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XMFSinchiruna (27.35)

Considering a New Investment Paradigm

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33

July 07, 2009 – Comments (13)

Hot off the presses ... I hope you Fools enjoy this one.

This is essentially a follow-up to an article I wrote more than a year ago about the broader implications of the financial crisis as they pertain to long-held investment strategies and the conventional wisdom concerning allocation and diversification.

As many of you know, I personally have created a very concentrated exposure to precious metals, base metals, and energy equities within my personal portfolio... and while I don't go around advocating to others that they match my degree of exposure, I do think that the time remains ripe for reassessing the conventional wisdom on asset allocation and approaches to diversification in the context of this crisis. Once the domestic economy is back on its feet, liquidity injections have been reined back in, and deficit spending replaced by fiscal responsibility, there will be plenty of time to return to the formulae that worked before the crisis began. In the meantime, and I think the meantime could last several years at least, I believe that adaptation will be a crucial ingredient for investing success.

Please share your thoughts after reading the article, either in the comments section there or here on the blog, and please rec the article if you value the content. Thank you, as always, for sharing your views and for your continued readership.

http://www.fool.com/investing/international/2009/07/07/considering-a-new-investment-paradigm.aspx

13 Comments – Post Your Own

#1) On July 07, 2009 at 3:58 PM, outoffocus (22.75) wrote:

Once the government and big banks are through with this market I'll be lucky if I have a para digms to rub together. AHAHAHAHA....sorry.

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#2) On July 07, 2009 at 4:09 PM, XMFSinchiruna (27.35) wrote:

outoffocus

Well done!! :) I wish I had thought of it!

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#3) On July 07, 2009 at 4:48 PM, binve (< 20) wrote:

Sinch, Great article man! I wish I could give 2 recs, one for your post, and one for outoffocus's joke :)

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#4) On July 07, 2009 at 4:55 PM, dividendhound (< 20) wrote:

People have really been beating up on commodities for the past week or so.  I personally agree with you, but I think we have to ride this down for a while until "all of a sudden" the news articles start coming out talking about devaluation and inflation again. 

Do you have any opinions on the talk of new commodities regulation that is supposedly an attempt to curb speculation? If implemented, do you expect an adverse effect on commodity prices?

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#5) On July 07, 2009 at 5:07 PM, nottheSEC (78.93) wrote:

Rec +1 on the discussion including your article. It is a very difficult topic.

  On the one hand people with the biggest losses are the ones who most ignored the tenants of modern portfolio theory.I assume that is the paridigm we are discussing?

  On the other hand you appear to be positioned for the recovery in metals for industry,hedging for deflation/inflation in precious metals and the increasing demand for oil.No? I would say yes for you but no for the novice.You know how to mitigate risk. You know how to find Buffet's proverbial "1 foot bars"

The novice and I include myself had no business straying from MPT. There is a lack of even a cursory financial education in this country.That basic information would have mitigated the average 401K investors' loss with investment in bonds, metals, cash etc. Despite this fact Schwab or perhaps some other discount broker is advocating hands on trading for all. A scary notion.

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#6) On July 07, 2009 at 5:50 PM, cthomas1017 (83.90) wrote:

I think more than a few fools would now "condone degree of exposure to volatile precious metal miners".  Personally, your advice here applies to the entire range of investment strategies form speculative to fixed income retirees.  A prudent evaluation is what you've recommended.

Fundamentally, we seem lost in this trap of arguing whether inflation or deflation is going to "win".  You've pegged the exposure correctly as "devaluation" of the dollar. 

I wish I could give you multiple rec's on this one.  Maybe I'll open a new CAPS account so that I can! ;)

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#7) On July 07, 2009 at 5:55 PM, XMFSinchiruna (27.35) wrote:

Ragingsamosa

I'll be writing about that seperately ... stay tuned. :)

nottheSEC

Points well taken ... certainly degrees of knowledge and even awareness of current events vary enormously among the investing populace, and these factors will have a direct bearing on an individuals chance of success with any type of concentrated exposure. 

The way I see it, one might consider concentrating exposures in a manner commensurate with one's level of confidence in the underlying investment thesis, the thoroughness of one's analysis thereof, and the willingness to accept dramatic consequences if one turns out to be completely wrong despite vetted expectations to the contrary.

In my case, I feel quite sure that dollar devaluation is inevitable, and that precious metals and core commodities will appreciate accordingly. I have determined that this is the only thing, in fact, that I feel sure of from a macroeconomic standpoint. After years of intense analysis and scrutiny of my investment thesis, I remain convinced that my concentrated strategy has a positive outlook for success even though last year's brutal sell-off still has me in the red. If I am wrong, I will lose my shirt, but I am relatively young and would have time to rebuild. I have grown very comfortable with my equity allocation (which by the way consists of 75% gold and silver exposure, about 10% base metals, 10% energy, and 5% other), but recognize that this is a very personal matter for each individual to reconcile for themselves. I am not trying to peddle my investment strategy by any means, but offer this article rather as a reminder that there is no one secret to investing success ... that alternate strategies exist and are viable, and that the financial crisis altered the landscape sufficiently for unconventional approaches to warrant due consideration.

Also, the article is a direct rebuttal to this article by a fellow Fool, which I believe sought to declare the conventional wisdom of broad diversification as the only viable avenue to investing success. Again, there are myriad avenues to investing success just as there are myriad avenues to investing failure ... no one has a monopoly on the right way to invest.

However you decide to proceed, please be careful, please be sure your actions are based upon comprehensive and intelligent analysis, and please let me know how it all works out for you. These are very tricky times for equity investors, but we're all in this together! :)

Fool on!

 

 

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#8) On July 07, 2009 at 6:34 PM, UKIAHED (35.19) wrote:

rec article and blog from me.

Question - I'm new to CEF - i notice that it has a premium over NAV - any idea if it ever gets to parity?

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#9) On July 07, 2009 at 6:58 PM, peachberrytea (69.04) wrote:

TMFSinchiruna

Just looking at our portfolio allocation.. you're heavily into PMs and I understand why, but how about agriculture? I think Jim Rogers is pretty bullish on that too. What's your take on that sector? Any reason why you prefer PMs metals energy more?

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#10) On July 07, 2009 at 7:52 PM, XMFSinchiruna (27.35) wrote:

UKIAHED

CEF will always trade at some premium to NAV, and I urge investors to watch that premium (updated daily on their website) when timing entry points.  The premium as of today is 9.4%, which remains on the high end, though I have seen it reach heights of 12-14% during significant rises in the metal prices. When I bought the majority of my shares, I recall a typical premium was more like 4-6%.

At these premiums, admittedly, the shares are pricey. I'm okay with some premium over other instruments due to the funds clearly unencumbered bullion assets, but one would like to see a premium well belowdouble digits, to be sure.

By the way, thanks for getting me to visit the site just now ... I wasn't aware they were planning a silver bullion trust! :) Looks like SLV has some competition on the way!

peachberrytea

I'm very bullish on agriculture, but I only invest in what I know. we don't have miners of food like we do in metals, so we're left primarily with seed and/or fertilizer providers and equipment manufacturers for the majority of potential equity plays. Many of these are great plays, though I have not been able to identify a glaring entry point this far (in part because I don't have time to follow that market closely enough with everything else that I track). Cal-Maine intrigues me, but again I just don't have a mastery of the egg market the way I do for metals.

To be honest, I am tempted to invest in agriculture more directly, i.e. by purchasing farmland and getting my hands dirty. :)

I only invest in what I know. I think recognizing one's limitations is another principal avenue to successful investing.

 

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#11) On July 07, 2009 at 8:45 PM, UKIAHED (35.19) wrote:

The premium as of today is 9.4%, which remains on the high end, though I have seen it reach heights of 12-14% during significant rises in the metal prices. When I bought the majority of my shares, I recall a typical premium was more like 4-6%.

Thanks for the info and thanks again for the post.

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#12) On July 07, 2009 at 8:52 PM, peachberrytea (69.04) wrote:

TMFSinchiruna

Overall I agree with the concentrated portfolio concept though I think it does depend on your age, risk tolerance, etc. Both Buffett and Rogers have recommended highly concentraetd portfolios so you certainly have some very intelligent investors on your side. They also stress that you have to be sure that you're correct and you've done your homework. For you Sinch, that works out well because you know your metals - you're investing within your circle of competence. So understandably a focus portfolio probably works fairly well for you though it may not work as well for others.

As far as investing only in what I know.. I wish I had the same discipline as you do, but I don't. I've been thru a few mistakes in this regard with buying what I don't know, but over time I've also tried to justify (or rationalize??) my decisions to buy what I don't that though. Usually when I do invest in something that I don't know there are 2 criteria:

1. the value has to be pretty obvious (margin of safety is large..) and
2. a well-respected investor has recently bought into that security.

I don't see the shame in coattailing. I find that it's a useful tool, because unlike you I don't know enough to be too heavily concentrated in anything (though my portfolio is heavily concentrated in commodities.. or will be, I'm still sitting mostly in cash). And even the sectors I do know, I don't think I can say I know them really really well - well enough to concentrate. So coattailing helps me diversify too a bit, and hopefully that doesn't take away from the upside (which is the point behind the concentrating) because the smart investor I'm coattailing has done the homework and would've bought only if the upside is very likely and reasonably large. I don't want to be locked into only the sectors I know, if there're other sectors that might outperform the sectors I know, so coattailing helps in these regards. As a young investor (I'm in my 20s) coattailing helps expose me to different industries and companies, and so that's a plus too and probably has value in the long run.

Might have went off on a tangent there a bit, but that's my approach to concentration/diversification.

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#13) On July 13, 2009 at 12:09 PM, ReadEmAnWeep (61.29) wrote:

"However you decide to proceed, please be careful, please be sure your actions are based upon comprehensive and intelligent analysis, and please let me know how it all works out for you. These are very tricky times for equity investors, but we're all in this together! "

 

+1

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