Portfolio Positioning for 2018 and Beyond

In previous posts, I have expressed a concern about the potential for a significant correction in equities markets.

I have reduced my holdings while retaining a few which have the potential yet to register nice gains.  (See previous posts.)

My strategy is simple:

1. Be positioned to survive a significant downturn in equities markets;
2. Conduct research to identify some potential investments;
3. Invest when valuations seem to be more attractive.

1.    Weathering a Downturn

When faced with the potential for bad weather, prudent mariners take a variety of measures: sail to safe places; batten down the hatches; prepare the crew to execute measures when all goes to hell.  

It's much the same with investments: sell off companies which are likely to be more adversely affected by downturns in the market; retain more recession resistant companies; go to cash; conduct one's personal affairs with prudence.

A few brief remarks:

• Weed out the weaker members of your crew and keep the stalwarts - it is always helpful to have skin in the game as downturns are impossible to predict with any precision.  You can examine the "theoretical" capacity of various holdings in your portfolio to weather a downturn by looking at a variety of measures such as: financial strength, the resilience of the market for its products/services during bad times, quality of management and the agility of the company in adapting to change, etc.  

• Protect your stash of cash: diversify, allow for the potential for inflation, be prepared to accept lower returns; do your due diligence as some investment vehicles may not provide the expected level of "protection" due to unanticipated events.  Many assume that cash will be king - but things may change if rampant inflation prevails. 

• Adopt a prudent lifestyle: live within your means; reduce/eliminate debt; do not engage in financially risky behaviour (e.g. do anything to increase the chance of divorce), constantly improve your skill base, strengthen relationships with family and friends (one of the most sustaining bulwarks  during hard times), etc.  

2.   Research Themes

Investing is a messy process.  Like most investors, the scope of my research reflects a variety of things:

• personal interests and expertise;
• a desire to expand my knowledge by moving into new areas;
• expectations for future opportunities;
• attitude toward "risk"; and,
• a variety of other personal  considerations e.g. energy, level of self confidence, willingness to allocate time to investing etc.  

Through experience, I learned that my greatest successes were the result of sustained personal effort.  I love the search, thirst for new learning, and enjoy  the challenge of managing a portfolio.  It's not for everyone.  

Here are a few research themes - a mix of "enabling" technologies and processes (e.g. robotics, internet merchandising) products and services (usually with a focus on specific economic sectors), and other "emergent" areas of interest which are novel and worthy of further investigation "just because".  

Mines and Minerals

Why?  Because:

• demand is still increasing and, in most instances, technological innovation will not reduce demand to the point where investment will be unattractive
• supply is, in most instances, getting more difficult to bring on line

In previous posts, I expressed by admiration for  the work of Richard Schodde.  One of his recent presentations is insightful: 

"Long term trends in global exploration – are we finding enough metal?

Here is the summary: 

 – are we finding enough metal to meet the future needs of the World?

The key commodities of interest were gold, copper, nickel and zinc/lead.

The methodology used involved forecasting the likely future level of global expenditures on exploration (which are driven by the commodity price) out to 2040; This is then divided by the projected long-run unit discovery cost (in $/oz or $/lb) so as to calculate the annual discovery rate (in Moz  or Mt metal).  The resulting rate was then adjusted downwards for the fact that not all discoveries turn into mines.  This adjusted figure was then compared against the projected future mining rate for each metal – from which it is possible to determine whether the World is  finding sufficient metal to meet its needs.

The key conclusion was  that … when you look out over the next 10-20 years the projected discovery rate isn’t enough to keep the market in-balance for many of the nominated commodities.  The shortage is particularly severe for nickel and zinc, and lesser so for  lead and gold.  Copper seems OK ... but that is based on a fairly conservative forecast for future metal production, which ignores any massive up-tick in demand from electric cars.

Taking the 10 year view industry needs to boost the amount of gold discovered by 45% over the base-line forecast to stay in-balance.  For lead, zinc and nickel the rate of discovery needs to rise by 41% for zinc, 72% for lead and 156% for nickel.  The situation is even more challenging when you take a 20 year view.

The above analysis assumes a unit discovery cost of US$45/oz for  gold (and rising) , 3/clb for copper, 3 c/lb for zinc & lead and  28c/lb for nickel sulphides (and rising).  It also assumes a long run commodity price (in 2017 US dollars) of $1175/oz Au, $2.75/lb Cu, $1.00/lb Zn, $0.85/lb Pb and $7.30/lb Ni.  These prices are based on the latest consensus view of industry analysts.

The study estimates that World exploration spend will rise by 65% (in real terms) over the next decade.  Even with that up-tick that’s still not enough to balance the market !

The clear conclusion from the above is that, for the global mining industry to sustain itself, it either needs to either reduce production, or increase the exploration spend (by more than the 65% currently projected), or it needs to be much more efficient at discovery (i.e. find more-for-less by a factor of 2x) or the commodity prices have to rise above that currently projected by the analysts; Or all of the above.

I will start my analysis by looking at the demand for various mining products.  Once done, I will look for specific companies.  That search will encompass all companies which have a stake in mining: suppliers of goods/services, miners, smelters, financiers, etc.

Here a few considerations related to future demand:

• supply (now and potentially)
• forecast demand for various uses
• things with the potential to alter supply and the movement of products to market (e.g. geopolitical instability, government regulation, technological innovation)

The intention is to develop a "view" and then to drill down for investment opportunities, usually in the form of specific enterprises as opposed to speculating in metals futures. 

Here are a few considerations related to investment opportunities:

• The first step will be to develop a systems model of the sector with a view to identifying the participants in a meaningful context (in the past, this exercise has revealed some precious nuggets of opportunity in various sub-sectors)
• The second step will be to identify specific potential investment opportunities promising sub-sectors.  I have written about this in previous posts.  Briefly, this will include: the quality of management (first and foremost); state of the geopolitical environment (e.g. respect for the rule of law, social stability etc.); cost and ease of bringing production on line to meet demand (I have a preference for operating mines where production could be ramped up quickly), competitive position of an enterprise relative to its peers etc.  

In future posts, I will present a high level synopsis of other aspects of my research themes.  

Failure of a Stock to Perform - some questions to ask

My reason for making this post was prompted by the following article:

The 12 Signs a Cheap Stock is a Value Trap

I thought, why not explore the use of the "12 signs" as avenues of inquiry when assessing potential investments?

In reading the article, you will note that most of the important signs do not address financial metrics directly.  It accords with lessons I have learned in thirty years of investing. 

When considering a potential investment, I look at a few key financials:

• various measures of indebtedness and the financial fitness of an enterprise to survive hard times
• trends in income
• expenditures and returns for various categories of expenditures

I spend more time on "non-financial" metrics. Why?  Because creative accounting can hide a lot.  Financial analysis constitutes the bulk of most analyst reports.  Why?  Because analysts are time pressed.  It's easier, faster, and safer to take the conventional route of going through the mechanical routines of standard financial analysis.  In my view, it is akin to creating a picture by using a "paint by numbers" approach.  There is also an element of "financial alchemy" to this process; namely, "forward earnings estimates".  At best, these estimates are based on hopes and wishes.  At worst, they are the products of shills.  As such, I hardly ever read reports by financial analysts.  And when I do, I always ask the questions: Why is the report being written?  Who stands to benefit?  There is no such thing as "altruism" in the equities management business.  

I am far more interested in investigating other aspects of an enterprise:

• the quality of its management (track record, governance and the make-up of the board, honesty, experience in the field of business)
• strategic plan (is it clear, concise, and purposeful?)
• positioning of the company's products/services relative to its competitors
• customer reaction to products/services
• quality of the workforce and worker assessment of the enterprise as a good place to work

I have written about this at length in earlier postings.  

In the end, businesses are all about people.  Financials are only a second-hand indicator of performance over the longer term.  That is why I maintain my positions with Clean Seed Capital and Questor (see earlier postings).  At one point, the stock price of Questor fell by more than 50 percent.  I ignored the charts because the sustaining power of the businesses rests on a few key attributes:

• seasoned management with a real understanding of the businesss
• sound  financials (no debt)
• agility and ability to adapt to a changing market
• products/services which meet a real need and confer a benefit to customers

The headline article is worth reading several times.  Make sure to read other articles by Nicolas Colas. He is a thoughtful writer.

For example, read his slightly different take on the sustainability of the stock market:

The Real Threats to the Equity Bull Market

It lead me to think about a few investment themes:

• businesses based on domestic markets which are likely to be sustainable in the face of global competition
• the potential of disruptive technologies/business models to yield handsome returns in the future
• "rebound kings" - enterprises which are likely to rebound nicely after the stock market tanks e.g. natural resource-based companies where product substitution is unlikely in the short to intermediate term

I have have reduced my exposure to equities significantly in light of my concerns about the stability of the equities markets.  And yet, I have never been busier with my research.  The "window of opportunity" will open again - entry points when most investors are discouraged and fearful.  The investment cycle will repeat.  It will pay to be prepared.  

Outlook for Investments in Agriculture - It's all about if/when

Are we at a turning point in the "agricultural equipment cycle"?

A recent series of articles would suggest that this is the case in the short term.

In order to "take the pulse" of the equipment sector, I consult several trade publications on a regular basis - among them:

Farm Equipment
The Progressive Farmer
Agrinews
Farm Journal
Capital Press

Regional newspapers are also a useful source.  For the "long view" I turn to state and national governments, especially when investigating themes for potential investments.  Some universities with major agricultural programs yield precious insights as well.

Combined, these source provide a variety of insights:

• a sense of the prevailing mindsets of the agricultural community
• "hard" information on topics such as yields, sales
• developing trends
• leads on innovative products/services (Clean Seed Capital come on down)

You hardly ever get this comprehensive perspective in reports issued by investment analysts: they simply do not have the time.  When I look back at the history of my most successful investments in agriculture, virtually all of them originated on the basis of leads generated by extensive reading of the above-noted sources.  Not one of the leads was generated by reading the financial press or reports by financial analysts. (They are generally quite boring - same old same old metrics and approach and lacking the freshness and enthusiasm of the best of the movers within the agricultural community.)

I have been interested in sales of agricultural equipment, the result of deciding to focus on equipment manufacturers and dealers a few years ago.  There is a central theme which dominates thinking in the sector; namely, annual sales.  It can be reduced to the graph which appears below which is presented in:
The Hits Keep on Coming

There are several possible interpretations of the graph:

1. We may be in a multi-year period of relatively low sales if one thinks that there will be a repeat of the years 1999 - 2006.  If one considers that farm input costs are still rising and that commodity prices are likely to remain low, the outlook for future sales may not be all that attractive.  In this environment,  farmers seek to minimize operational costs.  They are keeping old equipment longer and not buying new equipment as much.  (Parts/service receipts from dealers would suggest that this is the case.)  Also, used equipment prices would appear to be attractive as dealers seek to clear their inventories of used equipment. 
2. It would appear that sales of new equipment are near an all-time low, at least relative to 1985.  On this basis alone, some may contend that things cannot stay at this level forever.  Others may opine that the "replacement cycle" for equipment may cut in at some point, especially on the part of larger operators where there is an imperative for reliability.  

I am going to take a "wait and see" attitude.  Why?  It's all centred on if/when:

• There yet remains a strong potential for a significant correction in the stock market.  If/when this occurs, the exchange listed stocks of equipment manufacturers and dealers will inevitably fall in the general downdraft.  If/when this happens, investors will be presented with an excellent buying opportunity.
• Commodity prices are likely to increase at some point due to a variety of factors such as differences in yearly yields in major producing countries/regions.  If/when this occurs, farmers will have funds for new purchases.  This said, there are headwinds for North American farmers: the uncertainty of NAFTA, the new normal of major climate/weather events, increased competition from producers/marketers in South America, etc. 
• At some point, the equipment replacement cycle will turn.  It will simply be uneconomic to repair old equipment and retain an acceptable level of reliability.  This is not a question of if but when. 

On balance:

• I think that the replacement cycle is starting to kick in.  But alone, it will not propel significant sales.  There are still sufficient stocks of low hour equipment to dampen sales in the short term, especially given that farmers appear to be quite conservative in their outlook (this on the experience of being over-extended a decade ago).  For this reason, I will defer on investing for the time being.  
• My trigger point for buying will be a downturn in the general market.  Farm equipment manufactures and dealers know how to manage their way through lean times, and the best of them will position themselves for an eventual recovery.  A market downturn may represent an excellent entry point and an opportunity to profit in the inevitable recovery in the sector. 

I have only one position in the agricultural sector: Clean Seed Capital.  

Why?

• It has great bones.  See previous posts.  
• It meets a real need in a way that confers real benefits for its customers. 
• It's characteristics are such that it can survive the low point in the agricultural cycle.
• Most important: it has the potential (in my view) to profit mightily once the agricultural equipment cycle turns.  This could take place in a variety of scenarios: increased revenue from sales, a take-over by one of the major equipment manufacturers.  (See the recent additions to the Board of Directors as the company may be covering its bets on this possibility. http://cleanseedcapital.com/gary-anderson-joins-board-directors-acquires-5-interest-clean-seed-capital-group-ltd-tsx-v-csx/
• I am prepared for the inevitable gyration in the price of CSX, recognizing that it is a nascent enterprise.  As such, I am not prepared to attempt "to time the market" this time.  

The Financial Log Book - Performance of Investments - November 2017

Mindful of the potential for a decline in the market (see previous posts) I have decided to trim my holdings:

• to release some members of the crew whose prospects were judged not to be all that rosy in the short to intermediate term e.g. agricultural companies 
• to take profits and add to my stash of cash 

Why?

• Cash is often "king" in tough times.
• If the market declines, valuations may become more attractive and offer the potential for greater gains than presently.
• I will not get poor by taking profits.
• I've organized my financial affairs such that I can bide my time until valuations are more attractive.
• I have reconciled the conflict of trying to time the market with the desire to protect my portfolio.  On balance, I believe that markets are due for a major correction. 

This said, I have not stopped my investing activity.  If anything, I am working harder than in previous months:

• I am searching for companies with the potential to outperform their peers during a recovery period aka "rebound kings".
• I have intensified my research in a few strategic areas which I feel will offer the potential for profitable investments.  
• I increased holdings in some positions e.g. Fairfax India

Entity	Wt	Initial Price/ Purchase * Date	Price * Nov 6/17	Gain/Loss since Jan 1/17 %	Gain/Loss** Since Purchase %
Wheaton Precious Metals (WPM) (formerly Silver Wheaton)	H	12.37 2007-09-04	26.71	4.2	213.2
Polaris Materials Corporation (PLS) SOLD	L	10.70  2007-06-01	SOLD ouch	2017-08-01	- 92
Cenovus (CVE)                            SOLD	M	32.39 2010-07-27	SOLD	2017-08-24	9.26
North West Company (NWF)                  SOLD	H	16.23 2009-05-07	SOLD	2017-08-11	30.37
Deere & Company (DE)                            SOLD	H	88.07 2013-01-03	SOLD	2017-08-01	128.04
Rocky Mountain Dealerships (RME) SOLD	H	11.89 2013-01-03	SOLD	2017-08-22	11.12
Oaktree Capital Group (OAK)	M	56.45 2013-10-28	43.75	24.5	-22.50
Fairfax Financial Holdings (FFH)    SOLD	H	477.98 2014-3-25	SOLD	2017-03-08	624.10
Clean Seed Capital (CSX)	M	.51 2015-01-07	0.47	30.7	-7.84
Abitibi Royalties (RZZ)	M	2.57 2015-11-20	8.05	-0.70	212.2
Input Capital (INP)	L	1.86 2015-11-20	1.64	-14.9	-11.83
Fairfax India Holdings Corp (FIH.U)	H	10.42 2015-12-16	15.57	34.8	49.42
CRH Medical Corp (CRH)                            SOLD	M	4.43 2105-12-29	SOLD	2017-03-21	10.58

*    Prices are quoted in the currency of the exchanges where equities are listed.  As a result the gain/loss is not an accurate measure of the performance of the portfolio as the $US has risen significantly against the $=Cdn since many US positions were established.
**   Gain/Loss exclusive of dividends
10.58 sale price for offloaded crew members

Relative weightings of holdings in the portfolio when the position was first established:
H = >9%
M = 5-9%
L  = <5%

Commentary on Selected Holdings 

Agriculture

Farm incomes are suffering throughout North America for two main reasons:

• low commodity prices
• increased costs

As a result, farmers are economizing: reducing inputs of fertilizers, delaying purchases of new equipment, sourcing cheaper seeds etc.  

Many companies such as Rocky Mountain Equipment and Deere have adapted to the cyclical nature of the farming industry; however, I am concerned that share prices will be taken down  unduly when/if a major correction takes place in the markets.  In this scenario, valuations could become more attractive.  

Historical P/E ratio for Deere

I have retained my position with Clean Seed Capital.  It is a nascent company with "good bones": able management, supportive and understanding investors who know the farming business, a product with the distinct potential to provide a substantial benefit to farmers and which positioned to meet the needs associated with the trend to larger scale farming operations (farm consolidation is still taking place).  

I realize that this is not consistent with actions regarding my former holdings in agriculture.  I have a professional history of working with new enterprises.  As a result, I have a "soft spot" for supporting innovation and a tolerance for the volatility that characterizes that space.  Investing is a messy business! 

Ditto for Input Capital.  I am interested to see how the company will do in the depths of the agricultural cycle and how it will perform if commodity prices become more volatile.  Having skin in the game makes this more than a passive exercise.  Further, I consider that the lessons learned can be applied elsewhere.  

Resilient Companies

With some misgiving, I have jettisoned a few crew members.  

The North West Company is well positioned to survive during tough times.  In a sense, NWF has a captive market.  It is more able than its competitors in a significant part of its market area.  In retrospect, I should not have sold it but who says that investing is a rational process.  

Fairfax Financial Holdings has the challenge of adjusting to the "new normal" of climate change: more frequent and severe climatic events such as hurricanes.  I admire the management of Fairfax greatly and decided to shift my money to another of its operations; namely, Fairfax India Holdings in the belief that it presents a better investment opportunity.  So far, this thinking has been rewarded. 

Fossil Fuels

I have decided to sell off my positions in this facet of the energy field with the thought that there are better investment opportunities elsewhere.  

This said, I have a substantial position in an enterprise which is not noted in the Financial Log Book.  

Questor Technology Inc. is, in my opinion, a fabulous company.  It has great management which is well attuned to the oil patch, good financial bones etc.  Moreover, it has demonstrated its agility to adapt to a changing market (rental versus purchase of its incinerators).  It is actively exploiting the potential of its technology for applications beyond the oil patch.  Check out its recent corporate presentations:

http://www.questortech.com/investors/corporate-presentations/

While researching the company, I discovered Investorfile, a site maintained by Gerry Wimmer.  It focuses on small cap listings.  I subscribe to his blog via e-mail.  He has an excellent write-up for Questor Technologies - so no need to elaborate further on my part.  

I had the good fortune to have taken profits near the peak of its market price and the luck to have gotten in again after the stock sagged.  In recent months, investors have been rewarded richly.  

https://finance.google.com/finance?q=CVE:QST

Precious Metals

I purchased Silver Wheaton when its business model was novel and when it pretty well had the market to itself.  It was my first ten bagger.  

Things have changed.  It has more competitors.  I reduced my position in the intervening years and took some profits.  My reason for retaining a position is my belief in the safe haven value of gold and silver during tough times.  Besides, it is a favourite pet, an old and faithful companion that has served me well. 

A far more interesting company is Abitibi Royalties.  In brief, it is a play on the potential for increased gold prices and the possibility that some properties in its portfolio will be developed as working mines.  If this occurs, Abitibi will profit mightily.  See earlier posts for a discussion of the company.  

The share price increased significantly during the company's early years as a result of investor interest in its business model.  Since then, the "action" has settled down.  In recent months, there appears to be some encouraging exploration activity in a few properties in Abitibi's portfolio.  If mine development takes place and if metals prices increase, Abitibi's investors could be rewarded nicely.  This is the essence of my thesis for investing in the company ... coupled with its other laudable attributes: sage management, a great balance sheet, strong connections with key actors in the gold mining community, a business model which is somewhat novel and which addresses a specific niche without too much competition.  

Read Out of Your Comfort Zone - a short post

It's always useful to expand one's repertoire: to read viewpoints which differ from yours, to delve into new subject matter and literary genres.

Recently, I came across an interesting web site, the Reading Lists.

Our mission is to get more people reading and taking control of their self education. We aim to discover the world's most inspiring and important books.

Paul Treagus, the site's founder elaborates:

My mission is to inspire more people to pick up a book and use them [he needs an editor] as the stepping stones they are to achieving huge success and having massive world impact.  I have chosen the assembly of reading lists as my vehicle for achieving my dream.

He accomplishes this by interviewing people who have been successful in their endeavours and asking them to recommend books which are important to them.

There is a provision for individuals to nominate themselves for interviews.  A drawback is that some use the web site as a vehicle to promote their own books and services.  Self promotion is a fact of publishing life (e.g. payments to inflate book sales records, incentives for book reviewers to do book reviews and the like).  The Reading Lists is transparent in this regard - a good thing.

Here is a sampling of books on offer:

George Monbiot 

Doc Brown

David Papineau

Best advice: chose a list at random and commit to reading a few of the recommendations = no better way to climb out of a reading rut.

Unique Places to Stay in England

When visiting England, why stay in chain hotels and pubs when you can experience something completely different: historic places which reflect the history and traditions of this wonderful country.   Who wouldn't jump at the chance to stay in a Saxon cottage, a Tudor banqueting house, an outrageous folly perched on a hilltop with sweeping vistas, or a fancy set within an iconic landscape sculpted by Capability Brown ... or even a castle ... and ...  as an added bonus, to have the place all to your self.

Here I refer to rental accommodation operated by The Landmark Trust and The National Trust.

When you turn the key in the lock and open the door to these properties, you enter into another world - the legacy of those who built and lived in the space before you.  And that is the real attraction of the Trust buildings - something which surpasses the occasional grandeur of the architecture and the sometimes superlative settings.

... anyone who tries to write the social history of architecture must eventually confront the fact that the lives of buildings and the lives of human beings are timed by different clocks.  The form of a building embodies a contradiction: it is the actualization of the social relationships, material resources, needs, and talents of a particular patron, architect, household, or group of builders at a fixed point in time, but it is expected to outlive them and to remain useful and meaningful long after they are gone.  Buildings are expected to last.  Men and women are relatively short-lived by comparison, yet - unlike buildings - they are continually changing.  The passage of time for human beings is fast, bringing with it new ideas, new relationships, new ways of behaving.  These shifts are not only experienced from one generation to the next, but also in the daily lives of individuals as experience unfolds and consciousness evolves.  Thus each generation both changes the buildings that it inherits and builds new ones of its own, expressing and accommodating the relationships, habits of mind and beliefs which are all part of their distinctive culture. 
House and Household in Elizabethan England by Alice T. Friedman (The University of Chicago Press: London 1989) p.4

The Landmark Trust

The Landmark Trust rescues and restores noteworthy historic buildings and rents them out to cover the cost of their operation.  To date, the Trust has about 200 properties scattered throughout England, Scotland and Wales.  They range from whimsical follies to small castles.

Here is a short introduction:

https://www.youtube.com/watch?v=Nz-fhKBf28A

In its pursuit, The Landmark Trust has to negotiate the delicate balance of presenting the buildings with historical integrity, while at the same time, providing facilities to meet the needs of modern visitors.  Click on the following link for an insight into the thought process:

https://www.youtube.com/watch?v=RkeyJQWHSY8

The places are delightful:

• situated in wonderful settings (fields, woodlands, historic parts of well-preserved urban areas)
• replete with modern amenities: well-equipped kitchens, bathroom facilities, washing machines on occasion
• restored thoughtfully with a view to preserving the architectural integrity of the buildings both inside and out
• complete with libraries stocked with books on local history/attractions and visitor log books which record previous visitors' advice about local services and places to visit - something you would never get in a typical guidebook
• free from televisions, radios and WiFi service (we used a MiFi hub to access e-mail)
• varying in size, from places with a capacity for couples to parties of more than 12 

To date we have stayed in 6 of the Landmark Trust properties:

• the China Tower, a four story Gothic tower ca 1823 built on the sly by the wife of a rich landowner to celebrate his birthday (folklore holds that he was carried to the top in a chair due to his advanced age ... but not pushed off)
• Whiteford Temple ca 1799 built by a local lad who made good in India, set on a hilltop which presents fabulous views from the floor-to-ceiling Georgian windows (numerous rabbits are a distraction as they hop about)
• the Captains House ca 1825, on the coast of Cornwall, surrounded by ancient Celtic fields enclosed by 2000 year old stone walls 
• Freston Tower ca 1579, a six story Tudor folly near Ipswich with sweeping views over the estuary of the River Orwell (you are surrounded by sheep and flocks of pheasants)
• Beamsley Hospital ca 1593, founded by the Countess of Cumberland as an almshouse for poor widows ... provided that they were of good character and ... Protestant  (seven rooms are arrayed around a central chapel - doors everywhere).  Amazingly, the place fulfilled its original function until the 1970's!
• Swarkestone Pavilion ca 1632 near Derby, a banqueting hall with an architectural aura so compelling that it was once used in a photo shoot for the cover of one of the albums by the Rolling Stones

The prices are very reasonable - comparable to mid-range hotels or B&B's.  And you get far more for your money: 

• there is ample parking (no worries about being scraped by other vehicles)
• you can make your own breakfasts and dinners and shop for ingredients at local stores and markets (the ready-to-eat meals in some of the chains such as Sainsbury's are excellent)
• by dining in at night you avoid the inconvenience and danger of driving home after a bottle of wine (English drinking and driving laws are very strict)
• you are not bothered by the noise of other patrons (the places are exceptionally quiet: birdsong and the rustle of leaves)
• the settings are spectacular: we feasted on the views

By staying in these places you are also supporting the wonderful work of The Landmark Trust.  

The National Trust

The National Trust is also worth considering.  As a general rule, the Trust focuses on larger properties such as rural estates and natural areas, many of which were donated or passed into the hands of the organization as a result of their owners being unable to afford death duties.  Within the properties are situated a variety of buildings, some of which are rented out as vacation properties.  They range from apartments in stately manors and castles to humble estate worker's cottages.  

We rented a cottage on the large Boscott Park estate SW of Oxford.  The manor house was an unexpected discovery, especially the fabulous Faringdon Collection  and the gardens.

A few hints:

• make sure to have GPS supported navigation (we used a Garmin device with mapping for Europe and North America which could be updated)
• The Landmark Trust properties do not have WiFi.  We used a MiFi device to support our iPads and used a wireless speaker for sound.  The SIM cards are readily available at Carfone Warehouse or service providers such as EE (which has the best cellular network in England).  
• Reserve your accommodation well in advance of your trip as many properties are very popular and fill up quickly.  
• Read the library books.  They have been selected carefully to open insights into the local/regional history, folkways and tourist attractions.  
• Walk: the buildings are located in bucolic settings blessed with numerous pathways.  Nothing beats a walk at dawn along a river or a spectacular coastline in Cornwall.  

Slow Travel

We have slowed down and now rent properties for week-long periods instead of 3 or 4 day time slots.  By "settling in" we are more able to take the pulse of the countryside and savour our visits to local sites.  We find that we also have far more time to chat with people.  Already, we are planning our next visit to England.  It has much to offer, especially wonderful accommodation offered by The Landmark Trust and The National Trust.  

Here are a few of the places where we stayed during our last two visits. Click on the photos to get an expanded view. 

Whiteford Temple

China Tower







Captain's House

Beamsley Hospital

Freston Tower











Swarkestone Pavilion

More about a Potential Market Correction

I have reduced my exposure to equities and plan to trim my holdings even more.  See the previous post.

Here are some additional readings which explore dimensions not covered in the previous post.

One sign that investors are increasingly willing to pay more for less: Compared with the combined sales of all its companies, the S&P 500 is trading at its highest level since 2000.
Nevertheless, it’s far from obvious what will trigger the next downturn or when investors should get out. 
Everything is Crazy and Markets are not Freaking Out

Financial planners have a huge shock in store for them from groundbreaking research into the stock market’s long-term risk.

Contrary to what everyone for years has assured us, investing in the stock market does not become safer as our holding periods lengthen. On the contrary, risk increases the longer we hold stocks. This means we no longer can reassure ourselves or our clients that things will work out only if we are willing to hold on long enough.

The ownership structure of the stock market is, I think, a possible reason why equity markets have persisted at high valuations.  Retirement-related holders are almost compelled to hold equities because there are few alternatives to earn cash to satisfy the obligations/expectations of people requiring an income in retirement.  Further, other holders (mutual funds and their ilk) find it difficult to sit on the sidelines to await more enticing valuations - this as a result of pressure from their clients for "action" and the inability of most money managers to "do nothing".

In a white paper, Steven Rosenthal and Lydia Austin of the Tax Policy Center have broken out exactly which kind of investors own the stock market. They found that a majority of corporate stock is owned by different types of retirement plans, the largest being IRAs and defined-benefit plans.

Of the $22.8 trillion in stock outstanding (not including US ownership of foreign stock and stock owned by "pass-through entities" such as exchange-traded funds), retirement accounts owned roughly 37%, the most of any type of holder.
Who Actually Owns the Stock Market

Some commentators have attributed part of the stock markets' recent performance to the "Trump effect".
The Trump Effect on Financial Markets

I fear that his sojourn will end very badly: incoherent, inconsistent, prone to dismiss the views of others, etc.  Past history is replete with examples of self-centred populists catering to the base instinct of the crowd during challenging times.  They often meet bad ends.

Crowds are fickle and moods can change particularly when "encouraged" by the establishment when it feels threatened.  The fate of Girolamo Savonarola comes to mind.  He was a Dominican friar who preached in Florence in the late 1400's.

He was known for his prophecies of civic glory, the destruction of secular art and culture, and his calls for Christian renewal. He denounced clerical corruption, despotic rule and the exploitation of the poor. 

... he instituted an extreme puritanical campaign, enlisting the active help of Florentine youth.

Savonarola hinted at performing miracles to prove his divine mission, but when a rival Franciscan preacher proposed to test that mission by walking through fire, he lost control of the public discourse.

Under torture Savonarola confessed to having invented his prophecies and visions, then recanted, then confessed again.  In his prison cell in the tower of the government palace he composed meditations on Psalms 51 and 31.  On the morning of 23 May 1498, the three friars were led out into the main square where, before a tribunal of high clerics and government officials, they were condemned as heretics and schismatics, and sentenced to die forthwith. Stripped of their Dominican garments in ritual degradation, they mounted the scaffold in their thin white shirts. Each on a separate gallows, they were hanged, while fires were ignited below them to consume their bodies. To prevent devotees from searching for relics, their ashes were carted away and scattered in the Arno.
https://en.wikipedia.org/wiki/Girolamo_Savonarola
Execution of Florentine friar Savonarola

The "undoing" of President Trump is a distinct possibility: to date he has demonstrated a capacity to demean the establishment and divide large segments of his electorate.  The consequences of his potential comeuppance may include volatile movements in markets - an event which may be the turning point to unleash a torrent of "cleansing" factors such as market over-valuations, high levels of government debt etc.

The Potential for a Market Correction

I have started to batten down the hatches.  Why?

Howard Marks - "Here They Go Again"

Marks, the Chair of Oaktree Capital Management, identifies several worrisome trends:

• some of the highest equity valuations in history
• the so-called complacency index at an all-time high
• the elevation of a can't-lose group of stocks
• the movement of more than a trillion dollars into value-agnostic investing
• the lowest yields in history on low-rated bonds and loans
• yields on emerging market debt are lower still
• the most fund raising in history for private equity
• the biggest fund of all time for levered tech investing
• billions in digital currencies whose value has multiplied dramatically

Another set of ingredients is listed here:

The Warning Signs are There

There is no shortage of commentary on the potential for a significant market correction.  There is no way to predict when a correction will take place.

Some potential strategies:

• reduce exposure in equities and go to cash
• have the patience to wait for up to three or four years for a correction with the thought that it could be profitable to re-enter the market when valuations are more attractive
• economize: reduce spending in the meantime and make no major long-term financial commitments

Here is an extract from a previous post which was published in January 2016.  It is all the more relevant at the present time. 

When to Sell - The Thinking Process

The decision to sell is much harder than the decision to buy for a variety of reasons. On the one hand, it can be a recognition of "failure" in the event that the selling price falls below the purchase price. On the other, it forestalls the possibility of further gains if the selling price increases above the purchase price.

Most treatises on the matter start by listing reasons for selling. Many of the following reasons are inter-related:

• stock becomes "over valued"
• the onset of adverse changes in management and boards of directors
• company's failure to deliver on its business plan e.g. botched product launch, inability to secure financing etc.
• company's ability to compete declines
• a take-over makes the assets less desirable
• a "major" event causes severe (and potentially irreparable damage) to a company's business e.g. major legal actions with major settlement costs
• undesirable external changes in the company's operating environment e.g. adverse socio-political developments
• need to rebalance a portfolio in the event that the price runs up significantly

• a better investment opportunity emerges
• need to meet margin calls
• need for cash for personal purposes
• tax loss at the year end

I suspect that most investors sell out of fear - fear that they will experience yet further losses if they hold on in an environment of general market pessimism.

Thinking About Selling Should Start Before the Purchase

This is the key lesson I have learned. I'll use an analogy. A few years ago, I snowboarded on a large western mountain, my first time on anything with a vertical over 1000'. It was a bit intimidating until I had a chat with an advanced skier at the head of a long run. His practice was to visually scout out the slope beforehand: to look for changes in gradient, snow conditions, light etc - every thing that might affect his run. He then charted a mental path down the slope, noting points where he would turn, reduce/increase speed and potential bailout points if things got difficult. This done, he set out way points to guide him. His other piece of advice was to ski only to the end of the line-of-sight path and to stop and lay out another line once another part of the slope came into view.

I started to use this approach and found that life on the slopes became a lot easier and more enjoyable.

It's much the same with investing, especially with respect to the decision to sell.

• I state my investment thesis
• I establish some "way points" and monitor them closely
• If the course of the company changes I start to investigate the validity of my investment thesis
• The investigation may cause me to sell, buy more, or revise my thesis in light of further information e.g. a decline in the stock price may be the result of a transitory condition
• At yearly intervals (more or less) I review my investment thesis - akin to surveying the next line of sight on the slope.

It is very important to define one's investment horizon. For most of my investments, the horizon exceeds five years. It is largely the result of the type of company I invest in - cyclical resource-based enterprises or others where businesses move more slowly e.g. the North West Company. As a result, I am prepared to accept considerable variation in the price of a company's stock. The current decline decline in the stocks of Deere and Rocky Mountain Dealerships is a case in point. At some point, the agricultural cycle will recover along with the price of these stocks. I see no reason to sell now and try to time the market. My original investment thesis has not changed.

On the other hand, investments in other types of businesses involve shorter time horizons. High tech enterprises are an example: the risk of technological obsolescence or loss of market share to competitors often creates volatile circumstances for investors. In the case of precious metals, I have noted that prices are volatile. I have decided to speculate but only with funds I am prepared to lose if everything goes south ... and never to use leverage. In this instance, my waypoints differ from my other investments.

The central point is to develop a "mental model". It will differ for each investor in accordance with variables such as a person's tolerance for "risk" and "volatility", the sector, and the reasons for investing. It is more of an art than a science.

The "Amateur" Investor

People often exhibit irrational behaviour, particularly when it comes to things financial.  In particular, I am perplexed that many people spend a tremendous amount of time and money on education in order to acquire the skills/certification to earn a living ... and yet they invest no time or effort in learning how to manage the income gained by exercising those skills.  Instead, they abrogate responsibility for their financial well-being to others.  To my mind, this is astonishing.

Reasons offered for this bizarre behaviour include:

• lack of time
• advertising from the financial sector to the effect that finances are best managed by "experts" 
• the belief that it is too hard
• lack of confidence

My Background

I have no formal training in money management.  My academic background touched on the fine arts, molecular biology and geography where I graduated with a Master's Degree.

I was driven to learn about investing by circumstance: the need to establish a nest egg to retrain and start my own business in the event of a job loss due to downsizing.  As a manager, I laid off 40 percent of my staff ... and there was the distinct possibility that I would be next.  If this happened, I resolved never to work for someone else again, much preferring to be the master of my own destiny.

I started by studying two hours each day, usually during the early morning hours when I could not be distracted.  After 8 years and many mistakes, I started to earn more by investing than from my wages.  It was liberating.

Ten Lost Years

My investing career followed a fairly common path:

• I read the financial pages and "flavour-of-the-month" financial books.
• I subscribed to some money management magazines.
• I subscribed to a variety of investment blogs. 
• As a first step in placing my money, I retained an investment advisor who dealt almost exclusively with mutual funds.  I fired him because performance was sub par.  I also learned that management fees had a very corrosive impact on my portfolio and that most mutual funds fail even to surpass market indices on a sustained basis. 
• I retained a stock broker.  I fired him and her ... ever hear about "churning" and under performance?
• I decided to go it on my own and started by investing in junior companies with the thought that I could make quick profits.  I lost money. 
• I had little tolerance for dips in share prices.  I lost money. 
• I had no real appreciation of why stocks either rose or fell in value.  I got discouraged.  

Those were 10 "lost years" ... or maybe not.  It prepared me for a major event - the distinct possibility that I would lose my job. 

The Awakening

Until threatened with a potential job loss, I essentially "dabbled".  I was now motivated by survival.  

At first I hated the activity, but was driven by a duty to myself and family. I persisted and after six months, became fascinated:

• I loved the constant learning and synthesis and assessment of information from a wide variety of sources. 
• I soon learned that, like golf, a large part of investing involves a knowledge of self and how to manage one's emotions. 
• I also learned that the basis of successful investing, more than anything else, depends on developing a philosophy and a "world view".  This is a key differentiator which is often overlooked.  This is a "work in progress".  
• I learned to accept losses without regret and to learn from the experience. 

Why Amateurs Have an Advantage Over "Professional" Money Managers

The Lot of Professional Money Managers

Supplicants enter the "priesthood" of money management by one or more of the following ways:

• academic credentials
• industry credentials
• association with a business in the money management game (and believe me, many practitioners regard it as a game)
• familial connections

For understandable reasons, both government and industry have to rely on credentialism BUT that is no guarantee of superior performance or that money managers will work in the interest of their customers.  

In fact, an argument could be advanced that "average" is rewarded more than poor performance or superior performance. 

• Running with the herd and not standing out for any reason, means that money managers can play safe.  Most work primarily with the objective of maintaining their jobs.  Travelling outside the herd leaves one open to question, especially if one's investments go south.  
• Underperformance is common, but is often justified by the view/hope that a particular sector will outperform the rest of the market once conditions improve .... precious metals funds, come on down.  
• Out performance is risky.  It is very difficult to maintain outstanding performance metrics.  Fickle investors have no hesitation in abandoning "hot" funds and moving on to the next great thing.   

Investment professionals are often restricted by a number of other factors:

• Investment choices are restricted by the opinions of investment committees or company apparatchiks involved with "risk management".
• Brokerage firms and banks are often biased towards the stocks of companies they finance and money managers are often "encouraged" to push these stocks on unsuspecting clients. 
• Money management is a very "busy" profession.  Most activity is devoted to customer interaction and meeting bureaucratic protocols - NOT the search for profitable investments.  The truth is that most money managers simply do not have the time or mental focus to THINK - this despite the fact that a great number of them are very intelligent.  
• Career risk is always the prime motivator ... also the search for strategies and behaviours to improve one's income.  
• Time frames are limited.  Managers are assessed by short-term performance metrics both by their clients and their bosses.  The constant search for short-term gains is inimical to sound investment strategy ... and clients suffer as a result.  

The Lot of Amateur Investors

My definition of "amateur" is one who engages in an activity on a unpaid basis - no more - no less.  

In comparison with her/his professional counterpart, an amateur has several advantages:

• A dedicated amateur will, inevitably, have more effective time to learn and engage in the productive management of money.  
• An amateur has greater freedom to make his/her own mistakes and to learn. 
• An amateur can expand into new areas of interest without career risk. Being your own boss has real advantages.  
• Amateurs are not restricted by corporate policies and procedures.  
• Amateurs can adopt the "long view" - free from the pressures of short-term metrics which prevail in most institutional settings. 
• Amateurs have the luxury of being able to "do  nothing".  In contrast, it is very difficult for professional investors not to trade: pressures from their institutions and clients make this just about impossible, especially if some investments go south.  The value of this advantage is inestimable as it enables amateurs to minimize trading friction and to refrain from acting on the basis of half-baked ideas.  This said, most amateurs find it very difficult not to fiddle as they simply do not have the mindset to let their investments run.  

There are disadvantages:

• Professionals may have access to timely information not readily available to those "outside the loop".   Unless one is inclined to time the market, this advantage is not all that important as I regard investing in equities as a slow moving process, especially if one is a value investor.  
• The best professionals are not inclined to panic.  Instead, they look for opportunity when most others are fearful.  
• The best professionals are less inclined to follow the latest investment fads. From experience, I have learned that this can be injurious to one's financial well-being.  

Summary

Self-directed investing is not for everybody.  However, for those with an independent mindset, it can be very rewarding from many points of view: the joy of constant learning, the satisfaction derived from taking personal responsibility for one's financial well-being ...  I wouldn't have it any other way.