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Summary of Recent Thoughts

Dear Reader,

you well know, we have been strong proponents of maintaining a conservative asset allocation in y/our portfolio to ensure we had a large cash position to buy good assets at good prices at a later date.

, as markets keep falling, that date gets closer.

to date (YTD) we have maintained, on average, the following asset allocation
Asset class
 % in asset (average)           


We focus on common stocks of companies that show the attributes of being "high quality". This subjective concept attempts to encapsulate the idea of companies that are not likely to disappear in difficult times (i.e. have relatively little debt to equity), generate satisfactory and consistent free cash flows so have sufficient liquidity, and respectable returns on capital: all the while we attempt to buy this package at a reasonable price.

the last 2 weeks we have increased the portion of assets in equities. Indeed, if I were to reduce our approach as crudely as possible, I would suggest increasing your equity position by 5% each time the market drops by 10%.

maintain as a marker for fair value the S&P 500 index at 950. It remains stubbornly over valued (for the moment) in my opinion.

remain wary of emerging market equities, believing them to be still "excitingly" priced at the moment. We have seen 10-20% wiped off the value of emerging market indices YTD, and we expect to see more before putting cash into such assets.

yields are still too low to gather our interest. There is simply too large a possibility to make an error in investing when you make a loan (buy a bond) and receive only 3% for a 5 year maturity.

Many of you are aware from past emails and personal communication that we have purchased a reasonable quantity (approx. 7 - 9% of portfolios) of structured products that assume equity risk but generate "equity like returns" as income so long as select equities don't fall more than a certain percentage below the strike price (we do not proceed without at least a 40% volatility/price drop barrier, a memory effect during the lifetime of the product to receive dividends in the future should the stock temporary fall below the barrier and at least 7% income per annum). We do this especially for companies we may like but have relatively low dividend yields. This product falls under alternatives in terms of asset allocation.

From past emails we reiterate a belief that growth over the next few years will be weak, burdened by the large debt hidden in many corners of developed economies (consumers, governments, financials). The market over the last nine months had become too excited in pricing a recovery to "normal" times (in my personal opinion). In an environment where credit expansion will be weak this is an aggressive assumption.

A possible scenario which can lead this conclusion to be flawed would occur if a fear of holding cash should arise due to inflationary problems. In this scenario, it is possible cash would chase physical assets such as commodities and stocks. This would lead real assets to appreciate and would show GDP figures as appreciating (of course all that is happening is each unit of currency is worth less). However, should that inflationary pressure become aggressive (i.e. inflation rates greater than 7%), stocks are unlikely to benefit for long and would fall as witnessed in the 1970s.

As a result, we are looking to invest in commodities in the not too distant future. Pricing is starting to become more interesting.

As always, we look forward to receive any questions you may have.

Yours sincerely,

Alessandro Sajwani