Canary in the coal mine

17 November 2018

Dear Fellow Investor,

Canary in the coal mine

General Electric was once the world’s most valuable company. It is now struggling to survive. The company’s leverage is extremely high  The company’s bonds have taken a hit and some of their bonds have been downgraded to junk status.

Weekly price chart of GE.

The problem is debt which was used to make disastrous acquisitions and fund over generous company pension plans, and high salaries and bonuses to executives.

This is why I am very wary of companies who take on high debt to expand.

This is why in the current environment of tightening liquidity and trade uncertainty,  my focus is on value rather than growth.

I want streams of recurring revenue, low or no debt and prudent conservative management.  The companies we hold meet this criteria and will survive the volatility.

Growth is a bet on the future while value is based on the present.  Witness the present collapse in the FANG stocks in the US.(Facebook, Amazon, Netflix and Google)  These are all great companies but their valuations are at extremes  It is not how great is a company but the valuation and the prudence of the management  that is important.

One good piece of news was reported on Bloomberg: Chairman Powell commented in the latest minutes of the Federal Reserve that the  housing market is slowing down in the US and he may pause his rate tightening policy. Also President Trump is meeting  Chairman Xi at the end of November in Argentina  to discuss trade. Should there be relief on these 2 fronts expect an end of year rally in world stock markets.

Invest well and grow your wealth
Bill

Critter today is a thirsty lion from South Africa.

Lions kill more than 95 per cent of their prey at night, and spend the majority of the day resting. Although they drink readily when water is available, they are also capable of consuming sufficient moisture from their prey and plants - making them perfectly adapted to their arid landscape. Yet despite this, lion numbers are decreasing significantly.