Sunday Morning Coffee

Although there weren't a ton of comments left on yesterday's video post it appears that quite a few people seem to be on the road to giving up on the stock market.

If you are thinking about that, aside from my thinking that long term that is a catastrophic mistake, I would say to wait until the market makes back a meaningful chunk of what it dropped and while you're waiting try to figure out how to save more money.

Barron's really outdid itself this week with a couple of very interesting articles.

First up was an interview with Donald Coxe from BMO Financial Group. He outlined several longer term themes. He likes all things food as part of the ascendancy theme (this is a term I have been using for a while but he did not use that word). Each successive generation in emerging markets is larger than the previous, they are demanding more high-protein food (he specifically mentioned milk, beef and pork) and more and more they can afford better nutrition. He said he likes fertilizer stocks, the genetically modified seed stocks and the farm-equipment stocks.

He also likes energy, noting that delivery for 2015 is trading near $90. Although not stated it seemed like he was tying in the notion of US using 25 barrels per capita, China using two and India using just under one barrel.

He likes base and industrial metals for a recovery. He said that copper always doubles as the economy recovers. I don't know about it doubling but copper historically turns up big before just about everything else in a recovery.

It seems to me the best investors can spell out their ideas very plainly which is something I admire and try to emulate. The more complicated a strategist or the like makes something sound the more suspicious I become.

The other article I really got a kick out of was the cover story about the rough shape college endowments might be in. The timing of the article is kind of funny because I wrote up something very similar about the Alaska Permanent Fund for TheStreet.com which ran on Friday.

The Barron's piece touched on declines is assets traded on exchanges, taking appropriate markdowns on their private equity and other illiquid investments and that some of the smaller endowments may have created a lot of problems for themselves by trying to emulate Harvard and Yale. There was a comment about timberland being bid up in a frenzy by a bunch of endowments stemming from Harvard's long disclosed investment. The take away from the article is that many of the endowments are down 25%.

Endowment funds and sovereign wealth funds fascinate me. I write about them a lot on the blog and for theStreet.com. I think I say the same thing about them every time which is we can learn from them but emulating them is a very bad idea--apparently even for some of the other endowments. My point has been that we cannot be privy to the timing or have access to the managers.

All of the endowments profiled along with average educational endowment compiled by Bloomberg have in the neighborhood of 20% in hedge funds, a wide range in private equity allocations with an average of 7% and an average of 10% (much higher for Harvard and Yale) in real assets which can include illiquid assets. Just using the average the endowments have 27-37% in illiquid assets (again much higher for Harvard and Yale). The logic for this is spelled out with a quote from David Swensen who notes that endowments have suitably long time horizons to go heavy in this stuff.

One suggestion from the article that is a point I have made before is that maybe the endowments should focus less on the alternative assets and more on the basics. The low correlation effect stopped working a while ago (in most instances) and now many of the endowments have a portfolio full of diversfiers hedged with some public equity exposure.

Where I think we can learn from these funds is by learning about what they do, then picking one or two things, maybe three to work into your portfolio after proper study. Absolute return strikes a cord in me so I have a couple of percent or so in a fund. Jack Meyer convinced me years ago of the merit of a little timber exposure so I've had a bit of Plum Creek Timber (PCL) for quite a while. The other one I have stuck with is a small weight to commodities.

Some of the other things like private equity might be right for you or not but I think you should learn about all of them and as implied in the paragraph above use only moderate weightings.