Month: April 2019

Make Believe

© Can Stock Photo / nameinfame

It’s good fun to watch small children at play, using their imagination – they might be pirates or princesses, or serving imaginary meals, or having conversations with stuffed animals.

What is not good fun are financial types who pretend that so-called “market-linked” products actually provide exposure to real investment market returns. Often, a formula used to determine returns pays only a fraction of percentage gains, puts a maximum limit on returns, and ignores the effect of dividends. That’s investing only in the same sense that talking to a teddy bear is actual conversation*.

There is another common form of make-believe in the investment world. Some pretend that one might sharply limit the ups-and-downs in an account, yet still reap stock market returns, through some special strategy or tactic. Our view is that this is pandering. Long term investing is about willingness to accept a certain amount of risk in pursuit of getting paid.

Both of these fantasies play on the natural human desire for stability. But lower volatility may come at a cost of lower returns or higher costs. By the time the investor figures out there is either less stability than expected, or lower returns, a lot of freight may have been paid. Skip the make-believe, keep it real.

Clients, not everyone agrees with us – we hold contrarian views. 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.

Building a Faster Horse

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There is a quotation often attributed to Henry Ford: “If I had asked people what they wanted, they would have said faster horses.”

Biographers and historians have never managed to find any evidence that Ford ever uttered this statement, so it remains apocryphal. But the sentiment remains true to Ford’s reputation as a stubborn visionary.

For investors as well as consumers, sometimes there is a difference between what we need and what we want. We all want stability in our portfolios: why not? But stability often comes at a cost of lower income or growth potential. If you are sure you have all the money you will ever need, it makes sense to invest for stability. If you need your money to work for you, though, you may have to hold your nose and accept volatility.

If you really want stability, you can bury your money in a hole in the backyard. It will never grow, but you know that if you dig it back up you will still have what you put in.

The same is not true if you invest in volatile holdings. The value of your portfolio can and certainly will go down sometimes. As painful as that is, if you can afford to wait there is a possibility that it may recover over the long run.

If you just buried your cash in the backyard, there is no chance that it will suddenly produce more wealth. A long time horizon can smooth out the risks of a higher volatility portfolio, but it will not produce more gains from a more stable portfolio.

If we asked new prospects what they wanted, many would probably say they wanted stability. But that is not what we are selling. Not everyone has the same risk tolerance, and different amounts of volatility are appropriate depending on financial circumstances. We still generally think that learning to tolerate volatility may be more useful than seeking stability at all costs.

Clients, if you have anything to discuss, please call or email 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.

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

Rule #3

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Our Fundamental Rule #3 of Investing: own the orchard for the fruit crop. What do we mean?

If the fruit crop is enough to live on, you would not have to care what the neighbor would pay for the orchard – it’s not for sale! Whether the latest bid was higher or lower than the day before makes no difference.

You can think of your long term portfolio the same way. If it produces the cash flow you need, fluctuating values don’t always affect your real life – you buy groceries with the income, not with the statement value. The down years may have no impact on your life or lifestyle. All we need to know is where to find the cash you need, when you need it, to do the things you want and need to do.

This is what we mean when we say “own the orchard for the fruit crop.” It’s important, because enduring volatility is an inherent part of investing for total return.

There are two key points of caution. This approach presumes you keep the faith that downturns in the market end someday, that the economy recovers from whatever ails it—and you do not sell out at low points. Also, it assumes that your short term lump sum cash needs are covered by savings that do not fluctuate.

Clients, this understanding is key to our work. Please call or email us if you would like to talk about it, or anything else.


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.

Rule #2

© Can Stock Photo / ragsac

We often talk about our three fundamental principles of investing. Rule #2 is ‘Buy the best bargains.’ This is our intent, but we must act on what we know, which is incomplete. Our crystal ball does not actually work; we do not know the future. No guarantees.

The best bargain is likely to be unpopular – or else it might not be a bargain. We often buy into sectors that are down sharply from much higher levels, years before. The crowd is almost never rushing into shares that have declined 50 or 80% over a period of years.

This matches up nicely with our contrarian philosophy, doing our own thinking, going our own way. In fact, we believe that profit potential lives in the gap between the consensus expectation and the unfolding reality. We think there is an edge in finding a lonely, but correct, position.

There are different categories of bargains. The best bargain might be a cyclical investment at the low point in its cycle – homebuilders in recession, for example. Or a wonderful, durable blue chip company available at a temporarily low price because of some short-term issue. Or a deeply discounted bond in a stressed company that we figure is trading below liquidation value. No guarantees, as we said!

Our approach is not the only one. Some believe in buying only when an investment is already in a clear up-trend. Others want to own the things that are on the magazine covers, the ones everyone is talking about. For better or worse, we do our best to stick to our convictions. (And sometimes they are better, and sometimes they are worse.)

The value style, our philosophy, is right for us. 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.

Making Sense of the Data Flood

© Can Stock Photo / SergeyNivens

In the 21st century, information seems to be a thousand times more abundant than we could have dreamed of just a few decades ago. An insight into the olden days may be the best way to illustrate this.

When I first became qualified to work with investment securities, I would maintain a list of topics to research. It might be a specific company or an investment product, or some aspect of the economy. Day by day, new items would go on the list.

Every other week, I spent a morning in the library. Stock reports from S&P Marketscope and ValueLine were available there, in large binders. The financial newspapers and other reference works were available, too. I would chew through the items on my list all morning, then make telephone calls that afternoon and evening to report my findings.

No internet, no email, no cell phones.

Now, of course, we interact with economists and research analysts and portfolio managers in real time via webinars, Twitter, and conference calls. Research on thousands of companies is at our fingertips. Data and analysis subscriptions supplement the expert resources made available by LPL Financial and our other institutional partners.

Instead of writing research topics down in a notebook to be studied in the library days later, we often can respond to client inquiries almost instantly, and always quickly.

The key element in our approach is not the flood of information available. By itself, that flood would drown anybody. Instead, it is in the experience and knowledge we bring, in order to understand the narratives and themes lurking in the data. Context and perspective is vital.

When you have read thousands of pages of research, annual reports, and SEC filings, you develop an understanding of what is pertinent, and what may be disregarded. Greg Leibman, in his ninth year here, does a lot of the heavy lifting.

We are fortunate to be alive in this day and age, able to take advantage of the opportunities to operate more effectively on your behalf. Clients, if you would like to talk about this or anything else, please email us or call.

And Now, the Weather

© Can Stock Photo / ifeelstock

When you watch the news and the weather forecaster tells you there is an 80% chance of rain tomorrow, what exactly does that mean?

It might rain tomorrow, or it might not. It says rain is more likely than not. So if there is no rain after all, does that mean that the forecast was wrong?

Forecasting is often a fuzzy subject. No one can see the future with 100% certainty, so predictions are often spoken of in terms of probabilities. But we as humans are generally not good at thinking in terms of probability. An 80% chance is far from a sure thing, but when someone tells us something is 80% likely to happen, it can sometimes feel like one.

This is particularly true when it comes to trying to predict one-time events. If you flip a coin and it comes up tails, you can keep flipping it and see that it will still come up heads about half the time. If the weather forecast says there is an 80% chance of rain next Tuesday, there is only one next Tuesday. If Tuesday comes and goes without any rain, it sure feels like the forecaster blew it.

Economic and financial forecasting runs into the same problem. First, a forecast is only as good as its model. Economic projections may include assumptions that prove to be unfounded. But even a good forecast is limited to predicting a range of probabilities. If an analyst tells you they think there is an 80% chance that the market will go up this quarter, all they are really saying is that it might go up and it might go down. You probably did not need an analyst with a fancy model to tell you that.

We put little faith in short term market predictions. Even if they are accurate, you can probably not afford to bet the farm on them. We prefer to take a longer-term view. We cannot be sure how an investment will perform over the next month or next year, and do not believe in speculating on short term results. We feel much more comfortable in the trend over the long run.

Clients, if you have any thoughts or questions, please call or email 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.

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

A Better Topic Than “The Market”

© Can Stock Photo / Pedxer

Everybody talks about it; it raises a lot of questions. Is the market too high? Where will it go next? Is it due for a fall? How will the economy affect it? (Or politics, or world affairs, or astrology?)

Many people seem to be referring to a major market average or index when they talk about the market. But the investment universe is far broader than those. The individual pieces may have little to do with what is happening with the major averages.

  • For example, even when the averages are near all time highs, stocks in some industries or companies may be half or less of their own highs from years ago.
  • The United States is not the only advanced economy in the world with a stock market. Some overseas markets have done very little for a decade, and are not close to high points.
  • Certain holdings have shown a tendency to go the opposite direction from the major averages.
  • Even with in the US stock market, some holdings appear to be bargains even when highflyers have gone off the charts.

Instead of asking those questions about “the market,” we think it makes more sense to always be asking these questions:

  • Where are the best bargains in the investment universe? We should be looking at them.
  • Where are the stampedes? We should avoid them.
  • Is there a way to secure reliable income in today’s environment?

This is a way to bring the focus to something useful, in our opinion. Clients, if you would like to talk about this or anything else, please email us or call.© Can Stock Photo / Pedxer