More Wrong Than Right
By Julien B. Booth
July 9, 2016
Forest Capital does not sell pie charts. Brokerage firms sell pie charts. The average investor is over 70% invested in stocks. Why? Brokerage firms like to sell pie charts (it’s easy and really profitable). Pie charts say buy everything, but mostly stock (often due to flawed inputs).
We believe in owning individual securities across the capital structure of a company. If a healthy 7%+ can be returned from a decent bond, preferred etc., why take the stock risk? Stock is at the bottom of the capital stack (most risk).
Banks are a perfect example; bank stocks are down 10-30% year to date – yet their preferred stock is up 7%+. Brokerage firms do not like individual securities. True research takes effort and intellect – and conflict free thought. Brokerage firms are naturally
conflicted.
Wall Street has been far more wrong on the direction of rates (and by proxy, growth) than correct. The flattening of the yield curve has been screaming, yet few were listening. They are the supposed, “Smart Money”. God help us.
Rates are Crashing to HISTORICAL LOWS (a long time as they say). Bond prices are higher than I have EVER seen them (see the following graphic from the Wall Street Journal: http://goo.gl/oMsbnH).
There is REAL trouble brewing for pension funds (WSJ reports annual return assumption is 7.6%). Such return is virtually impossible, bank and insurance companies will also have a tough time. We encourage prudence.
At this juncture, we are taking some profits in bonds and reallocating to other areas where we can find value. Beware the brokerage now telling you to buy stocks+bonds (selling you a rear-view mirror).
As usual, thank you for investing with Forest Capital! For additional information on portfolio positioning, please contact Forest Capital directly at jbooth@forestcapital.net.