Safe is the New Dangerous

© Can Stock Photo / onepony

We strive to see the world as it is, and act accordingly. Going by the textbook and implementing conventional wisdom without testing it against actual conditions is not in our playbook. What we see today is nothing short of astonishing—for two reasons.

“Safe” has become the new dangerous. We are astonished at how the investment world appears to be upside down in some respects. And we are astonished that so few of us seem to have noticed.

During the year 2000, the technology-heavy Nasdaq Composite index fell over 39%1. This crushing of technology and growth stocks at the start of the millennium and the financial crisis that arose just seven years later drove fear of the stock market deep into the psyche of some investors. Consequently, we believe there has been a flight to safety that has created some real anomalies.

Yields on long term government bonds and high yield corporate bonds have fallen to near historical lows not seen in over 50 years2. It isn’t just in bonds, either. Supposedly safe stocks appear to be the most expensive part of the market.

Standard & Poors reports that the market average price to earnings (P/E) ratio is about 18. Food companies, shampoo makers, toothpaste sellers, medical supply companies and utilities are priced at a premium because those lines of business are assumed to be recession-proof…you know, safe. In an 18 P/E market, these companies are priced at 22, 25, 30, or 34 times earnings3.

We have owned many of these companies in the past at P/E’s of 10 or 12 or 14. Why anyone would own an electric utility when solar plus battery technology is bound to turn them upside down is beyond us. (We wrote about the coming change here.)

Consequently, we believe that allegedly “safe” stocks have become so expensive they are dangerous. The textbook says utility stocks are safe. We look at the world and say, “Not really.” Safe is the new dangerous.

Meanwhile, there are market sectors and companies priced below the market average P/E, including some with dynamic prospects in the years ahead. We believe the stocks we own are bargains. That’s an opinion, not a guarantee. You know we don’t offer guarantees, except that values will fluctuate.

Clients, if you would like a longer conversation about this upside down situation or any other topic, please email us or call.

1Nasdaq, Inc.

2Federal Reserve Economic Data, Federal Reserve Bank of St. Louis

3Standard & Poor’s, Inc.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Floating rate bank loans are loans issues by below investment grade companies for short term funding purposes with higher yield than short term debt and involve risk.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

We Eat Our Own Cooking

© Can Stock Photo / lisafx

Last week I was describing an investment opportunity, or ‘table-pounding bargain’ as I prefer to think of it, to a client. The client was not exactly skeptical, but she had a question. “Do you own it?”

This is a brilliant question. ‘Skin in the game’ is an extremely vital indicator. When someone is personally invested in an idea or concept, they are more likely to be focused on the potential for success or possibility of failure. Alleged leaders who do not share in the consequences of their actions are notoriously inept. (Congress and health care, for example?)

Modern philosopher Nassim Taleb (author of The Black Swan) takes it a step further and talks about soul in the game. Perhaps my level of compulsion, commitment to work to age 92, and obsession with your outcomes is evidence of ‘soul in the game.’ I’m not sure how I could possibly be more involved with my work.

Do I own it? Lady, I am loaded down with the stuff. I cannot in good conscience inflict the kinds of concentrations on you that I am willing to face. After all, few of you want to work to age 92 as I do, and between you and me, I am in the best position to knowingly run larger risks. So the most volatile accounts in the shop, upside and downside, are my own.

Let me clarify: we offer no guarantees. The fact that I own the ideas we talk about does NOT provide any tangible value to you. When your account grows, our revenues rise—it is win-win—and that provides an economic incentive to act in good faith. But whether or not I own something is no guarantee of anything.

My purpose in writing this is simply to say we may be right or wrong on any recommendation—but we are always sincere. I want you to know, that idea I’m talking most about, YES I own it!


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

Investing involves risk, including possible loss of principal.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.

Would You Take Every Drug on the Shelf?

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We have written quite a bit about the conventional investing wisdom recently. This essay puts the focus on what we do here at 228 Main.

One of our principles is to find the best bargains. We cannot be sure where they are, but we will still try to find them. We look for seemingly healthy investments at historically low-seeming valuations.

We recognize this means buying investments which are unpopular. This is fine with us. In fact, we rely on it. One of our core principles is to avoid stampedes. The more of something everyone else is buying, the more expensive it is going to get.

A natural consequence of our approach is that our portfolio construction may not be as diversified as conventional wisdom dictates. But we are not interested in trying to own everything. We want to own the bargains.

We may not always be able to pick them. We may miss out on some high flyers because we thought they were too expensive to buy. Sometimes a “bargain” turns out not to be one. Generally, though, we believe that our odds are better if we at least try to find the bargains.

An alternative to our way is like going to a doctor who prescribes every drug he can think of in case one of them works. “Chances are some of them will make things better and some of them will make things worse, but in theory one of them should cure you.” Wouldn’t you run out the door?

There are many unknowns in both medicine and investing. A doctor may have to try several courses of treatment before finding one that works. Similarly, we frequently implement several promising tactics at the same time. Some don’t work out and need to be replaced.

We think it is reckless, however, to simply give up trying to find successful investments in favor of simply grabbing a little bit of everything. Yet that seems to be a popular, if lazy, strategy with some investment professionals.

Clients, please call or email us if you want to discuss how our investment ideas apply to your situation.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk, including possible loss of principal.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

No strategy assures success or protects against loss.

Bargain Hiding in Plain Sight

© Can Stock Photo / mrivserg

Imagine a product that has these uses1:
• Vital part of every home and building.
• Goes into every vehicle; hybrids and electrics use up to four times more.2
• Needed for manufacture, installation and use of solar panels and wind turbines.
• Key requirement in making batteries.

One might imagine that demand for this product will rise in coming years, as technology changes our power grid and transportation, and the world continues to modernize.

Now consider the supply side. It takes billions of dollars and four years or more to create a new production facility. The industry that produces it went through a depression as prices for the product got cut in half from 2011 to 20163. Revenues disappeared, losses mounted, spending got slashed. New projects were cancelled.

Rising demand, constricted supply: we know how this works. Prices will rise, revenues and earnings for producers will go up, stock prices may follow. No guarantees, of course, and the timing is always uncertain.

The product is COPPER. There is no replacement for it. The question we face as investors is, can we get involved on a favorable basis?

We know companies that produce a lot of copper, along with other resources. Their stocks are traded on the New York Stock Exchange. The valuation on their shares seems compelling. A dollar of profit in one trades for a third less than that of the average stock; the other one carries a two-thirds discount. One is trading at one-third of its all-time peak a few years back, the other is discounted even more.

Both stocks have been about twice as volatile as the average stock. (This is measured by a statistic called ‘beta.’) We don’t care. Downside volatility is wonderful if you are trying to buy bargains. But owners should be prepared for the roller-coaster.

Clients, we are telling you this story for a reason. When you hear that ‘the market is too high’ or things are at some unsustainable peak, remember that at 228 Main, we are pounding the table and jumping up and down about the bargains we are finding. If you would like to discuss this or anything else at greater length, please email us or call.

1The World Copper Factbook 2014, International Copper Study Group

2The Electric Vehicle Market and Copper Demand, International Copper Alliance

3Federal Reserve Bank of St. Louis


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Investing involves risk, including possible loss of principal.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

What We Learned at the Big Conference

© Can Stock Photo / appalachianviews

I have gone to many conferences over a long period of time. Each has provided some perspective, insight or connection that proved to be quite valuable. Our quest to improve your financial position, being a human endeavor, is always susceptible to improvement. The conferences serve to expose us to ideas, concepts and tools that can help.

LPL Financial’s Focus17 event was perhaps the most consequential ever. The social media and blog presence we started at http://www.228Main.com two years ago has a far greater reach than we realized. We have relationships with top executives at LPL Financial and senior management that we did not know we had. This is turning out to be vitally important to you and to us.

Regulation creates change, and encourages standardization. You know we are contrarian; we dislike conventional wisdom, so we aren’t big on doing what everyone else is doing. As the company sorts out how to get to the future, our voice is in the conversation. Our proposals, the ones that will let us keep serving you as we have been, are being reviewed at the highest levels. If we didn’t have the new media presence, we would still be trying to let the brass know who we are and what we want.

Our communication strategy is to be radically transparent. We share our fundamental beliefs, our strategies, our methods and our views. So when we introduce ourselves to a policy-maker and say “this is what we are about,” the policy-maker says “Oh, I know, I read your blog. What do we need to do?”

Clients, understand, we put this all in place for you, not them. If there were three of me, none of us would have time for ego-stroking with big shots. But the fact is, these good people are going to help us shape the future in a way that might work out for everyone.

The highlight of the program was Bert Jacobs, Chief Executive Optimist of the Life Is Good Company. (You may have seen their T-shirts or coffee cups.) You have to know, the message that ‘life isn’t easy, life isn’t perfect, but life is good” certainly rang my bell. The idea that optimism is a tree trunk from which authenticity and empathy and humor and generosity etc. can branch is very powerful. Bert learned that ‘life is good’ resonated most deeply with people who had big challenges, not those who had easy lives.

I’ll summarize the rest by saying LPL Financial has a great culture carried by incredibly talented people. The firm is paying attention and taking care of business. You and we could not ask for more. Please call or email us with questions or to have a longer conversation.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Did Your Bucket Grow? The Measurement that Counts

© Can Stock Photo / justinkendra

We have an issue with investment theories that look great on paper but may not help people build wealth. The vagaries of human nature mean that investments which are appealing and popular and those which make money tend to be two different things.

In our opinion, Modern Portfolio Theory or MPT is in the category of ‘looks great on paper.’ MPT attempts to mitigate risk by diversifying a portfolio across different asset classes with different risk profiles. But it can not predict the future–this risk analysis is based on historical performance trends. Backwards looking, it tends to work until it doesn’t. It does, however, generate nice pie charts and beautiful rationalizations.

The apparent precision of MPT, based on measuring things that have little bearing or relevance to long term investors, may be a key factor in its appeal. We concluded that a lot of effort goes into measuring things that can be measured, whether or not the exercise is useful.

Recently we measured something in your accounts. We think it is telling evidence of our work together, your effective investing behavior and our research and portfolio management.

You can see in LPL AccountView or in reports we can run for you where your account balance stands relative to your cumulative net investment over time. In other words, your deposits and withdrawals since the beginning add and subtract to determine your net investment. By looking at your balance, we can tell the cumulative net gain or loss you have made over the years.

Many advisors could tell you the expected standard deviation of your portfolio, or the proportions of each asset class you should own, down to the hundredths of one percent, based on past performance. Some offer reports that compare monthly, quarterly, and annual account performance against a series of benchmarks.

If we had to guess we would say our simple measurement is the one you care about—did your bucket grow? And by how much? Clients, if you would like to tell us differently, or have a longer discussion on this or any other topic, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Investing involves risk, including possible loss of principal.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Security Selection Doesn’t Matter—or Does It?

© Can Stock Photo / alexh

One of the staples of conventional investing wisdom is asset allocation—the choosing of broad market sectors, determines investment outcomes. Supposedly, the selection of individual securities within each sector barely matters.

We will explain where the flaw is after a little history. The theory dates back to 1986 when the Financial Analysts Journal published a paper, ‘Determinants of Portfolio Performance.’ The authors concluded that asset allocation explained 93.6% of the variation in portfolio quarterly returns.

Since then, others have concluded that as much as 100% of returns are explained by asset allocation, that security selection doesn’t matter at all.

This version of reality is convenient for some financial planners, who are thereby relieved of the work of actually researching securities and managing portfolios based on that research. If it doesn’t matter what you own, only the category, you simply need to choose your pie chart of sectors and buy stuff to fill it up!

Here is the flaw: all securities are owned all the time, by someone. If you look at the aggregate of all investors (or many investors), security selection appears not to matter. But the individual does not own all securities – and the specific selection of what he or she does own has a huge impact on outcomes.

Investor A buys a security for $100, sells it later for $25 to Investor B. Investor B holds it while it recovers to $100. One has a 75% loss, the other a 300% gain. Security selection matters. In the aggregate, the security started at $100 and ended at $100. But that leaves out the loss for one and the gain for another.

One of Warren Buffett’s earliest investors put $15,000 in, back in the 1950s. Today his name is on the home of the symphony orchestra in Omaha, a beautiful performing arts facility he donated to the community. Security selection matters.

We offer no guarantees about the outcome of our work. But we believe the selection of individual securities is the biggest factor in those outcomes. If you would like to discuss this topic or anything else at greater length, email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Investing involves risk, including possible loss of principal.

Asset allocation does not ensure a profit or protect against a loss.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Another Anniversary

© Can Stock Photo / andreykuzmin

We are on top of the 21st anniversary of the foundation of our enterprise, Leibman Financial Services. I intend to operate it for another thirty-one years. I do what I can to make that outcome more likely to occur.

The future is a mystery, but the past is history we may examine. In August 1996, I began at the kitchen table of our home in the Eastwood neighborhood of Louisville. My biggest assets were all intangible—a curiosity about finance, passion for the markets, and a desire to use these things to help people get where they wanted to go.

Apart from that, we had little. Four kids, a mortgage, a lower level full of the babies and toddlers in Cathy’s home-based child care, and a burning ambition to keep the checking account above zero.

After a couple years, a bedroom freed up when a kid moved out. A couple of years after that, the quaint commercial Victorian building at 228 Main became available—and we bought it. Thank goodness for understanding bankers!

My brother Paul helped me get 228 Main ready for occupancy, and became my first helper. Cathy worked with me for several years, then son Greg Leibman took over when she retired. We are committed to add whatever staff is needed to provide you with comprehensive investment advice and good service. Larry Wiederspan has been a huge benefit on the service front, as Greg’s research and trading duties expanded.

Now, because of your trusted relationship, Mark Leibman of Leibman Financial Services Inc. serves over $65 million of your assets in brokerage and advisory assets through LPL Financial.

Many things have changed over the years. Our focus has tightened on investment research, portfolio management, and talking to you, the three core activities. Our appreciation and affection for you has grown. Our understanding of what we are doing evolves and gains definition over time. But our principles and our motivation are unchanged.

Our success depends on your success. Our only object is to grow your buckets, our best path to increased revenues. From where we sit, it feels like this is working out for everyone so far. Thank you all, for everything. Here’s to the next thirty-one years!


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Investing involves risk, including possible loss of principal.

Heavy is the Head that Wears the Crown

© Can Stock Photo / tashka

Pop quiz: if Joe Smith from Detroit works for General Motors, who is at the top of his chain of command? His boss’s boss’s boss’s boss, in other words? (I pick GM as a random example, but this exercise is true of any publicly traded company.)

If you own any shares of General Motors, the answer is you, personally. Makes you feel pretty important, right?

Of course, there are some caveats. General Motors has over 1 billion shares of stock floating around, and this is not an unusually large amount for an exchange-listed company. If you only own, for example, 1 share of GM stock you have less than a one-billionth part of the collective ownership authority over the company. Still, as a stockholder you are entitled to a have a proportionate voice in how the company is run, however small that voice may be. It is a powerful idea, and this idea of shared ownership is a cornerstone of our modern economy and way of life.

The most visible parts of your rights and responsibilities as a shareholder are, inevitably, the proxy voting materials that you may periodically receive as a stock owner. Your shares entitle you to vote on the company’s board of directors, as well as other significant decisions that the company may make from time to time.

For smaller investors such as you or I, shareholder materials can sometimes be more of a nuisance than anything else. Even if we got together with all of our clients and voted together as a bloc, we still would not command enough shares to influence a shareholder vote much. Moreover, we would generally want to stick with the default recommendation of the company management. If we disagreed with the job management was doing, we would not want to invest in the company in the first place! There are sharks out there in the investment world that look to gobble up companies and take over their management, but in here we are all pretty small fish—we just look for successful companies that we can swim along with. Most of the time, we are content to leave shareholder decisions up to the big fish.

That said, it does happen occasionally that a vote or shareholder election comes up that may have some effect on you personally. We keep an eye on what shareholder materials get sent out so that we can get in touch if something comes up that you ought to act on.

The bottom line is that the privileges of stock ownership can wind up translating into a lot of mail, and it can be difficult to sort through it all sometimes. Clients, if you receive any shareholder communications that you do not understand, please do not hesitate to pick up the phone or email us for help making sense of it.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

What You Don’t Know Can Hurt You

© Can Stock Photo / alphaspirit

In 2002 Donald Rumsfeld made headlines when he stood up during a press conference on the case for war against Iraq and proclaimed “there are known unknowns.” At first, this phrase sounds like a silly oxymoron. However, it actually makes a very important distinction. Whenever we are considering our planning, it is important to acknowledge both the risks that we know—the “known unknowns”—and the risks that we don’t—the “unknown unknowns.”

For example, suppose you are thinking about investing in an airline company. You are probably aware of a number of possible risks to an airline: natural disasters, plane crashes, or spikes in fuel prices, to name a few. These are your known unknowns.

Now imagine what happens to your investment if you buy airline stocks and the next day a scientist announces that they’ve built a teleporter that can safely and instantaneously transport people across the globe. Nobody could have foreseen such an outlandish invention—it would be something straight out of science fiction. This would be an unknown unknown, a risk that is so far off your radar you probably would not even think it was worth thinking about.

And you may be right. These risks are by nature rare and unpredictable, so it is practically impossible to plan around them. But it is important to remember that they can and do happen, and to be ready for the possibility. There was a point when heavier-than-air flying machines seemed like an impractical fantasy. Those who bet against the airplane wound up paying for it eventually.

Today, investors and advisor representatives have a wide range of tools to try to quantify the risks of a portfolio. These forecasts are only as good as the models behind them, though—they can only estimate based on the known unknowns, not the unknown unknowns. There is certainly some value in statistical risk analysis, but there is also a real danger in false confidence.

As humans we are pretty bad at understanding probability: a 5-10% chance sounds pretty unlikely, but in practice a 1 in 20 chance is not nearly as rare as we think it is. When we hear numbers like 95% we tend to think of them as being a safe bet. That’s not much comfort if you turn out to be the 1 in 20, though.

Here at Leibman Financial, we have a different approach to risk analysis. It goes something like this:

Everything we invest in has risks. Many of the investments we prefer are more volatile than average. You may lose money.

We do not make these statements because we are fishing for excuses. We are proud of our results and stand behind them. We want you to continue to do business with us, and believe the best way to ensure this happens is to make money for you.

We like to think we do a pretty good job. But we cannot guarantee our results, and we will not inspire false confidence by guessing numbers for you. If you have any concerns about investment risks, feel free to call or email us and we will discuss them to the full extent of our knowledge and understanding.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

Stock investing involves risk including loss of principal.