Shaping a portfolio for 2012 (I): general

I’m going to write my beginning of the year strategy thoughts in five or six installments over the next week. I’ll post on what I think is going on economically in Europe, China and the US; what I feel is currently discounted–and what isn’t–in today’s stock prices; how I see the markets evolving over the year; and how I’m positioning my portfolio.

Before I’ve written everything out (I usually think things through by writing), I suspect my bottom line will be that we’ll remain in a trading range for now, with short periods of investor enthusiasm alternating with periods of real fear.  I also expect the crucial issue will not be the way economic events will play out, but rather when investors will shift from discounting the same old (and bad) news again and again (typical down market behavior) to anticipating the possibility of good news in the future.  I think that the next major move is up.

globalization

Today I want to mention one dynamic–globalization–that I think will be an enduring issue over the next several years.  A week or so ago, I saw a commentary that’s part of the Financial Times’ A-List series (which is, as far as I can see, a hodge-podge of writers ranging from the exceptionally talented to the functional equivalent of Paris Hilton or Donald Trump).  It’s titled “The downward slide continues–the great revolt will come later,” and was written by Mark Malloch-Brown, a former UN official.   It’s short and well worth reading.  The part I found interesting was paragraphs 2 and 3.

It’s not that I think that Mr. Malloch-Brown has hit the nail on the head.  I don’t.   The situation is much more complex than his simplistic portrayal would have you believe.   I don’t think the world is going to hell in a handbasket from here, either.  And the emerging world vs. developed isn’t exactly new news. After all, the first Toyotas reached US shores almost 40 years ago.  It is true, though, that pace of change accelerated once mainland China decided the capitalist road was worth walking along (around 1980) and SAP et al developed supply chain software capable of monitoring global businesses (mid-1990s).

What I like about Mr. Malloch-Brown is that he doesn’t mince words.  There’s something important to the idea that governments like Greece, Italy, or to some extent the rest of the developed world, wittingly or not (I’m in the not camp), have maxed out their credit cards spending borrowed money to protect the local economic status quo, and to dampen the negative effects of pretending increasing competition from emerging economies doesn’t exist. The bill for that has come due.

It’s tempting to riff on the intellectual poverty of politics in the US.  I won’t–other than to say that there’s some small chance of a positive surprise if enough citizens demand change.

Whether that happens or not, I think that dedication to trying to preserve the status quo, which is what led Japan to into its two “lost decades” (so far) can be a useful litmus test for investors to separate countries into winners and losers and control their portfolio exposure accordingly.

There’s another important consequence of the idea that governments in the developed world no longer have the money to try to roll back the tides of change.  It’s that economic change may well happen at an accelerating rate over the next several years.

For investors, I think this means we should own agents or beneficiaries of change.  That’s already been the ticket to success since the turn of the century.  It may be even more so in the coming decade.

A quiz:  Rank the following stocks in order of their performance (on a capital changes basis–I’m lazy) over the past ten years:

Amazon

Apple

Berkshire Hathaway

Cisco

Kellogg

Intel

Microsoft

Oracle

Procter & Gamble

Wal-Mart.

Answer below↓

Apple     +3378%

Amazon     +1348%

Kellogg          +72%

P & G          +70%

Oracle          +67%

Berkshire          +56%

S&P 500     +8%

Wal-Mart          +4%

Cisco          -10%

Microsoft          -21%

Intel          -31%.

Huge gains for innovators, losses for companies that have gone ex-growth, struggles for firms that don’t globalize.  I think the next decade will bring more of the same.

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