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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


Why We’re Buying In This Market: Part Three

From the June 2010 Letter to Tarpon Folio investors by portfolio manager Cale Smith. The rest of this series can be found here.

The Downside

This next point in particular seems to be getting lost in all the noise.

Let’s assume for the sake of the argument that I am horribly wrong, and that the economy continues to dive right into a double dip recession. Let’s tack on other assumptions, too, including a double dip in Europe (which does seems likely, though no one is talking about it), persistently high unemployment and a bleak outlook for home prices. Let’s also assume our political leaders remain reasonably rational in their response to this scenario – or at least that they fake it for a while.

Should a double dip occur, even under those circumstances, it’s hard to see it being anything other than a mild recession.

Housing is already near a bottom, banks have already been re-booting themselves with new capital, and big companies have already gone through rounds of deep layoffs – and they’re sitting on historically high piles of cash. And whether you’re a supply-sider or a Keynesian, that we’re coming up on election season means that a double dip will certainly not go unaddressed in D.C.

So even if I’m wrong, I believe the downside is limited – at least in terms of investing. You are on your own if you quit your job to flip condos in Vegas again.

This, by the way, is also why you need a margin of safety in the companies you buy shares in, too – in case things go south for reasons you don’t originally contemplate.

Lastly, pundits calling for the end of America and/or a great depression are being, in the strictly academic sense of the word, asinine. You feelin’ me, Krugman? How about you, Elliott Wave guy? No more crazy talk outta either of you. We are America, dammit – the land that brings you moments like this:

(Wait for it….wait for it… and watch the guy in the lower right.)