Sorry for being such a pessimist

A few readers have questioned my pessimism after posting Stay Prepared for an Aussie Recession. With a headline like that, I guess, it's hard not to seem pessimistic. I've created the wrong impression, though.

My view is that you (and we) should be mostly invested most of the time. See Buffett Warns Investors on the Perils of Cash, for example. And there has been more money lost than gained by people trying to pick the next recession.

In the Australian Fund we have oscillated between 10% and 20% cash over the past few years. That level of cash is perfectly normal for opportunistic investors like us and I'm as optimistic about the current portfolio as I have been for a while.

Having created the wrong impression, then, I'll give it another shot.

I'm not predicting a recession. I'm not shifting the whole portfolio to cash.

To borrow a concept from Nassim Taleb, I am trying to create a portfolio that is robust against the risk of a recession.

I want us to be invested. I think there are plenty of opportunities to invest our clients' money and earn very attractive returns. I just don't want too much exposure to the Australian economy.

That means I demand an extra margin of safety when looking at discretionary retail stocks, as well as Australian financials, housing and anything else dependent on Australian consumers. We will buy them, if they are cheap enough, but we require a higher-than-usual expected return, because we think the risk is higher than usual at the moment.

If the economy sails through just fine, our portfolio of cheap stocks should produce more than adequate returns. If a recession hits, the damage should be minimal. And that's all we're trying to achieve.