Tactics

A Tender Proposition

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Investment owners sometimes receive confusing propositions in dense documents. We are talking about tender offers. Let’s cut through the fog.

A tender offer is when a buyer would like to purchase something you own for a specified price. There are three common types. Clients, many of you may be receiving tender offers now, of the first type:

1. Companies issue stocks and bonds to meet their needs at the time of issue. If the situation changes, they may want to buy those securities back from the public. For example, a company short of liquidity may issue bonds to raise cash. If they later have a more economical way to borrow, or simply want to pay down debt, they might try to buy those bonds back.

2. Sometimes an investment organization or hedge fund offers to buy shares in an unaffiliated public company.

3. Companies have obligations to each stockholder. Whether the stockholder owns a million shares or one share, the cost of providing annual reports and tracking proxy votes is the same. So companies sometimes offer to buy the shares of small holders, usually under 100 shares. These offers are called ‘odd-lot tenders.’

As a rule of thumb, be cautious when a stranger wants to buy something from you. A client once told me about an antique dealer wanting to buy one of her possessions. She said, “I knew one thing when he made that offer—it was worth more than that, or he wouldn’t have wanted it.” This could apply to the first two kinds of tenders.

If you own a small number of shares, you are under no obligation to sell them back in an odd-lot tender. You have the right to keep on owning your shares. The simple alternative is to just sell your shares any day if you no longer want them.

Tender offers may take away flexibility. Owners commit (‘tender’) their holdings. Then weeks or months later, they learn whether or not the tender will actually be completed. In the interim, the holding cannot be sold in the market and no money is received.

Clients, if you have questions about an offer you receive, please email us or call. We think it our job to understand those offers, and be available to talk about 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.

Working? Here’s Some Basics.

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What has been the biggest factor in helping people end up financially sound in retirement?

In our opinion, it is the availability of retirement plans in the workplace. This article is a primer on the high points. If you are on the job, this may be key information for you.

Employer-sponsored retirement plans have a number of features that may help people build wealth. They go by different names (401k, SEP, SIMPLE, 457, TSA, 403b etc.) but generally share these features:

1. Once you sign up, you invest automatically every payday. It takes no effort or thought month to month—you put your asset-building on autopilot when you enroll.

2. The arithmetic of pre-tax retirement plans can be compelling. For some, for every $5 they contribute, their paychecks may only go down by $4. Taxable income goes down, so your income taxes go down. A potential tax break for the working person—imagine!

3. Some employers match your contributions to some extent. A fifty-cents on the dollar match means if you put in $5, your employer will add $2.50. That’s like a 50% return on Day One! (Employer contributions may be subject to vesting, so you might not keep the whole match unless you stay on the job for up to five years, for example.)

We are always happy to talk to you about your situation, and how you might use an employer plan to get you where you want to go. But here are a couple of rules of thumb. These are general pointers that may or may not fit you, but some have found them useful:

First, saving 10% of everything you ever make is a good way to start on a sound retirement. If you aren’t there and cannot contribute that much, ratchet up your savings rate by 1% a year if you can—every year. Some clients make a habit of putting raises (or half of them) into the plan, or increasing their contribution rate by 1% per year.

Second, if you are a long way from retirement, you can afford to take a long view with the investments you choose for the plan. Why take a short term view on money you probably won’t spend for many years, or even decades? But the choice is yours—most plans give you options.

Clients, call or email if you would like to talk about your situation or any other pertinent topic.


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

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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

Higher Returns, or Minimize Taxes?

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In the course of our research, we recently came across a survey of investors published by a large investment organization1. It contained an example of a technique that might be used to manipulate investors into a less-than-optimal path.

Would you rather minimize taxes, or achieve the highest investment returns? Many people might think that this is a straightforward question: the survey reported that 61% of baby boomers preferred to minimize taxes. In our opinion, it is indeed straightforward—just not in the way they think it is.

We pondered that question, and wondered why there was even a choice between minimizing taxes and going for higher returns. Generally, an investor comes out better off if she or he aims for the highest after-tax returns.

Peddlers of financial products know that if they can get a prospect to focus on taxes, then it doesn’t matter whether the investment is really any good or not. It merely needs to meet that very important objective of minimizing taxes. A tight focus on taxes takes the spotlight away from the actual investment and its performance.

We think a better approach is to include the potential impact of taxes in our investment decision-making. You may hate taxes, but it would make no sense to go for 1% tax free instead of 6% taxable (all other things being equal)—the higher rate would leave you better off even after you paid the tax.

Some of you are more concerned about income taxes than others. It doesn’t matter what your object is, we need to agree that seeking the highest after-tax returns is a more sensible goal than either minimizing taxes or achieving higher returns. In our reality-based approach, we can integrate both objectives to work towards a more sensible plan.

Each of you is free to make whatever decisions you would like to, with your money. (We never forget whose money it is.) If you bring it us, we are never going to focus on just minimizing taxes, or just focus on achieving high returns. That is a false choice, and a seller who presents that to you may be trying to manipulate you.

We seek to achieve the best after-tax returns—that is the path that potentially leaves you with the biggest bucket. No guarantees, of course. Clients, if you have questions about this or any other pertinent issue, please email us or call.

1 2016 U.S. Trust Insights on Wealth and Worth survey, U.S. Trust Bank of America Private Wealth Management


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

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax advisor.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

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

Focus, people!

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We recently wrote about the meaning of money. Spoiler alert: we believe it may be a symbol of being worthwhile to the rest of society.

So today we are writing about the differences between entrepreneurs of middle class status, and those who have done better. Understand we are very big on being of service to our fellow humans, not so big on the pursuit of money for its own sake. We each define success in our own lives for our own selves. But there is a worthwhile lesson about being effective in our endeavors lurking in this topic.

Peter Schiff, author of Business Brilliant, identified in that book seven behaviors of highly successful entrepreneurs. Later he realized that just one trait dominated all the others. Its importance became apparent when he compared the behavior of less financially successful entrepreneurs to more successful entrepreneurs.

It turns out that, according to him, 45% of less successful entrepreneurs have no answer for the question, “Do you know what you are exceptionally good at that makes you money?” They believe they are excellent at six different things, on average. And 58% of them work to get better at things they are NOT exceptional at.

Meanwhile, 100% of more successful entrepreneurs know what they are exceptionally good at that makes money. They believe they are excellent at only two things, on average. And NONE of them work on their weaknesses; they spend all their time working with those things at which they excel.

When you think about the meaning of these three parameters, doesn’t it boil down to ‘focus?’ The more successful spend their energy on the two things at which they excel, because they know exactly how they are valuable to the rest of society. The less successful scatter their efforts across six things at which they believe they excel, plus they also spend time on their weaknesses.

It is no wonder that the group that consciously focuses more of their time on a narrower number of key things produces notable results. The race is not always to the swift, nor the battle to the strong, but that is the way to bet.

Bringing this closer to home, we believe there are two things at which we excel. Communicating with you to understand your goals and devise plans of action to pursue those goals is one. Managing investments in accordance with those goals is the other. The two things work together and complement each other: your goals inform your investment strategy.

Furthermore, each member of our team has duties that mostly correspond to their personal areas of excellence. People working at tasks they enjoy and excel at are going to be happier than workers who go through the drudgery of work that they do not like. Life is too short to spend it doing things you do not enjoy!

We do not know if these insights are of use to you. At least they help explain what we are about. None of this guarantees anything to anyone. Clients, if you would like to talk about this or any other pertinent 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 investing involves risk including loss of principal. No strategy assures success or protects against loss.

Clothes, Money, Wealth–Simplicity

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When I graduated from college just before my 21st birthday and went into business, I dressed to appear more experienced than I was. Suit, tie, wing-tip shoes—you know what I’m talking about. As the years went by, ‘trying to look experienced’ ceased to be an issue, somehow.

Over time, my wardrobe evolved into a new kind of uniform. Doc Martens casual shoes, gold socks, khaki slacks, polo shirt. In winter, add a sweater. When something wears out, replace it with like kind. I might be spending about $150 or $200 per year on my business wardrobe these past many years.

One of the byproducts of this simplified wardrobe is pure efficiency. I spend no time working out what to wear. My socks are all the same color. Choice of slacks is easy: the clean ones. And the polo shirt I select each day is the one whose ‘turn’ it is. My conscious thoughts run more to how to grow your bucket, and not so much trying to match colors on my fashion plate.

Mark Zuckerburg, billionaire social media pioneer, is famous for wearing the same modest clothes every day. Steve Jobs, cofounder of Apple, had the same habit. Anybody who has seen television talent show personality Simon Cowell has noticed his ever-present trademark black T shirt. Many decades ago, scientist Albert Einstein owned a number of suits—all grey.

Some of these luminaries are on record with the notion that the simplicity of standard routines creates time for them—and time is money.

Friends, I am not promoting the idea that you should be as boring as I am, sartorially speaking. There is a different way that standard routines can replace conscious choice and enrich you.

By making your periodic investments automatic instead of the product of a deliberate, recurring decision, you accomplish two things. First, the investment actually happens on schedule, every time—it is automatic. And second, you spend no time working on it or thinking about it every month—and time is money.

This is the way 401(k) and other retirement plans work. We know people who signed up for them, paid no attention for some period of years, and were surprised to find out later that they had accumulated tens or hundreds of thousands of dollars.

Roth IRA’s, college savings plans, and other forms of investment can be set up the same way. Automatic monthly investments may be drafted straight from your bank account, without the need for thought or action on your part.

Clients, if you would like to simplify more parts of your financial life, or talk about any other pertinent 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 investing involves risk including loss of principal. No strategy assures success or protects against loss.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Political Risk Rising

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Long time readers know we are fairly neutral about the impact of politics on investing. Our American system of checks and balances has served us well through the decades. The worst fears of those who let politics govern their investments may have not come about.

At the root, however, politics can affect policy that has an impact on the economy and markets. We prefer public policy that enables the greatest number of people to engage in the greatest amount of productive endeavor and enjoy prosperity. This is not always what we get.

There are two things being talked about in Washington that are problematic, in our view. Checks and balances may see us through, or we may end up with policies that hurt our economy.

In theory, trade lets us get more for things we produce and pay less for things we use. America and the rest of the world are potentially better off for it. But there is a political desire to put tariffs in place against major trading partners, we believe primarily for the sake of putting tariffs in place. A narrow slice of people and companies might benefit, but the economy may be hurt overall.

If trade volumes are materially restricted, average family incomes and corporate earnings are likely to decline, and the economy and the stock market may not do as well as they could.

Another thing: if you have ancestors that came from Germany, Ireland, England, Italy, Poland, France, India, Scotland, Norway, or anywhere else, some people that were already here were opposed to those immigrant ancestors of yours. But we believe that America is more prosperous today, with higher average incomes, because of the legacy your ancestors and others left.

But on top of the desire to fix our immigration laws so they make sense and are enforced, there is a desire to cut the volume of legal immigration, possibly up to one half from recent levels1. In our mind there is little doubt that our future wealth, prosperity, and standing in the world will be impaired if this comes to pass. We’ve been enriched by the immigrant scientists, doctors, entrepreneurs and others who have come to America in accordance with immigration rules.

You can etch this in stone: we are firmly against cutting our nose off to spite our face. Those who advocate for less trade and less legal immigration are doing just that, in our opinion. We are optimistic that sooner or later, we will end up with good policy—we always have. But there could be some unnecessary turmoil before we get there.

We aren’t suggesting that big changes need to be made in portfolios to reflect the political threats. But we are looking for opportunities that are less sensitive to how these policies work out. Clients, if you would like to discuss these or any other pertinent issues, please email us or call.

1New York Times, https://www.nytimes.com/2017/08/02/us/politics/trump-immigration.html


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.

All investing involves risk, including possible loss of principal.

No strategy assures success or protects against loss.

Classical Language, Mostly Classic Ideas

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A surprising number of Latin phrases are woven into modern society, considering the language has not been widely used for centuries. From simple truisms like tempus fugit (time flies) to mottos like e pluribus unum (from many, one), the wisdom and ideas of a civilization lost to antiquity survive.

The Roman historian Tacitus wrote “experientia docet,” experience teaches. We must take issue with this one. Investors make a critical mistake in learning from experience, in our view. They often learn the wrong lesson.

People sometimes adopt tactics and strategies that would have worked great in the last cycle. Unfortunately, times change and the outdated strategies usually fail to perform like they did before.

In the year 2000, following the stock market bust stocks fell—but home values rose. This taught people the wrong idea that “you can’t lose money in real estate”, which caused a lot of damage during the 2007 financial crisis. Then, by 2009, lenders learned the wrong lesson again—because auto loans outperformed in the downturn. Today they may be setting up future losses by putting too much money into substandard auto loans.

A related problem is best illustrated by a product pitch we recently received from an investment sponsor. Their latest offering is based on “the top performing asset class of the last decade!”

Clients, you know what our issue is with this. We love to buy bargains. The best performer over the past decade is, by definition, no bargain. Piling in after a big runup may be jumping on the bandwagon right before it goes off a cliff. However, the experience of the last decade evidently taught many that the specific sector was the one to buy now. Wrong lesson, again.

One interesting facet of all this is that experience actually can teach us. We just need to be certain we are learning the right lesson.

There were useful and profitable lessons in the tech wreck of 2000 and the real estate bust that began in 2007. In our view, those lessons are that it is dangerous to invest in over-priced assets—and it doesn’t pay to join a stampede in the market. Those lessons help us live with attractively priced stocks, and avoid the flight to safety that made historically more stable assets overpriced (in our opinion.)

So let us leave you with a little Latin of our own devising: cognitio ad felicitatem. (Knowledge leads to prosperity.) Clients, if you have any questions, comments or insights 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.

No strategy assures success or protects against loss.

Stock investing involves risk including loss of principal.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Life and Wealth Topics, Re-Visioned

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A gifted teacher of our acquaintance talks about the roots of the word ‘revise’ and ‘revision’ with her writing students1. To re-vise is ‘to see again,’ literally. It isn’t just fixing spelling or formatting text, but a fresh perspective, new meanings, an opportunity.

With our native fondness for new ways of thinking that are so often at odds with conventional wisdom, you have to know this concept resonated with us.

A brief catalogue of the major concepts we have seen anew, or re-visioned, includes:

1. How to think about risk in investing.
2. Investing successfully for a long retirement.
3. Integrating personal objectives with the demands of running a business.
4. Comprehensive financial planning.
5. Retirement (ours), which we transformed into a plan to be of service to age 92.
6. Where to live, which resulted in homes in both Nebraska and Florida.
7. Communicating in 21st century media yet staying personal and relevant to you.

We have addressed some of these topics in past articles. Others we will cover in the weeks and months ahead. And you know we will re-vise, “see again,” and find a new twist to tell you about.

One of the great blessings of our career is to know so many people like you who are willing to join us in looking at familiar issues in new ways. We believe this has worked out over time for you and us.

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

1Caitie Leibman, Director, Doane University Writing Center, http://doanewritingcenter.blogspot.com/2017/09/a-fresh-look_4.html


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

No strategy assures success or protects against loss.

Investing involves risk, including possible loss of principal.

 

Four Trends for Fall, 2017 Edition

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

Here are four trends we’ve been watching for some time:

1. The cost of solar electricity and battery storage, being forms of technology, are declining year by year. In some places around the world, this combination may already be the most cost-effective way to provide new electrification. We believe we will see the end of fossil-fuel-powered generating plant construction within the next decade or so. This will not happen because of environmental activism, but because of compelling economics.

The investment ramifications are manifold. There will be winners and losers, and we have been investing in accordance with our developing understanding of how this is going to play out.

2. The world’s most populous democracy, India, may be poised for decades of economic growth much like China experienced over the past thirty years. Moreover, by 2050 India is projected to be the most populous country in the world. China will be surpassed as a result of its short-sighted ‘one child policy’ that created a huge demographic challenge with an aging population.

By getting in early, even a small investment allocation may make for significant potential gains over years ahead. No guarantees, of course.

3. The airline industry, after nearly a century of cutthroat competition that resulted in wave after wave of bankruptcies, has consolidated into a handful of companies that compete much more gently, to their mutual profit. The energy revolution may result in lower prices for fuel in the future—a large part of airline operating costs. And continuing development around the globe bodes well for air traffic volume trends.

The consensus expectation in the market seems to be for a return to the bad old days of costly competition. But we believe the industry has fundamentally changed due to the dramatically lower number of competitors after years of mergers and consolidation. Consequently, stocks in some of the major airlines appear to be bargains.

4. The Federal Reserve and other central banks around the world are set to begin unwinding the interventions used to effect the so-called “zero interest rate policy”, the policy by which the Fed kept the effective federal funds rate close to 0% following the recession of 20081. While restoring returns on bank savings and certificates may be a good thing for savers, rising rates on bonds will cause the value of existing bonds to go down. When you think about it, a 2% bond cannot sell for its full face amount in a 4% world.

Many parts of the fixed income universe appear to be distorted by the central bank policies. We believe that massive amounts of money flowed into mispriced assets in an attempt to find safety.

Clients, these are the things that have caught our attention. We cannot know the future, but it makes sense to try to get a better handle on it than the average market participant. We can offer no guarantees except that we will continue to put our best effort into the endeavor. If you have any questions or comments or insights to add, please email us or call.

1Federal Reserve Bank of St. Louis, Federal Reserve Economic Data


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.

No strategy assures success or protects against loss.

Stock investing involves risk including loss of principal.

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.

The Power of Patience

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One of the basic principles of investing is that the longer your time horizon, the greater the yield you can generally expect. On certificates of deposit at the bank, you get higher interest on longer maturities. If you are buying US Treasury bonds, the 10 year bond usually has a higher yield than the 1 year bond. Conversely, if you are taking out a loan, you pay higher interest on a 30 year loan than on a 10 year loan.

If you’ve got a long time horizon, this seems like an easy way to maximize your returns. But there is no such thing as a free lunch—the only reason issuers will pay you more for a longer time to maturity is because they are hoping to get something out of it.

Some individuals may have short term outlooks, and be easily spooked out of the market. That’s bad news for investment companies and debt issuers who find their money reserves drying up when investors start cashing out. If investors lock into longer terms the companies are free to implement longer term strategies with less of a worry about investors abruptly pulling the rug out from under them. That is why they are willing to pay higher yields to keep the money in for longer.

It sounds like a win/win situation, but there are risks to buying longer term investments. A lot can happen in thirty years! Maybe the investment landscape changes and what looked like great returns at the time turns into chump change when newer investments start yielding more. Maybe the issuer runs into trouble, raising questions about the security of the investment. If you were holding a shorter term instrument, you might have avoided those problems.

The good news is that you, too, can benefit from a longer term perspective—without needing to lock your money away in illiquid long-term investments. If you are not jumping in and out of investments in response to short term swings you can cut down the drag on your portfolio and potentially enjoy better returns. Even better, you can specifically seek out more volatile investments that are less popular with investors and may command higher returns than more stable, popular investments. By investing for the long haul, you may enjoy the higher returns that may be available on long-term money.

And, because you did not actually have to lock in your investments for decades, you are still able to react to major upheavals. You can ride through the small bumps without hurting yourself by selling out low and still be able to pull out if you need to.

Of course, staying the course may be easier said than done. Tolerating volatility has been a path to higher returns in the past, but not everyone is capable of doing that. We believe there is an advantage to investing for the long term. But one may retain liquidity—the freedom to change tactics—instead of committing to a course for years or decades to come. Clients, if you want to talk about your time horizon, 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 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.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

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.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Investing involves risks including possible loss of principal.