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Bearing up

Last week, I lunched with a semi-retired colleague who is even older than me. A Cambridge graduate with an MBA from Wharton – the US university that claims to be the world’s first collegiate business school established 130 years ago – his views are not always reassuring. But as someone who has spent even longer in the investment world than me, it would be foolish in the extreme not to listen.

Let’s call him Peter – because that conveniently happens to be his name. Peter is a value investor – a student of the works of Benjamin Graham and a fan of Jeremy Grantham. He is also a bear – or at least has been for the last two decades.

But Peter’s point of view is that even bears can make money running long positions in a market they feel destined to trend downwards. And anyway, not every part of the market will be at risk from bearish sentiment.

Just now, he feels that value rests with the major multi-national businesses, which have been ignored in the rush to embrace emerging markets and other, more esoteric, smaller companies. These big businesses include, after all, the type of company that is quietly prospering on the back of providing goods and services into those lesser developed nations that are shooting the lights out in terms of economic growth. Some-thing of a no-brainer, I feel.

And he’s also bullish over gold. His is not the only argument I have heard promoting the virtues of the yellow metal. Technical analysts have been getting quite excited over the prospects for a resump- tion of the upward trend in the metal’s price. Even fundamentalists can point to gold’s attractions as a hedge against uncertainty – which exists in spades right now – and protection against inflation.

With the Bank of England deciding that economic stability is preferable to a higher cost of living, anything that gives even some sort of counter-balance to the ravaging forces of rising inflation is bound to be welcomed. Even government bonds deliver negative real returns these days. Indeed, it is the above-inflation- level yields of the sort of company Peter still considers worth buying that make them so appealing.

Peter, with his vast experience and considerable reading programme, is not the type to grab attention in a market that remains more momentum-driven than anything.

But I do find some of his insights quite revealing. Is it really true that the Fed now owns more US treasuries than anyone – including the Chinese? Apparently, the FT ran a story along these lines. So who might they offload this stock to? Who indeed?

It adds up to supporting my continuing theme that inflation will be with us for the foreseeable future. Perhaps the cost of living will not be rising at the rate we suffered during the 1970s or even in the early 1990s but it will insidiously be eating away at our living standards at a time when there is little prospect of incomes rising to combat these forces. Not a comfor- table prospect but one with opportunities nonetheless.

At a time when the attitude to risk seems to be softening, I suspect that the prudent course of action is to concentrate on greater certainty and blue-chip standards.

While I cannot detect bubbles on the horizon (OK, some emerging markets are looking toppy but compared with Japan in the late 1980s or technology shares in 2000, they are a steal), safety first sounds a good message to carry forward into 2011. I am sure Peter would approve.

Brian Tora is a consultant to investment managers JM Finn & Co


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