Month: November 2015

What Happened to my Account?

© Can Stock Photo Inc. / SergeyKuznecov

2015 has been a difficult year, investment-wise.

Most of us know how this works. We have periods where we laugh and laugh about how much money we’ve made, and other times where we want to cry and cry.

In addition to the ups and downs of the market, our accounts have spells where they behave differently than the broad market averages. Everyone has noticed the divergence this year.

So 2015 reminds us a lot of 1999, when the tech stock boom was in full swing. Midyear, we turned negative on large growth companies. But that was what everyone was buying. We preferred the bargains in “old economy” stocks like railroads and food companies and tractor makers. They went down and down while technology stocks went up and up. We seemed awfully stupid as our favorites ground lower month by month.

Of course, that all changed when the bubble burst. The high fliers ended up declining about 80% over the next two and a half years (the tech-heavy Nasdaq Composite index slid from a high of 5,408 in 2000 to a mere 1,108 in 2002), while the “old economy” stocks staged a good rally. In other words, we turned smart.

In trying to understand the carnage of 2015, one glaring fact stands out. All year long we have held the strong opinion that the best bargains in the market could be found in the natural resource sector. Companies that had anything to do with extracting minerals or oil from the ground started the year at amazingly depressed levels—bargain prices, in our view. Then they became cheaper. Then they became cheaper. Then they became cheaper. We seem awfully stupid, again!

We know how this works. At some point the gluts that have been so painful for many of our holdings will turn into shortages. Higher prices and growing revenues are the likely result. We’ve been through this with other holdings in the past, watching values getting chopped in half before tripling or quadrupling.

What we do takes patience. We never wanted 2015 to require so much of it, to require an explanation of performance divergences. But we believe the tide will turn, as it always seems to. Thank you for your business.

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 loss of principal. No strategy assures success or protects against loss.

Anatomy of a Bubble


The above chart was formulated by Dr. Jean-Paul Rodrigue in 2006, in the middle of the developing housing bubble. It illustrates the general pattern that most market bubbles tend to follow.

Early on, a small number of money managers and other sophisticated investors begin speculating that a given asset may be undervalued and establish small investments in the hopes of future gains. As these initial investments start to pay off, other managers begin to notice their success and follow suit, slowly ramping up prices. There may be one or more temporary sell-offs as early investors decide that their speculation has paid off and pull out of assets that they now perceive as overvalued.

Sometimes, this is as far as a price fluctuation will go. When a rising price starts to attract media attention, however, it creates the potential for a true bubble. At this point the price may already be significantly over asset value and the original “smart money” investors’ reasons for buying no longer apply. But as the general public becomes more aware of the success stories that the rising prices have created, more and more people buy in. This drives the price up even further, reinforcing the public perception that an easy money-making proposition has been discovered.

As the bubble nears its peak, wise investors quietly pull out as it becomes clear that the price is unjustified and unsustainable. Latecomers with little understanding of their holdings invent new explanations to rationalize the extreme overvaluations the bubble has created. They believe the old rules no longer apply and the inflated price is the new “normal.”

At some point, reality sets in and triggers a cascade in price. The bubble begins to deflate, although bullish investors may try to deny that this is happening. They see the initial decline as a buying opportunity, creating short-lived recoveries before the bubble goes into its final plunge. Often, the aftermath of the bubble leaves the asset so despised it becomes badly undervalued, creating buying opportunities for savvy investors—which may eventually generate the start of the next bubble, many years down the line.

We already know the lesson here: avoid the stampede. When we hear everyone else is buying something, it’s tempting to join in. But even when it seems like the price just keeps going up and up, we know what’s eventually around the corner.

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 loss of principal. No strategy assures success or protects against loss.

The Next Recession is Coming!

© Can Stock Photo Inc. / svanhorn

The next recession is always coming—and the next recovery, and so forth. Like the seasons and the tides, the economy runs in cycles. But after reviewing all the evidence, we don’t think it will arrive any time soon.

LPL Financial’s Research Department put together a useful summary on this issue. This is the short version, with other thoughts on the topic.

The first thing to understand is that two of the most popular fears about the cause of recessions are unfounded. The growth part of the cycle does not end because of old age. And the start of interest rate increases usually marks the midpoint, not the end, of the growth cycle.

So what are the causes of recession? LPL Financial believes that imbalances are the culprit. “In a healthy economy, there is a balance of responsible levels of borrowing, confidence, and spending.” So recessions are likely to occur after we see over-borrowing, over-spending, and overconfidence.

LPL Research has actually constructed numerical indicators to test for these three “overs” and calculated back through history. But it doesn’t take a rocket scientist to know that confidence is poor and spending has been weak. Borrowing has not gotten anywhere close to danger levels, either. Their conclusion is that the probability of a recession in the near future is unlikely.

The LPL “Over” Index agrees with another set of recession warnings we monitor, the Four Horsemen: home building, auto sales, business investment, and inventories. When one or more of these areas becomes overheated, trouble may ensue. All four are all at fairly subdued levels, or close to long term averages—not overheated.

There is one other indicator which may be both instructive and profitable. The price of raw materials usually peaks at around the same time the economy does, near the onset of recession. Crude oil, iron ore, copper and other natural resources tend to rise during expansions. But the prices for these goods have been falling for more than four years. We expect to see a sustained move up prior to the next recession.

We look at the facts and act accordingly, after considering all the pertinent information we can find. Our conclusion is that optimism is warranted. We will continue to follow our principles: search for bargains, “own the orchard for the fruit crop,” and avoid stampedes in the markets.

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.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing involves risk including loss of principal.

Putting the Security Back in Social Security

© Can Stock Photo Inc. / CBoswell

There is a recurring concern that comes up when discussing retirement planning with clients. When we sit down with someone to break down various sources of retirement income, sometimes they will stop me and say “Mark, I don’t want to count on Social Security because I’m pretty sure it will be gone by the time I retire.”

It’s an understandable concern. We see headlines all the time calling for Social Security reforms (meaning cuts), throwing around scary words like “default” and “insolvent.” However, it is important to remember what these words really mean. If someone owes you $100.00, and they can only pay you back $99.97, they are technically insolvent. But you’re not really going to miss those three cents all that much.

The Social Security trust is short more than a couple of pennies, but the concept is the same: the program has merely enough funding to meet most of its obligations rather than all of them. You might hear estimates that the Social Security trust fund will “run out” within 20 years, but this does not mean the end of Social Security. Even without the support of the trust, the Social Security program is projected to have enough revenue to continue paying out approximately 75% of its obligations after the trust runs out (according to the latest annual report of the trustee board at

This is still a problem, obviously. No one wants to wake up in 20 years and hear their benefits have been cut by 25% because Social Security ran out of money. Thankfully, the fixes are not onerous. The math behind the Social Security trust, as with any pension fund, is based on the principle of compound interest—something that Albert Einstein is said to have called the greatest force in the universe. Staving off that future 25% drop can be accomplished by a smaller 13% decrease in benefits or increase in revenues today (representing a payroll tax of about 2%.)

These changes will undoubtedly cause some pain and there will be resistance to Social Security reforms. None of us knows what the future may bring, so it may be foolish to treat benefit projections as hard and fast numbers. But it seems clear to us that Social Security will likely survive in some form.

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

Weighing the Bad and the Good

© Can Stock Photo Inc / gunnar3000

If a salesman came up to you on the street and offered you an investment that had only a 54% chance of making money, would you think it was a good bargain? Probably not.

Over the past 65 years the S&P 500 index has had a positive daily return less than 54%. With odds like that, one might think that some skepticism in stock investments was warranted. And yet, over the course of those 65 years, the S&P has risen over 12,000%. Even though it has lost money almost half the time, taking that 54% bet over and over again turned out to be very profitable. At times, market movements feel like they’re going one step forward, one step back—or at times even one step forward, two steps back. But over time, stepping forward 54% of the time is enough to build a great track record.

Past performance is certainly no guarantee of future results. We can only hope that the next 65 years are as good for the market as the past 65. The potential is there, though. And obviously, market volatility does pose obstacles. If you have $10,000 today and you really, really need to make sure you have $10,000 tomorrow, investing in a market that goes down 46% of all trading days is not a very good idea. Investing in volatile markets takes a certain mindset and a longer term investment timeframe. Call or visit us to discuss what investments would be suitable for you.

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.

It’s the Journey, Not the Destination

© / chbaum

When we think about our lives and plans, milestones are a useful concept to help organize our thoughts. In ages past, the mile markers on the roads of the Roman Empire let travelers know of the progress of their journey.

The same is true of the milestones in our lives: birthdays, anniversaries, graduations and retirements are points on the journey, not the destination. The road continues on, after we reach each milestone. They are memorable accomplishments worthy of celebrating, a natural time to reflect and take stock… but not the destination.

Thus it is with our business anniversaries. We’ve been at 228 Main in beautiful downtown Louisville for fifteen years, as of November 1st. Larry is wrapping up one year in our shop already; Greg will soon mark his sixth anniversary. Next year, our firm marks twenty years in its current form.

But we measure our progress by the people we’ve helped. The staff, systems, experience and resources we put together to do our work for you more effectively are our true milestones. Hiring a third member of the team, having a dedicated staffer to help with the technology clients use, building out our 24/7 communications in the New Media, allocating more time to research and portfolio management: these are the recent milestones we care about.

In other words, our true milestones are the ones that help us help you make sense of your journey.

Take Me Out to the Ball Game

© Can Stock Photo Inc. / dehooks

Thirteen years ago, Oakland manager Billy Beane turned the world of professional baseball on its head. As depicted in the movie Moneyball, Beane knew that the Oakland Athletics didn’t have the budget to compete head to head with better-funded teams from larger markets. He looked to advanced statistics to give him an advantage, realizing that baseball’s conventional wisdom did a poor job of judging player performance. Traditional baseball skills like speed and contact hitting were being overvalued, while game-winning skills like patience at the plate and slugging power were being undervalued. By focusing on what really mattered over what was popular, Beane was able to find the best bargains in the baseball universe.

While many baseball franchises grudgingly followed suit after Beane, traditionalist manager Ned Yost has stuck to the old wisdom. Under him the Kansas City Royals have broken every rule set forth in Moneyball, emphasizing speedy contact hitters who will swing at anything to get the ball in play and steal bases at the slightest opportunity. Despite that, he’s taken the Royals to two consecutive championships and a long-awaited World Series pennant, leading some fans to hail his success as the death of Moneyball-style statistics.

In fact, Ned Yost apparently took to heart the one true lesson behind Moneyball: never follow the crowd.

The Oakland Athletics were able to win because they turned aside from what “everybody knew” about baseball. After their successes were highlighted by Moneyball, what “everybody knew” changed. When everybody else started chasing after the same statistics that led the Oakland A’s to victory, they started undervaluing old-fashioned baseball skills like speed and contact. Ned Yost ignored what “everybody knew” about those old baseball skills and built a great team around them.

Billy Beane is fond of comparing the baseball world to investment markets, and the comparison is an apt one. Both baseball and investment markets are prone to cycles as people chase after the crowd—creating opportunities for those who avoid the common wisdom of what “everybody knows.” The Royals’ pennant is a testament to the value of going against the grain.

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

Why Life in the 21st Century is So Grand

© / binik

People know why financial advisors invest time and effort studying the economy, markets and specific opportunities. The case for commenting and writing and posting in the 21st century media may be less clear. But there is a compelling reason why we are so engaged, one that has to do with your financial wellbeing.

One of the biggest factors in investment outcomes is investor behavior. The average investor (and some advisors) behave in counterproductive ways. They tend to buy at high prices in times of euphoria and sell at low prices in times of general despair or panic. We believe our clients are far from average, however, and we would like to keep it that way.

Our theory is that more communication leads to understanding, understanding leads to effective behavior, which in turn usually results in better outcomes. We have no guarantees about the future, but we are pretty sure the wealthier our clients are, the better off we will be.

If we take time to write down one or two of our stories every week, we can post them for any client to read any time, 24/7, at their convenience. There aren’t enough hours in the day to tell a story a hundred times in a week, but a hundred people can read the story at the same time here in the 21st century.

More communication is better communication, and there is a terrific side effect. Since some fraction of clients get some fraction of their information from our new media efforts, we have more time to talk one-on-one when that is needed. Whether you follow on Facebook or Twitter or subscribe to the blog, we have more time to talk.

More communication, more time, potentially better investment outcomes….life in the 21st century is incredibly grand. We’re glad you are with us.

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 loss of principal.