November 2, 2013 Comments

On Friday the S&P 500 was up 0.3% and Toronto was down 0.2%.

Stantec was up another 5.7% and is now up a total of 65% this year making it the best performing stock on our list this year.

Berkshire Hathaway is updated and rated (lower) Buy at $115.27.

Berkshire is so huge that it is unlikely to provide an outstanding return. It should do okay and occasionally when it becomes more under-valued it can be a great investment. And right now it is probably a reasonable investment.

I follow Berkshire for what it (i.e. Warren Buffett) can teach me about investing in general.

An interesting point is that of Berkshire’s $458 billion in assets, and despite the fact that Berkshire is known for its huge investment portfolio, almost none is invested in U.S. Treasury BONDS. It has a large investment in U.S. Treasury bills which is where it keeps most of its cash and cash equivalents. But there is  a grand total of just $2.5 billion (0.5% of the assets) invested in U.S. Treasury bonds. This is an especially low figure when you consider that most U.S. insurance companies keep a large portion of their assets in U.S. government bonds. Berkshire has only 6% of its assets in fixed income of any kind. This compares to 23% of assets in equity securities. Most of Berkshire’s assets are invested in wholly owned businesses. Of this 6% invested in fixed maturity investments, most has a term of five years or less and very little has a term of over ten years. Buffett has said that long term bonds are a terrible investment at this time. He practices what he preaches (and also preaches what he practices).

Conventional advice is to always have a significant exposure to fixed income. However, keep in mind that not all fixed income is created equal. Most fixed income investments such as medium and especially long term bonds may be fixed income but they are not, by any means, fixed in market value. To the extent that preferred shares are considered fixed income, they often behave very much like long-term bonds, they are in no way fixed in market value. (Shorter term preferred shares with much lower yields may be relatively fixed in value).

Also keep in mind that the three main asset classes are, cash, fixed income and equities. Dividend paying stocks should be considered to be in the equity category even though they pay an income. Preferred shares are something of a hybrid but should probably be considered to be fixed income. Preffered shares are unlike bonds in that they may never mature and that makes them far different than bonds.

If Buffett is right (and it’s ALWAYS wise to assume that he is) then it would be wise to keep fixed income investments to the shorter maturity and to favor preffered shares over bonds. Personally I have been content to hold more cash than usual and in some ways that is in lieu of fixed income. Cash in my investment accounts pays up to 1.25% in accounts like TDB8150 (see list above), although most of my cash pays me nothing at all. Cash (the portion that pays nothing) gives me instant availability in case I wish to purchase stocks. Cash and deposit accounts provide complete stability since they do not decline in value if interest rates rise.  To my mind those advantages outweigh the tiny extra return I could get by holding fixed maturity investments in the two to five year range. Many preferred shares pay substantially higher interest rates but those that do (perpetual preferred shares) would fall in value if interest rates rise. I consider preferred  shares to be an alternative to equity investments and not an alternative to fixed maturity / cash investments.

At this time (of record low yields) I would avoid bonds and avoid perpetual preferred shares. For income I would favor higher dividend paying equities or simply selling down equities as cash is needed. For the portfolio stability features that bonds are often meant to provide I would prefer cash and deposit accounts. Regarding preferred shares an exception might be if the tax advantages were important, for example where they are held in a taxable account and especially if a lack of other income can result in substantial preferred share income at a low tax rate. I simply see no place at all for long-term bonds at this time.