Month: December 2015

2015: Year In Review

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As we think about the year now ending, we would love to say “It was the best of times, it was the worst of times.” That would not be accurate. However, it truly was “the spring of hope, the winter of despair.”

Nobody has ever conveyed the concept of a mixed bag as well as Charles Dickens did in the opening lines of ‘A Tale of Two Cities.’ And nothing is more fitting when we think about 2015 in the investment markets.

The parts of the market that appeared to be cheapest at the start of the year mostly got cheaper, and cheaper, all year long. Meanwhile, interest rates remained at seemingly impossibly low levels—expensive bonds remained expensive all year. Natural resources that had been sliding for years continued to slide.

Back in the real economy, new jobs were created each month. Retail sales and most measures of economic activity moved higher through the year. Inflation remained quiet, and consumers paid astonishingly little for gasoline. The low prices for natural resources and energy fed into low input costs for businesses, which helped business profits remain near record levels.

The kinds of excesses that cause the end of the growth cycle were simply not present in 2015. The ‘irrational exuberance’ of investors that usually accompanies major peaks in the market is also scarce.

Our principles remain unchanged, but we are always seeking to improve our strategies and tactics. Avoiding stampedes, owning the orchard for the fruit crop, and seeking the biggest bargains are always going to make sense. Putting these principles into practice is the hard part. The new year will see a continuation of the increased attention to diversification, the search for new sources of portfolio income, and new ways to think about effective portfolio construction.

We are ready to say goodbye to 2015, a year when the S&P 500 crossed the breakeven line more than twenty times. But we do so with the spirit of “the spring of hope,” given what we know about how things work. Please call us with your questions or comments.


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

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

The China Syndrome

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In today’s increasingly globalized world, actions can have far-reaching economic consequences.

Take, for example, China. If you pay attention to business news you will probably hear a lot about China; as the second largest economy in the world, this should not be surprising. China is a major importer of raw materials such as oil and metals, so any signs of the Chinese economy slowing down tend to be met with alarm and panic in the markets.

These raw material imports have fueled a massive construction boom unprecedented in human history. Over the past 25 years, the percentage of China’s population living in cities has more than doubled. Almost 500 million people have moved from rural China into the cities—that’s the equivalent of the entire metro population of New York City moving into China’s cities every year for the past 25 years. It’s no surprise that the Chinese construction industry has played such a huge part in the world economy.

Some skeptics will argue that this part of China’s role is over and the boom is unsustainable—Chinese construction will level off, China will import fewer materials, and much of the world economy will slow down.

We view this as short-sighted. To put China’s demographic trends in context, China’s level of urbanization is on par with where the United States was at in the 1920s. China’s urbanization is still a century behind ours, and at some point they’ll have to catch up. If China follows the demographic trends of every other modern industrial nation, at some point in the not too distant future another 500 million people will be moving into Chinese cities—and they will still need places to live there.

We may not be sure of the timing. It might take them another 25 years, or it might take them longer or shorter. But the demographic reality is that China’s urbanization is not done, and neither is the construction they need to do to make it happen, or the demand for raw materials to build with. In the big picture, we view concerns of China’s economy slowing down as premature.


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

Make Sense of Your Financial Planning

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If you go searching for financial planning help, you will find a great many tools at your disposal, from online calculators to professional financial planners who can help you chart a course for your future.

Whether you’re using online tools or seeing a professional face-to-face, the logic they will use is often the same. First, they will sit down and total the major expenses you expect to face over your lifespan: paying off debt, marriage, childbirth, kids’ college, new houses, retirement, et cetera. Then they divide the grand total of your expenses over the number of years you expect to live through to pay them off, adjust it for compounding interest, and arrive at a target percentage of your income that you should be saving each and every year of your life in order to afford these major milestones.

Often calculations like these will give you worrying results. This arithmetic often tells you that you must put aside an enormous amount of income into savings or else you will never be able to afford to retire.

Fortunately, there are a couple of crucial flaws in this reasoning that may provide some relief. Young couples often stay up late worrying how they’re going to pay for a house, kids, college, and retirement, and the answer is simple: you’re not paying for all of those things at the same time. As we advance through our lives, new expenditures come up and old ones go away. When you buy a house, the money you were setting aside for a down payment turns into money you set aside for kids. When you send your kids off to college, the money you were setting aside for them turns into money you set aside for retirement. You don’t have to save for all your big expenses in advance: your cash flow (which will tend to increase as your earning power grows with age and experience) will help accommodate different expenses at various times.

Don’t get us wrong: saving more money is better than saving less money. But it’s important to remember what you’re saving money for in the first place, so that you can spend money on the things you want and need in life. Call us if you need any help making your plans and planning work.


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

Annual Market Forecast

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It is that time of year. Prognosticators and pundits issue their forecasts for the year ahead. Wouldn’t it be nice to know what the future holds! Some forecasts are hedged, and don’t really say much. Our prediction is quite specific.

Many of those who have visited our offices know that we actually do have a crystal ball. It forecasts the direction of the stock market for the coming year. It does not say how far the market will go, but it always predicts the direction.

If you knew which way the stock market was going to go, could you make money investing?

Here’s the catch: our crystal ball has only been 76% accurate. So perhaps the question should be, if you knew which way the stock market was going to go 76% of the time, could you make money investing?

Without further ado, here is what my crystal ball says about the direction of the stock market for the year beginning January 1: it will go up.

Long-time observers will not be surprised. The crystal ball always says the market is going up. It has never predicted a down year. And checking back over the past hundred years, according to Standard & Poor’s, it has been right 76% of the time.

We don’t know how well its track record will hold up, but we believe this presents a favorable backdrop to buy bargains, avoid stampedes in the markets, and seek to own the orchard for the fruit crop. In other words, to keep on keeping on, following our plans and strategies.

It is tempting to include a discussion of the economy, the strengths we perceive, and the faint possibility of recession. We’ll leave that to people with more time on their hands. If your plans or planning will be evolving in the new year and require our attention, please 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.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Our Three Principles, or Postmodern Portfolio Theory

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We recently wrote about the conventional investment wisdom, as embodied in Modern Portfolio Theory. No surprise here: we don’t like it. The pie charts, talk of asset classes and correlation…it is all wonderful until it isn’t. Our alternative approach relies on three fundamental principles. We believe they apply in every season.

Our first principle, avoid stampedes in the markets, is based on our understanding that the stampede is usually going the wrong way. There was a stampede into tech stocks in 1999, which ended badly. There was a stampede into real estate in the early 2000’s, which ended badly. There was a stampede into commodities after that, which ended badly. In short, major peaks are usually accompanied by a stampede of money that drives prices to extremes.

Our second principle, seek the best bargains, lets us sort “the market” into its pieces. The three major asset classes are stocks, bonds, and cash alternatives. Cash and its alternatives currently earn practically zero-point-nothing interest rates; bonds are barely better. Diving one level deeper into stocks, we find that some sectors and industries are expensive and others appear to be bargains.

Our third principle is to seek to own the orchard for the fruit crop. Portfolio income is an important component of total returns, and those among us who rely on our portfolios to buy groceries surely understand the importance of cash income. As noted above, interest rates remain very close to zero—we do not believe that bonds or cash alternatives are a good way to generate income these days. But we are currently enjoying generous dividends from many companies in the bargain sectors, including the oil and natural resource companies. Other holdings purchased in past years continue to pay regular dividends, from pipelines to telecom to auto stocks.

We must note that, in actual practice, these principles require patience. One should always know where needed cash and necessary income will come from. Please see our post ‘The Fruits of Investment (link)’ for a fuller treatment of the three principles in action.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

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.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Poverty, Prosperity, Optimism, Pessimism

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“What causes poverty? Nothing. It’s the original state, the default and starting point. The real question is, What causes prosperity?” – Per Bylund, Ph.D.

Some believe that my persistent native sense of optimism must be evidence of a traumatic brain injury in my youth. A more pessimistic person once asked me if I wasn’t reading the papers or watching the news. But one of my aims every day is to see and understand the world as it is around us. So let us dispense with talk of being dropped on one’s head, and ponder the megatrends that shape our part of history.

The World Bank calculates that in 1990, 37% of the population of Earth lived in extreme poverty, with incomes of less than $1.90 per day (2011 dollars). One can imagine the privations that accompany such massive and grinding poverty, from poor sanitation and dirty water to disease and lack of basic health infrastructure.

In twenty-five short years, the population count in extreme poverty declined to less than 10% of the people—down from 37%. These 700 million have all the same challenges and problems of the nearly 2 billion poor back in 1990, and we cannot minimize the gravity of the situation for these people. Yet never in history has so much progress been made in such a short amount of time for so many people—hundreds of millions of people were lifted out of extreme poverty.

Measuring progress another way over a longer time frame, global life expectancies have been calculated to be less than 30 years in 1870, and around 71 years in 2013. Life spans more than doubling in 150 years! In either of these cases, poverty and longevity, it seems unlikely that anyone around at the beginning could have believed the progress that was about to unfold.

One naturally wonders about the factors behind the wonders of modern times. I’d like to think our progress depends on the degree of freedom that each of us has to make the most of our own potential, in societies with the rule of law and respect for the rights of the people. My idealized concept of our economic system is that the surest path to prosperity is being of value and service to others, a sustainable and ever-improving system.
We have challenges, problems, issues, aggravations, and troubles—as always. But my optimism remains based on reality.

The Philosophy Lurking in Your Portfolio

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Modernism is a philosophical movement that arose from the far-reaching transformations Western society underwent in the late 19th century. This gave way to the skepticism of the late 20th century which led to the movement we call Post-Modernism.

This sets the stage for our discussion of Modern Portfolio Theory (MPT), and our response to it.

If you have ever seen the customary asset allocation pie chart or heard talk of getting exposure to all the major ‘asset classes’ then you have been exposed to MPT. It presumes that historical data about the behavior of all the various kinds of investments enables computers to calculate the best mix of holdings to get the returns we desire with the lowest level of risk. One investment zigs when another one zags, leaving the total portfolio steadier than it otherwise would be.

Great theory. Here are the problems that arise in practice:

1. At times of greatest stress in the markets, when you most need MPT to work, the historical correlations go away and the most overpriced assets get slammed regardless of what the computer thought.
2. Common sense and fundamental investment analysis often reveal that one slice of the asset pie is likely to leave a very bitter taste. Large growth stocks in 2000, real estate in 2007, commodities in 2011…everybody knows now that the best allocation to these overpriced bubbles was ZERO.
3. Although the discipline of MPT reduces the damage from counterproductive crowd behavior, it neither eliminates the damage nor allows one to profit from the madness of crowds.

Our investment management approach, forged in the skepticism born of deep knowledge of MPT, is based on three fundamental principles. We believe these principles are timeless, suitable for any market. We have written about them before, we will write about them again, and we have talked incessantly about them for twenty years. For now let us simply note that, as a reaction to Modern Portfolio Theory, they might collectively best be known as “Postmodern Portfolio Theory.”


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

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.