Some Thoughts on Investing from My Recent Interview

In the first few years of this blog I posted occasionally, but still much more than the last few years, on investing and economics. Now I mainly post on those topics on the Curious Cat Investing and Economics blog (see how the name and that practice are in sync with each other?).

I was recently interviewed about investing strategies and thoughts and decided to share that with the readers of this blog. Some excerpts from the interview:

I have maintained a portfolio that I call the sleep well portfolio for 10 years (started April 2005). I hardly have any turnover (under 2% annually I think) and hold stocks I would be comfortable locking in a vault for 10 years. The largest holding there is Apple, followed by Google; I also still really like Google as a long term investment. The stocks in the portfolio for the entire period are: Google, Amazon, Toyota, Intel, Pfizer…

We got out of the “Too Big to Fail” crisis, but have not addressed the core problems – and likely have made them much worse. We didn’t take the opportunity to address the financial system risks created by the actions of “Too Big to Fail” banks. And it seems to me we have left the central banks in a very vulnerable position. They have already played strategies that previously seemed impossible due to the position they were placed in, and if it happens again, what are they going to be able to do? I think the risk of massive economic failure is large enough to consider in an investment portfolio.

How would you suggest an investor guard against the potential for a massive economic disaster?

John Hunter: My main thoughts on that are to greatly value companies that are likely to weather economic calamity greater than any since the great depression. Having tons of cash obviously helps (Apple, Google…). Having a business model that puts a company in a position to make money (even if it is a lot less than they are making today) if the economy does extremely poorly, is also good (Apple, Google, AbbVie…).

It is possible for the economy to be hit so hard Apple, Google, etc. lose money. But if that happens, I believe huge numbers of other companies are going to be out of business, and the economy will be in shambles…

The sleep well portfolio has beaten the S&P 500 by about 220 basis points (on an annual rate of return basis) (see details on how marketocracy calculates returns – they reduce returns by 200 basis points to simulate investment adviser fees). The interview includes much more details as well as links to posts on my investing blog going into more detail.

Aside from prominent tech stocks like Apple and Google, are there other segments of the economy that you think have potential for significant growth? For instance, what healthcare stocks do you like?

John Hunter: Three macro-economic factors make healthcare an appealing investment. First, the aging population should provide a booming market. Second, the huge increase in rich people globally that can afford very expensive medicine again provides an ever-growing market. Third, the broken healthcare system in the USA results in exceedingly high-priced medical care in a very large and rich market.

It is very bad economic policy to continue the policies in the USA that have resulted in the extremely expensive but not more effective healthcare in the USA compared to other countries for the last three decades. Yet, I don’t see the current political parties having any interest in addressing the problems.

The health care mess in the USA creates huge problems for the economy and people in the USA but it prints money for any company selling products and services in that market. Hopefully it is meaningfully addressed but it is very hard to make that case given the behavior of the political parties the last 3 or 4 decades on this huge problem. And the other strengths of the USA economy allow that to continue.

As bad as the USA economy seems (health care costs double with no better results than other rich countries, more people in jail than anywhere else, huge costs of a massive military force, huge debt at the government and individual level, huge shortfalls in accounting for pension costs [even greater failures at the state and local level than the federal level*]…) the only large rich country it seems even debatable that they have a better economic outlook than the USA is China.

The argument is probably just as good that the USA has better prospects than China. As bad as the long term health care crisis is, the massive economic costs can be absorbed by the strengths of the USA economy and that is what the two parties have decided to do that last 40 years and likely will continue to do. The damage to individuals will continue, though that may be somewhat addressed by the parties – they don’t really seem to object to doing so, they just need to find ways to do so that don’t impact any of those giving them lots of cash and that is a bit tricky.

Read more interviews with me on management topics and on travel and blogging topics. Also listen to podcasts with me on management topics.

Related: posts on this blog’s investing categoryposts on investing from the Curious Cat Investing blog

* companies failure to account for retire costs has been greatly helped by the conversion to 401(k) funding instead of pension funding. That was a very good policy decision by the government. The government provided very good 401(k) incentives and gave companies cover to move away from false pension promises (promising much more than could be provided based on what was happened – which just meant companies went bankrupt much more often and pension benefits were slashed). There are still serious issues but the problem is much much less than it would be without the switch to 401(k)s.

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