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2006-06-19 :: Evening Thoughts

My first boss in this business was a guy by the name of Owen Mair.  He taught me just about everything I know about the trust and investment business, as well as the things you can’t learn in school – many of which aren’t fit to discuss here, but also much about being a success in this business.  He taught me that you have to have the courage of your convictions to make decisions on behalf of your clients that will create and enhance the wealth that they have entrusted to you. 

In order to create and enhance the wealth of your clients, you must have the talents to analyze what is happening in the world, determine how it impacts your actions, and then execute the decisions from which your clients will profit.  Sometimes those decisions are contrary to the investing masses, like our investment thesis three plus years ago that energy and metals stocks would return to favor and move toward their former dominance of the S&P 500 based upon the simple concept of supply and demand.  

Many of you have met Andy Thorman with whom I work quite closely in the management of client money.  Andy is in the same postion I was 20 years ago when I started working with Owen.  He is learning how to structure portfolios so that they fit within our overall investment framework.  I hope to pass along to Andy all that I learned from Owen, but this is likely the most important concept:  since clients trust us with their money, we have to trust ourselves as well.

The point of this rambling is that we are at another one of those inflection points where my analysis is differing from much of the investing masses; Andy and I have to trust that analysis instead of following the lemmings over the cliff .  Most people are underweighting energy, metals and infrastructure in favor of cereal, beer and toothpaste – slow growth, old line consumer industries that will likely see a few percentage points earnings growth keeping pace with inflation.  Quite frankly, I’d be embarassed to have my clients pay me if this is the best I could come up with during the current turmoil.  Courage of convictions?  I see no convictions in the cereal/beer/toothpaste strategy – I see only money managers that aren’t much more creative than index funds.

So, toward that end, I thought I’d tell you what we are doing at the tactical level with client funds right now.  We used today’s drop in commodity stocks to add to positions in Nabors, Suncor, Canadian Oil Sands, and Barrick Gold.  Tomorrow, we’ll add to positions in Tenaris, Gardner Denver, and DrilQuip.  On store for the week are increases to positions in IngersolRand, Johnson Controls, URS,  Alcoa and Ultra Petroleum.  This is an ongoing process which we started a few weeks ago, adding to or start new these positions as client portfolios allow.

We have some cash on hand in accounts, but most likely we’ll need to make sales to cover these pourchases.  Candidates for sale are any of the higher P/E technology stocks that may be implicated in the options backdating scandal.  Also, we’ll likely be shifting within the energy
and metals sectors in favor of the late cycle energy stock as well as the gold and aluminum stocks.  

Energy, metals and infrastructure are the three true secular growth stories in the market today.  Yes, maybe toothpaste will outperform between now and September 30th, but while that is happening, my clients will be building positions in companies that have strong earnings, growing earnings, earnings that matter.  They will be paying fire sale prices for those earnings, and establishing positions that will likely double or triple in value over the next five years. 

That is something that Owen would be proud of and its something I am proud to teach Andy. 

More later!

Mark