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US as Quadruple-A --- America's best days lie ahead --- Ditto for the world

August 22, 2011

Tralucent’s views on equities in August 2011:

Spooked out, and feeling depressed and confused over all kinds of uncertainty such as the US debt downgrade by S&P, the US economy’s future and the European debt crisis, investors have thrown in the towel. The global equity markets have retreated almost 20 percent between July 5th and August 5th. We remind investors that the future has always been uncertain and that the US situation is totally misunderstood, and we urge investors to use the current weakness to add to equity holdings.

US as quadruple-A: The US downgrade is ridiculous, as the US should have a quadruple-A rating. Over the years we have learnt much from people with superior track records and one of them is Warren Buffet. It is important to note that before you get spooked over the downgrade, you should consider what he has to say about it: which is that the downgrade is ridiculous and that if anything the US ought to get a Quadruple A rating. We agree. We travel around the world and study strengths and weaknesses of various economies, and we have come to similar conclusions. If you think the US is bad, think about the rest of the world. Next time come to Africa with us … even Europe.

America’s best days lie ahead: It is impossible to explain the outlook of a nation as diverse and dynamic as the United States in one page, but we urge investors to think of the following excerpt from Berkshire Hathaway’s annual letter before they declare the nation dead:

“No matter how serene today may be, tomorrow is always uncertain. Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective. We are not natively smarted than we were when our country was founded nor do we work harder. But look around you and see a world beyond he dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”
– Excerpt from Warren Buffett’s Annual Letter to Shareholders, published February 26th, 2011

And same for the world: The billions of new consumers … nations full of capitalists…At this point, it is not just America, it is much of the world. The collapse of the Soviet Union unleashed billions of consumers and entire nations into a capitalist way of thinking that has significantly positive ramifications for the future. Mankind is headed for higher highs.

So what are we thinking? And what are we doing? As we write this, the S&P500 is trading at approximately 12 times earnings. Investors ought to pay attention to this valuation that implies an 8% earnings yield. This compares to almost nothing in the bank and barely 3% for the long bond. This clearly is an incredible bargain to be had. We at Tralucent are investing every bit of our available cash into the markets, and we recommend you do the same. The problems of Europe and a lot of others will not disappear overnight but let that not stop you from taking advantage of the bargains.

Successful investing is a mindset as well and we urge you to read between the lines of the Buffet note… those seeking a state of certainty prior to investing will never be able to experience it as nothing is ever certain. Investing will always be about making the most prudent decisions under various states of uncertainty.

Let’s do coffee or a beverage of your choice….If you want more information, give us a call and we will be happy to discuss any of these points further.

Equity Markets