Arohan’s investing life

At the first blush it appears that as goes the US economy, so goes the world market. If the hiccups in the US economy can have such an effect on the markets elsewhere, than it would appear that the markets are now highly correlated. Does this mean that there is no value in diversifying internationally?

I would say that is not true. What we are seeing is how the markets act on a daily basis. True, that over a short horizon, the markets may be correlated. After all, we now live in a global economy where many companies are traded on exchanges in many different countries. However, over a longer term, each market performs based on its own fundamentals. Many emerging economies are growing today based on the fundamental changes in the business processes and political environment. Unless there is a drastic change in these, which I do not see happening any time soon, these markets will continue to do well

At the same time, do not write off the US economy. There have been countless such cycles in the past. It is true that the baby boom factor may not be present anymore, but the US economy is now driven by innovation, risk taking, and generally sound economic principles. These are still here (although one may question the soundness of economic principles involved in the subprime situation, but that is just a small component of the economy, it will probably do some damage in the short term but it will soon pass)

Regardless of the macro-economic picture, the basic value investing credo of finding value at a cheap price has stood the test of time and will likely continue to yield market beating results over a long investing horizons

Over the last few weeks, many companies have come out and expressed their fear that the US economy may be heading into recession some time in 2008. These companies include AT&T and UPS. Countrywide CEO has already claimed that the housing market is in its worst recession since the Great Depression. Reviewing the market performance since the start of the new year also shows that wall street is also concerned about possible recession in the US

Will it happen or not is anyone’s guess

The way I see it, the economy is already in recession in pockets. Sure, the housing market is in doldrums, and is already affecting the consumer morale. There are geographies in the country that are already suffering. Michigan is one. The USD has been plummeting for a while making even the cheap imports more expensive, at the time when the consumers have started to pull back on their discretionary expenditure. The malaise seems to be spreading, not receding, so much so that White House, after being in denial for some time, is now talking about possible measures to kick start the economy

What is a long term investor to do?

This are precisely the times when being invested in value stocks with high margin of safety makes sense (it actually makes sense in all economic times). Be patient and look for opportunities outside of US. While the US downturn may affect the foreign markets as well, most of the reasons for the US economic downturn is local. Additionally, if you do want to maintain exposure to the US economy and have a long term horizon, consider investing in companies that have global franchises and are financially strong. Good values among such companies are not hard to find today. Take Bank of America for example

But most of all, keep some cash that can be deployed to scoop up value stocks as the opportunity to do so will arise more and more in rest of 2008. And be patient

As the political process grinds on, it is important for all long term investors to take some time to visualize the US economy in the future and the most important issues facing the country. This may be a good time to reposition your assets, or you may choose to wait and see who gets to the White House later this year

Let me lay out some of the challenges facing the US economy over the long term, most of these are addressable and any new government will need to take concrete steps to address these to ensure US continues its long tradition of economic leadership:

1. Ageing population, other parts of the world, notably India, Brazil, China, etc are blessed with young demographics rapidly reaching their most productive years. The current anti-immigration populist stance taken by some in Washington will do nothing but to stop the country from allowing younger, qualified population to come and take place of the ageing and retiring population here. The immigration system in US is decidedly unfriendly. US does not need to look farther than Canada and Australia to find a progressive immigration system. Heck, even European countries are realizing that this is an issue and relaxing their immigration policies
2. US foreign policy is driving away investors. True that Citigroup, Merril Lynch, etc have found white knights in the foreign sovereign funds but the administration has found ways of stopping companies from “unwanted” countries to buy stakes in domestic companies in the recent history. Globalization is inevitable and the US needs to learn to play nice with others
3. The world need not revolve around oil. Invest in alternatives rather than trying to secure all the oil in the world for us by any method necessary
4. Foreign governments need to have confidence in US if they are to keep financing US growth - try not to make it easier for others to diversify their holdings away from the US dollar denominated instruments
5. Global warming exists. Don’t let the solution to the problem (and resulting wealth creation opportunities) to come from others. Take a lead
6. Terrorism is a fact of life in many parts of the world. People do not stop living and working to improve themselves. Neither should the government. New administration should not be a one agenda administration. There are many other important issues to deal with (Frankly, I have not decided on who I like best for the President, but I have decided this: it is not Rudy, precisely for this reason)

This is my list. I am sure the readers will have many things to add to this. Please comment