Month: October 2018

Parrots and Canaries

© Can Stock Photo / bugphai

Once upon a time, canaries were used as a warning system for the buildup of toxic gases in coal mines. Death of the canary served as a warning to get out. These birds may be more popular now in the writings of market commentators than they ever were for mine safety.

A different bird might make a more useful metaphor. The Monty Python comedy troupe once performed a dialogue between a disgruntled customer and a pet shop owner. The customer was attempting to return a Norwegian Blue Parrot, which had apparently been dead when purchased.

The pet shop owner contends that the bird is resting, or stunned, or perhaps pining for the fjords. He attempts to distract the customer with praise for the bird’s beautiful plumage. The customer lets loose with an extensive string of euphemisms for death. “He has ceased to be! Bereft of life, kicked the bucket, shuffled off this mortal coil, run down the curtain, joined the choir invisible.”

The Norwegian blue may make a better analogy than the canary in the coal mine for financial markets.

Why? When the canary died, nobody debated it, or even suggested finishing out the shift down in the mine. But the death of the parrot was the subject of a long argument. That is what happens in the financial markets. For any product or security or market index you can find opinions on both sides at any time. BUY! SELL! BUY! SELL!

There are parts of the investment universe where certain commentary seems to us like someone saying “beautiful plumage” about a dead parrot. And, to be fair, there are other sectors which we believe are resting, or stunned, or perhaps pining for the fjords. Think of how a market optimist must have sounded in March of 2009 at the stock market bottom.

As contrarian investors, we typically hold some unpopular opinions. We believe profit potential lives where there are gaps between consensus perception and unfolding reality. So we do not really want everybody to agree with us—we cannot all be contrarians! We make no guarantees, but this is how we strive to do things here.

Clients, if you would like to talk about either “the canary in the coal mine” or “the parrot in the pet shop,” 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.

 

What Did Don McLean Mean?

© Can Stock Photo / HHLtDave5

The song American Pie is one of the most iconic pieces of pop culture of the last century. Don McLean used its poetic imagery to evoke events and trends both from the world of rock and roll and American society. The narrative he wove caught the imagination of millions.

Some of its references seem clear, while others have multiple interpretations. It seems like thousands of people took a crack at decoding the entire, long, song. From then until now, each listener constructs their own meaning from it.

McLean himself was loathe to interfere with the meanings that people drew. For decades he refused to say anything about the commentary of others or describe in greater detail his own thoughts about any of the references.

The single thing he did say has obvious applications to the things we collaborate on with you. In concerts and interviews, he would share what it meant to him: “It means I don’t ever have to work again if I don’t want to.”

Isn’t that what many of us strive to do with our working years? We use our skills and talents and effort so that someday we can say, “I don’t ever have to work again if I don’t want to.” Few of us produce an epic work at a young age that sets us up for life. But many of us, like McLean, depend on the fruits of our labor to achieve financial independence.

There is a process that turns your skills and talents and effort into wealth that may get you closer to your goals. It’s why we are in business.

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.

 

Simply Effective: Avoiding Stampedes

© Can Stock Photo / dgphotography

“Avoiding stampedes” may be the simplest and most straightforward of our three fundamental principles of investing. Let’s talk about what it means.

In our view, a stampede in the markets has two features: large volumes of money changing hands, and irrational pricing. Information, evidence and indications about money flows are readily available. The assessment of pricing is necessarily more subjective.

At the time, many believe that prices make sense—or they would not be where they are. Technology and internet stocks in early 2000, homes in 2007, and commodities in 2011 all fit that pattern. At the peak, some true believers thought there was significant room for further increases. Only with the benefit of hindsight is it obvious that things were out of whack.

These examples are all about stampedes into a sector. Money also stampedes out of things at times, as we know. Stocks during the last financial crisis and high yield energy bonds near the bottom in oil prices in early 2016 are prime examples.

You may recognize a pattern. The habit of avoiding stampedes is a contrarian approach to investing—going against the crowd. If everybody else is doing it, we probably don’t want to.

In fact, if everybody else is doing one thing, we may seek to do the opposite.
Behavioral economics lends support to our practice, in our opinion. Much work in that field purports to show that most people do the wrong thing at the wrong time, thereby hurting their returns. Doing better than average would seem to require doing the opposite of what most people do.

(Of course, no method or system or theory is guaranteed to work, or even to perform the same in the future as it has in the past. And putting a theory into practice may be difficult to do.)

In practice, being a contrarian can be lonely. The crowd at the diner is unlikely to endorse doing what nobody else seems to be doing. We don’t care—we are striving to make investment returns, not please the crowd.

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 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.

Living the Reality

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We have heard the phrase “living the dream” when someone describes a life in which everything is going well. I have used it myself once or twice.

But the truth is life has rough spots. What dream would include family and friends with chronic diseases and other issues, funerals for those we admire or love, and all the other challenges one might face?

Of course, there are joyous and glorious things in life, too. Most of us would have a difficult time counting all of our blessings. So joy and pain—both are part of the deal. Some have it better, some have it worse, and our fortunes do fluctuate.

We believe the long-term view that serves investors well is also valuable in keeping the bad patches in perspective. “This too shall pass” is helpful in thinking about both the worst times in our lives and economic recessions or market turmoil. One may find glimmers of hope for better days even on bad days.

Another way to cope is to find ways to soften or cushion or rebalance some of our worries. I outsource worrying about the lawn to a lawn service, for example, while I get to worry more about how to grow your buckets. Hopefully, by letting us worry about your buckets for you, you might have less worrying to do. If we can do that, we will know that our work has value and we are probably doing something right.

We are not living the dream. We are living the reality, coping when we need to, celebrating when we can. That is life in all its glory.

So grateful you are a part of it.

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.

Even Better Than Advice to My Younger Self

© Can Stock Photo / Bialasiewicz

There is a recurring thing in social media about what people wish they had known when they were younger. We’ve never been too interested in participating, since there is little to be gained by wishing for a different past. (I did once post on this subject, but it was an attempt at humor: “Advice to my younger self—don’t go for the chili dog pizza at the truck stop.”)

A colleague got us thinking about this recently. We ended up with a hotter notion: advice from our future self. Imagine that the “you” from a year or a decade from now could come back and talk to you today—what would they wish you knew? “Advice from my future self” gives us the chance to make things better, beginning today!

At the risk of sounding as unstable as Vonnegut’s time-traveling character Billy Pilgrim, I imagined a conversation with my future self exactly to test this purpose. I already knew what my future self wanted to talk about—but I have been acting as if I didn’t know. The conversation may mark a turning point for me.

This is sort of personal, so I will not bore you with the details. But it isn’t difficult to sort out what kinds of advice our future selves might give:

  • Save something every payday
  • Acquire needed skills to change career trajectory
  • Gain closer connections with special people around us
  • Eat better
  • Do something active every day
  • … ???

We cannot know for sure what your future self would want you to know. It is almost too goofy to recommend to you. But if you ever get tempted to give advice to your younger self, we suggest that taking advice from your future self is likely to be far more useful.

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.

I Mow My Lawn with a Checkbook

© Can Stock Photo / tab62

You may have heard a thousand times that “time is money.” For me and perhaps for you, the reminder to use our time well was a needed and useful lesson.

As we grew into adulthood and established our lives, careers, homes, and everything else, money seemed scarce and time was abundant. Using time to get money made a whole lot of sense.

Things change as we age, you may have noticed. A client shared a revelation that came to them shortly after they retired: “I spent all those years worrying about having enough money in retirement, and quickly learned that the scarce thing is time, not money. I’ll run out of time long before I run out of money.”

This conversation led us to the thought that money is time. The point was driven home recently when I received a compliment about my lawn from a neighbor down the street. “You must spend a lot of time taking care of it,” they said.

I was forced to admit I spend virtually no time on it.

I mow my lawn with a checkbook. That same tool takes care of the landscaping and keeps my home clean. It has more functions than a Swiss Army knife. Time, for me, is a scarce resource—a valuable commodity. It is a blessing to be able to spend money and get time.

From time to time you have heard us advise “invest wisely and spend well.” These things mean different things to different people. A very dear friend loves to mow the lawn, tinker with lawnmowers, fool around with the shrubbery. Good for them, I say. One of the ways they spends money to gain time is by paying us to help with their financial affairs.

To our young clients, a reminder: time is money.

To our not-young clients, a different version: money is time.

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.

The Worst State to Retire In

© Can Stock Photo / flashgun

It seems like everywhere you turn, there are opinions about retirement. We have not seen this particular bit of advice, so here goes.

After thought and study, we conclude that the worst possible state for retirement is… the state of confusion. Confusion may seriously impair the retirement experience.

• If we don’t understand the income potential of our lump sum balances, we may either be unnecessarily tight with our budget, or run the risk of winding up broke.

• Running out of money is a common and natural fear. Arithmetic guided by experience and knowledge may ease that concern.

• Decisions about Social Security benefits and pension payouts may have a large impact on financial security. The advice one gets at coffee break or at the water cooler may not be the best.

• Health care transforms for most people in retirement. Putting all the pieces together can be confusing. Medicare Part A, Part B, Part D, and supplemental insurance all enter into it. Personal health and financial factors play roles, too.

We advocate thoughtful approaches to major life decisions. A framework of solid information and the right arithmetic may help reduce confusion.

All in all, the state of confidence is a far better place to retire than the state of confusion. Clients, if you would like to discuss 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.

Every Share Sold is Bought

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We talk a lot about cycles, but there’s one truth to them that we could come right out and say more often: there are no ups without downs, no downs without ups. Night and day. Yin and yang. Buy and sell.

People sometimes lose sight of this reality, especially when talking about the waves of selling that engulf the markets from time to time, cratering prices. They might say, “Long term investing is all well and good, until the financial crisis comes and wipes out half your account—that happened to me.”

In the last crisis (2007–2009), the markets recovered and went on to post gains for many years. When I inquire whether their accounts have bounced back since then, some reply, “Of course not! Everybody had to sell out to save what was left!”

Life is too short for most arguments, isn’t it? We move on to other topics. But the fact remains: even on the worst days in the depths of the crisis, when the market was suffering large percentage losses, we believe every share sold was also bought. There are two sides to every transaction, a buyer and a seller. Not everybody “had” to sell out.

In the fall before the market bottom in March 2009, noted investor Warren Buffett wrote in The New York Times that the economy was likely to be larger—and company profits higher—ten and twenty years in the future.1 Therefore, he was buying.

We felt the same way.

But it may feel as if everybody is selling. In the crisis, one of you told us it was no longer possible to talk about the economy or markets at coffee in the mornings, because every single person there called you a fool for staying in or told you all your money would be lost. Another said the same thing about the Friday night dinner crowd—you felt lonely. But you persisted.

It is popular lore among financial advisors to presume that people are really not capable of investing effectively, pointing to behavioral economic studies. You know we have worked hard to find you, the exceptions: people who either have the native good sense to invest effectively or who can learn how to do it.

We believe that every share sold is also bought. We have a choice, which side of those transactions to be on. Clients, if you would like to talk about this or anything else, please email us or call.

Notes and References

1. Warren Buffett “Buy American,” The New York Times: https://www.nytimes.com/2008/10/17/opinion/17buffett.html. Accessed: September 24, 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 investing, including stocks, involves risk including loss of principal. No strategy assures success or protects against loss.

 

World’s Biggest Roller Coaster?

© Can Stock Photo / winnieapple

The biggest roller coaster in the world is Kingda Ka, at Six Flags Great Adventure in New Jersey. Sometimes investing provides a similar experience.

We have written before about the lovely decade of the 1990s, when the major stock market averages more than tripled. When you get up close and really look at what happened, however, it looks a whole lot different. We examined the data for the S&P 500 Stock Index.

During that decade, there were 1,171 trading days when the S&P went down. The total points “lost” on those days adds up to 5,228. Put that in perspective: the decade started at just 353 points! The down days “lost” more than fourteen times the beginning value1.

Who would knowingly stick around if, on the first day of the decade, we knew that 5,228 points would be “lost” on the down days?

There is a reason we put the word “lost” in quotation marks. It might be more appropriate to speak of temporary declines rather than losses. We say this, because of what happened on the other 1,356 trading days in the decade.

On those up days, the market went up a total of 6,344 points—or more than 17 times the beginning value1. If we knew only that piece of the future at the outset, money might have flooded in.

The bottom line is, here is how we got a triple in the market: it went up 17 times its original value, and down 14 times its original value, in totally unpredictable bits and pieces of rallies and corrections. Patient people prospered.

It is hard to argue with a triple. That is a fine result. This is why we talk incessantly about the long term, long time horizons, keeping the faith, following fundamental principles, and not panicking at low points.

During the decade, how many times did 10% corrections have to be endured? 20% bear markets? Were there any 30% or 40% losses? WHO CARES? It didn’t matter to long term investors.

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

Notes & References

1Standard & Poor’s 500 index, S&P Dow Jones Indices: https://us.spindices.com/indices/equity/sp-500. Accessed October 3rd, 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 indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted.

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

 

Four Trends for Fall, 2018

© Can Stock Photo / Elenathewise

The gap between consensus expectations and reality as it unfolds is where we think profit potential lives. This is why we put so much effort into studying trends, and the ramifications for investors.

One year ago, we wrote about four trends. The next energy revolution (solar + batteries), long range prospects for the world’s most populous democracy, the airline industry, and rising interest rates continue to play roles in our thoughts and portfolios.

Other ideas are also in play.

1. Thinking about the next few years, our highest conviction idea is inflation will exceed consensus expectations. Some of the ways we act on this belief may provide some counterweight to other portfolio holdings, since inflation hurts some industries while it helps others.

2. As the economic expansion lengthens toward record territory, the desire to extend our lifespan tends to be insensitive to the business cycle. Biopharmaceutical companies, working on cures for everything from Alzheimers to various forms of cancer, seem attractively priced.

3. The trend toward rising interest rates, noted last year, may have an effect on weaker and more leveraged companies. We are looking to avoid the second-order and third-order effects that higher rates may have on some borrowers.

4. US stocks have become popular relative to international equities, with dramatic outperformance over the past decade. At some point the trend changes, and better value usually wins out.

One of the difficult things about being contrarian–going against the crowd–is that we sometimes look silly. When everybody else is having more success in the short run while we search for bargains, it can be tough. But that is what we do. We’re excited about the continuing evolution of your holdings as the future unfolds.

We can offer no guarantees except that we will continue to put our best effort into the endeavor. Clients, if you have any questions or comments or insights to add, 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 economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.