September 15, 2025

by David Maddux, CEO | CIO

We sent the following note to clients on September 5th.

Global Stock Diversification Is Working So Far this Year and Warren Buffett Is Stashing Cash

I wanted to share a brief update with you as summer has officially closed out and we shift to a new autumn season.

• International stocks have generated positive returns in recent years, but are particularly helping a diversified portfolio this year.
• Economy – seems to be rocking along, but investors seem complacent as some risk signals are flashing – including consumer credit and the tight interest rate spread between corporate debt and US risk free treasuries.
• Macro forces like tariffs, geo-political instability, Artificial Intelligence (AI) impacts and domestic political friction can each individually stir the pot.
• My focus remains on allocating from fact-based measures of value and erring on preparation over forecasting and allowing for flexibility.

International stocks have been an interesting positive so far this year as they are up 21.6%^ through August (represented by the All Cap World Index excluding US) while the classic US stock market proxies of the S&P 500 and Dow Jones Industrial Average are up 10.8%^ and 8.3%^ respectively.

Why this price change has occurred is hard to pinpoint, but the global economy has been signaling a low risk of recession (since January of this year per Ned Davis Research) and the US dollar has been depreciating against a basket of various currencies, which is a positive for US based investors in international stocks.

I have been re-reading Asset Allocation – Balancing Risk by Roger Gibson, for the fourth time, at least.  The foreword to the 1st edition is from Sir John Templeton, the famously successful “value” investor from 1954 – 1992, and the following nugget resonates –

Will this trend in international stocks continue or fizzle out like it did in early 2023 after showing some leadership?  My simple answer is I do not know and I may be jinxing this recent trend by writing about it, but regardless, remain focused on having a portion of the stock bucket invested internationally.  My view remains that these various international markets are fairly valued at an average Price divided by Earnings (PE) of 17 and Price divided by Sales (PS) of 1.7 vs. the US that is showing 26 and 3.3 on the S&P 500 (lower is better, all else being equal).  

Regarding the overall environment, I do not see anything in the economic data to highlight as some type of tipping point to a slowdown, but have a view that there is little margin for error in economically sensitive assets like stocks and corporate bonds.

Specifically on the domestic economy, the Federal Reserve Bank of Atlanta publishes their “GDPNow forecasting model [which] provides a ‘nowcast’ of the growth rate of the official [gross domestic product].”  This estimate is showing 3.0% annualized GDP growth for the 3rd quarter (https://www.atlantafed.org/cqer/research/gdpnow).  This model is a balanced prediction which makes the Fed’s interest rate strategy (to cut short term rates or hold) a tough decision.

Regarding the pricing of risk – a key area that I review regularly is the amount of interest that the lowest quality “Investment Grade” borrowers (BBB as opposed to AA) are paying compared to treasury bonds.  This chart below goes back 30 years and plots the interest rate difference or “spread” compared to treasury bonds.  The current ~1.0% spread is a historically low interest premium that these lower quality companies would have to pay, when the average has been closer to 2.0%.  An implication is that lenders are about as confident as they can be that there will be below average defaults amongst this lowest rung of the investment grade market (conclusion credit to Data Trek Research).

https://fred.stlouisfed.org/series/BAMLC0A4CBBB#

That does not imply that anything will change anytime soon, but with auto loan and credit card delinquencies at 18 year highs, as well as uncertainty around tariffs, we want to maintain both diversification within stocks, as well as some portion in short term risk free treasury bonds – especially for static portfolios or those distributing money for planned spending needs.  In other words, turbulence can happen at any time and once it gets started, we cannot know how long it will last until it is over.

Coincidentally, I have also been watching Berkshire Hathaway’s cash position grow to the highest in 35 years at almost 30% of total assets as Warren Buffett seems to be erring patiently (Cypress Capital).  This rising cash balance has historically been a marker for caution among Buffett acolytes.

In the spirit of being prepared for surprises, I want to share another nugget from Sir John Templeton–

Our average client is the most conservatively allocated to stocks since we started Brightwater 11 years ago.  This result is a function of a bottoms-up process at each client level, but is interesting to note.  Generally a favorable stock market over this time period has allowed for financial plans to have the flexibility to reduce the volatility of stocks and higher interest rates in the treasury bond market have provided an attractive alternative at the edges.  As a result, I have tried to hold the line on some mild underweighting toward stock targets since the summer of 2024, as risk seems mispriced and there seems to be a general complacency in investor psychology.

Please message me if there is anything I can clarify or if you want to compare notes in detail.  In the meantime, my focus remains on allocating capital toward fact-based measures of value and erring on preparation over forecasting, which should allow for flexibility to step through a variety of environments.

This letter is tonal in nature.  We use model portfolios and apply consistent thinking, but each client has a separate portfolio and there are many reasons for exceptions, like tax basis, planned distributions, heirloom holdings, preferences, size of the account, etc. 

Brightwater Advisory, LLC is an SEC registered investment adviser* with its principal place of business in Tampa, Florida.  This letter contains general information pertaining to our advisory services. The information is not suitable for everyone and should not be construed as personalized investment advice. This letter contains certain forward‐looking statements (which may be signaled by words such as “believe,” “expect” or “anticipate”) which indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward‐looking statements. There is no guarantee that the views and opinions expressed in this note will come to pass.

Investing involves risk, including risk of loss, which an investor must be prepared to bear.  We manage investments based upon factors which may include, but are not limited to, a client’s investment time horizon, income, net worth, attitude toward risk and investment knowledge. Therefore, it is important for clients to inform us promptly if there is a substantive change to his or her risk capacity, including financial situation. In addition, if goals and objectives have changed, please let us know immediately. Indices are unmanaged. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index.  

^Past performance is no guarantee of future results.

For additional information about us, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure web site.

*Registration as an investment adviser does not imply any level of skill or training.