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November 30, 2020 | Margin of Safety is Job Number One

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

Bullish equity sentiment at 59.2% was at an eye-watering 40 points above bearish sentiment (19.4%) in last week’s Investors Intelligence Data. Heavily indebted amid high unemployment and low yields, a desperate retail crowd has once more joined long-always managers and funds all-in on equities, gold and cryptocurrencies that have no security of principal, due date or contractually prescribed income payments.  The exodus into the riskiest assets at record high pricing has truly been historic.  Lurching from one capital blow up to another, the financially undisciplined scoff at those who emphasize principal protection and margin of safety.  Hubris comes before the fall.

As economist David Rosenberg recently wrote:

You own bonds in the portfolio to manage your risk, so ignore those folks who tell you to dump your bonds because yields are too low. They are low because, as a price, the bond market is telling you that we are heading into a future of ultra-low expected returns.

There is inflation risk and duration risk in Treasuries, to be sure, but they are unique in their payment safety characteristics. They are the only assets where security and certainty of payment is assured and guaranteed.

The losses from February to March clearly recovered too quickly for financial wisdom to stick–all evidence that the bottom and final liquidation sale are yet to complete.

Komal Sri-Kumar, president and founder at Sri-Kumar Global Strategies, explains why he sees the current environment is better for bonds than gold. He speaks with Bloomberg’s Guy Johnson on “Bloomberg Markets. Here is a direct video link.

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November 30th, 2020

Posted In: Juggling Dynamite

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