Master of my own portfolio

There are so many things investors are supposed to be protecting themselves against; inflation, deflation, energy prices, protectionism, meltdown in the eurozone, meltdown in China and those are just some of the problems we may be able to foresee. The ones that will get us, of course, are the ones we can’t.

We’re taking on too much.

An article I skimmed recently offers suggestions for investors wishing to prepare for the end of the euro crisis depending on their appetite for risk. For the cautious it recommends eurozone government bond exchange traded funds, for the moderate it recommends European equity income funds, and for opportunistic investors it recommends emerging market funds.

The suggestions seem to be predicated in a positive outcome for the eurozone in the long-term.

Maybe the advice fits the scenario. But in other scenarios it could be disastrous: buying bonds ahead of a period of high inflation? Emerging markets before a Chinese hard landing? I’m just asking the questions, because I don’t think this way so I don’t know which investments fit what scenarios.

And I don’t know how investors focusing on the big picture juggle all these conflicting possibilities.

The ability to read the economy the way they must implies a kind of omnipotence that makes me doubt whether they really can.

Mortals, must surely have lower expectations.

That’s why I invest in businesses. Businesses are made up of people who should know their markets, and be specialists in what they do. They should be thinking about the risks they face, and what drives profit. They should be applying all their efforts to adjusting the business to the circumstances it faces to benefit their customers, employees and owners in the long-run.

It’s not my job to second-guess management any more than it is to second-guess the economy. If it were, I’d need to know as much as each individual running each company I owned. I’d need to be almost as omnipotent as the masters of the universe who can read the whole global economy.

The trouble with having an interest in the economy, and current affairs generally, is it can make you think you ought to be omnipotent, or even that you are. And this post, and my last one on cash and its alternatives, serve mostly to remind myself I’m not.

My job is to make sure the companies I invest in, and the companies I add to the Thrifty 30 portfolio, are set up to face an uncertain future.

I need to know:

1. Whether the managers have made good decisions in the past, and whether their incentives work in the interests of the owners, because those kind of managers often add value to a company.
2. The products a company sells will still be in demand for years to come, because if they’re not then the past, which we know, does not tell us anything about the future, which we don’t.
3. A company is financially strong enough to withstand the kinds of shocks companies typically experience bearing in mind some are more sensitive to events than others.
4. How to judge whether the share price undervalues the company, bearing in mind the preceding three factors.

We don’t need to be masters of the universe to succeed, mastering these skills is hard enough.