Slightly Worthwhile Addendum on Bonds

Over decades: how the foundation invests in equity-like assets should primarily impact its
portfolio. Yet any equity-oriented investment fund might post quotational losses in successive
years on occasion. [You may know Sequoia (not the superb venture capital firm but SEQUX), the
only money manager Warren Buffett recommended when closing his partnership c. 1969. From
Decembers 1972-1974, like others, they lost approximately 36% quotationally.

Was that a good time to invest with them? Well, over the next decade their cumulative return
exceeded 1,100%: over 3x the S&P 500’s. The best time to invest with good fund managers is
when they show poor marked to market returns generally and provided their net assets couldn’t
disappear due to borrowings. (J.M. Keynes noted timelessly, you know: market-clearing prices
can stay irrational longer than leveraged speculators’ solvency.)]

It can be upsetting to see stocks priced near 14x earnings fall 50% at the onset of a confidence
buster, then fall to 6x, 5x, 4x – unless we expect disturbances occasionally. Then amidst panic
we smile and buy bargains. Well, we do that if all our securities haven’t plummeted concurrently.
That’s one reason it can be best to underperform the Lehman Aggregate in primarily Treasury
obligations when credit risk is poorly compensated and to concordantly eschew any Agg-
mimicking fund. (Cf. www.yale.edu/investments/Yale_Endowment_05.pdf, page 14.)

-----------------------------------------------------------------------------------------------------------. Even if you

keep it, perhaps you would like to move some capital from ---------- into like a Bob Rodriguez-led
FPA “Core-Plus Fixed Income” account (www.fpafunds.com/fixedincome.asp) (accept no load) for
a worse yield with enhanced safety. That may slightly increase the probability that you’ll always
have 1+ subaccount marketably unimpaired in US dollars.

To boost that probability is an aim fine and possibly unsatisfactory, for consumption habits might
engender horrendous USD value declination eventually. You know bonds are valued partly for
modest correlation with stocks and other assets that withstand inflation best. Fixed income
holdings can be diversified across currencies in a sensible way nonetheless.

[FPA has favored US Treasury Inflation Protected Securities. TIPS are fine, though unreliable
purchasing power preservers given discretionary hedonic adjustments. --------------------------- is
similarly wedded to the US dollar, apparently committed to invest < 10% of its net assets in non-
US securities unhedged. Hopefully fears of a dreadfully inflationary resolution to macroeconomic
imbalances are unwarranted and yet neither fear nor hope undergirds investing. Given uncertain
potentialities, diversification is sensible when disparate securities are roughly equally attractive.]

Maybe you would like to move some of the fixed income portfolio into unhedged non-USD bills/
2
bonds of foreign sovereigns only when they satisfy all of 4 conditions: (1) citizens own > 50% of
the sovereign’s debt (little incentive to print money), (2) debt/GDP < 50% (enabling internationally
competitive taxation without inflation), (3) exchange rate isn’t terribly disadvantageous relative to
3
estimated purchasing power parity (PPP ) and (4) the security’s nominal yield and {its nominal
yield minus the sovereign’s highest estimated inflation rate in recent years} aren’t materially <
4
newest US TIPS’ coupon rate. (America federally, you know, fails condition #1. )

2
Hereinafter “debt” means public debt held by private investors (not within government).
3
Naturally PPP impacts long-term exchange rates non-exclusively. However #3 accords with primum non
nocere. Abiding by it we wouldn’t exchange USD for euro-denominated bonds now. Conversely we might
-------------------------------------------------------------------------------------------------------------------------------------------.
4
That’s column 11 divided by column 3 of Table OFS-2 (“Estimated Ownership of U.S. Treasury Securities”)
in “Ownership of Federal Securities” in the US Treasury Bulletin (fms.treas.gov/bulletin/index.html).

2007.03.30 – Note for -------- regarding Foundation – page 2 of 2