Month: May 2016

Cars and Trucks, Philosophy and Money: A Research Case Study

© / Apriori

How do YOU get where you want to go? Transportation. We are invested rather fully in automakers and related companies, so we pay a lot of attention to this vital sector of the economy.

Many companies in the sector are reaping handsome revenues and profits, paying generous dividends, and yet the valuations in the marketplace do not reflect the good results. Some say this is because vehicle sales are at a peak, 17 million units a year, so stock prices reflect a future decline in revenues and profits. Others forecast new sales records ahead for the industry, with rosier outlooks. Who is right?

With 260 million light vehicles in the US fleet, it seemed to us that 17 million, or one-fifteenth of the fleet, was clearly a sustainable annual sales pace. After all, replacing 1/15th of the fleet does not seem excessive.

But we know the story is a little more complicated than that. We wanted to see how annual sales compared to fleet size through recent history. We looked back at annual sales data from Wards Auto and annual fleet size from the U.S. Bureau of Transportation. It turns out that the current rate of about 6% annual-sales-to-fleet ratio is in the middle of the 4 to 8% range that has prevailed over the last 25 years.

Annual sales are made up of two things: changes to the size of the fleet, and replacement for existing vehicles in the fleet. Annual sales equal the change in the fleet plus a replacement factor of 5.5% of the fleet, on average, over the past twenty five years. This means that we are replacing 1/18th of the fleet every year.

We immediately wondered if replacing 1/18th of the fleet makes sense—eighteen years is a long time to replace the whole fleet! But if that replacement rate held steady for many years, the average age of the fleet would not be eighteen years, but only half that—nine years. With the current actual average age at eleven years (Ward’s data), this makes sense.

What does it all mean? When you figure a replacement rate of 5.5% plus a fleet growth rate equal to population growth, or use the average fleet growth rate of 1.2% over the last twenty-five years, you find that annual average sales might be in the 16.5 million to 17.5 million range going forward.

The upshot is that the current sales rate may be near the actual equilibrium pace, with future years coming in higher or lower depending on economic and other factors. We reject the notion that current sales are at an unsustainable peak, while acknowledging they will go up and down.

We know the future rarely follows a straight line from the present, though. Think of the dramatic evolution that the automobile has undergone in our lifetimes: fuel injection, catalytic converters, four wheel drive, air bags, onboard computers… what’s next? The work of understanding the world is never done, and we will always be researching and studying to further our knowledge.

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

Niche Market of the Mind


In every field of human endeavor, it seems that the best of the best are specialized. From the doctor who specializes in one form of cancer to the CPA who works mainly with trucking companies, specialists rule.

In business, the shorthand term is “niche marketing.” Financial advisors may work with people of a specific religion, those with shared hobbies or interests, people who work in a particular field or for a certain company, or those with some other traits or characteristic.

If you know us, it should not surprise you that we are different. Our niche market encompasses retirees and workers and truck drivers and executives and nurses and engineers and teachers and accountants and married couples and widows and single people. At first glance, this may seem to be a poorly defined client group.

But our clients represent a very well-defined group: it is a niche market of the mind.

We work hard to qualify clients by productive attitudes toward investing—and we are not afraid to try to train clients if the right attitudes don’t come naturally. A tolerance for volatility and a fundamental confidence, as a society, we stumble our way through our problems are two of the elements we need to have.

The rewards for pursuing this niche have been amazing. While other advisors cope with massive defections from informed strategy when the outlook darkens, our clients tend to stay the course. We avoid the curse of “cash on the sidelines,” waiting and waiting for that comfortable moment to get back in the game after selling out. We never promise stability, so we spend less time apologizing for the inevitable volatility.

In short, we can do our best work for people who are in the best position to profit from it over the long haul.

Is it always easy? Is it always fun? Of course not. The market goes up and down, and “up” is a lot more fun than “down.” Pessimism and optimism ebb and flow, and it can be tough to buck the crowd. Any rational person has to scratch their head in the toughest times and wonder whether they are doing the right thing. But together we have tended to make appropriate decisions.

Good information communicated well helps drive effective behavior. Behavior can help determine investment outcomes. Good outcomes can increase account balances. And we get paid on account balances. This is why we are doing what we do.

We don’t care if you engineered the truck, or drive the truck, or own the trucking company… if you have what it takes to invest successfully, we specialize in you. This is why we strive for a niche market of the mind.

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.

Things Warren Buffett Never Said

© / meikesen

Warren Buffett may be the most famous investor in the world. The annual meeting of his company is known as ‘Woodstock for Capitalists,’ and is attended by 40,000 people. Countless articles, essays, and books have been written (including by us) about the things he has said.

As far as we know, nobody has ever written anything about things Buffett NEVER said. But here are our top three things Buffett never said:

1. “The stock went down, so I sold it.” Buffett knows the market goes up and down. He studies companies, not stock ticker symbols. When the fundamentals are in place, he buys. Then he holds. Then he holds some more. If the price declines, he typically buys more. This is what ‘buy low, sell high’ is all about.

2. “I’m waiting to invest until we get more economic data to clear up the uncertainty.” In his seven decades of investing, Buffett has noticed that uncertainty is always with us. He reads and studies ceaselessly, and when he finds something to buy, he buys it. Frequently, this turns out to be when the price is depressed because of temporary factors. Others are paralyzed by uncertainty when Buffett is taking action.

3. “A lot depends on what the Federal Reserve does next month.” Buffett has run his company for more than five decades, while seven different people held the chairmanship of the Federal Reserve Board, through innumerable cycles of Federal Reserve tightening and loosening. He can tell you what he paid for his stake in Coca Cola and when it was purchased. He probably cannot say what the Federal Reserve did at the meeting before, or the meeting after, the transaction. Why? Because it doesn’t matter in the long run.

Warren Buffett does not wear a halo. He is a human being and that means he makes mistakes. But he has made more money investing than any other human being on the planet. We think it pays to listen to the things that he has said. But there may be even more value in understanding the things he never said.

If you would like to discuss these concepts or your specific circumstances at greater length, please write 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. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Stock investing involves risk including loss of principal.

The Next Recession is Coming… Again

chart from

Regular readers will recognize this headline. The next recession is always coming. Human nature being what it is, the economy will always have cycles just as the world will always have seasons. The excesses that build up in good times lead to imbalances that get corrected by economic downturns.

The most notable feature of the current economic expansion is its slow, plodding pace. Most people with jobs or in business are familiar with one of the reasons for this: unprecedented expansion of the regulatory state. Our shop and many others in many lines are coping with new kinds of nonsense that hampers production or service. (We are not arguing for a Darwinian, regulation-free society, of course.)

The silver lining in our plodding economy is the lack of a boom in any major sector that could create a big downturn. New home construction has not really exceeded the sixty-year average. According to the National Auto Dealers Association, vehicle sales–while near a record–only replaced 1/15th of our vehicle fleet last year. It seems to us that the peak in auto sales lies ahead of us. Capital spending and business investment, which has at times gotten too inflated in the past, has remained extremely subdued.

Energy, of course, did boom—and then busted. But our diverse and dynamic economy has largely absorbed the job losses, and consumers and businesses are enjoying unforeseen low gasoline and energy prices. Corporate earnings have not been great, but should strengthen in the quarters ahead.

The Index of Leading Economic Indicators points to near-term trends in economic growth, and it has flashed a steady positive reading for years. The bond market speaks to us about economic conditions through the yield curve, which remains encouraging and positive. LPL Research publishes a Current Conditions Index which measures economic vitality right now—and it has remained in positive territory. LPL Chief Economist John Canally draws mostly comforting conclusions from the latest labor market statistics ( )

So yes, the next recession IS coming. We just do not think it will arrive soon. Our plodding plow-horse recovery continues, no boom—but no bust either. This is good news for investors.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Benefit of Being Picky

© Can Stock Photo Inc. / Farina5000

Suppose you had the opportunity to attend a fancy catered gala. When you get to the dessert table, a dizzying array of delicious looking pies are spread out for you to sample, too many to choose from. Not knowing which ones might be the best, a fellow next to you tells you he’s going to sample a little bit of everything and offers to help load up your plate the same way.

If you happen to be deathly allergic to peanuts, you would ask your helpful friend to skip the peanut butter pie and just get you some of the rest.
“Nonsense,” he tells you. “You never know, the peanut butter pie might be the best of the lot.”

“But if I eat it I’ll go into shock and might die. I can’t even let it touch the rest of the dessert on my plate.”

“You don’t know the future. Just because you’ve had an allergic reaction before doesn’t mean that you’ll have one now,” he says, handing you a plate with a slice of peanut butter pie smack in the middle. Instead of getting to enjoy your dessert you’re left unhappily trying to pick around the edges of the uncontaminated slices of pie.

This situation sounds absurd, and it is. And yet it resembles a commonplace practice within the investment industry. There is a portfolio strategy known as asset allocation that says that since we can’t know for sure which assets are going to go up or down, investors should aim to own a slice of everything. Because different asset classes move in response to different economic pressures, when one goes down it will hopefully be balanced out by a different asset going up. The goal is to try to reduce volatility through diversification.

However, just like our unhappy party-goer in the example above, there are probably some slices you don’t want any of—period. Tech stocks during the dot-com bubble in 2000 and mortgage based securities during the real estate bubble of 2007 were two slices of the investment universe that were very dangerous to your financial health.

Proponents of asset allocation dismiss this notion as market timing, saying that you can’t predict when the bubble will burst and that you miss out on potential gains by staying out of the bubble. But if we’re allergic to the pie, we don’t care how delicious the pie might be—we don’t want a slice.

Our approach may or may not be the right one. Nevertheless, we believe that being picky about the slices we take may bring us better results than blindly grabbing a bit of everything. If you want to talk about how this may apply to your portfolio, please call or email 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. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

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

It’s a Market of Stocks, not a Stock Market

© Can Stock Photo Inc. / mddphot

In the financial press you hear a lot of talk about “the market”: the market is up, the market is down, the market is jittery, and so on. Sometimes they’ll cite a specific index, such as the Dow Jones Industrial Average or Standard & Poor’s 500, using them as shorthand for the stock market as a whole.

This is a generalization, of course. There is no single monolithic “stock market” that tracks the performance of all publicly traded companies. What happens with one company’s stock price may not be happening with others—even within the big indexes.

For example, the S&P 500 Index rose 19.81% in 1999: the peak of the dot-com bubble. According to Standard & Poor’s sector research, the tech sector of the S&P Index went up a whopping 98.27% that year while boring sectors like consumer staples and utilities actually went down. “The market” had a great year, but a tech-heavy portfolio fared much better than a portfolio invested in old economy stocks. The reverse was true the next year, when the tech bubble popped and S&P’s tech sector dropped over 40% while banks, utilities, and staples went shooting up.

We find S&P’s index to be a useful barometer for the stock market as a whole and are sometimes guilty of using it as a generalization for all stocks. But it’s important to remember that the index is still made up of individual stocks, each with their own story.

Sometimes when you average all of those stocks together some compelling stories can get lost in the mix. Some advisors recommend a broad-based index approach, hoping that overperforming stocks will balance out underperforming stocks. While there is a time and place for indexing, we would really just prefer to own the overperforming stocks and try to leave the others out of it. Obviously this is not really feasible—we cannot know in advance which stocks will do well. However, we believe we can try.

As contrarian investors, we are interested specifically in stocks that look like they have the potential to buck the trend of the market. When there’s a stampede, we prefer to be running the other way. So it’s little surprise that some of our favorite holdings may be up when the indexes are down (or, unfortunately, vice versa.)

At 228 Main, we often deal with generalizations about the market because of the broad scope of our writings. If you want to talk specifics, call or email us and we’ll see if we can help.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Problem with Goals

© Can Stock Photo Inc. / imagesbyrob

Scott Adams, creator of the wildly successful comic strip Dilbert, is a man of big ideas. Some of them are fantastic, some of them are questionable, a few of them may be literally insane. However, for all his eccentricity it’s hard to argue with results: over the past three decades Adams has managed to parlay his workplace doodles into a multi-million dollar franchise.

Among his many ideas, there’s one in particular that he credits his success to: he doesn’t believe in setting goals for himself. Instead, he believes in building systems to work towards what he wants. The idea is simple. Most peoples’ goals depend on factors outside their direct control, which leads to frustration. By focusing on what you’re doing to manage those goals, though, you can build a system or framework for trying to achieve what you want. This way, you’re only concerned about the things that you control yourself, rather than worrying about goals that are outside your immediate reach.

For example, suppose a freshly minted high school graduate wants to be a doctor. That goal will take an enormous amount of dedication and training, and no amount of passion or talent is going to replace that. At any given moment, they’re an entire decade away from reaching their goal—it will take them five years of school before they even reach a point with any kind of real hands-on training. When faced with such a distant goal it’s easy to despair of ever reaching it. But while they can’t just up and be a doctor, they can always work on their system for trying to become a doctor. By focusing on their immediate day to day studies instead of their long-term goal, every day is a success. They simply use their system.

We think this makes great life advice in general, but it’s particularly important when it comes to investing. Our goal is to grow our portfolio over time, but what the market does day to day is entirely beyond our control: we can’t force our portfolio to go up. What we can always do, though, is work our system. In our case, this means practicing our three core principles: avoid stampedes in the market, look for the biggest bargains we can find, and own the orchard for the fruit crop. We can’t push a button and make your portfolio grow. But we can practice our investing discipline every day, even when the markets don’t cooperate.

They Say You Can’t Handle the Truth!

© Can Stock Photo Inc. / firebrand_photo

The conventional wisdom in the investment business is that you can’t handle the truth. Our whole business is built around the idea that you CAN handle the truth. Some were born that way, and others may be trained to handle the truth. The stakes are quite high, because those who can handle the truth about investing may be more likely to enjoy success at it.

We humans do have some tendencies which are both deeply rooted and counterproductive to informed investing. The easy path for us would be to pander to those tendencies, affirm them, pat you on the back and take your money. Here are some examples of that:

“They” (the adherents of flawed conventional wisdom) promote the idea that the pain of a loss is twice as great as the pleasure of a similarly sized gain.

“They” speak of temporary downturns as if they were actual losses, a disservice to long term investors.

“They” promote the idea that arithmetic works against investors, since a 20% loss must be followed by a 25% gain in order to break even.

“They” sacrifice total returns on the altar of expensive new products or stagnant investments in the hopes of reducing volatility.

We, on the other hand, believe you can handle the truth. Our experience confirms this. Here is the truth:

1. Long term investing always involves living with volatility, there is no way around it.

2. The ‘pain of a loss’ is optional—it may be offset by the joy of finding bargains, or ignored in the confident knowledge that downturns are temporary. The economy and markets always muddle through and eventually recover.

 3. According to Standard & Poor’s records, over the century’s experience with the Dow Jones Average, so far every 20% loss has been followed by a greater than 25% gain.

4. Investing for the long term in accordance with proven principles, using timeless strategies and timely tactics, in a manner that can get you to your goals, is the right way to do it.

We believe that people who keep some money in the bank, and who know where their needed cash flow will come from, can usually live with our methods and strategies with at least some part of their wealth. And we know that others may not be able to do it. Some lack the confidence that the system will endure, others just cannot tolerate fluctuating account values. It takes all kinds to make the world.

Our aim is to add value to those who can handle the truth, as we’ve defined it here. We work hard to educate and train and impart perspective and context…and it has worked. As always, if you have questions or comments, please write 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. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.

The Most Expensive Phrase

© / Nikonaft

“The four most expensive words in the English language are, ‘This time it’s different.’”
– Sir John Templeton (1912-2008)

“The second-most-expensive words in the English Language are, ‘Too Far, Too Fast.’”
– Mark Leibman (1956-2076)

We write extensively about cycles because understanding them is a critical talent for successful investing. Here is how the famous quotations above fit into our understanding.

“This time it’s different” refers to the tendency to believe that an unsustainable trend will continue. Some circumstance or reason makes people think that the forces which normally cause a trend change do not apply. In practice, it usually happens most often when a type of investment has gotten to the bubble stage—irrational pricing and large flows of money. You could hear these words at the peak of the tech bubble in 2000, the real estate bubble in 2007, the commodity bubble in 2011, et cetera. And there are always stories that go along with the expensive words, a tale that explains exactly why “this time it’s different.”

Recently, though, we’ve heard from many quarters that certain investments have gone up “too far, too fast.” Pondering this phenomena, we’ve concluded that “too far, too fast” is a mirror image twin of “this time it’s different.” Where one is used at the peak, the other begins to appear shortly after the bottom is reached—after the crash.

For example, crude oil fell from $140 years ago to $28, then recovered to $43. To put this in perspective, oil fell 80% and after a rise it was still down 70%. Nobody knows the future, of course, but the “too far, too fast” crowd thinks oil needs to go back down. Oil fell because of booming supply and sluggish demand—a glut. But every glut plants the seeds of a shortage. The “too far, too fast” crowd isn’t paying attention to the changing fundamentals of the market: the inevitable cycle.

The stock market has mounted a vigorous rally, up from the February lows, and we hear “too far, too fast” about that as well. Yet, putting the move into perspective, the market is still below the highs reached nearly a year ago! Too far, too fast—my foot!

We must note that “two steps forward, one step back” has not been repealed. The markets go up and down. But people who sold out of the market over fear of a downturn are sitting on cash, failing to reinvest. Why? “Too far, too fast.” As you know, our principles and strategies prevent those kinds of problems.

One of our roles is to help you avoid two of the expensive actions that afflict others: hanging on through a bursting bubble, and failing to take advantage of bargain prices. Please call or write if you have questions or comments about the current markets and your situation.