Month: March 2018

You Are Somebody, Not Everybody

© Can Stock Photo / Bialasiewicz

Our pursuit of effective strategies for successful investing covers a wide range of disciplines. Economics and mathematics are obviously needed, but history and psychology play surprisingly large roles.

As contrarian investors, avoiding stampedes is a fundamental principle for us. We often find ourselves going against the crowd. It turns out that there is a lot of conventional wisdom with which we disagree.

The world is complex; humans use shortcuts all the time to keep things simple enough to handle. The problem arises when characteristics of a group are ascribed to each individual within the group, as a shortcut way of dealing with people.

For example, Americans on average are sedentary and overweight. But if you watch who enters the door of the YMCA at 6 A.M., you know that the group characteristics do not apply to every individual. We use this same principle to find clients who will not sell out at low points or fall for the latest overpriced fad.

Behavioral economics indicates that humans tend to behave in counterproductive ways when it comes to investing. But just as the “Y” does not treat each member as if they were overweight and sedentary, we know that counterproductive behavior is optional at the individual level. We choose to try to avoid it.

We were reminded of this recently in reviewing some studies about happiness. The studies show that people quickly take new things for granted, homes and cars for example, so the initial happiness soon wears off. But in our experience, this is a matter of choice.

When in Louisville, I live in the humblest quarters ever since I graduated from college. I am grateful to have an abode that meets my modest needs. In Florida, my days are spent in a nice home that is wonderfully suited to our family. My gratitude and appreciation and happiness about that never flags. This just puts me right in the middle of the pack of the greatest clients in the world. (Our opinion.)

When we read studies about behavior, we will always remember that you are somebody, not everybody. Economists and psychologists can prove all they want about human tendencies, but we will not accept their findings as your fate or ours.

Clients, if you would like to talk about this or anything else, please email us or call.

Surviving A Trade War

© Can Stock Photo / gina_sanders

 The interlocking international trade agreements crafted over the past several decades have all been threatened by recent abrupt changes in U.S. trade policy. Many countries seem to be in the business of threatening retaliatory tariffs, in the name of ‘fair trade.’ When countries engage in rounds of tariff-raising, it is called a trade war.

The human tendency is to expect current conditions to continue. We believe we must strive to think objectively about how things may change, assess possibilities, and be proactive in our decisions and actions.

We can seek to understand the impact of a tariff by examining the case of pickup trucks. The U.S. assesses a 25% tariff on imports of these vehicles1. In practice, this tax collects no money—it simply stops the import of pickup trucks.

Have you noticed how expensive trucks are, relative to cars? This benefits U.S. manufacturers at the expense of consumers, farmers, and businesses small and large which use trucks.

So generally the tariff has the effect of increasing consumer costs and reducing consumer choice, while making profits for a very few companies higher and reducing profits at all truck-using companies by a little bit.

Imagine if other countries retaliated by increasing tariffs on things made by Deere and Caterpillar and Boeing. This would be great for Airbus and Kubota and Claas, which would have less competition in the rest of the world. Foreign consumers, both individuals and companies, would pay more and have less choice. And workers employed in the U.S. by Deere, Caterpillar and Boeing would lose their jobs.

Forget for a moment which countries are charging how much in tariffs on which goods. Any increase, either by other countries or the U.S., increases costs on balance for consumers everywhere and reduces employment overall, in every country.

Typically, in a trade war the economy is depressed because consumers face higher prices so buy fewer goods. Production decreases to match reduced demand. Incomes are lower, jobs are fewer, and profits are slashed. This is why the stock market reacts to potential trade disruptions.

We believe the best approach to investing is to seek the best bargains and avoid stampedes in the market, with a very long time horizon. Chaos produces bargains and opportunities and stampedes; taking the long view may be the best hope for coming out on the far side in better shape.

Diversification may help, but will not eliminate volatility. It is not good fun to see portfolio values go down in the short run—but it is inevitable from time to time. Clients, if you would like to discuss this or anything else, please email us or call.

1Wikipedia, https://en.wikipedia.org/wiki/Chicken_tax. Accessed March 2018.

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.

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.

A Dangerous Fairy Tale

© Can Stock Photo / andreykuzmin

We have written about the power of narrative—stories—before. Stories help us understand and organize the world, and our lives. But not every narrative is helpful, or positive, or improves things.

Much of our political discourse today revolves around a central narrative that does not stand up to examination. We strive to be nonpolitical at 228 Main. Our clients come from every walk of life, and you run from one end of the political spectrum to the other. But the false narrative going around today has the potential for great mischief in our economy and markets. We therefore must address it.

The general theme is that other countries, both allies and enemies, have sorely abused the United States by crafting trade agreements that our leaders were stupid to sign. This has supposedly gone on for decades, because nobody until now has cared about the working person.

We are “losing” hundreds of billions of dollars every year, the story goes. Our factories and jobs have been stolen. And meanwhile we donate to and defend these countries that have mistreated us so. NAFTA, the World Trade Organization, and other international agreements are allegedly at the heart of our misery.

The mischief rests in the remedies proposed to right these wrongs. Trade deficits will be cut by simply eliminating trade. Retalitory tariffs will straighten out the bad behavior. Students of history or economics know how this ends up: it is the story of the Great Depression.

Here is a competing narrative. The whole world and the U.S. have enjoyed decades of progress and prosperity unparalleled in history. A billion people have been lifted from extreme poverty, more people than ever before are working in America for more money than ever before, unemployment is at a forty year low.2

Trade has helped to make us all richer and our lives better, on the whole. We have been fairly free to purchase the goods and services we want, without regard to origin. Our choices, yours and mine, are what determines the volume of trade between countries.

We have a global system of relatively free trade because enlightened leaders HAVE cared about American workers and American prosperity. Let’s examine some facts:

1. NAFTA hurts us terribly? The United States Gross Domestic Product (GDP) per person is 24% higher than Canada’s, and 205% higher than Mexico. 2 We have added 40 million jobs since NAFTA was signed.1 If they are killing us, why aren’t they richer than us?

2. Our companies can hardly do business in Europe? We sold $501 billion in goods and services there in 2017. Our GDP per person is 19% higher than Germany, 36% higher than France, and 57% higher than Italy. They supposedly have been taking advantage of us for decades, yet we do a lot more business than they do?

3. China is a special case, and the U.S. has legitimate grievances. Although its per person GDP is lower even than Mexico, piracy and lack of protection for patents and trademarks are serious issues. These need to be addressed. But a trade war, or mounting a new regime of tariffs, is the wrong approach. There are other means and mechanisms.

Millions of people in the US and virtually all of our farmers are dependent on exports. Our Fortune 500 companies do about half their business overseas. Retaliatory tariffs, trade embargoes or restrictions will hurt them—and all of us.

Clients, if you would like to discuss this or anything else at greater length, please email us or call. We aren’t looking for political arguments. We do believe we will all be better off if we stop believing harmful fairy tales.

1Federal Reserve Bank of St. Louis.

2All GDP numbers derived from the World Factbook at cia.gov.

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

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.

Straightforward Pricing

© Can Stock Photo / PixelsAway

We believe the investment results we manage are due in part to your sensible, effective investment behavior. You know we think you, our clients, are the best in the world.

Even though some people panic and sell out at low points, you realize this kind of behavior is optional. Many of you invest more when the market has declined. You and we share the belief that focus on the long term lets us seek to improve our long term results.

Effective the first of the year we revamped the pricing on the investment advisory accounts we manage for you in our capacity as investment advisory representatives of LPL Financial. Our object is to reward you for your role in our results.

So we put in a system of volume discounts based on account value, not original invested capital. And we instituted discounts for your persistency: costs decline after two years, and eight years, and sixteen years.

Here in the third month of the quarter, we are busy reviewing costs. Some of you will see fee reductions for the passage of time or an increase in the value of your household assets. Changes if any will take effect next quarter.

Year by year we strive to improve the quality of our research, the capacity of our trading desk, and the responsiveness of our service to you. These things are not free: our overhead tends to rise over time. But our business has grown and our productivity rises as we figure out better ways to do things.

Here is the schedule. After the eighth and sixteenth year, an additional discount of 0.05% will apply. Clients, if you have any questions about this or anything else, please email us or call.

pricing

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 investing involves risk including loss of principal. No strategy assures success or protects against loss.

Change is Still Constant

pyramid

We wrestled for a long time with the issue of how to build portfolios in a zero-interest environment. The crushing of interest rates distorted values in the investment markets. The old ways of thinking carried too much risk, in our opinion. (When interest rates rise, bond prices tend to fall.)

So about a year ago, we settled on the concept of ballast. This enables us to tailor portfolios to address individual preferences. Different clients can have differing portfolios, while retaining common elements that enable efficient management.

Ballast refers to holdings that might be expected to fall and rise more slowly than the overall stock market. Ballast may reduce the volatility of the overall portfolio, thereby making it easier to live with. And it may serve as a source of funds for buying bargains when the market seems to be low. We’ve been able to put this thinking into effect.

A little over a year ago, monetary policy in the U.S. shifted from zero interest to a plan to raise interest rates over time. As we foresaw, this has not been great for bond prices. But now U.S. Treasury securities actually have a little bit of a yield these days, with short term maturities recently reaching over 1% for the first time in years.1

The return of interest rates on lower volatility, short term, liquid balances makes it easier to hold cash and cash substitutes as part of a portfolio structure. As interest rates continue to normalize, returns on cash could increase.

We like the portfolio framework, shown above, that we developed a year ago. We will continue to assess clients that may be suitable for this strategy. As the economic environment changes, we will review the need to adjust the tactics used in each layer of the portfolio. Change is still constant.

We will update you soon on the trends we are seeing in our long term core investments. Clients, if you would like to talk about this or anything else, please email us or call.

1Effective Federal Funds Rate. Federal Reserve Economic Data, Federal Reserve Bank of St. Louis. Accessed March 2018.

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 investing involves risk including loss of principal. No strategy assures success or protects against loss.

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.

Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction cost. Investors should consider the tax consequences of moving positions more frequently.

Enduring Value

© Can Stock Photo / EpicStockMedia

We think a lot about how to make things last. It is a key concept for your assets, our relationships, and the securities in which we invest.

But our enterprise here at 228 Main has to endure so we may continue to be of service. We therefore work diligently on its sustainability.

Thinker Morgan Housel wrote about the sources of sustainability in business. Relative to the competition, these attributes provide an enduring competitive advantage:

1. Learn faster.

2. Empathize more with your customers.

3. Communicate more effectively.

4. Be more patient.

These things resonated with us because they represent much of what we strive for. Patience is a prerequisite of successful investing. It is free, but not easy to practice. It also is what lets us be content to work with you at your pace, on your schedule, since we are talking about your money.

You know by now how highly we value effective communication! Listening to you and talking to you in various ways is one of our three core activities. We put a lot of effort into it.

Empathy—understanding what you are going through, where you want to go—is perhaps the key to being able to meet your needs.

We are surprised at how much we are still learning after so many years of experience. In this rapidly changing world, continuous learning is required in order to be able to survive and thrive.

Clients, we are not claiming perfection in any of this. But we are mindful of the things we must do in order to be a reliable partner for you through the years. If you would like to talk about this or anything else, please email us or call.

We Are All Globalists

© Can Stock Photo / lucidwaters

Global trade and international relations have dominated the news lately. The president signed a pair of sweeping tariff proclamations and issued a number of statements about trade.

Each of us has been mostly free to buy the goods and services we choose, regardless of origin. Chanel, Honda, Burberry, Adida, Mercedes Benz, Nestle, Armani, Samsung, Phillips, LG, Toyota, AXA, Bayer…these global brands earned their position because enough of us voted for them with our wallets.

If you are of a certain age, you remember when ‘fruits and vegetables’ meant about a dozen things. Now the produce section features products from dozens of countries.

Trade is not a one way street, either. Within forty miles of beautiful downtown Louisville, the small town of Valley Nebraska hosts Valmont. The company began in the irrigation equipment business in 1946. Today Valmont does business in one hundred countries on six continents.

Likewise, the farms surrounding these towns help feed the people of many nations.

Many of the most iconic American companies like Caterpillar and Boeing produce for the whole world, too. As with those international brands, they earned their position by being valuable to their customers.

We could buy Fords instead of Toyotas. And people in other lands could buy Kubotas instead of Caterpillars. But what would be the point? The U.S. and the whole world has steadily gotten wealthier and more prosperous by doing business in a relatively free system of global trade.

Because citizens of each country may or may not choose to buy and sell equal amounts to other countries, so-called trade deficits result. You have a trade deficit with the grocery store—week after week, you are in there buying things. Yet the grocery store never buys anything from you. This is not a problem, is it?

Trade has made us richer and our lives better. Less trade will make us poorer and life more difficult. (A trade war and collapse of trade was at the heart of the Great Depression, after all.) We are watching current developments carefully.

Clients, if you would like to talk about this or anything else, please email us or call.

Win, Win, Win

© Can Stock Photo / kk5hy

Remember ‘win-win thinking?’ This phrase became popular in business a long time ago to describe interactions in which everybody comes out better. Our favorite example is as familiar as the grocery store. The grocer wants your money more than he wants the can of beans. You want the beans more than you want the money. A trade is made; everybody wins.

“Win-Win” is a fair description of how our business works. In our investment advisory accounts offered through LPL Financial, we are compensated by a percentage fee on account value. Our best path to growing revenues is growing account values. When you do better, we do better.

In the old brokerage model, products are sold to investors for a one-time commission. We think of this as the Good Luck plan, because the salesmen get paid up front and can wish you good luck, as they head down the road to find another prospect. They have no skin in the game, so to speak.

This does make sense in some situations. If you know what you want and do not plan on trading it, the one-time commission model probably works well for you. In a brokerage account, after you pay the sales charge you can hold on to your investment without paying ongoing management fees as you would in an advisory account.

However, we are in the business of trying to figure out how to grow your bucket, which often involves many trades over the course of a year. This creates a conflict for us: the more we trade in a brokerage account, the more commission charges add up, which is great for us but not for you. But our advisory accounts do not pay us on commission. When we switched to focus on advisory business, your interests and ours became much more closely aligned: we were free to make trades we believed would help you without worrying about commission costs. Life got simpler for us and better for you, we believe.

Win-win thinking also led us to introduce longevity discounts to our fee schedule. The longer we are in business with you, the better we understand each other. Longer time horizons and longer relationships are good for you and good for us. Another win-win deal.

It runs deep. From time to time we find that a client is paying for advice which they do not care to follow. This is win-lose, not win-win. We endeavor to get out of these situations as soon as we figure them out.

The biggest advantage of win-win thinking is that all of our energy can be devoted to striving to improve your situation. Relief from worrying about our position is quite liberating. Clients, if you would like to talk about this or anything else, 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 investing involves risk including loss of principal. No strategy assures success or protects against loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs.