November 28, 2008

A few recent articles have caught my eye about the potential for inflation to spike up in the next few years, as a result of the financial bailouts.

This quote from Seth Karlman from Street Capitalist, with the orginal post here.

We think inflation could become out of control in 3 to 5 years. Yet, we might not wait for that position. Hence, perhaps early, we have a large inflation hedge. We don’t own gold as a commodity. We won’t disclose our inflation hedge, yet with enough work, you can find true inflation hedges.

And this comment from International Value Advisers’ Charles de Vaulx in the latest issue of Value Investors Insight

Do you still have an affinity for gold?

CDV: Yes. As governments throw significant amounts of money at the economic crisis, that will eventually push inflation higher. We want to have some gold in our portfolio – it’s now a 4.5% position, virtually all in bullion – as that happens. There’s a saying that you should not confuse a clear vision with a short distance. We’re willing to own gold even though it may not act as a hedge in the near future, because we have a fairly clear vision about what will happen to inflation three, four or five years out, and it’s not a pretty sight.

Pershing Square Letter to Investors

November 18, 2008

Scribd has a copy of Bill Ackerman’s letter to investors. It is a good read with details about specific investments, their attitude to investing and how they operate their fund.

Here are a few excerpts:

Current market

We are currently witnessing the greatest deleveraging event in history.

These actions have led to forced and indiscriminate selling in security markets around the world, which in turn has caused other investors to panic or simply to sell, to get out of the way of other forced sellers.

As such, it may be reasonable to conclude that the forced liquidation that is now taking place may not be a prolonged process.


Our strategy is to seek to identify businesses and occasionally collections of assets which trade in the public markets for which we can predict with a high degree of confidence their future cash flows – not precisely, but within a reasonable band of outcomes. We seek to identify companies which offer a high degree of predictability in their businesses and are relatively immune to extrinsic factors like fluctuations in commodity prices, interest rates, and the economic cycle. Often, we are not capable of predicting a business’ earnings power over an extended period of time. These investments typically end up in the “Don’t Know” pile.

Risk management

Our simple approach to investing also allows us to avoid complicated approaches to risk management. Our investment strategy does not require us to open offices all over the globe. As such, we don’t need traders working around the clock. We can go to sleep at night and sleep. Our weekends are largely our own (Ok. I admit it. I am writing this letter in the office on Sunday.) Our risk management approach is to: (1) put our eggs in a few very sturdy baskets, (2) store those baskets in very safe places where they cannot be taken away from us and sold at precisely the wrong time due to margin calls, and (3) to know and track those baskets and their contents very carefully. We call this approach the sleep-at-night approach to risk management. If I can’t, we won’t.