“Park Avenue apartments belong to the optimists”

We would like to repeat our longer term view: Valuations relative to bonds and cash are compelling. Following the worst decade since the 1920’s (all possible decades are included) we believe that the future of business is brighter and that equities will outperform alternative assets.

Our view about the financial system and the western world was emphatically presented in December 2008 in an environment of maximum pessimism. Indeed year 2009 proved to be one of the best in history. The courageous risk-takers took advantage. Year 2010 to-date has generated a correction amid concerns about the strength of the recovery and sovereign bond issues.

It has been a fact of life that human ingenuity, risk taking and entrepreneurship create wealth. The shareholder participates in this wealth creation mechanism but evidently undertakes more risk than by investing in fixed income assets. The lender who invests in bonds and deposits attempts to maintain the real value of wealth and has serious growth limitations. Real estate, commodities and consumer goods are essentially derivatives that redistribute the generated wealth. The asset allocation has to decide between growth and protection and determine the appropriate allocations in asset classes and currencies.

The dismal performance of equities in the last decade has altered the Post WWII equity cult and created a bond cult and even a gold cult. The excessive fear of equities has generated at present attractive valuations in contrast to the expensive ones at the turn of the century. The Cash of consumers, business and banks remains on the sidelines. Finally, it should not be forgotten that the stock market is not a hotel: we should feel uncomfortable when we buy if we want to invest at attractive valuations.