Month: February 2017

Spring 2017 Market Themes

© Can Stock Photo / photoslb

We look for promising investments by studying opportunities in detail, reading annual reports, SEC filings, analyst commentary, and doing our own arithmetic. Potential gains live in the gap between the unfolding reality and consensus expectations. The outcome of this study and thought is a list of investments we would like to own.

Although we look at individual companies, we often find themes in our list. This makes sense when you consider that undervalued companies are often found in unpopular industries.

Last fall we wrote about three of our market themes. Biotechnology companies, the evolution of the automobile, and natural resources continue to figure into our thinking. Other themes have emerged.

Consolidation has fundamentally changed the dynamics of the airline industry. It used to be that fierce waves of competition caused price cutting, which led to poor financial results and even bankruptcies. But there are not twenty players, or even ten any more. Consolidation and liquidation has reduced the number of major competitors to four.

The four biggies compete with each other, but more gently. Each knows that lower growth ambitions and stable pricing may lead to greater profits than higher growth ambitions and lower prices. This idea of a pricing oligopoly seems to explain the behavior of the airlines, which are booking record profits. We believe the market has not awoken to the new dynamics, and undervalues the stocks. We may be wrong.

The European equity markets have had one problem after another for more than a decade. An index of major blue chip stocks, the Eurostoxx 50, is lower than it was ten years ago. Meanwhile in the US, major averages have doubled. Dividend yields and prices are more favorable “over there.” So we have begun to include European equity exposure in portfolios.

The Buy List of thirty-some holdings reflects these themes and other opportunities we believe to be attractive. There are no guarantees on any of them. We can tell you we are excited about the prospects. If you would like to discuss your holdings or situation in detail, 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.

Stock investing involves risk including loss of principal.

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

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

Case Study: The Looming Retirement of Mr. & Mrs. C

© Can Stock Photo / lucidwaters

We recently were consulted by folks who are just a few years from retirement. Mr. and Mrs. C had a chance to make a major purchase that they had long considered and would really enjoy. Some people want a camper or a boat, others a cabin…you get the picture. They wanted our help to figure out if it would fit with the rest of their plans and planning.

The process we used to help them is the same framework we use to help people understand how retirement will work for them, financially speaking. Perhaps it will be of interest to you.

There are four kinds of numbers that figure in.

  1. Monthly outgo—how much will it take to run the household in retirement, to live as you plan to live?
  2. Monthly income—what are the pieces of recurring monthly income? Monthly pension benefits, Social Security, and rental income are in this category.
  3. Planned lump sum purchases or obligations to pay. This was the thing that stumped Mr. & Mrs. C. They had a chance to lay out some money that could improve their lives a lot, and needed to know whether it would work out.
  4. Lump sum resources available. Long term savings, 401(k) plans, IRA’s, investments, and money from planned sales of assets are the main categories here.

Fortunately, Mr. & Mrs. C have expected retirement income sources that should sustain their lifestyle in retirement. Once that was determined, we could move on to sorting out the best way to handle the purchase they planned.

There are tax considerations to withdrawing retirement plan dollars, cash flow considerations from taking on debt, and opportunity costs to cashing in investments. We framed the costs and benefits of each alternative so they could figure out what they wanted to do. If you would like to talk about your situation, please call or email us to set a time for discussion.


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

News from the Trade Desk

© Can Stock Photo / mflippo

 As a hands-on research and portfolio management shop, we develop capabilities that many advisors do not need or have. If we were just finding money and sending it off to a third party to manage, life would be simple (and boring).

From time to time our research uncovers potential opportunities in discounted corporate bonds. The market for these high yield bonds is challenging. At times the market is “thin,” which means there is a lack of buyers and sellers. That makes it difficult to complete the purchases we desire.

Fortunately, LPL Financial has experienced and capable traders on the bond desk. They help us execute multimillion dollar bulk transactions at the best available prices. Buying for many accounts at one time in a bulk deal is a more efficient way to do it.

The opportunity in bonds is somewhat rare. We have only purchased eight different issuing companies in sixteen years. But there is another kind of trading that is relatively constant—the purchase and sale of stock.

The bulk bond purchases led us to a breakthrough in our stock trading protocol. One day we learned at 1 P.M. that a big bond purchase had been completed. We needed to go through eighty accounts and make sales of stock to raise money to pay for the newly purchased bonds. We had two hours before the market closed.

We had devised a protocol (a set of rules) to guide us. The four holdings we liked the least were ranked in order of priority to sell. In each account, we sold in that order until the bonds were paid for. Greg Leibman worked from one end of the list, Mark Leibman worked from the other, and they met in the middle before the market closed.

More recently we adapted the protocol concept to make stock trades. We came to a negative conclusion about an industry we previously invested in—at the same time we uncovered a new opportunity in another industry. We devised a protocol to sell one and buy the other, and completed more than five hundred stock trades in a single day.

The trade desk is where two of our key activities come together for you: research and portfolio management. We are pleased at the continued development of our research. The time we save with effective operations goes back into communicating with you—so call or email if you would like perspective on any money question.


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 market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.

Stock investing involves risk including loss of principal.

Case Study: The Portfolio of Mr. X

© Can Stock Photo / arekmalang

Over the last year or so, you taught us a lesson. We are a little embarrassed it took us so long to catch on. But learn we did, and now we are enjoying the payoff.

The lesson is, some people require a layer of cash or other cash equivalents in their accounts to reduce the volatility and risk of the overall portfolio. We used to see this as a form of heresy against our beloved three fundamental principles. Clients were encouraged to maintain their safety blanket somewhere else, so that we could concentrate on our traditional research-driven, focused approach to investing.

We still aren’t comfortable with market timing, and selling in a panic will always result in an invitation to do business elsewhere. But we finally have started listening to those who desire a portion of liquid assets inside their portfolios, or a layer of less volatile investments.

Mr. X is a patient man who has stuck with us despite our stubbornness. His philosophy nearly matches ours—but not quite. When he visited the shop recently to discuss his desire for a little less risk (again), we explained that we had adapted to preferences like his, and how much cash or liquid assets did he want to maintain in his account?

Mr. X could scarcely believe what he was hearing. He asked if we were really going to skip the part where we argue. When we assured him we would simply carry out his wishes, he was surprised and pleased.

Of course, we discussed the central tradeoff. Higher cash levels will generally result in lower long term returns. Mr. X pondered the issue, and specified a relatively modest fraction of the account to be in cash.

Trading lower returns for less volatility can have desirable effects. The cash layer may enable a person to stay with the overall plan in tough times. Financial confidence is a very nice thing to have, and the cash layer may help address it.

We have not abandoned our principles. We simply came to the realization that we could help more people invest more effectively if we listened to them more carefully. Life is better for us, and more pleasant for Mr. X as well.

If these issues are pertinent to you, please write or call to talk about 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. All performance referenced is historical and is no guarantee of future results.

Professionalism? Or Pandering?

© Can Stock Photo / stokkete

Two popular trends in the investment business may be affecting the financial health of clients. In my opinion the use of “risk tolerance assessment” tools, combined with the trend toward model portfolios, may be good for advisors and bad for the customer.

Many advisors use risk tolerance assessments. The issue is that when markets are lovely and rising, these tests have the potential to show that risk tolerance is high based on the client’s response. When markets are ugly and falling, they have the potential to show risk tolerance is low based on the client’s response. These tests measure changing conditions, not some fixed internal thermostat.

The potential for mischief comes into play when the results are tied to model portfolios. A lower risk tolerance potentially gets you a portfolio with less chance for long term growth, lower exposure to fluctuating but rewarding markets, and more supposedly stable investments with smaller potential returns. So the market goes down, risk tolerance goes down, and people may sell out at low points.

Conversely, when markets go up, risk tolerance goes up, and people may buy in at high points.

The old rule is ‘buy low, sell high.’ It is my opinion that the supposedly scientific approach of risk tolerance assessment tied to model portfolios encourages people to do exactly the opposite.

It appears to be objective, almost scientific. The pie charts are impressive. But the process panders to the worst elements of untrained human nature—and actual investment outcomes may show it.

It is as if the cardiologist, upon learning that a patient dislikes sweating, prescribes sitting on the couch instead of exercise. Or if a pediatrician first assesses a child’s tolerance for icky-tasting medicine, then tailors his prescription accordingly.

We believe that people can handle the truth. Our experience says people can learn to understand and live with volatility on some fraction of their wealth in order to strive for long term returns.

So the first step in our process is to determine if a prospective client can be an effective investor. It doesn’t matter to us whether they were born with great instincts or are trainable—we provide support and education through all kinds of markets. It takes a lot of effort, but we do it because of the results it may provide.

If you need a refresher on the ‘buy low, sell high’ thing or would like to discuss how this affects your plans and planning, 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.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal.

If You Always Do What Everybody Else Does…

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Our clients know we are not like most other financial advisors. We used to be content to let people discover the differences at their own pace, if ever. But changes in the world have made clarity about the distinction a crucial matter—vital for us, vital for you.

The financial industry is responding to regulatory and competitive pressures by adopting standardized approaches for all investors. This ‘safe’ approach based on conventional thinking supposedly reduces risk of fines or litigation.

Consequently, many advisors spend no time reading SEC filings or analyzing financial statements or managing portfolios of stocks and bonds. Instead, they try to find people to stuff into one of three or five pie charts filled with packaged products.

There are more than 300 million people in the country. We do not believe you all fit into one of these pie charts.

Our principles-based approach is based on building custom portfolios for each client. We are contrarian—we do NOT want to do what everybody else does, and get what everybody else gets. We hope this is why you continue to do business with us.

With different methods, we get different outcomes. Client results generally do not match “benchmark” returns such as the S&P 500 Index, or what the pie chart would have gotten you. Sometimes we do better, sometimes we do worse, and over the long term we hope to come out ahead. No guarantees, of course.

Our portfolios also experience volatility. We all understand that this is an integral part of long term investing. We do not sell out just because the price goes down. Warren Buffett loves to buy when the price of a good opportunity declines, and so do we.

Since each client has a custom portfolio, there is a range of returns even among clients with similar objectives. We are constantly improving our portfolio process hoping that all clients receive as much benefit as possible from the opportunities we identify. But with our approach to portfolio-building, there are still nearly infinite variations in holdings. Money comes in at different times, and client preferences are taken into account when investing. Naturally outcomes differ one from the next.

Bottom line: if you want the benchmark return, or to end up with what everybody else gets, or to avoid volatility, you should find an advisor to slot you into a pie chart. Don’t worry, it is easy to find one—they are all over the place.


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.

Memento Mori

© Can Stock Photo / boggy

In ancient Rome, it was customary for the city to throw lavish triumphal parades in honor of victorious generals. The whole city would turn out to celebrate those who had brought glory to Rome. For a successful general, it was an intoxicating reward.

Lest their generals become too intoxicated with success, however, the Romans would assign a servant with a unique task. Their job was to follow the triumphant general throughout the festivities and periodically whisper in their ear memento mori: “Remember, you are mortal.”

It is humbling advice, and one that we would do well to remember. The markets have had several great quarters lately, leading to the Dow average topping the dizzying benchmark of 20,000 points for the first time last week. We have no way of knowing how high it may get in this rally or the next, either.

We do know one thing, however: no rally lasts forever. No matter how high the market soars, it can always drop back down. We don’t know when, and we don’t know how much, but someday that day will come. There is always a recession in our future.

Our goal is to try to minimize the damage by avoiding stampedes when we see them. When investor sentiment gets overly exuberant, when we start hearing people say “You can’t lose money in the stock market”, this is when we must pay heed: “Remember, market rallies are mortal.” We are confident that in the long run the markets may bounce back from future downturns as they have always done before and we can potentially be better off afterwards—but the recovery will undoubtedly be slower and more painful if we fall into the trap of thinking that our portfolios are invincible just because they’re doing well now.

We’re thrilled with our performance over the past year and excited about the continued evolution of our portfolio strategies. At the same time, we know that nothing lasts forever. At some point in the future, we will have to reckon with another downturn. It might be in a year, or it might be in five years. Either way we must keep this inevitable fact in mind if we hope to try to mitigate the damage. If this weighs on your plans and planning, give us a call or email us to discuss 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. All performance referenced is historical and is no guarantee of future results.

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

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.