Month: April 2017

Case Study: The Life of Mr. S, and Working to 92

© Can Stock Photo / Leaf

Long ago, I met a man in his late forties. He had just resigned one position and accepted another. Needing a place for a 401(k) rollover, he agreed to do business with me. Our methods and access to investments were quite limited then (I was still in my twenties!), but I did the best I could.

Through the years his life evolved and changed; like all of us, he had his share of joy and pain. His wife began to suffer a chronic illness. His industry consolidated which caused some moves from town to town. But his children all ended up in successful marriages and careers, and grandchildren came. I advised him on wealth management throughout, helping him manage challenges from family health expenses and other things.

At sixty-six he retired, fearing he had not saved enough. The size of the fruit crop he needed each year seemed too large for the orchard he had grown, so to speak. We devised a plan that gave him a chance for things to work, although without any guarantees.

Of course, through these years, our knowledge and experience and confidence and capabilities flourished. We grew together.

Mr. S is pushing eighty-one years old now; poor Mrs. S had her disease go from chronic to acute and she succumbed a short while back. Mr. S stays busy helping with grandchildren and keeping up his home.

His retirement finances have worked out well, although this is not evidence of anything to anyone else. Good fortune played a role, past performance is no guarantee of future results, and all that. But I still want to tell you what happened so far.

Over fifteen years, Mr. S has withdrawn more than he retired with—and he also still has a current account balance that is larger than when he started. He tells us it is like the endless coffee refills they have at the café.

I call Mr. S when I need a pick-me-up; his gratitude is boundless. This, friends, is why I want to work to age 92.

That gives us a little more than thirty years to help many more of you get to eighty with more confidence than you ever thought possible. If you are fifty or older now, we will do our best between now and then to earn your gratitude when you turn age eighty. Clients, if you would like to talk about this or anything else, please email or call 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.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Our Success Will Never Hurt You

© Can Stock Photo / Cebas

I never aimed to build an empire, or hire an army of people to run it. From a very young age in business, all I wanted to do was find a group of clients who, if we took care of them, would take care of us. Little did I know how gratifying this outcome would be, or how close our relationships would become!

But nothing succeeds like success. It turns out many of you believe we are good at what we do: understanding your life and goals, framing issues so you can make good decisions, and managing your money effectively in a way that coordinates with your life.

Our communications are simple, accessible to almost anyone who can read. Our stories and essays and parables get shared to friends of our friends, and their friends. You recommend our services when you believe it would be a favor to someone close to you. So growth is inevitably happening, even though we devote all of our thoughts and efforts to growing your buckets and communicating with you—not looking for more buckets.

Consultants advise us to ‘segment’ our client group into A, B, and C clients. This is typically based on economics: big accounts are A, little accounts are C. The advice is to get rid of C clients, move B clients to a junior partner, and concentrate on A clients. Of course, being contrarian, this conventional wisdom has never made sense to us. It never seemed right. More than one of you came to us after getting demoted in this way by some hotshot.

For a long time we’ve been able to say, all of our clients are first class. Increasing efficiencies and improvements to our systems and processes and delegation of administrative duties helped us keep this true.

Between the wide reach of new media and unsolicited referrals, one thing—my time—will come into play as a limiting factor. But we have a thoughtful plan, and I think you will like it.

All the way back to the 1970’s, when you went to Kentucky Fried Chicken, Col. Sanders was not back in the kitchen at the fryer. His recipe was there, his methods were there, his image was there. But associates were doing the work. If our growth continues, as seems likely, new clients—not you—will get the Col. Sanders version.

You folks with whom I have a personal relationship, who value our work and depend on it, you will always have access to me to help with your plans and planning. This is why we say our success will never hurt you. Clients, if you would like to talk about this or anything else, please email or call 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.

Culture vs. Strategy

© Can Stock Photo / Cebas

Long ago, we conceived the notion that a well-grounded enterprise had values as the foundation. Principles arise from values, strategy builds on principles, and tactics align with strategy. So ultimately, everything you do every day has your values at the bottom of it.

Our initial thought was to get a nice graphic of this structure so we could explain it to clients more clearly. But the only way to truly convey values is to live them, day by day and year by year, and let others draw their own conclusions. So we dropped the idea of talking about them.

We were reminded of the structure recently, when an airline made a public relations disaster by dragging a bloodied customer off an overbooked plane. The next morning, the value of the airline dropped by more than half a billion dollars in the stock market. In the aftermath Tom Peters, the dean of business gurus, attributed the problem to the CEO for having a defective culture.

This prompted us to look up ‘organizational culture,’ a concept developed by MIT professor Edgar Schein in the 1980’s. His academic work parallels our old notion about values, with some differences in terminology.

Schein is credited with a business classic: “Culture eats strategy for breakfast.” So when we think about the airline, we know the strategy is to increase the ‘load factor’ or utilization rate because fuller planes make more profit. But that strategy is not grounded on any deeper value than short-term profit.

The airline we prefer to fly on is known for trying to get their customers where they are going in the most pleasant and efficient manner possible. That is their culture. The staff smiles a lot, and deals honestly and tactfully when any issue arises. Paradoxically, it is the only major airline operating in the US today that has never booked a quarterly loss.

The difference between the two airlines perhaps illustrates that culture eats strategy for breakfast. This is a useful lesson for us in selecting companies in which to invest, and for you, in choosing where to do business for any product or service. Clients, if you would like to talk about this or any other topic, please email or call us.

Securities offered through LPL Financial, Member FINRA/SIPC.

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.

The State of Our Union

© Can Stock Photo / Niyazz

Our union? Yes, you and we are partners in a unique enterprise. As a client, you share our confidence about the long term. Many of you are willing to live with volatility in the short term to get where you want to go. And many of you don’t join stampedes or sell out in panic. This investment behavior puts you in a select group. It is a vital ingredient in the beginning of your success—and ours.

The 21st anniversary of the decision to embark on our ultimate business venture is a natural time to take stock. Where are we now? Where are we going? We’ll assess this in terms of our three key activities.

Communications.

We love to talk—you know this. About two years ago, we began to figure out how to talk to all of you, every day if you would like. The new media has two aspects. Real time commentary and news shows up in the social media venues like Facebook and Twitter. A permanent library of all of our philosophy and strategies and methods can be found 24/7 at 228Main.com.

Paradoxically, the success of our new media has given us more time to talk one on one, by telephone or email or in person. So now we spend more time doing what we love, connecting with you directly. We expect to continue to build both our archives and our skill at real time interaction.

Investment Research.

To a surprising extent, our research capabilities are tied to new media activity. We interact with great minds in economics and market strategy, trading ideas and insights and finding topics we wish to investigate more deeply.

The one-to-one communications with you also contain a research element. We gain perspective on global markets by talking to executives who have traveled the world on business. We have a better understanding of specific industries and companies because we talk to people who are in those businesses. Every one of you is a consumer, and we talk to you about companies and products you deal with every day.

Our conventional sources have never been better, either. LPL Financial continues to build out our back office research staff by adding and developing talent. Bottom line: we are connected to ever-richer sources of ideas and trends as well as the specific data we need to do our work.

Portfolio Management.

Over the past eighteen months we have worked on improving our capability to act more quickly on fleeting opportunities. You saw the results. Our portfolio review process is more robust than it ever has been.

We also have tweaked our strategy. Now, client portfolios see more activity but in smaller pieces. Instead of looking for opportunities where we can invest 5% of a portfolio balance, we will take action if 1 or 2 or 3% position sizes are appropriate. With more holdings comes greater diversification. Theoretically, this may give us a smoother ride to our goals.

The markets are like a thousand piece mosaic whose tiles are constantly changing. So we cannot tell you what changes are coming in the future—only that we will always be trying to figure out how to grow your buckets more effectively.

So the state of our union is grand. We have focused on our systems and processes so we can take care of business no matter what happens in our lives or the economy and markets. We offer no guarantees about the future, except for our intent to get better as we go along. Thank you all for your part in our unique partnership. Clients, if you’d like to talk at greater length about these things or anything else, please email 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.

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.

Alternative Facts, Alternative Investments

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Over the past few months, there has been a lot of hay made in the press about “alternative facts.” The term is a sarcastic euphemism; when something is labeled an alternative fact, the clear implication is that it is not a fact at all.

There is a certain class of investments which are collectively called “alternative investments.” This term is unrelated to the term “alternative fact”, but the similarities are undeniable.

Traditional investments are based on the notion of putting your money to work in order to generate more money. When you invest in a company’s stock, you are buying a piece of a going concern that generates revenue. When you invest in bonds, you are buying a debt obligation that bears interest. Even if you are just holding cash reserves, when you leave your cash with a bank, they are paying you interest to hold onto your money. In today’s interest rate environment you are probably earning close to nothing, but at least in theory there is some return on cash.

This is not to say that traditional investments are not without risks. You are not guaranteed to break even, let alone make money—companies may go broke, leaving stocks and bonds at a fraction of their former value. But you still have the hope that your money can grow into more money over time.

“Alternative investments” is a very large category which encompasses a wide range of assets. The only common element is that they do not fall into traditional investment categories such as stocks and bonds, and in many cases, arguably do not qualify as investments in the traditional sense at all.

Commodities are one form of alternative investment. These are gold, silver, oil, corn, and so on—actual, physical products, not the companies that produce them. If you buy a bar of gold, all you will ever have is a bar of gold. It will never turn into two bars of gold. If you are lucky, maybe you can sell it to someone for more than you paid for it. But that is speculation, not investment.

Derivatives contracts are another type of alternative investment. A derivative’s value is based on (“derived from”) the value of another asset, such as a stock or commodity. When you buy options to purchase a company’s stock, you are making a bet that the company will be successful, just like owning stock. However, stock options tend to have a very short time horizon. You are speculating on short term price fluctuations, not really investing in a company’s long term growth.

Undoubtedly some people make good money speculating on alternative investments. As a result, some portfolio managers believe in buying small slices of alternative investments for everyone in case they happen to outperform traditional investments. Our response: nuts! We want to build an orchard big enough to live off the fruit crop. We have no interest in owning a smaller orchard and trying to make up the difference buying and selling fruit with other fruit speculators.

Clients, if you want to talk about your portfolio, please call or email. But if someone is trying to sell you “alternative investments”, you should perhaps treat them with the same skepticism you’d give to someone pitching “alternative facts.”

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

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

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.

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

Crab Claws, Sustainability, and Your Money

© Can Stock Photo / connect

Perhaps the most sustainable crop in the world is the stone crab claw, a seasonal Florida delicacy. You see, stone crabs are caught in live traps, a claw is removed, and the crab is returned to the water. The claw regenerates, usually growing back larger than before—an ability they evolved to escape predators, which now supplies Florida fisheries with a sustainable catch.

We have come a long way since 1883, when a keynote speaker at the International Fisheries Exposition in London proclaimed that “all the great sea fisheries are inexhaustible.” We later learned to our chagrin that it is, in fact, entirely possible to harvest anything to the point of extinction.

Fortunately we also figured out how to nurture fisheries to produce more fish, and to limit harvest to sustainable levels. You can take out the entire population of fish just once…but you may be able to harvest some fraction of the population, year after year, until the end of time.

A pertinent comparison may be made to your stock of wealth in retirement. Like a fishery, a portfolio can be over-harvested until it inevitably declines and disappears. But with sustainable management, it may produce a recurring crop. This is the endowment principle in action. A dollar may be spent one time only—but if invested, the income from it may be spent every year, in perpetuity.

Decades ago, our life expectancies did not extend long past retirement age. Planning for a short retirement, one could aim at a target sum and figure that it would be spent down over a few years, then there would be a funeral. But with many life expectancies extending decades past retirement, the arithmetic of planning has changed completely. Not every financial planner has kept up with the change.

Sustainable fisheries assure the world that it will not run out of fish. Sustainable portfolios reduce the chance that you will run out of money in retirement. One of our objects is to help you understand what part of your resources may be considered permanent capital, to be invested on a sustainable basis.

This is a process that has some nuances; each of you has a different situation and specific goals. Clients, if you would like to talk about your situation, 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.

Investing involves risk, including possible loss of principal.

Short Cuts

© Can Stock Photo / BackyardProduct

When I was a child, a friend and I were off on some adventure or other. We arrived back at his home quite a bit later than expected. His mother was waiting, and demanded an explanation. My friend’s answer was Marx Brothers-quality dialogue: “We took a short-cut!”

His mother seemed to think that a short cut ought to reduce travel time, not increase it.

Some financial professionals and investment advisors take a very similar short cut. They adopt the view that it is either not possible to do better than the market averages, or not worth the effort of trying.

The reasons sound plausible, but may not stand up under examination. Human nature often encourages counterproductive behavior. We believe untrained human nature is a poor guide to investing; training and education may improve investor behavior, which may improve investment results. But the short-cutters seem to pander to human nature in its untrained state.

Active investment managers typically underperform the market averages, and this is often cited as evidence “it is too hard to beat the market.” What many fail to see is that active managers have human beings as customers, so may include popular investments and avoid out-of-favor sectors in order to draw more funds to manage. These tactics, of course, may be detrimental to actual investment results.

So that human nature thing enters into that argument, as well.

Life is straightforward for the short-cutters. They typically avoid the hard work of researching specific investment opportunities; they spend no time reading SEC filings, press releases, and conference call transcripts. They have no reason to try to understand the role of emotion driving money into different market sectors.

Hey, it is a free country and we are glad it is. Each person is entitled to his or her own opinion; investors are free to use or ignore any advice or advisors.

The short-cutters have become very popular. At the same time, with your help, our business has continued to grow and prosper. We do not mind the existence of short-cutters; they may actually reduce the competition for favorable opportunities. But we do want you to understand what we are talking about, and why.

If you have questions or comments on how this may apply to your situation, 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.

Art Versus Science

© Can Stock Photo / karandaev

For most of human existence, our primary occupation was trying to get enough food to keep ourselves going. Countless millions of manpower-hours have been spent hunting, gathering, farming, and fishing to put food on the table; millions more were spent preparing, preserving, and cooking.

The upshot of this is, we got really good at it. Thousands of years of practice gave us a lot of room for trial and error. We figured out how to create healthy, sustainable diets from practically every environment on the planet. Every culture came up with their own answer for how to feed and support their population. But if you asked any of them why their diet worked, they wouldn’t really be able to give you an answer. All they knew was that this was how they had traditionally made their food. It was an art, not a science.

As humans we are inquisitive creatures by nature, so some of us were unsatisfied by this answer. So scientists began to study what made our food tick. They isolated essential vitamins and minerals and determined their effects on our body. Armed with this knowledge, they devised newer and more “scientific” diets. According to their theories, we could make cheap mechanically processed food and insert vitamins to give us all the nutrition we needed. We would be free of having to slave away in the kitchen and wind up healthier than ever.

Unfortunately, this never really panned out. It turns out we still don’t understand nutrition as well as we thought we did. We’ve revised our nutritional models again and again, and yet we are still not substantially healthier or wiser than we were when we were slaving away in the kitchen doing things the way grandma did.

This is an elucidating story on the limitations of scientific study, but it also has practical applications for our work. Just as our food scientists try to figure out what makes our food tick, financial professors try to figure out what makes our investments tick. They isolate factors that they believe account for investment performance and construct portfolios on the theory that they can reduce holdings to simple factors and whip up a balanced “diet” that has a little of everything.

Sometimes, the theories work. But anyone who thinks that they have unlocked the secret to guaranteed wealth is going to be just as disappointed as the food scientists who were certain they had unlocked the secret to guaranteed health.

We believe that we are likely to do better by sticking to the same timeless investment principles that our predecessors in the market made their money by. We are not Luddites—we are more than happy to include scientific investment analyses in our research. But we still believe that investment is as much art as it is science.

Perhaps someday in the distant future someone will manage to reduce investment success to an algorithm. Until then, we will trust our “artistic” judgment over what a computer tells us we should buy. If you would like to have an unscientific discussion about this or any other money topic, please call or write.

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