Insights and Publications

Quarterly Commentaries

• First Quarter 2012 - "Investing in a Bubble"
  Excerpt:

  With the release of Berkshire Hathaway’s 2011 annual report, Warren Buffet took aim at those who have elected to utilize gold within their investment strategy. He wrote:

  “The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

  This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

  The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

  Defenders point out that Buffett is not considering the ability of gold to diversify a portfolio in various economic or market scenarios and that those who hold modest allocations do so for this reason rather than from “fear of almost all other assets.” We see this as a valid argument although the debate itself raises interesting issues regarding the cost of buying insurance for a portfolio. Measuring this for gold is arguably quite difficult as would be the case when attempting to establish fair value for any asset without the potential to generate positive cash flow. As such, projecting returns is subject to even greater uncertainty than is generally the case and we can never have a good idea of what it will ultimately cost to hold gold.

  Nevertheless, in what is widely acknowledged as a deeply uncertain time, it stands to reason that the cost of most forms of insurance is quite expensive today. As highly rated government bonds are a form of insurance against deflationary environments and/or significant equity market declines, we have a perfect example of this principle at work.

• Fourth Quarter 2011 - "Measuring Prudence"
  Excerpt:

  In an uncertain and deeply troubling era, we take great comfort in the fact that time, with great consistency, marches on. While somewhat artificial, December 31 tends to carry outsized significance as we bid farewell or good riddance to the year just passed. With the misery of 2008 in mind, 2011 will be remembered as a difficult but not disastrous year and one where the pervasive nature of the financial crisis became universally apparent.

  Naturally, this revelation, accompanied by exceptional market volatility, has driven investors to consider their portfolios within the confines of the world we have now been living in for nearly five years. Yet, we continue to believe that the seemingly endless nature of our current problems and the resultant pessimism has created opportunities for those who can look past the perceived certainties of today. This view is both the product of a natural proclivity towards contrarian thinking along with an underlying sense of optimism regarding the very long-term prospects for the world at large.

  We must also acknowledge that the stress of the last few years and the prospect of more difficult days ahead is quite disturbing. Worse still,more than a decade of anemic returns from most high risk assets has created a more serious problem as many endowments have failed, over this period, to generate the returns necessary to preserve their purchasing power1.

  Failure is a powerful word as it implies that which is both final and irreversible. Fortunately, a perpetual time horizon, while daunting in terms of the amount of return that must be earned, is also useful in that neither success nor failure necessarily reflect a permanent condition. As such, the term failure is inappropriate in most cases. Nevertheless, even interim shortfalls are undesirable and we must ask ourselves what they say about the ways in which charitable capital has been invested and about how those who serve as fiduciaries will be perceived...

• Third Quarter 2011 - "The Best of Times?"
  Excerpt:

  At the beginning of the 21st century, it might have been considered laughable to waste ink on so obvious a statement. Yet, experience has a way of altering our perceptions and after over a decade of poor cumulative returns, extreme volatility and a long process of extinguishing late 1990s optimism, many today reject this idea outright or to at least have serious doubts about its veracity.

  Skepticism and concern today is quite reasonable thanks to the presence of serious and lasting global problems combined with periodic bouts of significant market volatility and falling prices. Nevertheless, it is more important than ever to remember that there is virtually no information in day to day, week to week or even month to month price changes as today’s climate is the product of 1) post-traumatic stress disorder amongst investors, 2) an undeniably confusing and complex near term outlook and 3) capital markets that are experiencing significant and troubling growing pains due to the rise of electronic trading. None of these factors alone is responsible for today’s market climate – rather, it is the interaction amongst them that has produced dizzying price changes.

• Second Quarter 2011 - "Bad Memories"
  Excerpt:

  It is undoubtedly safe to assume that very few institutional investors would be pleased to have their efforts categorized in this manner. When seeking an explanation for the frequency of this outcome, there are those who would assign responsibility to factors such as incompetence, bureaucracy, laziness, fraudulent behavior, outrageous fees, etc. With the notable exception of the last item, we believe this explanation to be inaccurate as the investment industry tends to attract intelligent, hardworking, well motivated individuals in numbers that far exceed the prevalence of mediocre outcomes that exist.