Saturday, August 13, 2011

Consumption, Construction and Connection

Apple, Bayer, Camden Property Trust, Caterpillar, Conoco Phillips, Daimler AG, Google, Home Depot, IBM, Intel, Liberty Capital, Merck, Nestle, Novartis, Oracle, Pepsi, Pfizer, Polycom, Samsung, Starbucks, State Street, Time Warner, Union Pacific, Wells Fargo.

I pulled the above names from the top twenty five positions (alphabetized) of funds (a couple from each) that currently occupy the equity portion of our clients' portfolios. The total number of holdings for these funds exceeds three thousand - however seventeen hundred are held by the small cap index fund which accounts for just 5 to 10% of our typical portfolio. The average number of holdings, not including the small cap index fund, would be two to three hundred. Therefore, if you're our client, you're diversified in a big way.

I'm typing this on an Apple product, I get headaches every now and then, I'm often held up in traffic while heavy machines plow the road ahead, I drive a Daimler-made car, I use Google daily, I frequent Home Depot, my office computer is run by an Intel chip, the kids drank Nestle Hot Chocolate last week (camping) and I bank at Wells Fargo. And I no doubt use the products of, or am exposed to, most or all of the other companies on my list.

The question is; will credit rating downgrades or European financial sector woes keep the hoards away from the iPhone 5, the headache victim from the aspirin, the Pepsi drinker from the Pepsi, the coffee drinker from the coffee or you and me from the internet? Nope.

The problem (if volatility unnerves us) is; the media, through sensationalization, commands our attention, and our monthly investment statements reflect the price per share of our holdings on the very last day of the previous month. When buyers are in the mood to buy at lower than thirty day ago prices, we see the price decline in dollar terms on page one. We don't see the billions worldwide consuming the products and services produced by the companies whose share prices determine the present paper value of our portfolios.

Provided the next default, downgrade or recession doesn't end the world as we know it (understanding that such events will lead to great volatility in share prices), I'll continue to advocate owning global franchises in the appropriate quantity (based on age and temperament), rotating among sectors when called for and rebalancing the mix among stocks and fixed income assets twice each year.

In other words; the equity portion of your portfolio represents your share in the profits derived from the propensity of people worldwide to consume, construct and connect. And when you consider the longer-term trajectory of growth in population, infrastructure and desire in the emerging markets of the world, share price volatility means virtually nothing - that is if you're not currently a seller.

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