The last quarter was dominated by images of popular unrest in Greece aimed at the government’s austerity program demanded by the Germans. As we have been saying since the beginning of the century, we have doubts that the Euro can continue to exist under its current form.
Cultural differences among the European nations create conflicts that make it very difficult for everybody to live under the same economic system. Everybody knows that about half of the Italian economy is underground, not many Greek residents pay taxes, (especially property taxes due to an antiquated and corrupt real estate valuation system), Spain and Portugal are reeling from their real estate bust (not dissimilar to the US) while German and French banks are loaded with debt belonging to PIIGS countries. (For your information the acronym PIIGS stands for Portugal, Ireland, Italy, Greece and Spain.) From our perspective, the Euro will continue to exist in its current format until the major financial institutions within the European Union are recapitalized.
It reminds us of an old joke about the Europeans: Paradise is where the police are British, the cooks are French, the mechanics are Germans, the lovers are Italians and all is organized by the Swiss whereas Hell would be where the Police are Germans, the cooks are British, the mechanics are French, the lovers are Swiss and all is organized by the Italians.
Meanwhile, politicians in the US are still negotiating the US debt ceiling situation. Republicans and Democrats alike refuse to compromise on the issue because they perceive that it will hand the other party an advantage for next year’s presidential election. Hopefully, they are playing poker rather than Russian roulette, as Warren Buffett said last week, since it would be silly to fail to act on the debt ceiling.
At Claret, given our bottom up approach in stock selection, we do not really take all these macroeconomic events into account. It does not mean that we don’t care. It simply means that we believe the stock price of any given company should tell us the tale regarding its value. Let us remember that “price is what we pay, value is what we get”.
As we stated in the last quarterly letter, we still expect some sort of a correction. It has been an unusually long time since a correction of over 10% occurred. The US debt impasse or the European contagion could well be the catalysts. In any case, given the size of both the US and the European economies, the Asian and South American growth rates, the persistent low level of interest rates and the extent of globalization, valuation is certainly on the low side.
We continue to believe that equities remain the better investment alternative for the time being.
For a light summer reading, we have selected a few quotes from well known (and some less well-known) writers, publishers, money managers and other personalities. Most of them reflect our investment philosophy and our beliefs in the way we conduct our business with our clients. We hope you’ll enjoy them as much as we do….
“When all men think alike, no one thinks very much.” -- Walter Lippmann (writer)
“You cannot escape the responsibility of tomorrow by evading it today.” -- Abraham Lincoln (American President)
"History is a race between education and catastrophe." -- H.G. Wells (author)
"To be conscious that you are ignorant is a great step to knowledge." -- Benjamin Disraeli (politician)
"The art of being wise is in the art of knowing what to overlook." --William James (psychologist)
"The wisest mind has something yet to learn." -- George Santayana (philosopher)
"The only place where success comes before work is in the dictionary." -- Vince Lombardi (American football coach)
"Patience is the companion of wisdom." -- Saint Augustine (religious figure)
"Have no fear of perfection--you'll never reach it." -- Salvador Dali (artist)
"Who questions much, shall learn much, and retain much." -- Eric Hoffer (philosopher/writer)
"Cherish youth but trust old age." -- (American Indian proverb)
"Laziness travels so slowly that poverty soon overtakes him." -- Benjamin Franklin (printer/author)
"Patience is bitter but its fruit is sweet." -- Jean Jacques Rousseau (philosopher)
"If I had to live my life again, I'd make the same mistakes, only sooner." -- Tallulah Bankhead (actress)
"Nothing is more dangerous than the idea, when you only have one idea." -- Alain (French philosopher)
"Doubt is not a pleasant condition, but certainty is absurd." -- Voltaire (author)
Knowledge comes, but wisdom lingers." -- Alfred Lord Tennyson (poet)
"Pennies don't fall from heaven; they have to be earned on earth." -- Margaret Thatcher (politician)
“Love all, trust a few. Do wrong to none.” -- William Shakespeare
Never believe anything until it has been officially denied.” -- Claud Cockburn (journalist)
“A specification that will not fit on one page of 8.5x11 inch paper cannot be understood.” -- Mark Ardis (professor)
“Be a good listener. Your ear will never get you in trouble.” -- Frank Tyger (columnist)
Laws are like sausages. It’s better not to see them being made.” -- Otto von Bismarck (German statesman)
“If you find something everyone agrees on, it’s wrong.” -- Mo Udall (politician)
On that last quote, we wish you all a good summer.