Magical Kingdoms

I must confess that trips to Disneyworld have not been high on our family’s vacational agenda, and, indeed, a quick four-day jaunt in March with two of our children marked only the second time that I succumbed to this distinctly American cultural destination. As is the norm for my travels, I discovered some things directly applicable to the investment business, and as such, feel compelled to share them with you.

Think Global. Disney is teeming with folks from other countries, and according to staffers I spoke to (off the record, of course) they are increasingly among the most enthusiastic and loyal customers that the resort attracts (read: they spend a lot of money and come back often). I am reminded of this every time another protectionist bill is floated in the Senate or another restriction is proposed to the non-policy that is the U.S immigration posture. The U.S needs to be encouraging smart, hardworking and enthusiastic people to come here, work and pay taxes. Domestic economic, religious and cultural freedom is one of the few remaining U.S. edges in the era of globalization, and we should be playing that card for all its worth. Where would we be right now without foreign financial investment in our debt-laden economy? Have a look at FRODOR (foreign ownership of U.S. debt, not a character from Lord of the Rings) .

Gold Rules. This is particularly apt considering it is a theme we have had here since 2003—prices for goods and services are rising globally, and there are is no better way to hedge (and profit) from that trend than owning gold, gold-themed exchange traded funds and derivatives thereof (like mining stocks). A no frills base ticket to a park in Disney’s kingdom costs $60 and the place was packed during a few school days in March. Gold has fascinated for centuries, but I like it for what it is telling us about inflation and the dollar. Gold tends to do quite well in inflationary environments and it hedges against the dollar, which is one of my favorite long-term themes: the US current account deficit and “guns and butter” spending is not a formula for currency appreciation. The dollar, as “reserve” currency (meaning it is the most widely accepted, after gold) generally moves in the opposite direction as gold, and is instructive to keep updating this chart.

Anticipate Change. Be sure to separate Disney the theme park in Orlando in your mind from Disney the stock. (DIS), which has actually declined in price over the past five years. I cannot speculate why this is so except that there must be many other parts of the Disney kingdom that are run less magically than the one in Florida. What I can say about the latter is that acute attention is paid to the cultural and entertainment needs of its customers. New attractions roll out on a regular basis and old ones that draw less are retired or refurbished. Menus are constantly being updated, and while the resort offers food that is bland, it is fresh and well prepared.

It was a contrast to the drumbeat of news in March about the undoing of GM. Indeed, lack of foresight and failure to respond to changing world markets is sorely lacking in the U.S. industrial complex, particularly the automotive one.

Ford and GM’s formula for rolling out cars that are expensive to make, unattractive to consumers and inferior to foreign competition has disastrous consequences, which will rebound through the U.S. economy for years. I pick on the automakers because they are such a large part of U.S. industrial production—and what a volatile and poorly planned production cycle this has been in the U.S—just look at the inter-year swings.

Looks a little like the stock chart for Disney, doesn't it?

For the quarter, the S&P was up 4.21% and the Balanced Composite index was up 2.96%. Most of our accounts recorded gains in this quarter averaging 3.11%. I believe the market is way ahead of itself—many observers were calling for a 5% return for the S&P for all of ’06. We remain defensive and are determined to catch the business cycle turn as early as possible; we will give up some returns now, in order to achieve that goal.

My final observation is there is truly no magic in the investment business—you have to keep asking the right questions to many different people and draw conclusions from experience, not from out of a hat. In the end, it is focus, not hocus pocus, which defines our financial kingdom.