It’s always darkest before the dawn and this market may be on the verge of turning around and ...
Around the World with the Adventurous Investor
12/01/2007 12:00 am EST
When asked to sum up his thoughts about the 2008 markets by interviewer Howard Gold, David Stevenson simply stated risk and volatility. He remarked that he doesn’t know what direction the market is headed. But he thinks there will be potentially interesting returns in specialist markets and currently favors cash and income-based products.
Stevenson mentioned the theory behind The Black Swan, a new book by Nassim Nicholas Taleb, which says that investors focus on what usually happens, but a rare “black swan” event often comes along to foil everyone’s plans. He thinks the markets are experiencing a Black Swan today in their high degree of correlation. He believes investors who are unsure of the market’s direction should put their efforts toward finding markets and assets with no correlation, such as bonds.
Stevenson observed that investors often make the same mistake, thinking they are Warren Buffett, who breaks almost all the rules of asset allocation. Therefore, they buy shares without taking into consideration the balance between risk and reward in their portfolios. However, since most investors do not have the access to information that Buffett has—and aren’t investment geniuses like him--they should consider asset allocation.
One example: when you are in a market that is beginning to punish riskier asset classes—such as small caps in our current environment—it’s time to reallocate your assets into something less risky, perhaps an alternative asset class. Right now, Stevenson is considering certain hedge fund investments.
He also has his eye on biotechs and pharmaceuticals, and recommends that investors stick to the fundamentals, primarily cash flow, and the sustainability of the annuity income from pipelines. The pipeline of the big pharmas is variable, veering on not very good, at the moment, so the best way for them to improve their pipelines is to buy biotechs, which are now on the verge of becoming mature companies in the US.
He is not yet looking at specific companies as he thinks the market may take another kicking in the next few weeks. He is currently very heavily invested in cash and fixed-income products, and is quietly buying into soft commodities such as agricultural products, but only with a small portion of his portfolio.
Gold also asked about Stevenson’s recent columns discussing his interest in US real estate at a time when investors were running for the exits. Stevenson replied that many foreign investors are now looking toward the Florida and California property markets, but he is interested in New England. He noted that he is not in a rush, as he believes values will decline further, but it’s hard to pass up a lovely home on the US coast that he can buy for 100,000 pounds (more than $200,000), when you can’t get a one-bedroom flat in Europe for that price.
Additionally, the US is still the world’s most capitalistic economy with declining interest rates—very attractive characteristics. He is surprisingly bullish on the US in the face of frequent lashings it has recently taken around the world. Stevenson remarked that most US bashers are not down on the country for fundamental reasons, but more because much of the rest of the world would like to see global power shared, rather than concentrated in one superpower, as it has been for the past decade or so.
One area about which he is very bearish is the Shanghai market. Stevenson admits to normally being a contrarian, but even so, he “looks in horror” at Shanghai’s valuations and thinks that China overall is structurally a very bad proposition for investors. Its legal system is deeply flawed and unreliable, it has very bad corporate governance, and in his opinion it is not in the same league as other emerging market investments such as India.
In fact, Stevenson said the country’s legal system could lead to an almost instantaneous destruction of shareholder value. He surmised that the Shanghai stock exchange was at least 30-40% out of kilter at the moment, and therefore favors shorting the markets, using instruments such as some of the ProShares exchange-traded funds, which offer two-for-one leverage.
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