We follow three guiding principles in our work. Avoid stampedes in the markets, find what we believe to be the biggest bargains, and seek to “own the orchard for the fruit crop.” (The orchard analogy for income-producing securities is apt, since neither crops nor dividends are guaranteed.) In this letter, we will explore how these principles apply to one question that seems to be quite common these days. The question is whether the stock market is simply “too high,” based on the move up from the panic lows of 2009.

Our first principle, avoid stampedes in the markets, is based on our understanding that the stampede is usually going the wrong way. There was a stampede into tech stocks in 1999, which ended badly. There was a stampede into real estate in the early 2000’s, which ended badly. There was a stampede into commodities after that, which ended badly. In short, major peaks are usually accompanied by a stampede of money that drives prices to extremes. Our observation is that there has been no stampede into stocks yet, no overwhelming volume of money driving prices to ridiculous levels.

Our second principle, seek the best bargains, lets us sort “the market” into its pieces. The three major asset classes are stocks, bonds, and cash alternatives. Cash and its alternatives currently earn zero-point-nothing interest rates; bonds are barely better. Diving one level deeper into stocks, we find that some sectors and industries are expensive and others appear to be bargains. For example, natural resources in most forms have seen falling prices for several years. Oil is about one-third of the 2008 price; copper is near a decade-low; the price of iron ore has been falling for four years. So stocks in the largest global natural resource companies are as low as one-third or one-fourth of the peak prices of a few years ago.

As a counterbalance to natural resource companies, we have found potential bargains among companies that benefit from low energy and resource prices: selected automakers and suppliers, airlines, trucking companies, and manufacturers. While “the market” may or may not be too high, these companies certainly do not appear to be too high.

Our third principle is to seek to own the orchard for the fruit crop. Portfolio income is an important component of total returns, and those among us who rely on our portfolios to buy groceries surely understand the importance of cash income. As noted above, interest rates remain very close to zero—we do not believe that bonds or cash alternatives are a good way to generate income these days. But we are currently enjoying generous dividends from many companies in the bargain sectors, including the oil and natural resource companies. Other holdings purchased in past years continue to pay regular dividends, from pipelines to telecom to auto stocks.

Summing up, this study of our principles leads us to say “the market” is not too high, particularly the sectors we currently own. No guarantees, of course, and past performance is no guarantee of future returns.

---

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

Stock investing involves risk including loss of principal.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

Investing in real estate involves special risks such as potential illiquidity and may not be suitable for all investors.

The fast price swings in commodities will result in significant volatility in an investor’s holdings.

Precious metal investing involves greater fluctuation and potential for losses.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

No strategy assures success or protects against loss.