Whitney Tilson says big-cap blue chips are smart and safe investments for the potentially lean coming years.
Whitney Tilson is the founder and managing partner of T2 Partners. He explains what investors should be doing in an economy that isn't likely to have a double dip or a strong, V-shaped recovery.
Wallace Forbes: Can you share with us your big-picture views?
Whitney Tilson: Sure. We're bottoms-up stock-pickers, but we also factor in our overall view of the world. That view right now is, to quote Ben Bernanke, things are "unusually uncertain." There's a very wide range of potential outcomes. We're hopeful for a wonderful V-shaped economic recovery, but we don't think that that's very likely. There's a chance for a nasty double-dip, but we don't think that's very likely either. To quote GMO's Jeremy Grantham, we think the most likely scenario is "seven lean years." That simply means there is a lot of deleveraging that needs to take place--particularly among governments and consumers (corporate balance sheets are actually in very good shape)--in the aftermath of the bursting of the greatest asset bubble in history. It's going to take a while to work our way through our problems.
In light of this, we're playing defense on the long side, looking first and foremost for safety: companies with strong balance sheets, market positions and cash flows. So even if economic growth is weak, they will still be able to generate decent growth. The good news is that normally you have to pay up for high-quality companies like that, but today quality is on sale. Big-cap blue chips are one of the only areas in the marketplace where we're finding attractive risk-reward equations. So that's the long side.
On the short side, the expectation of QE2 by the Fed has caused a big burst of speculation, and animal spirits have returned to many pockets of the market. We actually think our short book is the most attractive it's been since we've been managing money over the past 12 years, with the exception of early 2008, when we went short financials, real estate and other highly leveraged companies.
That was a once-a-century shorting opportunity, and we didn't miss it. Today there's all sorts of froth, nonsense and speculation in the marketplace, if you know where to look. In summary, we think we have a get-rich-slowly, safe, defensive long book and a get-rich-quickly, massively over-valued short book.
Forbes: Interesting. Now you had mentioned the quote of Jeremy Grantham of "seven lean years." Do you anticipate that long a period ahead for this kind of environment?
Tilson: I think he's probably counting the fact that we've already had three lean years, so my guess is we have at least another two to five years of high unemployment and below-normal GDP growth--say in the 0% to 2% range GDP growth and north of 8% unemployment. My guess is that is our fate for a number of years. I hope that I'm wrong and am being too conservative.
Even if I'm right, this is not a disaster scenario. Eighteen months ago was a disaster, and we were on the brink of Armageddon. Today and for the foreseeable future we're just in a muddle-along period, where good stock-picking and being conservative will pay off.
Forbes: Can you give us some specific investment recommendations to take advantage of these circumstances?...MORE