Should investors still be in "protection" mode for most of their assets?
To preserve capital when securities prices are too expensive, we try to be more discerning about being more global and less U.S. focused. It's pretty clear to us financial power is shifting in the world. That's not news to anybody, and it's important your portfolio reflects the understanding that growth is going to be Asian. We also have just a lot less equity exposure than if we thought we were in a more ordinary time. Instead of owning everything to be defensive, we think it's more important to be selective, because the business environment is tougher. Give me some funds that accomplish that.
We like focused funds that only own 20 to 30 stocks because many big-name mutual funds are really closet index funds that own a broad swath of businesses. Nobody has 200 to 300 good ideas. Our staples are mostly value funds. We own Third Avenue Value fund (TAVFX) and Longleaf Partners fund (LLPFX). We own Julius Bear International Equity (JETIX) for our global exposure. They put more emphasis on eastern Europe than other funds we've been able to find. Financials and energy make up an outsized part of most indexes. If you rode those down this year and moved out of indexing now, wouldn't you miss the recovery?
I wouldn't worry about missing the bounce on financials. That's an industry that's being fundamentally changed. If you look at their 2006 earnings, they look phony, to my way of thinking. Earnings were greatly transaction related, and we won't see that level of activity again. That put a lid on it. The returns on capital in banking and financial services we saw as recently as a year and a half ago we won't see for another 10 to 15 years. I wouldn't count on that industry recovering once these clouds pass. Energy is another story, but if you're concerned about missing the bounce in energy, then get out of the index and put it into energy. What kind of cash position should you have?
We have about 17 percent cash equivalents—money markets and short-term treasuries. We also have a lot of money in short-term bond funds to preserve cash and get a little income.