Gaffer's Portfolio 

February 26, 2010

Had it not been for diversification, the past month's news about Toyota would have been much more disturbing - especially after one of the leading commentators assured everyone Toyota would declare bankruptcy.

If that had been so, the portfolio would have lost less than 5%. Without diversification, though, I like many others would have had a white-knuckle flight. Many sold; in time I think that will prove to be a mistake. Toyota will fix its problems, repair its image and be back on top with even better and more reliable cars.

My former wife owned a Toyota years ago (and a different one now). Four years after she bought it and had no trouble with it a group of engineers arrived from Japan to inspect it (and presumably others) for rust. They gave her a rental and four of them swarmed over her car for an entire day - finding nothing wrong. A company that gives customer care way beyond the expected will survive its present costly difficulties and prosper. Toyota stays in the portfolio.

Of far greater concern to all of us is the battle between workers and governments in Europe and elsewhere. I'm not sure how seriously people view it just yet. Not seriously enough, I think.

Spain, with huge unemployment, wants to increase the retirement age to 67 to preserve pension funds. What will they do with those extra young people who remain unemployed, swelling those ranks further because older people say put? Riots in the streets. This is just one country in recent headlines, including France, the UK and various others clamoring for more money.

Increased wages mean increased prices and customers are tapped out. What happens when two immovable forces collide?

But governments, some literally, are bankrupt. Portugal, Ireland, Spain and Greece. (So is the U.S but the Capitol Hill hasn't woken up to the fact yet; it thinks it's a state problem! Only those up for reelection seem to recognize the inescapable problem.)

We have enjoyed a reprieve from another Great Depression but don't count on the big bad bear to be gone forever. If or when it returns, just keep on dollar cost averaging and buying good companies at ever cheaper prices. Time and severe belt-tightening will eventually fix what ails us now - though it will be a rough ride.

Expect the U.S dollar to be devaluated at some point, maybe by as much as 50%. The Chinese have dumped some of their horde of U.S T-Bills already and there is nothing of substance to back up the U.S dollars now being printed furiously. The Chinese currency is seriously undervalued. One way to fix that, since the Chinese don't see it to their advantage to do so, is for other countries to devalue.

It's a mugs game being played out all over the world but hang tough; unless the world ends first, we will come through what lies ahead.