Healthy Avoidance

This morning the FT had this little snippet that Warren Buffet is buying US corporate debt and foreign sovereign debt. I chuckled to myself because this is what I have bought for clients of late. Specifically in the last six months I’ve bought paper from Hewlett Packard, Eli Lilly, UPS and Norway sovereign debt (I had Norway debt mature in May and I bought some more) all maturing in 2-4 years.

What I think Buffet is doing and what I know I’m doing is simply avoiding what appears to be the least attractively priced part of the market, that being US treasuries. Buying expensive treasuries would not be a death blow as you would get the par value back at maturity but if yields are low and on their way higher then buyers risk holding onto a security that drops in value and is paying a below market yield (after rates presumably go up).

Keeping the maturity short and buying things other than US treasuries helps avoid this problem. A recurring point to my writing of late has been avoiding the least attractive part of a market or the riskiest, depending on what we are talking about. For example, a couple of years ago when the financial sector grew to be more than 20% of the S&P 500 and the yield curve inverted it made the sector very risky. Currently the very low yields combined with the printing of money over the last few months makes treasuries, at a minimum unattractive and maybe makes them very risky. As opposed to trying to be right about the fate of treasuries over the next couple of years I think it makes sense to avoid the space altogether.

Avoidance can be a powerful ally in navigating market cycles. It is probably a lot easier for most folks to recognize when something is unattractive versus picking the right stock.