreal was my first purchase after raising cash. The answer to the viewer of this chart should be clear: a sound economy should produce better investment results than a profligate economy (like the United States).

Bank of Montreal is just the first of the Canadian holdings we will be adding if/when the markets correct. We will be concentrating on high cashflow stocks from Canada like Toronto Dominion Bank and BCE (fka Bell Canada) and we are in the process of researching similar companies in the countries above the Line of Safety.

The Line of Safety: remember it as you are investing your own money; we are taking it very seriously.


Click Here to watch Joe Cocker

Tomorrow is the 35th anniversary of the Fall of Saigon, one of the principal historic events in my life.

Today’s trivia: this week marked the anniversary of the creation of the universe according to a famous mathematician and astronomer. Can you name him?

Most of you that read this blog lived through some part of the Vietnam War. Whether you were a supporter of President Johnson or a supporter of the protesters, this was a transformative time in our history. Whether we learned anything or not is another question, but that isn’t a debate I want to hold on this blog. Remembering the lessons of history is important for investing as well as for running a country. Tomorrow, do your best to celebrate the lives of those in our country impacted by that war.

Tomorrow, I have a very special video picked out. I hope you will enjoy it.

Mark