Correspondents

February 24, 2012
Santiago, Chile

I want to start off today’s letter by thanking the 120+ folks who’ve made the journey down to Chile over the past two weekends to break bread on the farm. Last weekend’s event was a real delight, and I’m looking forward to tonight’s festivities with the new group.

It’s a pleasure to spend time around people with a similar world view, and it was amazing to see dozens of complete strangers forming fast friendships in such a pleasant setting.

On to this week’s questions.

First, Art asks, “Simon, we know the index fund ‘buy and hold’ strategy of most financial advisers is for the birds. What kind of investment(s) would you recommend for someone without much time to manage their portfolio, but wants good long-term investments through an easily accessible brokerage account?”

The traditional mantra of ‘buy and hold US blue chip stocks’ is absolutely for the birds. Turkeys, to be exact. Adjusted for inflation, the S&P 500 is down 2.41% in the ten years since February 24, 2002. Throwing in the average index fund’s fees would have soured that loss even more. Pitiful.

[Editor's note: for math wonks, the St. Louis fed has tracked the compounded inflation rate since February 2002 at 27.48%; the S&P 500 closed at 1090 on Friday, February 22, 2002.]

The fact is that right now, markets are completely fractured. The price discovery mechanism has been buried under bailout rumors and policy innuendo. Fundamentals really don’t matter anymore, it’s just a question of politics and money supply.

To make things worse, we live in a zero-yield world where risk quantification is deeply flawed. The largest debtor in the history of the world, which is on a one-way road to going debt supernova, is considered ‘risk free’. This is completely idiotic, and it has created severe structural issues in the market.

In my mind, nothing beats investing in private businesses that provide honest, tangible value to the market.  Such deals are much more exciting and easier to understand than divining what toxic assets Citigroup has on its books. Plus, as a director of an operating business, you can generally influence many risks yourself.

Managed trading accounts and trading services may also be reasonable options. Our partner Tim Staermose’s now sold-out Fourth Pillar strategy is one example; it uses takeover arbitrage in Australia to generate consistent double digit returns devoid of the volatility that typifies capital markets.

Well-managed productive land in investment-grade scale also strikes me as a very sound option, especially in an environment of continued monetary debasement. This is what we’ve done in Chile– we’re growing a LOT of food… and if the investment thesis isn’t 100% correct, there’s still a lot of personal benefit.

There’s also the option of applying the ‘buy and hold’ strategy to certain frontier markets– accumulating a basket of select, high quality equities in a place like Mongolia where you can walk away for five to ten years while the economy grows like a weed.

Next, Frank asks, “Simon, year in, year out, I seem to be in trouble with the IRS. Last year I took the step of obtaining a second passport from St. Kitts, and I’m seriously considering walking away from my US citizenship in the hopes that they’ll leave me alone. Is this a reasonable supposition?”

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