AN INVESTMENT STRATEGY FROM A BILLIONAIRE

[To The Point is honored to have legendary investor Robert Agostinelli tell us his investment strategy in what he calls "Obambi Land."]

With the zealot flame of blind activism taking advantage of the dislocation in the banking and real estate markets, we are faced with near unprecedented conflagration in the global markets that we all rely on to manage our wealth.

Absent this opportunist attempt to "melt" down the free market system  and impose a social democrat’s illiberal  and centralized dream on all Americans, my advice would be more measured. However this is not the reality with which we are confronted.

Recessions are a normal, indeed a healthy, element in the natural rhythm of an open market system. Our economy is historically very resilient and even with the pain of contraction, the rebound would without government intervention come more quickly than anytime in the post-industrial history of mankind.

This of course is understood by Mr. Obama and his team of "experts" charged with "setting the economy right" – hence the speed of their reckless intervention.

Now with looming taxes and spending at a rate and magnitude beyond any reasoned bounds, the weight on the economy could leave us in the doldrums for a sustained period of time. Apart from the long term erosion of our individual freedoms, protectionism (under the guise of support for the economy) will come and of course massive regulation.

In these circumstances the investment choices for the common man have narrowed measurably.

With the near certainty of significant inflation and uncertainty about asset valuations from our traditional "equity multiple" approach, one is reduced to a conservatism not seen since the 19th century.

The detachment between these valuations and the underlying investor confidence therein leaves us with a near term rush to "secure" liquidity and investments in securities which are in of themselves either liquid or naturally tack against the winds of inflation. For these purposes and in light of the banking crisis, traditional "liquidity" reserves of cash or near cash must be redefined.

As we witnessed in the Bear Stearns, Lehman and AIG debacles, cash or near liquid securities risk profile suddenly became a concern. The one benefit of both the "Paulson plan" and by extension Mr. Geithner’s "plan" is that the Federal bank guarantees have partially reassured markets as to this asset class.

Going forward, certain investors find it advisable to hold up wards of 50 per cent of one’s assets in cash or a mix of  non-US government backed bonds. For them, the sovereign risk of G7 nation state paper remain a reasonable bet, and yields for many are above current U.S. Treasury paper.

However – there is a growing body of both shrewd investors and sovereign nations who are going beyond this definition due to an even more dour view of the economic outlook.

In their mind’s eye these liquidity options have become a "risk" class due to the implicit devaluation of currencies due to the massive amount of money which will be printed to finance the irrational deficits, particularly in the USA, UK and western Europe. The dollar, sterling and euro will come under massive "valuation"  pressure in the near term.

In these circumstances there are only two hedges, gold or hope that nation states such as Japan and China will prop up debtor nation paper through increased purchases to protect their current holdings.

Even if this were the desire there are limits to their capacity and they know it. Hence the global rise in gold prices versus every major reserve currency.

This has been not only a function of increased speculation but rather a systematic build up of gold reserves by all G20 nations. This has not been the case since the 70’s and before that World War II. As one seeks liquidity, gold may in fact be the most viable of these said alternatives.

If these investors are right, the conventional view that the ore is "overvalued " at $900 will be dwarfed by these macro trends with prices rising to over $3000/ounce.

A good portion of the remaining portfolio  should be held in a combination of real estate or other hard assets save for the "qualifiers" cited below. These should be of the very best quality only.

While the bottom on real estate may not be known, quality always drops less.  Timed properly such holdings will remain capable of maintaining value in inflationary periods. Also despite the drop in commodity prices, energy reserves are currently priced attractively and will rise in accordance with inflation.

As for equity markets, this remains too volatile to play. Even the most seasoned experts are not clear on where values will stabilize. Until the economy begins to settle and the full weight of this "Obama mania" is understood, caution must be the rule of the day.

For the more sophisticated investor the real value in industrial holdings is in the leveraged loan market. The dislocation in value and market inefficiencies have led to real value opportunities. Less liquid but providing multiples of cash flow in the low single digits, the "real money" is playing here.

As for private equity and other alternative assets this too is subject too much speculation. Private equity investing should be reserved for those "in the know" who have the means to access the viability of different firm’s programs. This can be a safe harbor in these circumstances.

As for hedge funds, this is an industry that has outgrown its cutting edge reputation and become a leveraged follower of the market. While not as risky as the pundits suggest, (leverage ratios were well below most investment banks), the liquidation calls from investors has led to an irrational reduction in asset values.

These dynamics have also created the dangerous dimension where these "smart money" investors are powerless to operate in a sea of redemption calls. It is simply too uncertain and non-transparent to risk the plunge.

We will survive the irrationality of the polemic policies of Mr. Obama.  Ultimately the animal spirit of the American people will tire of his radical approach. When reason returns and confidence in our future is restored, the American economy will once again be the engine of global growth.

Let’s pray that the cost of this radical intrusion can be turned back before it costs future generations a portion of their posterity solely for the satisfaction of a small segment of Americans to "get even" with capitalism’s "invisible hand".

Robert F. Agostinelli is Managing Director of the Rhone Group, a private equity fund with $5 billion in assets.  He is a board member of numerous financial and civic institutions in Europe and the United States, including the U.S. Marine Corps Scholarship Foundation.