Month: August 2017

We Eat Our Own Cooking

© Can Stock Photo / lisafx

Last week I was describing an investment opportunity, or ‘table-pounding bargain’ as I prefer to think of it, to a client. The client was not exactly skeptical, but she had a question. “Do you own it?”

This is a brilliant question. ‘Skin in the game’ is an extremely vital indicator. When someone is personally invested in an idea or concept, they are more likely to be focused on the potential for success or possibility of failure. Alleged leaders who do not share in the consequences of their actions are notoriously inept. (Congress and health care, for example?)

Modern philosopher Nassim Taleb (author of The Black Swan) takes it a step further and talks about soul in the game. Perhaps my level of compulsion, commitment to work to age 92, and obsession with your outcomes is evidence of ‘soul in the game.’ I’m not sure how I could possibly be more involved with my work.

Do I own it? Lady, I am loaded down with the stuff. I cannot in good conscience inflict the kinds of concentrations on you that I am willing to face. After all, few of you want to work to age 92 as I do, and between you and me, I am in the best position to knowingly run larger risks. So the most volatile accounts in the shop, upside and downside, are my own.

Let me clarify: we offer no guarantees. The fact that I own the ideas we talk about does NOT provide any tangible value to you. When your account grows, our revenues rise—it is win-win—and that provides an economic incentive to act in good faith. But whether or not I own something is no guarantee of anything.

My purpose in writing this is simply to say we may be right or wrong on any recommendation—but we are always sincere. I want you to know, that idea I’m talking most about, YES I own it!


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 opinions expressed in this material do not necessarily reflect the views of LPL Financial.

Investing involves risk, including possible loss of principal.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.

Would You Take Every Drug on the Shelf?

canstockphoto16219846

We have written quite a bit about the conventional investing wisdom recently. This essay puts the focus on what we do here at 228 Main.

One of our principles is to find the best bargains. We cannot be sure where they are, but we will still try to find them. We look for seemingly healthy investments at historically low-seeming valuations.

We recognize this means buying investments which are unpopular. This is fine with us. In fact, we rely on it. One of our core principles is to avoid stampedes. The more of something everyone else is buying, the more expensive it is going to get.

A natural consequence of our approach is that our portfolio construction may not be as diversified as conventional wisdom dictates. But we are not interested in trying to own everything. We want to own the bargains.

We may not always be able to pick them. We may miss out on some high flyers because we thought they were too expensive to buy. Sometimes a “bargain” turns out not to be one. Generally, though, we believe that our odds are better if we at least try to find the bargains.

An alternative to our way is like going to a doctor who prescribes every drug he can think of in case one of them works. “Chances are some of them will make things better and some of them will make things worse, but in theory one of them should cure you.” Wouldn’t you run out the door?

There are many unknowns in both medicine and investing. A doctor may have to try several courses of treatment before finding one that works. Similarly, we frequently implement several promising tactics at the same time. Some don’t work out and need to be replaced.

We think it is reckless, however, to simply give up trying to find successful investments in favor of simply grabbing a little bit of everything. Yet that seems to be a popular, if lazy, strategy with some investment professionals.

Clients, please call or email us if you want to discuss how our investment ideas apply to 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.

Investing involves risk, including possible loss of principal.

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.

No strategy assures success or protects against loss.

Bargain Hiding in Plain Sight

© Can Stock Photo / mrivserg

Imagine a product that has these uses1:
• Vital part of every home and building.
• Goes into every vehicle; hybrids and electrics use up to four times more.2
• Needed for manufacture, installation and use of solar panels and wind turbines.
• Key requirement in making batteries.

One might imagine that demand for this product will rise in coming years, as technology changes our power grid and transportation, and the world continues to modernize.

Now consider the supply side. It takes billions of dollars and four years or more to create a new production facility. The industry that produces it went through a depression as prices for the product got cut in half from 2011 to 20163. Revenues disappeared, losses mounted, spending got slashed. New projects were cancelled.

Rising demand, constricted supply: we know how this works. Prices will rise, revenues and earnings for producers will go up, stock prices may follow. No guarantees, of course, and the timing is always uncertain.

The product is COPPER. There is no replacement for it. The question we face as investors is, can we get involved on a favorable basis?

We know companies that produce a lot of copper, along with other resources. Their stocks are traded on the New York Stock Exchange. The valuation on their shares seems compelling. A dollar of profit in one trades for a third less than that of the average stock; the other one carries a two-thirds discount. One is trading at one-third of its all-time peak a few years back, the other is discounted even more.

Both stocks have been about twice as volatile as the average stock. (This is measured by a statistic called ‘beta.’) We don’t care. Downside volatility is wonderful if you are trying to buy bargains. But owners should be prepared for the roller-coaster.

Clients, we are telling you this story for a reason. When you hear that ‘the market is too high’ or things are at some unsustainable peak, remember that at 228 Main, we are pounding the table and jumping up and down about the bargains we are finding. If you would like to discuss this or anything else at greater length, please email us or call.

1The World Copper Factbook 2014, International Copper Study Group

2The Electric Vehicle Market and Copper Demand, International Copper Alliance

3Federal Reserve Bank of St. Louis


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.

Investing involves risk, including possible loss of principal.

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

What We Learned at the Big Conference

© Can Stock Photo / appalachianviews

I have gone to many conferences over a long period of time. Each has provided some perspective, insight or connection that proved to be quite valuable. Our quest to improve your financial position, being a human endeavor, is always susceptible to improvement. The conferences serve to expose us to ideas, concepts and tools that can help.

LPL Financial’s Focus17 event was perhaps the most consequential ever. The social media and blog presence we started at http://www.228Main.com two years ago has a far greater reach than we realized. We have relationships with top executives at LPL Financial and senior management that we did not know we had. This is turning out to be vitally important to you and to us.

Regulation creates change, and encourages standardization. You know we are contrarian; we dislike conventional wisdom, so we aren’t big on doing what everyone else is doing. As the company sorts out how to get to the future, our voice is in the conversation. Our proposals, the ones that will let us keep serving you as we have been, are being reviewed at the highest levels. If we didn’t have the new media presence, we would still be trying to let the brass know who we are and what we want.

Our communication strategy is to be radically transparent. We share our fundamental beliefs, our strategies, our methods and our views. So when we introduce ourselves to a policy-maker and say “this is what we are about,” the policy-maker says “Oh, I know, I read your blog. What do we need to do?”

Clients, understand, we put this all in place for you, not them. If there were three of me, none of us would have time for ego-stroking with big shots. But the fact is, these good people are going to help us shape the future in a way that might work out for everyone.

The highlight of the program was Bert Jacobs, Chief Executive Optimist of the Life Is Good Company. (You may have seen their T-shirts or coffee cups.) You have to know, the message that ‘life isn’t easy, life isn’t perfect, but life is good” certainly rang my bell. The idea that optimism is a tree trunk from which authenticity and empathy and humor and generosity etc. can branch is very powerful. Bert learned that ‘life is good’ resonated most deeply with people who had big challenges, not those who had easy lives.

I’ll summarize the rest by saying LPL Financial has a great culture carried by incredibly talented people. The firm is paying attention and taking care of business. You and we could not ask for more. Please call or email us with questions or to have a longer conversation.


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

Did Your Bucket Grow? The Measurement that Counts

© Can Stock Photo / justinkendra

We have an issue with investment theories that look great on paper but may not help people build wealth. The vagaries of human nature mean that investments which are appealing and popular and those which make money tend to be two different things.

In our opinion, Modern Portfolio Theory or MPT is in the category of ‘looks great on paper.’ MPT attempts to mitigate risk by diversifying a portfolio across different asset classes with different risk profiles. But it can not predict the future–this risk analysis is based on historical performance trends. Backwards looking, it tends to work until it doesn’t. It does, however, generate nice pie charts and beautiful rationalizations.

The apparent precision of MPT, based on measuring things that have little bearing or relevance to long term investors, may be a key factor in its appeal. We concluded that a lot of effort goes into measuring things that can be measured, whether or not the exercise is useful.

Recently we measured something in your accounts. We think it is telling evidence of our work together, your effective investing behavior and our research and portfolio management.

You can see in LPL AccountView or in reports we can run for you where your account balance stands relative to your cumulative net investment over time. In other words, your deposits and withdrawals since the beginning add and subtract to determine your net investment. By looking at your balance, we can tell the cumulative net gain or loss you have made over the years.

Many advisors could tell you the expected standard deviation of your portfolio, or the proportions of each asset class you should own, down to the hundredths of one percent, based on past performance. Some offer reports that compare monthly, quarterly, and annual account performance against a series of benchmarks.

If we had to guess we would say our simple measurement is the one you care about—did your bucket grow? And by how much? Clients, if you would like to tell us differently, or have a longer discussion on this or any other 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. All performance referenced is historical and is no guarantee of future results.

Investing involves risk, including possible loss of principal.

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.