On Monday I had the opportunity to meet a subscriber, Patrick from Colorado Springs, Colo. Patrick happened to be in Los Angeles on business, and inquired whether I was available for a quick cup of coffee to discuss the markets and the challenges of being an analyst and portfolio manager. I do travel a lot and cannot often entertain such requests, but ask, and sometimes you shall receive. I was in town and had some free time, so we met to talk stocks.
Our lively discussion reminded me that there's no better way to understand than to explain. Until you can explain a concept to others, you don't truly "get it." Similarly, there's no better way to formulate your investment strategy than to justify to others what you are doing in your own account. Unless you can review your account with another person, position by position with the rationale behind each holding, you should sit down in a quiet corner and further contemplate your strategy.
Contributors here at Real Money do this to some extent every day, as we write about the markets and individual investments. However, our communication is generally one-way. We get some feedback from the comments section or email, but we do not get the give-and-take of an in-person discussion. Sitting down with Patrick and discussing my positioning, and responding to questions in real-time, really helped me to crystalize my latest thinking.
My general position has not changed a lot over the past couple of years, but on the margin I am moving to wanting even more inflation protection. The Federal Reserve's massive easing in 2008 was a necessary and correct response to the immediate crisis, but the latest round of quantitative easing that is supposed to finally boost employment is not likely to work, as I noted recently.
My most recent portfolio purchases have been gold via the SPDR Gold Shares (GLD). (Note to those end-of-days types advocating only holding physical gold: If society breaks down so much that the gold fund cannot honor its commitments, we have bigger problems than owning gold might solve. If you are in that camp, I suggest buying guns instead.)
My target gold position is around 20% to 25% of the portfolio, and I view it as a cash substitute, rather than an "investment." I believe QE in the U.S. and Europe will eventually lead to a bout of inflation, and gold will hold its value against depreciating paper currencies. The gold position also fits with a general theme to be diversified amongst many currencies.
I also want investments denominated in Canadian or Australian dollars, for instance. Investors should do this via exchange-traded funds or mutual funds targeting various countries and holding stocks and/or bonds denominated in the local currency.
Gold is nice, but you can't eat it, so to create wealth long term you still want to own pieces of growing businesses. As the "Dividend Diva," you know that I prefer businesses that spin off lots of cash -- and pay it out to shareholders.
In an inflationary environment, the best businesses to own are those with pricing power that can quickly adjust to rising costs and get little consumer resistance to price increases. I love the tobaccos for this reason, and most consumer staples exhibit this quality, too. A high-yielding portfolio of "franchise" companies with pricing flexibility will perform well in a depreciating dollar environment.
Finally, every portfolio needs some sizzle. The last element of my allocation is a sprinkling of small stocks with high growth potential. These names can turn a solidly performing portfolio into a spectacular one if a few of them work out. Keep in mind that they are also higher risk, so you want to limit your exposure such that you sustain your wealth if none of them work out.
I regularly highlight many of these ideas in the Long Shot columns. Recent favored names include water treatment technology company AbTech (ABHD), turnaround play Energy Recovery (ERII), and refrigerant recycler Hudson Technologies (HDSN).
All these names will be volatile, but over a three- to five-year period should be able to return multiples of your investment, if the stories play out as expected.
So a tip of my hat to Patrick from Colorado for helping me crystalize my thinking. For other readers, I am contemplating following the lead of our illustrious Tim Collins, who regularly invites subscribers for a cocktail and stock talk when he travels.
I am on the road a lot, and will announce when I'll be in a city and have time to meet a reader or two. In my mind, nothing's more fun than sitting down with like-minded investors and sharing our passion for the markets, trading ideas and analysis.