Once In A Lifetime

And You May Find Yourself Living In A Shotgun Shack
And You May Find Yourself In Another Part Of The World
And You May Find Yourself Behind The Wheel Of A Large Automobile
And You May Find Yourself In A Beautiful House, With A Beautiful Wife
And You May Ask Yourself-Well...How Did I Get Here?

Talking Heads - "Once In A Lifetime"

In my 50 odd years on this planet, I know I've heard the term "once in a lifetime" at least 150 times. Here is a list of once in a lifetime events, that all happened in the past decade. Thanks to Doug Kass who put it together. As we all know they happen with much more regularity than we'd like to believe:

Black Swan events over the past decade
• Sept. 11, 2001, attacks on the World Trade Center and Pentagon;
• 78% decline in the Nasdaq;
• 2003 European heat wave (40,000 deaths);
• 2004 Tsunami in Sumatra, Indonesia (230,000 deaths);
• 2005 Kashmir, Pakistan, earthquake (80,000 deaths)
• 2008 Myanmar cyclone (140,000 deaths);
• 2008 Sichuan, China, earthquake ( 68,000 deaths);
• Derivatives roil the world’s banking system and financial markets;
• Failure of Lehman Brothers and the sale/liquidation of Bear Stearns;
• 30% drop in US home prices;
• 2010 Port-Au-Prince, Haiti, earthquake (315,000 deaths);
• 2010 Russian heat wave (56,000 deaths);
• 2010 BP’s Gulf of Mexico oil spill;
• 2010 market flash crash (a 1,000-point drop in the DJIA);
• Surge of unrest in the Middle East; and• Last Thursday’s earthquake, tsunami, nuclear event in Japan.

At times like these, when a major crisis seems to be around every corner, I often get asked, "What should I do now?"

My answer is always the same; it's too late to worry about what has happened, but it's never too late to prepare for what might happen. And anything might happen. 

When building my own investment portfolio I spent an inordinate amount of time thinking about what might go wrong. I wasn't too worried about what might go right, bull markets tend to lift all ships, I wanted to focus on risk, what could go wrong. History is full of proof that risk is "same as it ever was." 

Obviously natural disasters have always been part of living on the third rock from the sun, and they always will be. There is little we can do to protect ourselves from the wrath of mother nature, other than not living in a flood plain, or on a fault line, or in the shadow of a volcano. We can build stronger houses and buy insurance, and that will generally work, until it doesn't.

On the other hand man made disasters generally arise from greed, fear, and the quest for power. Wars, the rise and fall of countries, and financial shenanigans are the main risks to any investment portfolio. These risks may manifest themselves in inflation, deflation, currency devaluations, and bull and bear markets. 

Nearly all of us in this country were born in a period of prosperity, and subsequently are rather complacent, but it wasn't always like that. There were generations before us that suffered through rather frequent financial upheavals. They survived, but it wasn't easy. 

In building my portfolio I tried to factor in as many of these risks that I could. The goal here was hedging risks and protecting principal. 

Here is a look at my current Personal Asset Allocation:

Real Estate (Home & Vacation Condo) 18%

Global Tactical Asset Allocation Portfolio 40%

Current GTAA Allocation:

US Stocks 20%

Int'l Stocks 16%

US REITS  6%

Int'l REITS 4%

Gold  9%

Commodities 10%

US Fixed Income  9%

Int'l Fixed Income  8.5%

Cash & Foreign Currency 17.5%

Municipal Bonds 14%

Additional Gold    5%

High Yield Portfolio    3%

Miscellaneous 10%

Cash 10%

Total 100%

While I may me fairly diversified, and even though I take a very active approach to asset allocation, I'm still nervous. The essence of a surprise is that it catches you off guard. I've mentioned numerous times how my number one worry is that the US dollar is no longer the worlds reserve currency. If this were to happen, I probably don't have enough invested in international securities (currently about 40%). I also worry about a confiscatory tax of some kind. At dinner over the weekend I told some friends that I was looking into opening an account outside of the US. Nothing major, just an account. They asked why? I didn't have a specific answer, other than if the time were to come when I needed an account overseas, it would probably be too late to open one. So I'm looking. If any of you have an overseas account let me know about your experience. Many foreigners have multiple accounts around the globe, and even multiple passports, we Yanks tend to be very US centric, to a fault. Being prepared is acting before the Money's Gone.

Thoughts On Japan:

Don't buy into the BS emanating from the mouths of some so called economists, saying disasters stimulate GDP. That the rebuilding efforts in Japan will help spur economic growth. We've heard this failed logic again and again. We heard it after Katrina, and we heard it after the BP oil spill, it simply is not true. Governments can't spend their way to prosperity.

Lets look a little closer at this argument. Let's say your window breaks and you can't afford to fix it. The government rides to the rescue and pays you to fix your window. Their rationale goes something like this; we borrow the money and pay you, you hire the window repair guy, he buys a new window from the factory, and the window factory orders more glass from the glass factory. A virtual cycle of prosperity. Except at the end of the day all you have done is replace a broken window with a new window, nothing has changed. If this virtual cycle actually worked you would break every window in your house to stimulate economic growth. And why stop there, just tear down the house, or the neighborhood, or the state...just think of the growth. Disasters are not additive to growth. It's Keynesian BS that says governments can borrow and spend their way to prosperity.

There may be a more dangerous implications of the Japanese disaster than the spread of radiation leaking from their power plants...the repatriation of their liquidity. Japan is the second largest owner of US treasury securities at $886 billion (China is at $1.2 trillion). If they decide to sell some of those securities, or more likely simply let them mature and ask for their money back, someone else will have to pick up the slack. This week Portugal had a horrible 12 month bill auction that sold at a yield of 4.33%, and Belgium decided to postpone its auction of 6 year bonds. It appears that the Japanese have other uses for their money, than funding other nations deficits. 

Here is an excellent piece penned by Michael Lewis way back in 1989, that shows how little things change over time. He does an excellent job reviewing Tokyo's 1923 earthquake, and questions how prepared we can really be if we ignore so many warnings. Scary good piece: michael lewis japan quake 1989

A word on the nuclear power plants. Until control of the nukes happens, they are out of control.

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.