Month: June 2017

Fishing Lures Are Made to Catch Fishermen

© Can Stock Photo / zorandim

Archeologists say the oldest known fishhooks date back 23,000 years. They have no idea when one person first sold another one a fishing lure. But ever since then, it has been a truth that fishing lures are designed to catch fishermen, not fish. A useful corollary is lurking just beneath the surface.

Recently the Wall Street Journal wrote about a narrow investment sector that was getting flooded with money by investors starved for yield. ‘Direct lending’ allows investors to take on the role of lending money to middle-size companies. The article made the point that the flood of money had reduced yields as well as the safety of the loans—perhaps investors should look elsewhere.

As if on cue, we immediately received an email about a direct lending strategy ‘formerly available only to institutional investors.’ It is said to be an innovative way to generate current income.

After years of near-zero interest rates and lingering fears about the stock market, who isn’t looking for an innovative way to generate income—particularly with a strategy formerly available only to institutions?

Clearly, investment products are designed to catch investors, not investment returns.

Behavioral economists have amply demonstrated how prone we humans are to make irrational decisions—to do the wrong thing at the wrong time. The bane of investing is the tendency to buy in euphoria near the peak and sell in panic near the low. The crowd seems to miss on the timing, time after time.

You know our principles include the idea of avoiding stampedes. We know that going against the crowd can be rewarding—our approach is contrarian. When something we are doing becomes popular, we need to think about doing something different. And if everybody else is buying some sector or product, we are likely to be suspicious of it.

Market history is full of products that attracted lots and lots of money, but little in the way of returns. It is much like sporting goods stores full of lures that catch fishermen, not fish. Clients, if you would like to talk about this or any other pertinent topic, please email us 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.

Structured products typically have two components; a note and a derivative and a fixed maturity. They are complicated investments intended for a “buy and hold” strategy and offer protection from downside risk in exchange for forgoing some upside potential to achieve that protection. Principal protection may vary from partial to 100 percent.

Investing involves risk, including possible loss of principal.

Sell That Dog!

© Can Stock Photo / artshotphoto

Sometimes the world changes, we notice, and take action in your portfolios. An attractive opportunity may arise, or some issue may develop with a holding we already own. This is the story of a problem that developed, and how we handled it.

For several years we had owned shares in a certain class of telephone companies. Smaller landline carriers, generally serving less-populous areas, offered very high dividend yields. We believed there was a gap between perception and reality from which we could profit.

You see, everyone knew that landlines were in decline as consumers switched to cell phones only. This trend was particularly pronounced among younger households. But we knew that consumer landlines were a small part of the revenues of these companies. Most of the business came from data lines for businesses and high-speed internet access for consumers.

We were happy to own the shares and collect the dividends, believing that growth in the growing parts of the companies might offset shrinkage in the shrinking parts.

An amazing thing happened in 2016. For the first time ever, the number of homes connected by wire to the internet declined. People began to rely more on their smart phones and pad-type devices to connect. Some no longer needed or wanted a computer connected to the internet anymore. This was not what we expected.

We realized the ramifications for our holdings: the part of the business that was supposed to be growing was now shrinking! If revenues declined, dividend cuts would not be far behind. There seemed to be no chance for these companies to preserve value for shareowners.

Fortunately we had been cutting back these holdings for some time to make room for opportunities in high yield bonds. But we concluded that we had better divest the rest. We got rid of the rest of the holdings in all discretionary accounts in a single day of trading.

As we reviewed market sectors recently, we could not help but notice that the two former main telephone holdings were down year to date by more than 35%. Thank goodness we sold out.

Clients, nobody is perfect. The markets have a way of humbling everyone. We do think we improve our chances with wide-ranging research, study and thought. If you would like to discuss these ideas or any other pertinent topic, please email us 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.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Progress Beyond Our Dreams

© Can Stock Photo / smuay

In the spring of 1902, Brooklyn printers by the name of Sackett & Wilhelms had a problem. It is doubtful whether anyone realized the vast ramifications the solution would bring.

When the humidity changed, the printers found that the paper expanded and contracted, causing their four color printing process to come out misaligned. Wasted days, wasted paper–it was a pretty big problem. Fortunately, a young engineer at the Buffalo Forge had an idea.

The engineer drew plans for a device to control the humidity of the print shop, and the crew from Buffalo Forge installed it. It was the first of its kind. By the end of the summer, the device had been a success.

It took four years for someone else to come up with the name “air conditioning.” Systems spread to other commercial enterprises, and eventually to other businesses, homes, and even to automobiles. As we approach the summer months here in the 21st century, it is hard to imagine life without air conditioning!

The engineer, who was just a year out of college when he drew the plans, later founded and ran his own company. You might have heard of Willis Carrier’s air conditioning company.

Every day, somewhere people are working on solutions to problems the cost us money, time, health, or some other resource. Others are working on things that may improve our lives, or entertain us, or provide some other advantage. Our everyday lives contain scores of things that did not even exist twenty or forty years ago.

For most of history, this is not how things worked. Life was nasty, brutish, and short. Generations came and went, but little changed. Then modernity unleashed human creativity and potential like never before.

This may be the key factor behind the seemingly perpetual upward tendency of the equity markets, all the way back to their origins.

We have mentioned this before, but it bears repeating: stock markets are volatile. They go up and down. There are no guarantees. But they may represent a way to invest in human potential. Clients, please call or write if you would like to talk about this.


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

A 10% Correction is Coming!

canstockphoto2807017

There is an amazing thing about the performance of the stock market this year. Looking at the S&P 500 Stock Index, it has hardly dipped more than a few percent from its peaks. There has been a little wiggling, but far less than usual.

We human beings have a remarkable capacity to get used to current conditions, and expect them to persist. This could make trouble for us when the 10% market correction does eventually come around.

Long time clients know we believe that these market drops can neither be predicted nor traded profitably. Many of you call when the market does drop, seeking to invest in any bargains that appeared. We know how this works!

(Of course, we do not own ‘the market.’ Our holdings—and your account balances—sometimes deviate from the direction of the market. In 2016 we were fond of the difference. 2017 so far, the market is a little ahead of us. The point is, the market wiggles up and down, and our performance relative to the market also moves around.)

Commentator Morgan Housel recently wrote “every past market crash looks like an opportunity, but every future market crash looks like a risk.” Our experience after the 2007-2009 downturn demonstrated the first part of that statement. It is the next market crash that we must be concerned with.

Our research process is focused on finding bargains. We’ve taken steps in many portfolios to dampen volatility by changing holdings. Cash levels are generally higher, too. But none of these things will eliminate the temporary fluctuations that are an integral and necessary part of long term investing.

The market will decline. Our portfolios will decline. These declines will seem like a risk when we are going through them; we may see later that they really were an opportunity. The relative calm we’ve experience recently will give way to more volatile times—we know this, and should not be surprised by it.

We’re working to be in position to profit from opportunities that arise. Clients, if you would like to discuss your situation in greater detail, please email us 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.

Investing involves risk, including possible loss of principal.

Investment Success and EQ

© Can Stock Photo / Mark2121

We write about productive investment attitudes and habits because we have seen first-hand their power to improve one’s position. Knowledge improves behavior, effective behavior increases account balances, growing balances raise our revenues. Everybody wins.

Behavioral economists have identified ways in which humans seem wired to make poor financial decisions based on emotions. We know from our work with you that this neither dooms our investment performance nor requires us to settle for mediocre results.

Communicating ideas and perspectives is therefore at the very heart of our enterprise. So we were excited to find the work of author Justin Bariso. He wrote the following concise wisdom about his field of expertise:

“Emotional intelligence is the ability to make emotions work for you, instead of against you.”

Some propose that emotional intelligence and its measurement, EQ, is more vital to success in business and life than one’s intelligence quotient, or IQ. This makes a great deal of sense to us, generally, although brains are wonderfully useful in our work, too.

We think Bariso’s statement has special meaning in the world of investing. Many people let emotions work against them; behavioral economics demonstrates this. Our approach, which explicitly seeks to avoid stampedes and embraces unpopular viewpoints, absolutely seeks to let emotions work for us. Emotions create anomalies in market prices, and that is where our opportunities live.

Legendary investor Warren Buffett once said, “Be greedy when others are fearful, and fearful when others are greedy.” Isn’t this just another way to say ‘make emotions work for you instead of against you?’

Clients, if you would like to talk about this or any other pertinent topic, please email us 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.

Investing in the Path of Progress

© Can Stock Photo / irynarasko

The economic history of the past 2,000 years begins with little change for many centuries. Then, in the 17th century, things began to change—a lot.

Energy progressed from waterwheels and windmills to steam engines, electrification, and the fossil fuel economy. Each revolution brought lower prices, wider adoption, and increases in human productivity, incomes and wealth.

Energy powered the factory system, in which standardized parts enabled output to skyrocket compared to the age of one-at-a-time production by artisans making custom articles. One may have romantic notions about the age of the artisan, but far more people could afford shoes when they came out of a factory.

And that was just the beginning of the modern world, with its incredible increase in living standards and lifespans.

chart

Country by country, the pattern is rising urbanization and the decline of subsistence agriculture as economies modernize. It happened first in Europe and America. China is well along this path. The effect on incomes and economic growth is nothing short of astonishing, as you can see on the chart.

As investors, we see what may be a compelling opportunity from two current trends coming together. The next energy revolution, built on solar technology and battery storage, will enable vast parts of the developing world to modernize more quickly. Just as some places skipped the copper-wire age of telephones and built cell towers, in the years ahead some areas will skip the age of fossil fuels for electricity as solar power gains the economies of scale.

The most populous democracy in the world, India, is at an early stage of the trend to urbanization and modernity. Two thirds of the people live in rural areas; many are still engaged in subsistence farming. With a culture that values literacy and education, India is poised for growth and progress. Some believe that India is where China was twenty or thirty years ago—before decades of rapid economic growth. Add the next energy revolution to the mix, and you can see that exciting times may lie ahead.

The economy of India already includes some global companies, and many more publicly owned companies producing goods for the local market and nearby neighbors. By our standards, it is investable: money can be effectively invested with a reasonable expectation of gains. The India exposures we are putting in place are traded on the New York Stock Exchange, and priced in US dollars.

Of course, the future is uncertain, and there are no guarantees. As with all long-term investments, prices may be volatile. Clients, if you would like to discuss how a small India allocation might affect your portfolio, please call us or send email.


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.

What We Learned from You

© Can Stock Photo / ScantyNebula

One of the privileges of working with you is the opportunity to get to know your life stories. Over the decades, we’ve met a lot of people and heard many stories. We learned a lot about about productive financial habits and instincts from you, our clients.

We have noticed that people who are successful in retirement have some habits that helped them get there. These factors do not guarantee success, of course, but there seems to be a strong correlation. Here are three habits that seem to be key:

1. For all or most of their working careers, they invested regularly—every month, every payday. 401(k) plans, automatic deposits to Roth or other accounts…these put wealth-building on autopilot.

2. They spent less than they made. One client told us, it isn’t how much you make, it is how much you keep. We all know people who make good money and spend all of it–and others who manage to save on modest incomes.

3. They adapted to unexpected surprises without impairing their long term financial planning. Having an emergency fund, realizing that life has uncertainties…these are key to getting back on track through all kinds of times.

The three habits go a long way towards building financial security. In addition to those, some clients were apparently born with helpful investment instincts:

A. A native sense of confidence that the country works through its problems, that economic slowdowns give way to recovery sooner or later. Those who believe that seem to have an easier time waiting for markets to rebound.

B. An aversion to needing to do what everybody else is doing. Fads (or stampedes, as we call them) can be a dangerous way to invest.

We got done at the university a very long time ago. Thanks to you, however, we are always learning. One of the gratifying aspects of our work is the opportunity to pay it forward—to deliver the good news to the next generation. Clients, please email us or call if you would like to discuss this or any other topic.


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

It Really Is All About You

© Can Stock Photo / ShutterM

Time is finite, limited, for everyone. We have diligently restructured how we take care of business for you over the past few years to create more time for our key activities. One of those key activities is talking to you, one on one.

Two years ago we were preparing a total makeover of our communications program. In the 21st century, thoughts can emerge from our fingertips and travel at the speed of light to the screens of your computer, tablet or smart phone. The instantaneous aspect of new media is nicely complemented by the permanent archive of our philosophies, methods and views at 228Main.com—available anytime, anywhere.

If we get the same question twice or need to tell the same story twice, we figure a lot more people have the same question or should hear the same story. So we put it out there for everyone.

We also write about case studies, retirement concepts, financial planning issues, the economy, investment strategy and tactics. Topics in the news also get our attention, particularly when there is context we would like to add.

Bottom line, if we think of something that has a chance to improve your financial position, we are going to write about it. It might be a story or a parable or a bit of history or biography.

Each one of you is unique. Some pay attention to our daily comments and features on our Facebook page, Twitter, or LinkedIn. Others ignore all that, but read our blog posts. At least one client already knows how we think, and doesn’t need any more. And a few read everything in every venue.

We get a lot of feedback from our colleagues—but we are writing for you, not them. What would you like to tell us about our blog or social media activity? Are there topics we aren’t covering, but should? Are you getting anything out of it? Do you feel like any time you spend reading our stuff is well spent—or wasted?

Email us or call if you would like to let us know how we are doing.

Meanwhile, if you aren’t connected to daily commentary but wish to, you can bookmark https://twitter.com/MarkLeibman even if you are not registered at Twitter. Or ‘like’ our Facebook page at https://www.facebook.com/LFNEWS. Or connect on LinkedIn at https://www.linkedin.com/in/lfnews/. We look forward to hearing from 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.