The 247Bull portfolio utilises two types of investment strategy:
- A strategy for core holdings (discussed here), which are those positions held for the medium to long-term. These holdings make up around 70% of the portfolio.
- A tactical asset allocation strategy for the remaining 30% of the portfolio. This portion of the 247Bull portfolio takes advantage of specific trading opportunities as and when they arise, and this website will continue to feature them.
Portfolio strategy for core holdings
As investors our primary goal is to understand the powerful long-term macro forces that shape the global economy and determine the direction of financial markets. The reason for this is simple: Almost 90% of stock market returns are driven by macro influences.
History shows that the really big money is made by identifying, and boarding these trends early, and then riding them until they come to an end. It is for this reason that a large part of the 247Bull.com website is dedicated to the goal of understanding and tracking these trends.
This can be described as a long-term trend following strategy, however it is heavily influenced by the principles of value investing and contrarian investing, both of which help with timing a market entry or exit.
It is also worth noting that we view the world through an Austrian ‘free-market’ lens, rather than from the typical Keynesian perspective. This has many advantages which will be covered in a future article.
Current long-term macro trends
The current long-term macro trends we see are:
- Currency debasement: Loose monetary policy (measures such as quantitative easing or QE) will continue to erode the value of money.
- Financial repression: We will continue to see the policy of financial repression which keeps money captive and then subjects it to negative real interest rates, i.e. rates of interest well below the true rate of inflation.
- Debt Deleveraging: Governments will continue to try to prevent/ postpone the natural process of debt deleveraging.
- Increasing systemic risk: Systemic risks within the global economy and financial markets continue to increase. This is due to a large number of factors including: the interlinked nature of the modern financial system, the lack of proper accounting oversight, the socialisation of risk, regulatory organisations that have no teeth and ratings agencies that have proven themselves utterly ineffectual.
- Stagflation: Britain (together with many other G20 nations) will remain in stagflation for around 5 to 7 years (perhaps longer), which means low or even no economic growth combined with high rates of inflation. It’s even likely that we will experience hyper-stagflation.
- Lower real disposable incomes: Consumers will continue to be squeezed by a combination of pay rises that are below the rate of inflation, and the rising cost of living. This will result in lower real household disposable incomes.
- Government intervention: Governments will continue to intervene in the economy and markets.
- Poor stock market performance: The major stock indices are in a bear market that is likely to last until around 2020.
- Peak cheap oil: We have passed the peak in conventional oil production. From now on oil will be harder to bring to market and as a result it will be more expensive. Fluctuations in the price of oil will also have an increasing impact on economic activity.
- Deglobalisation: Deglobalisation refers to the gradual reversal of the globalisation trend that we have witnessed over the past few decades. The globally distributed manufacturing and supply models used by many of today’s businesses (such as Dell and Apple) is only made possible by cheap, abundant fossil fuels – notably oil. As cheap oil becomes increasingly scarce, the savings made using cheap labour in the Far East will be more than offset by the cost of shipping the raw materials and finished products around the world. As a result more and more companies are likely to bring their manufacturing facilities back home so that they are located close to where their products will be sold.
- The shift from capitalism to socialism: It’s been many years since we have had true capitalism, today we have a morally repugnant form of crony capitalism/ corporatism. However, the widely held belief that capitalism is to blame for the current financial and economic malaise has triggered a shift towards socialism.
- An ageing population: Populations are ageing in nearly all countries. According to the UN, the population of the world age 60 or older will be 2 billion by 2020. This trend will likely have a detrimental impact on many economies, including that of China.
- Increased volatility: The extreme volatility we have seen in both geopolitics and global financial markets in recent years is set to continue.
- Inflation vs. deflation: The forces of inflation and deflation will continue to battle it out.
Current long-term investment themes
From our analysis of these macro trends we have derived the following long-term investment themes. These cover the actions that investors must take in order to be protected from, and profit from, these macro trends.
- Risk has been redefined: The conventional notion of risk has been redefined. Investors can no longer sit safely in cash (savings accounts) and ride out the storm. Instead they must take action to protect and grow their wealth.
- Preservation of wealth: The number one priority for every investor (or anyone with wealth) in today’s environment, should be the preservation of wealth. It’s for this reason that physical gold should be the foundation of every portfolio.
- Avoid investments linked to discretionary spending: As real household disposable incomes fall, those assets related to discretionary spending will continue to suffer. Unless, that is, they target the ultra-wealthy. Investors should look to own companies that produce or provide food, energy, water, medicine etc. i.e. things people have to have. Several of these companies are on our watch list and will be added to the 247Bull portfolio when the time is right.
- Avoid counter-party risk: Thanks to increasing systemic risk investors have little or no ability to gauge the solvency of many organisations, in particular banks and other financial institutions. Many of these institutions remain highly leveraged and the debts of one often appear on the balance sheet of another. Investors should steer clear of any investment that involves unnecessary counter-party risk.
- Beware of buy and hold: The world’s major stock markets are in a secular bear market and are no higher today than they were 12 years ago. Adopting a passive buy and hold strategy in this type of market is a bad idea and one that’s likely to lose you a great deal of money. Instead investors need to be much more selective when it comes to picking stocks or else they need to become adept at market timing.
- Avoid bubbles: Government intervention will continue to create asset bubbles. Investors need to be mindful of following the herd into overpriced assets that expose them to considerable risk.
- Income is more important than capital appreciation: In this environment regular income is much more important than capital appreciation. Investors that receive regular dividend income not only stay ahead of inflation, they are also likely to be much less concerned about the performance of a company’s stock. As a result they are in a better position to ride out market volatility. The 247Bull.com website will continue to feature stable companies that provide regular dividend income. Particularly those that have a history of increasing their dividends. (See articles tagged Dividends).
The bottom line
The overriding macro trend we see, is the shift out of paper assets which are subject to the actions of governments and their printing presses, and into tangible assets that provide a store of value. This is the trend investors need to be most cognisant of over the next 5 to 10 years.
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