Controversy bubbled up last week as prominent blogger Michael Shedlock wrote an article that was critical of Peter Schiff, who, while being correct about several aspects of the financial crisis, may not have positioned clients at his Euro Pacific Capital brokerage firm to avoid the decline.
Shedlock, and a few days later
The Wall Street Journal
, had several testimonials from Euro Pacific clients who were down far more than the
in 2008, despite the head of the firm seemingly predicting the macro-economic events that unfolded. Between Shedlock's article and the
piece, Schiff posted a reply on
Central to Schiff's macro-economic theme has been inflation of some magnitude in the U.S. and the devaluation of the U.S. dollar. Schiff has also been a believer in the decoupling theory. In 2008, there was no inflation, more like an asset deflation, the dollar went up and decoupling did not pan out as many hoped it would.
It would be reasonable to question Shedlock's motives or try to attack Schiff's method or persona, but neither can help your money grow or protect your assets during a market decline.
Shedlock includes a Euro Pacific client's position page in his post, and the holdings are mostly a mix of various types of resource stocks (including energy names) with a lot of exposure to Australia, Canada and Singapore. The account is almost fully invested, and Shedlock calculates the decline to be 61%, which is consistent with a couple of clients the
I don't doubt the investment thesis of any of the names in this account, and I'm sure the logic behind each pick is compelling, but it is by no definition a diversified portfolio, not even close. In Schiff's defense, I will say that after reading his rebuttal and the
article, I am not sure that building diversified portfolios is the firm's objective. Hopefully, the clients knew that.
quotes an adviser from Virginia who says: "Mr. Schiff's investment strategy was a focused bet on a single outcome, rather than risk management for investors looking to protect assets from an economic collapse." He then goes on to call Schiff a speculator.
Concentrated bets, intended or otherwise, are something I have been writing about for as long as I have been writing. Concentrated bets in technology did people in at the start of this decade, concentrated bets in emerging markets, commodities and mining stocks did people in during 2008 and concentrated bets will do people in during the next investment mania.
Based on the portfolio posted by Shedlock, there was no allowance for being wrong. Or as Schiff might say, being early. Because Euro Pacific is a brokerage firm, it cannot publish performance, but, by all accounts, the results achieved for clients leading up to 2008 were outstanding, which makes sense because foreign markets were outperforming and the dollar was underperforming.
A decline of roughly 60% from the peak undoes a lot of the success from earlier in the decade, which is a very real consequence for Euro Pacific's clients and might not be made back so quickly even if the dollar and foreign markets start to strengthen.
My take here is that this is another example of a lesson not learned from the inflating of the technology bubble from 1998 to 2000. People temporarily made a lot of money betting on a narrow theme, relying on a specific outcome. And then it all came unraveled. I'm not sure how this was different.
Keep in mind, I agree with Schiff about the dollar in terms of direction, not magnitude. I also agree that looking out over a medium and long period of time, U.S.-based investors will be far better off favoring foreign-denominated assets. But
is not the same thing as owning "nothing but" with no plan for rebalancing. There needs to be recognition that nothing goes in one direction forever.
Reading all the commentaries, including Schiff's, it seems clear there was no exit strategy to implement. A plan for defense is crucial no matter how "obvious" something is.
The obvious outcome does not have to happen when you expect it. A great example of this goes back to Internet stocks. I would argue that the Internet has changed our lives more than the hype said it would, yet it has been very difficult for the average investor to make money off it.
There is nothing wrong with having unyielding faith in a specific outcome, but as history shows again and again, it makes sense to leave a little wiggle room in case you are wrong.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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