Back in 2017, we wrote about two trends that would interact to change the world. Declining costs of solar power generation, combined with declining costs of battery storage, would herald an energy revolution.
In a recent article, Bloomberg News suggests that solar and wind energy is more economical to build than coal or gas plants in two thirds of the world. Five years ago, this wasn’t the case anywhere.
New sources of energy have heralded remarkable periods of growth and prosperity in the past. Water and steam brought us into the modern era more than two centuries ago. Coal and petroleum pushed development beyond what anyone could have predicted, before their use became widespread.
The next energy revolution, solar and wind plus battery storage, will bring massive new opportunities – and threats to older technologies. We are thinking about ramifications for investors.
1. The demand for copper may rise, against a constrained supply.
2. Underdeveloped areas of the world may develop faster, since solar can be deployed on much smaller scales than big central generating plants using fossil fuels.
3. Cheaper electricity may encourage new uses, not yet dreamed of.
4. Incumbent electric utilities may find themselves with stranded assets in the form of obsolete plants and equipment.
No guarantees on any part of the future, of course. But it does seem to be unfolding as we expected a couple years ago.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and 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.
Consolidated Edison Company of New York (Con Ed) was listed on the New York Stock Exchange back in 1824. Known then as New York Gas Light, it holds the record for the longest listing on the exchange.
For every single day of those nearly two centuries, every share of its stock was owned by somebody. Through financial panics, recessions, wars, the Depression – through everything – every share of its stock was owned by someone.
It seems curious to us that some investment advisors advocate the belief that the vast majority of investors are incapable of owning shares of stock through the inevitable downturns. (Stocks do go up and down, as we often note.) Yet somebody has to own every share, every day.
These advisors with low expectations of you usually rely on one of two basic approaches.
1. Keep 40 to 60% of your long term assets in bonds or other forms of fixed income. This strikes us as an exceptionally poor idea for many long term investors, because of historically low interest rates, and potential losses from inflation and rising interest rates.
2. Expect to be able to sell out before big declines, and reinvest before big rises. This unlikely outcome is usually sold as a “tactical” strategy. It is a great one, too, but only on paper. Nobody to our knowledge has ever demonstrated a sustainable long term ability to reduce risk while maintaining market returns with in and out trading.
Our experience tells us that many people understand long term investing, and living with the inevitable ups and downs. Many more can be trained to become effective investors. We think you can handle the truth: real investments go up and down.
The thought of forfeiting a significant fraction of potential future wealth by pandering to fear of short-term volatility hits us wrong. We won’t do it here at 228 Main, nor would we pretend we our crystal ball works well enough for in and out trading.
Of course, our approach is not right for everyone. Clients must be able to live with their chosen approach, and not everyone can live with ours. We can handle the 60/40 or 40/60 mix for clients who want less volatility. But the fraction in the market is going to experience market volatility, a pre-requisite to obtaining market returns.
We mean no disrespect to advisors with different approaches. After all, they lack the main advantage we enjoy: working with the best clients in the whole world.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and 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. 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.
We wrote before about your three investment buckets, each with a different time horizon. Here is why that is so crucial.
Business founder Jeff Bezos highlighted the key thing about time horizons.
“If everything you do needs to work on a three-year time horizon, then you are competing with a lot of people. But if you’re willing to invest on a seven-year time horizon, you are now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”
The investment parallel is clear: just by lengthening the time horizon, you can live with the short term volatility that is inherent in the pursuit of long term investment results.
Those with a short time horizon—an insistence that market values be stable day to day or month to month—can generally expect meager returns. Stable values and liquidity both cost a premium, and if you want both you’re not left with much room for returns. This is good for your short-term bucket, but may hamper you anywhere else.
Behavioral economists have a theory that the preference for stability is very strong, part of human nature. If the demand for stability is high, then the price of stability may be high—and the rewards for enduring volatility may prove to be large since fewer are willing to do it. This is based on our opinion, no guarantees!
Bottom line: we believe in investing for the long term with your long term money, and leaving short term strategies to your short term bucket. It pays to understand volatility, and its role in your investment returns. No matter what, you should be able to live with your chosen strategy, even when (especially when?) it is uncomfortable.
Clients, if you have questions about this or anything else, please email us or call.
Content in this material is for general information only and 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.
Every share of stock in existence is owned every single day by somebody. But the market news often refers to “all the selling on Wall Street” on a down day, or “the buying on Wall Street” on an up day. In reality, every share sold was also bought.
This came to mind when we recently read the words of a supposed expert: “investors need to be protected from themselves.” Since “you can’t change people” then the right prescription is a 60/40 or 40/60 mix of stocks and bonds, because otherwise people would sell out at a bad time – in a down market. But every share sold gets bought! So we cannot all be selling at the same time.
The idea that nearly everyone should give up the potential returns of long term stock ownership on a large fraction of their wealth because they won’t behave properly seems wrong-headed to to us. Our actual experience with you over the years says that many people are either born with good investing instincts, or can be trained to invest effectively.
We believe you can handle the truth. Long term investing requires living with volatility, the ups and downs. This is not appropriate for your short term needs, of course, for which you need stability.
In these times when bonds pay so little, insistence on a significant allocation to a sector where returns are likely to be historically poor for many years seems short-sighted. Particularly when used to shield true long term money from normal stock market action.
Let’s be clear: our philosophy is not for everyone. History suggests that about one year in four, broad stock market averages are likely to go down. If you can’t stand that with some fraction of your wealth, our approach is not the right one for you.
Clients, if you would like to talk about this, or anything else, please email us or call.
Content in this material is for general information only and 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.
Our previous letters have talked about the three buckets you have for your money: short term, long term, and in-between. Each one serves different purposes. Today we will dive into the details of the different assets you can put into those buckets.
The simplest and most familiar asset class is cash. It has a fixed value and is completely liquid, available to spend any time you want. While the change jar on your counter is not exactly an investment, you can put it in a savings account and generate a little bit of interest. Short term certificates of deposit and Treasury bonds can also be considered cash equivalents as long as the maturity is within a few months. They can not be spent without notice, but could be turned into cash quickly for major expenses.
Longer duration CDs and bonds fall into another asset class: fixed income. You can expect higher interest by accepting longer maturities and shakier credit ratings, so fixed income will generate more income than cash. There is a reason for this: your risk exposure also increases. Buying bonds with poorer credit quality increases the risk that the borrower will go broke and default. And if you lock in your money long term at a fixed interest rate, you will be in for pain if inflation and interest rates rise. This can make fixed income investing difficult in a low interest rate environment.
The third main asset class are equities, or stocks. These are what you are thinking of when you talk about the stock market. Stocks represent partial ownership in a given company. Exchange-listed stocks are liquid, and owning a share of a rapidly growing company offers the potential for higher returns. But again, these returns come at a trade-off of volatility and risk. There is no fixed face value or interest rate on equities, and the market price can change rapidly.
There are also alternative investments outside of these three main asset classes. Most alternative investments are tangible assets such as real estate or physical commodities. These assets are largely speculative: they do not grow on their own and do not pay out interest. As such, we do not generally recommend them.
Different assets are useful for each bucket. Your short-term bucket needs both liquidity and stability, so it should be mostly or entirely in cash. Your long-term bucket can tolerate more volatility and will probably want to seek higher returns, so equity investments may be more appropriate. The intermediate-term bucket can hold a range of investments, although you will probably want a healthy proportion of cash and short-term investments.
Your financial situation is unique, and there is no one-size-fits all approach. Clients, if you want to discuss what is in your buckets, please call or email us.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
CDs are FDIC Insured to specific limits and offer a fixed rate of return if held to maturity.
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.
Stock investing involves risk including loss of principal.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
You surely have noticed this by now: we disagree with conventional ways of doing many things. Modern Portfolio Theory (MPT) forms the theoretical underpinnings of a lot of investment practice today, without adequate understanding of its deep flaws.
MPT defines volatility as risk. We believe, as Warren Buffett does, that volatility is just volatility – the normal ups and downs – for long term investors. So one common practice is to promote the advantages of getting 80% of the market returns with only 50% of the risk (for example). This supposedly is a superior “risk-adjusted return.”
But you could use the same statistical methodology to show that it may cost you about one third of your potential wealth in 25 years to have a 50% smoother ride on the way. For an investor with $100,000 in long term funds, this might be a $250,000 future shortfall. The question might be, “What fraction of your future wealth would you sacrifice in order to have less volatility on the way?”
The idea of sacrificing future wealth is a lot different than the idea of reducing risk. But they are two sides of the same coin. This is the hidden trade-off in superior risk-adjusted returns.
Our experience is that people can learn to understand and live with volatility. We believe investors get paid to endure volatility.
Of course, our philosophy is not right for everyone. Volatility is easier to tolerate for investors with a longer time horizon. But we believe everyone should see both sides of the coin before making a decision to forego significant potential future wealth for a smoother ride, less volatility, along the way.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and 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.
We talked about human capital, the traits, characteristics and skills you possess which others value. This is the source of your earning power. When you spend less than you earn, you develop savings. Our topic today is how to manage those sums.
Think of having three buckets. The first one you have is short term. This is where you go to find money to deal with emergencies. You also use the short-term bucket to save for annual expenses like real estate taxes or insurance premiums. This bucket must be stable and liquid, to provide money when you need it. Returns are secondary.
On the other end, you have a long-term bucket. If you ever hope to retire instead of going to work every day, or accumulate wealth for other long-term goals, you need one of these. Unlike the first bucket, this one may endure more volatility in the hopes of garnering higher returns over a long time horizon. You should plan on not tapping this bucket except for those long term goals, short of an emergency which can be met no other way.
Naturally, the third bucket is in between. You may have goals for things that happen in a few years, on an intermediate time horizon. It might be for a major purchase like a boat or camper, to meet educational expenses for a child who is a few years away from college, a down payment on a home you intend to buy at some point in the future.
Not surprisingly, the third bucket may balance stability and higher returns with a middle of the road approach. This is in between the strategies of the short-term bucket and the long-term bucket.
There are other aspects of investing that we will explore in future letters. But the idea of three buckets is a helpful way to understand the functional purposes of investing. You will need to know something about the basic kinds of investments, styles of investing, some tax considerations, and the options available in retirement accounts.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and 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.
As we complete four years in the world of digital communications, it makes sense to take stock. What have we gotten done, where are we headed?
We began with three thoughts. We had the intent to be able to communicate at the speed of light when events demanded – sort of a civil defense system for times of stress. And we wanted to communicate with all of you each week about our current thinking on a wide variety of topics. Finally, make available a complete archive of our philosophy and strategies, for you to find and read on your schedule, available 24/7.
We worked out a way to deliver these things with a combination of three methods. Nobody needs to access all three, but we can reach more of you by being more places.
228Main.com hosts our blogs, nearly 400 already published, one or two new ones each week. Daily posts in social media offer additional features, plus links to the blog articles, comments about developments in our thinking, and weekly short videos. And weekly email newsletters provide links to the new blog posts and videos, along with schedule notes.
We love the way you forward emails or like or share our Facebook or Twitter posts. Some of your friends and relatives have gotten to know us this way, at their leisure, with no threat of us bothering them with unwanted approaches (as if we ever would!) The 21st century is a great place to live if you like to communicate.
We are working on consolidating selected blog posts into books, thinking about a YouTube channel to make our video library more searchable, and continuing to explore new ways to communicate.
21st century communications played a key role as we met the challenges of the last few years. But instead of being a pale substitute for the way we had done business before, we learned that more communication is just plain good for you and good for us.
If you would like to talk about this or anything else, please email us or call.
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