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Valuation Comments – November 1, 2013

November 01, 2013
by Kal
active investing, best asset classes
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A cautionary note about valuations in the current market environment.  Conditions are in place today for overvalued US equities to get more overvalued.  Persistently low long term interest rates and a “highly accommodative” monetary policy encourage investors to pay more for every dollar of earnings.  Note that equity investors, who have not been paid in recent years for taking equity risk, are being paid exceptionally well in this environment.

We maintain full equity exposure today but protect clients by having above-normal allocations to undervalued non-US equity markets and below-normal allocations to US equities.

Conversely, bond investors have been paid exceptionally well in recent years for taking bond risk and should recognize that they have been benefitting from artificial support from the Federal Reserve.  These exceptional bond gains will be given back once this support is gone.  All holders of income oriented investments should expect to be impacted, as prices for these investments adjust to the new interest rate environment.

We maintain full bond exposures today but avoid owning Treasuries and long duration bonds.

About the Author
At The Headlands Group, we are committed to making high probability of success investors. We transform client concerns about financial markets into the confidence that comes from knowing their investing experience will be a successful one. If we can succeed in getting clients to avoid “easy and popular” and allowing us to do “difficult and unpopular” on their behalf, we have made them into the “house” at the market casino and improved the odds that they will be successful over their investing lifetimes. We believe our clients perform better than most large institutions – despite not having the same investment resources.
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