The cash/flow model used by Pallas Athena requires a coherent grasp of the relation between the size and allocation of portfolio resources and the reasonable cash flow needs of the holder of these resources. The greater the certainty of the cash flows and the closer they are to the certain needs of the owner of the cash flow, the more control of time will occur. This means that in practice the equity allocation of the portfolio should, like a fine cheese or wine, always have the time requisite to develop its nuances without interruption.
Likewise, the income portion of the portfolio should be regarded as a goose laying golden eggs with some certainty, and not as a source for capital gains. Here the certainty of a maturity date is as important as the lack thereof is to equities. Income securities should be structured so as to make sure that reinvestment of principal will take place on a gradual regular basis that does not depend on impossible prediction of macro economic factors.
The uncertainty of prediction and the knowledgeable admission of this uncertainty leads to the paradoxical conclusion that time does not contract and cause emotional pain but rather stretches out rather equably. Such a situation makes it much more possible to make good decisions than when the hourglass is always running out. The best decisions, investment and otherwise, are most likely to be made when the hourglass is filling.
At Pallas Athena we try to make sure that every equity security has a growing stream of net income that is not unduly reliant on various accounting entries such as restructuring, amortization, depreciation and tax deferrals. Companies that consistently pay taxes and stick to their knitting may be unexciting for journalists but are very exciting over time to bank accounts.
We also are not enamoured with leverage, especially the kind that makes executives lose sleep. We think executives are more likely to add value if they spend their time marketing and producing and leave debt management and creative accounting to their competitors. Finding really good companies, companies that combine earnings growth with a high degree of solvency, is like finding a needle in a haystack, but there are such needles and it is worth knowing about them. Fortunately, it is not necessary to have a huge number of them; it is just necessary to be able to let the ones held do what they do best more or less indefinitely. Income securities are chosen as financial instruments having the known characteristics of rating, maturity, currency denomination and yield.
Investing for income is as multi-faceted as investing for growth. The facets are different, but require just as much attention. Income assets should be clearly distinguished from those whose primary purpose is capital gains. Much effort can be expended trying to find hybrid securities which will both grow and produce income. Mostly such effort is wasted. Buying securities for either income or growth is a more fruitful strategy.
The amount of income or yield one can expect to receive from any income security varies inversely with interest rates. Academic studies have shown that investors, professional or otherwise, have been consistently unsuccessful in predicting interest rate directions. Cash flow and laddering management ensures the ability of Pallas Athena clients to take advantage of unforeseeable re-investment opportunities over time. As with equities we concentrate on a theoretically sound strategy that can achieve practical freedom from time and trading constraints imposed by having to predict the unpredictable.