Mike Martin on How to Survive the Economy |
| Blooker Comments - Surviving the Economic Times | |||
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This is an interview by OurBlook with Mike Martin, president and chief investment officer for Financial Advantage, Inc., in Columbia, Md. Let's assume people have some money left after the carnage and wish to protect it and build back up again, or are starting over entirely. What factors should they consider in investing? MM: I think the main investment concept to keep in mind and through which to filter all investment ideas is that Big Picture economic and political forces are the main thing these days ... more important than the value/growth approach to securities selection ... more important than traditional diversification concepts (own a little of everything and you'll get the "market return" which will be a more than acceptable result.) And in designing portfolios, we think the main thing is to keep the main thing the main thing! It is essential to focus on the big forces . we even jettisoned a value mutual fund we've owned for years because they are so focused on company-specific issues that we think they run the risk of making big errors in earnings projections for businesses. The extant big picture forces include: o Consumer spending is headed south as a percentage of U.S. GDP, probably dramatically. Reasons include demographics (more seniors, need to save more), wealth destruction that's already happened, debt overload and a cultural shift that is beginning to admire and imitate practicality in spending decisions and simplicity of lifestyle. Consumer spending had reached about 71 percent of GDP and could fall by about 10 percentage points, at least slowing the potential GDP growth and perhaps even forcing it to go negative for more than a little while. o Government expansion you can count on; you may think that one is hard to miss, but there hasn't been all that much reflection, yet, on the implications. Probably the biggest is the almost certain success of government's re-flation plans. The problem is too much debt (a whole story in itself); the easy way out is devaluing the currency. Since the government is the largest debtor (and widening its lead over any aspiring contender every minute!), it is the biggest beneficiary of inflation . it will be able to service and maybe even reduce its dollar-denominated obligations with easier-to-get dollars in an inflationary environment. And since the government is also in charge of the currency, it is a no-brainer that this will happen. The real quandary is why the markets are still more concerned about deflation than inflation. At the same time (and this is more controversial), it seems the current government is also using the cover of the "financial crisis" to initiate what they consider beneficial programs of greater government influence or control in many industries . banking and investing; energy use and production; health care services, to name just a few. o Economic power is shifting . it may take a really long time, but the U.S. has borrowed itself silly, shifting wealth and financial power to Asia and the Middle East. And Europe has already spent its future, and its shrinking population is starting to discover that. Political tensions have been pushed below the fold in major newspapers by the so-called "financial crisis"; but in an environment of greater government power, we expect confrontations to increase, polite at first, but possibly more rancorous as we proceed. Investment choices should be made, we think, which have a chance of producing an acceptable return in a global economic environment characterized by these forces. That is why we keep saying, "It IS different this time." How can investors look ahead rather than backward? MM: Yesterday's portfolio, while it may feel comfortable and we may like looking at the historic returns and imagining that past really is prologue, is ill suited for the tomorrow we will live in. First thing we think needs to be changed is the idea that a personal investment portfolio should be "long only"; that is, we think some investments should be able to benefit from falling securities prices ... i.e. it is OK to have short positions. We now talk about our "net long" position, meaning our total stock exposure minus our total short position. Next, inflation protection should be an over-arching concept in a portfolio for the next 10 years. Government bonds are way overpriced, for example, so we have only TIPS in our portfolio and we own the Treasury Money Market fund, which essentially pays nothing, simply for the nominal safety. We are actually short longer-term treasuries. We have a large position in gold bullion as a hedge against all paper currencies (the U.S. is far from being the only fan of currency devaluation; as a matter of fact, we think there is a better than even chance that we'll eventually see a competitive currency devaluation spiral.) Third, there are kinds of investments available today that are not correlated to either stock prices or interest rates and do not require economic growth to provide a return. A few of these have an experimental place in our portfolios, and may become larger commitments in future. Finally, for stocks, we are focused on companies that have the ability to grow through market share gains, globally. This requires a different evaluation filter than simply traditional "value" investing in a world where you could assume economic growth. It means only owning companies that produce goods and services that are desired by modern consumers, at a cost that is brutally competitive globally, that have financial resources and a management mindset to expand even when the economic news is not invitational, and that are minimally exposed to negative government pressures. Mr. Martin spent 14 years on Wall Street, where he held positions as analyst, research director and vice president for Standard & Poor's and New York Stock Exchange member firms. He also has served as vice president and as director of research at T. Rowe Price, one of the country's largest mutual fund complexes. He has been published and quoted extensively in financial media including the Wall Street Journal, New York Times, Kiplinger's Personal Finance, Money Magazine, Worth Magazine, Smart Money, Mutual Fund Magazine, Financial Planner Magazine, Modern Maturity, the Chicago Tribune, Washington Post and International Herald Tribune. His fixed-income investment book, "Life after CDs," was published by Dearborn Financial Publishing in Chicago. Mike's academic degrees are in economics (Assumption College) and law (Fordham University School of Law.
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