One of the problems with "What to Do in 2008" articles is that, regardless of who is relating their picks or pans to you, those picks were not likely selected as a function of your portfolio, property, or business holdings, or of your investment strategy. To whom, then, should you listen? With examples of successes and failures of investments that perchance didn't originate in your noggin, pick your favorite talking head (writing head?) and it's likely they'll receive both accolades and some old fashioned wood-shed treatment. This isn't to say that listening to others' ideas is indicative of shortsightedness or slothfulness. On the contrary – as long as research follows – listen to everyone whose opinion you value is worthy of your time!
And since Seeking Alpha is based on giving folks with respectable credentials opportunities to discuss investment views, I'll give you several views, as well. The options presented below represent our portfolios' possible orientation for the coming year. Garner something from my thoughts, oppose my opinions, whatever: I'm letting you know what I plan to do before/as I do it…Perhaps some of our ideas will synch up!
Hedging against poor quality picks with Berkshire Hathaway (NYSE:BRK.A)
Although folks opine that Warren Buffett's company would be worth nothing without Warren Buffett, I'm in the camp that believes the opposite: Yes, Buffett is building a conglomerate empire whose shapely form and elegant composition were crafted by a master value investor. But the incredible corporate leadership and service provided by folks at the institutions under Berkshire's umbrella provide insurance of excellent leadership when Warren hands over the helm. And while valuations might have been somewhat rich at >$5000 for BRK.B, the ~10% haircut they were given after a critical Barron's article gave many – including us – an opportunity to add to our position.
Hedging against the broad US markets with UN, MCD, EFA, and emerging markets exposure
We opted for Unilever (NYSE:UN), as discussed in a previous article, over Proctor & Gamble (NYSE:PG), because of its international nature, earnings denomination in Euros, better p/e than PG and Colgate Palmolive (NYSE:CL), and excellent growth prospects abroad, particularly in Asia and the Middle East. On weakness, we add to the position, which sports a 2.5% yield.McDonald's (NYSE:MCD) continues to be a long term bet on an efficient growth company which continuously refines its product offerings with market-beating sales growth at home, strong international positions – especially in Asia, and the knowledge that, despite offering more "less unhealthy" options than before, MCD's bread and butter – greasy fast food and a "Sweet Tea" 2.5% yield – is still a good hedge against a possible recession. With MCD's recent pullback from its year high of $63.69, we've been increasing our position.
The broad iShares MCSI Euro-Australasia Far East ETF (NYSEARCA:EFA) – provides a reasonable hedge by investing in companies whose earnings are denominated in local currencies. While the downside is that EFA sports an R^2 coefficient of 99.98 compared to the S&P's trend, these are, in effect, "developed world" large caps whose performance on their respective home markets is not statistically different than how our S&P components behave. Thus, EFA's performance need not mirror the S&P's even if the movement is often similar. Plus, the long term benefits of considering further international exposure are manifold – not to mention that EFA offers a 1.85% yield and a relatively low cost ratio of 0.34.
Finally, we cannot consider another year without emerging markets affiliation. Although we own Vanguard's emerging markets ETF (NYSEARCA:VWO) (yielding 1.25%) for the long haul, we've owned strong growth international markets in singular, as well – including Sweden (NYSEARCA:EWS), Malaysia (NYSEARCA:EWM), Taiwan (NYSEARCA:EWT), and Germany (NYSEARCA:EWG), as well as individual Chinese holdings. However, in light of (continuing) geopolitical instability, solitary state/equity emerging markets exposure – while we believe can represent a fairly large, diversified portion of an overall investment portfolio – should be watched like a hawk. Looking forward, we continue to like Russia – probably through Van Eck's Market Vectors' ETF (NYSEARCA:RSX), and Mexico, through iShares' Mexico ETF (NYSEARCA:EWW) (though we've yet to take positions in either). If we get a Frontier ETF this coming year, yes, we'll consider taking a position. But we'll all need to watch our allocations to traditionally very low R^2 investments…
Hedging against US real estate with TAO, RWX, and SRS
Despite writing an introductory article for Seeking Alpha about the introduction of Claymore's China real estate ETF (NYSE:TAO), I have yet to purchase any shares of this thinly traded single state play. As a long term holder of iShares' US Real Estate ETF (NYSEARCA:IYR), I'm more likely to look toward diversified international real estate – something like the SPDR Wilshire International Real Estate ETF (NYSEARCA:RWX). Still, I'm considering hedging up to 35% of my IYR position with ProShares' UltraShort Real Estate ETF (NYSEARCA:SRS).
Hedging against the greenback with FXM and FXA
Some of our international plays – and "domestic" equities operating largely internationally – already give us exposure to foreign currencies, namely the Euro (NYSEARCA:FXE) and Yuan (NYSE:FXY). However, adding a little something extra to the mix would see me selecting from two: the Mexican Peso (NYSEARCA:FXM) and Aussie Dollar (NYSE:FXA). The Peso is representative of strong growth, growing exports, and a stronger middle class in an increasing stable southern neighbor – with a 2.5% dividend to boot. The Australian Dollar, representing a nation in a key trade locale, awash in a commodities-rich economy, is a strong play if one believes in the continued long term demand for various metals and financial services in Asia. A > 5.25% dividend sweetens the mix. (Note: If we invested in the aforementioned EWW, we would not take a position in FXM.)
Hedging with lower R^2 correlation using agricultural, timber, and steel commodities
With commodities far from their valuation nadir, there are still opportunities for buying now if your time horizon is lengthy – years, not months. Believing that the world is going to need more staple food components than fewer, we're looking for entry points in either Powershares' Agriculture ETF (NYSEARCA:DBA), which holds only wheat, sugar, soy beans, and corn – or Roger's Elements Agriculture ETN (NYSEARCA:RJA), which holds nearly every staple food component, including a 2.87% lumber stake. I have written about the reasoning behind buying timber in the past for Seeking Alpha, and my thoughts remain the same: we'll stay with Claymore's Timber ETF (NYSE:CUT). Finally, I've just begun looking at a subsector of infrastructure as represented by Van Eck's Market Vectors' steel ETF (NYSEARCA:SLX). While I believe many equity infrastructure plays are possibly worthwhile, I am more interested in considering a specific portion of that – one that literally comprises the very foundation of the transportation, shipping, automotive, and building industries required by a modernizing/developing world.
Other ideas I'm considering (in their nascence)
- Exchanging our Chinese equities holdings for iShares' Chinese ETF (NYSEARCA:FXI), with a 60% short position in ProShares' double-leveraged short Chinese ETF (NYSEARCA:FXP);
- Hedging some of our emerging markets exposure with a 20% position in ProShares' UltraShort MSCI Emerging Markets ETF (NYSE:EEV);
- Taking a long position in Japan with iShares' (NYSEARCA:EWJ), but hedging it with a 40% short using ProShares' (NYSEARCA:EWV);
- Shorting the Russell 2000 index – using either ProShares' (NYSEARCA:RWM) or (NYSEARCA:SJH) (or openly shorting ProShares' Ultra Russell 2000 Value Index (NYSEARCA:UVT)) – and going long the Nasdaq (as a tech hedge) – using ProShares' (NYSEARCA:QLD), as opposed to Powershares' (QQQQ).
Whatever is your pleasure, make sure it fits your investing profile, as well as your financial goals for 2008 – don't let someone else tell you how to invest your money unless that someone is intimately familiar with your situation.
Happy New Year!
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Disclosure: The author has positions in the following ETFs/equities: BRK.B, UN, MCD, EFA, VWO, EWT, CUT