PERFORMANCE: As of May 15, 2015 the ValueAligned fund, L. P. – Our hedge fund – was up 4.8% while other stock hedge funds were up 3.4% year to date. Meanwhile our ValueAligned model portfolio was up 7.1% versus the S&P 500 index which was up 3.9%.
MANAGING STOCK MARKET RISK: We manage risk using "tactical allocation" – an active management portfolio strategy that re-balances the percentage of assets held in various categories in order to take advantage of market pricing anomalies, strong market sectors, or risky "bubbly" asset sectors.
CONVENTIONAL ADVICE ON ALLOCATIONS: Conventional allocation consists of many categories like US stocks, international stocks, emerging market stocks, bonds, cash, commodities and the ubiquitous gold. This is an odd mix of throwing everything in the pot to make sure the client is diversified. But is it really in the client's best interest when most of us are saving for a 30 to 40 year retirement?
SIMPLE ENOUGH FINANCE FOR THE MASSES: We simplify things here. There are only three kinds of investments in all of finance. 1. Fixed income 2. No income 3. Rising income... That's it. I know people tell you that there are 50,000 stocks to choose from, 20,000 mutual funds to choose from. bond funds, bonds, annuities, commodities, commodity funds, hedge funds, structured finance vehicles, blah blah blah blah blah.
All of these things can be categorized into just three things: fixed income, no income and rising income investments. An example of a fixed-income investment is simply a bond. A bond pays periodic interest in currency units that are fixed throughout time. No income is self-explanatory. Things like commodities, gold or fancy art pay no interest, pay no dividends, and is therefore simply a bet that somebody else will pay more in the future for what you just overpaid for (thinking of art here).
RISING INCOME INVESTMENTS: And then there are rising income investments – the only type of investments that you should own. And the only type of investments we own here at ValueAligned Partners. Rising income investments come two varieties: real estate with its rising rents over time, and businesses, or shares of those businesses, with their rising income and consequently rising dividends over time. That's the only way to beat inflation and maintain and actually grow your purchasing power into retirement.
SIMPLE ASSET ALLOCATION FOR THE PEOPLE: Our asset allocation process is simple. Our strategy is to invest only in stocks of great companies, and as our model tells us there is more or less risk in the stock market, we adjust that allocation between stocks of great companies and cash. That's it. We have only rising income investments and cash so we can buy rising income investments when they go down.
Where did I get this from you say? I believe that there is so much wisdom to be gained from the people that have done this investing thing for a very long time. The antidote to conventional wisdom is to go to the investment sages-no not me-none other than Warren Buffett.
BUFFETT ON THIS STUFF: He writes in his 50th anniversary annual report for Berkshire Hathaway, "the unconventional, but inescapable, conclusion to be drawn from the past 50 years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century."
He continues, "stock prices will always be far more volatile than cash equivalent holdings. Over the long-term, however, currency denominated instruments are riskier investments – far riskier investments – than widely diversified stock portfolios that are bought over time and their own in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, were volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
STILL HEDGING OUR GAINS WITH CASH. Stocks are a bit overvalued but there are still opportunities in special situations where ValueAligned companies are restructuring or growing in a profitable way. Monetary policy is still supporting the bull market. But with the Fed's interest rate hikes looming in the not-too-distant future, that leg of the bullish case is getting weaker. Until psychology and sentiment gets more bearish, which is bullish for us, we are waiting for lower prices to invest the cash that we have on the side lines.