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Brett Arends' ROI
Aug. 24, 2010, 12:01 a.m. EDT · Recommend (3) · Post:
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"¹ Previous Column
The bookstore massacre is coming
First Take "º
Barnes & Noble's next chapter
By Brett Arends
BOSTON (MarketWatch) -- Labor Day's around the corner. Summer recess is almost over. Time for one last blast. One more ostrich burger cookout in the Hamptons. One more round of Irish Car Bombs in the Vineyard.
Enjoy it while you can.
After this, it's game time.
September. The fall. The fourth quarter. The economy.
Gulp.
Volatility and trading volume both drop as the summer trudges to an end, reports Barrons.com's Bob O'Brien.
What can you do? Should you be long, or short? All-in, or on the sidelines? How can you protect yourself, but not miss out?
The omens aren't looking good.
For some insight I spoke to one of the smarter guys around. Charles de Vaulx, the star money manager at International Value Advisers. He's been knocking the cover off the ball since launching his latest fund in the midst of the crash two years ago. Investors in IVA Worldwide are up about 30% over that time. World equity markets: nothing. Before that he built a terrific reputation as the rising star alongside Jean-Marie Eveillard at First Eagle.
His advice now?
Hold plenty of cash. And be ready to, um, "embrace volatility."
De Vaulx thinks we're in for a volatile time, and he thinks the investors who win are going to be the ones who make that work for them instead of against them. "As an investor, you should not view volatility as a threat, but as a friend."
How?
Everyone wants to buy low and sell high. But you can't buy low if you already bought high. A lot of stocks are expensive right now. A lot of bonds, too.
Many bond investors are betting on deflation. De Vaulx thinks we'll dodge the bullet. But that's only because he thinks Washington, ultimately, will step in and do whatever it takes to prevent it.
(Could be. But color me skeptical. I have less faith in our political system to achieve anything.)
De Vaulx doesn't think we'll see a double-dip recession. But he thinks we're going to have slow, grim growth for five or seven years. Maybe 2%, 2.5% a year. And that's bad news for the unemployed, bad news for the rest of us (and bad news for Obama). We probably need 3% growth or more to create jobs.
Okay, you've heard the doom and gloom. So where should you put your money?
Cash, plenty of it. See above.
Japan. Yes, you heard the man. Japan. The Tokyo stock market. You probably forgot it was there. So has everybody else. And that's an opportunity. De Vaulx says that after twenty years of pain, many Japanese companies have rock solid balance sheets -- many have more cash than total debts. The market is trading at 1.1 times tangible book value. The yield is about 2% -- high by historic standards there, and more than the thirty on the thirty year government bond.
Cusp bonds. I'm coining that term for bonds on the cusp between "investment grade" and "high yield." If you pick your names right, you can get decent yields with lower risk. De Vaulx has 16% of his fund here -- selected high-quality high-yield bonds. Look for companies with strong balance sheets and lots of liquidity. If times get tough, they'll need it. And don't go too far down the yield curve. Two to seven years' maturity. Why? The economy's so weak that inflation may be subdued that long. But sooner or later it's coming, and if that happens any investor locking in a fixed income for 20 or 30 years is going to be in trouble.
Gold. Yep. "It should do well either way," says De Vaulx -- meaning deflation or inflation. The only condition where gold gets killed, he says, is "disinflation," in other words when inflation falls. That's what happened in the '80s and '90s. Not a worry here.
Selected stocks. Where are the minefields? As a value investor, De Vaulx avoids stocks that are expensive in relation to earnings. He is also avoiding companies with weak balance sheets, or which need a lot of capital investment -- those companies get crushed if inflation picks up. Likes on the U.S. markets include insurance brokers Aon Corp. /quotes/comstock/13*!aon/quotes/nls/aon (AON 36.66, -0.26, -0.70%) and Marsh & McLennan Cos. /quotes/comstock/13*!mmc/quotes/nls/mmc (MMC 23.29, -0.16, -0.68%) , Dell Inc. /quotes/comstock/15*!dell/quotes/nls/dell (DELL 11.56, -0.38, -3.18%) and eBay Inc. /quotes/comstock/15*!ebay/quotes/nls/ebay (EBAY 22.83, -0.44, -1.89%)
One more week. One more barbecue. Then the party's over.
Brett Arends is the author of "Storm Proof Your Money," on how to survive the slump.
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co.
Barnes & Noble's grim quarterly results may signal the end of an era, writes Angela Moore.
1:03 p.m. Today1:03 p.m. Aug. 24, 2010 | Comments: 17
- marketwatchchris | 1:16 a.m. Today1:16 a.m. Aug. 24, 2010
"Summer's almost over -- get ready http://on.mktw.net/btZdAy" 11:45 p.m. EDT, Aug. 23, 2010 from MKTWArends
"Are bookstores doomed? http://on.mktw.net/cVev9S" 11:06 p.m. EDT, Aug. 16, 2010 from MKTWArends
"Jobless alarms fall on deaf ears of investors http://on.mktw.net/bxZIWP" 11:23 p.m. EDT, Aug. 9, 2010 from MKTWArends
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