Friday File: Fairfaxes, Blackbirds, Nodaks and more

Buying and selling in the Real Money Portfolio -- adding exposure to India and the Montney, Selling some Insurers, and updates on small speculations

By Travis Johnson, Stock Gumshoe, October 15, 2017

When the market is doing well, holding hedges like cash and gold is going to hurt your portfolio performance when you measure against the S&P 500 or other common benchmarks. That’s the case for me right now, and has been for the recent past — though it hasn’t been enough to bring me below the S&P 500, at least. My portfolio performance as of earlier this week (including all of my diversified funds, not just my individual equities) shows a return of 16.8% year to date and 12.3% for 2016, compared to 15.4% and 12% for the S&P 500 total return for those time periods (including dividends, in both cases).

So that’s clearly not fantastic outperformance, but it makes me reasonably pleased — I think of my gold and mining exposure, which is roughly 14-15% of my individual equity portfolio right now — as a hedge against crisis and against perpetual currency depreciation (though good companies are a better inflation hedge than gold, over time, since they can raise prices), and I think of cash, which is currently 6-7% of my portfolio, as an “optionality” hedge that gives me the opportunity jump on things that look interesting the next time the market freaks out or we have a real bear market decline. If I can keep doing as well as the overall market while still keeping meaningful exposure to gold mining and to cash, with some investments that offer significant speculative upside over time, I’m pretty happy.

(That’s all as tracked by Personal Capital, by the way, which is that rarest of beasts: a Stock Gumshoe advertiser that I personally recommend, despite the fact that I try pretty hard to avoid giving the impression that our advertisers are endorsed by us in any way. Not to put too fine a point on it, but I use the service every day and if you decide to try their service, then they pay Stock Gumshoe. Simple, and quite clearly I’m biased when it comes to this service.)

So… what do I have to write to you about today, with hopes that it will help my portfolio continue to beat the market and be interesting? I have a few more options positions that I’ve added to the portfolio recently (more on that in a moment, I don’t usually write much about them because I can’t recommend options trades to a large group of people — but I did get a question about that this week), but now I want to focus on India and take a look at the Fairfax India Fund, which has come up a few times during my discussions of Papa Fairfax Financial Holdings, and which, to cut to the chase a bit, I’ve just added to my personal portfolio.

I’ve been thinking about India quite a bit in recent months, the large country that is perennially the “should be amazing” part of the emerging market world, along with Brazil. The case for India is always pretty much the same: So many people. So many young people. So many educated young people. Such an entrepreuneurial culture. Such a huge runway for growth they can have if they clear up the corruption and stagnation of their bureaucracy and channel the energies of the that young population into an economy that works for everyone.

Is it going to happen now, under the sometimes worrisome regime of Modi? It kind of looks that way to me… or, at least, they’re making more progress on many fronts than we’ve seen in a long time, but we are also at a bit of an inflection point when it comes to Modi’s attempted reforms — India has both attempted to slow the black market by recalling all their high value bank notes (often referred to as the “shock demonetisation”), and attempted major (and rapid) tax reform by replacing a lot of confusing tax systems with a goods and service tax that also turned out to be plenty confusing, with quite a few hiccups in the implementation.

That has led the government to be in a bit of a panic, frankly, as tax receipts are way down from what was expected, and economic growth has slowed partly because of demonetisation confusion that hit smaller businesses, and has worried some folks that if the revenues come in light the government will cut spending on needed infrastructure at a time when that economy really needs an infrastructure boost both for stimulus reasons and because the core infrastructure is simply inadequate for a nation of a billion people.

There is plenty of criticism of the Modi government — even when it comes to his handling of the economy, which was supposed to be his strength, so we shouldn’t assume that all is rosy… the stories about growth being “stunted” because of government mismanagement are easy to find, as are worries about possible spending cuts and failures of the new tax system, but Prime Minister Modi maintains a high level of popularity, if not as high as it was a year ago, and I expect reforms will continue to be pushed — along, probably, with more government spending on stimulative infrastructure.

India does not have the clean appeal of China for an investor, because it’s perceived as a highly fragmented and bureaucratic democracy that’s hampered by tradition and laden with layers of baksheesh — China, as an authoritarian state dominated by state-owned industries with a strong “what’s good for the country, not what’s good for the individual” mindset (except the individuals who are high up in the party or in state-run industries, of course), can act much more quickly and make its corruption and bribery much more efficient. It also doesn’t have those high-profile headline-generating tech companies like China’s Alibaba (BABA) and Tencent (TCEHY).

But India does have what China lacks: A young population. China’s population controls have made the country more sustainable than it was 50 years ago in terms of resource utilization and space, but they will also tend to put a lid on its growth — much like in the US, where the slowing birthrate means that we require a lot of ongoing immigration to kept our working age population growing enough to support economic growth (and, in fact, to support government promises like Social Security). China is not in nearly as rough shape as the even-more-homogenous and anti-immigrant Japan on the demographic front, but it could get pretty bad pretty quickly if there’s anything to upset the population in China. Without a history of a retirement social safety net, China’s aging workers spend less and save more, which is great for capital formation but not so great for trying to build a consumer-led economy. China’s middle class is probably on the verge of getting squeezed a bit in the decades to come as it supports a larger and larger elderly population.

That’s not true of India — to give some perspective, the median age in India is about 27, Brazil’s about 32, China and the US a