Too Much Money?

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There is a certain recurring refrain that is heard from portions of the political spectrum: greedy corporate executives make too much money!

To some extent, we sympathize. As shareholders, we have an ownership stake in the companies we invest in. Their executives are our employees, and their paycheck comes out of money that belongs to shareholders. So it should come as no surprise that we have no tolerance for executives lining their pockets at the expense of the company.

Perspective is important, however. It’s easy to be outraged when you hear eight-figure salaries being thrown around. To pick a name out of a hat, according to the company’s SEC filings General Motors CEO Mary Barra took home $28.5 million in compensation last year. To many of us, that seems absolutely insane… but she heads a company that took in $152 billion in sales that year (S&P data). Doing a little math, she got paid a comparatively modest 0.018% of GM’s revenue.

There’s some debate over just how important an executive’s contributions really are. It strikes us as a reasonable proposition that the exertions of a skilled CEO could conceivably improve company revenue, and we suspect even the biggest corporate skeptic may grudgingly concede that a capable top executive could be worth two hundredths of a percent of company performance. In this case GM’s shareholders are hardly getting robbed.

It is true, as corporate detractors often point out, that the size of executive compensation packages has ballooned over the past 30 years. On the other hand, so has the size of the corporations those executives oversee. It sounds alarming to see CEOs getting paid $10 million where they used to only get paid $1 million—but we forget that, due to mergers and acquisitions, those $10 million CEOs may literally be doing the jobs of ten of those $1 million CEOs of yesteryear.

Simple folk like us will never spend $28.5 million in our whole lives, let alone in a single year. We have no idea what on earth you spend an eight figure paycheck on—the mind frankly boggles. At the same time, the sheer scope of the billions of dollars that a talented top executive may be responsible for is equally boggling.

We have a vested interest in making sure that the companies we invest in pay their people fairly. What’s “fair” for someone who manages a company worth tens or hundreds of billions of dollars may look absurd at a glance, but that doesn’t tell the whole story. We believe in researching the story ourselves to make sure we can be confident in the leadership of companies we seek to invest in.

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.

Stock investing involves risk including loss of principal.

The Most Expensive Phrase

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“The four most expensive words in the English language are, ‘This time it’s different.’”
– Sir John Templeton (1912-2008)

“The second-most-expensive words in the English Language are, ‘Too Far, Too Fast.’”
– Mark Leibman (1956-2076)

We write extensively about cycles because understanding them is a critical talent for successful investing. Here is how the famous quotations above fit into our understanding.

“This time it’s different” refers to the tendency to believe that an unsustainable trend will continue. Some circumstance or reason makes people think that the forces which normally cause a trend change do not apply. In practice, it usually happens most often when a type of investment has gotten to the bubble stage—irrational pricing and large flows of money. You could hear these words at the peak of the tech bubble in 2000, the real estate bubble in 2007, the commodity bubble in 2011, et cetera. And there are always stories that go along with the expensive words, a tale that explains exactly why “this time it’s different.”

Recently, though, we’ve heard from many quarters that certain investments have gone up “too far, too fast.” Pondering this phenomena, we’ve concluded that “too far, too fast” is a mirror image twin of “this time it’s different.” Where one is used at the peak, the other begins to appear shortly after the bottom is reached—after the crash.

For example, crude oil fell from $140 years ago to $28, then recovered to $43. To put this in perspective, oil fell 80% and after a rise it was still down 70%. Nobody knows the future, of course, but the “too far, too fast” crowd thinks oil needs to go back down. Oil fell because of booming supply and sluggish demand—a glut. But every glut plants the seeds of a shortage. The “too far, too fast” crowd isn’t paying attention to the changing fundamentals of the market: the inevitable cycle.

The stock market has mounted a vigorous rally, up from the February lows, and we hear “too far, too fast” about that as well. Yet, putting the move into perspective, the market is still below the highs reached nearly a year ago! Too far, too fast—my foot!

We must note that “two steps forward, one step back” has not been repealed. The markets go up and down. But people who sold out of the market over fear of a downturn are sitting on cash, failing to reinvest. Why? “Too far, too fast.” As you know, our principles and strategies prevent those kinds of problems.

One of our roles is to help you avoid two of the expensive actions that afflict others: hanging on through a bursting bubble, and failing to take advantage of bargain prices. Please call or write if you have questions or comments about the current markets and your situation.

No Straight Lines


Nature’s most prevalent theme might by “cycles.” From breathing to day/night to the seasons of the year to seventeen year cicadas, cycles rule the universe.

At some level, we know from our own life experience that the economy and markets also move in cycles. Yet our human nature encourages us to focus on the present and the immediate past when we try to picture what tomorrow may bring. It seems that most people can’t see the turning point, even when we know it is inevitable.

The green arrow in our drawing could be many things. Let’s say the beginning of the green line at the low point is gasoline in 2002, $1.50 per gallon, rising in nearly a straight line to $4 by 2008. We all remember the first time gas hit $4—everywhere you turned, an “expert” was talking about gas going up to $7. Many thought we would never see $3 per gallon again, ever. All of this wrong-headed thinking was based on the straight line trend. The human mind is creative: it can invent a plausible story to justify anything—so the experts had a story to explain why gas was going to $7.

Stepping back to look at the bigger picture and the longer term, one sees that the apparent straight line was simply a small piece of a longer term cycle. We know why the turning points happen, and we explained that here.

The downward red line could be many things, too—the price of copper or iron ore from 2011 to 2016, the stock market 2007-2009, interest rates over the last couple decades. The same principle applies: ultimately, there are no straight lines, only cycles.

Sometimes we invest because we believe a turning point is coming based on a cycle we’ve studied. The challenge is that the straight line part of the deal may persist longer than we thought it would, meaning that our investment in the turning point has less value (usually temporarily.) But our fundamental understanding of cycles is what keeps us going. Often the straight line takes prices to more extreme levels, and new opportunities emerge. Our job is to do the best we can to take maximum advantage of the tuning point, when it comes.

With perspective, background, context and history playing such a major role in our work, it continues to amaze me that a history degree is of such great value in the work of investing. It is a good thing, too, since my art skills are not great (as you can see.) The moral of the story for you is to think hard when somebody proposes that “based on current trends” something must happen or will never happen. The trend is probably part of a straight line that is, itself, part of a longer cycle.

If you have questions about how this applies to current events or portfolio holdings or your specific situation, please call or write.

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.


Guidelines for Product and Service Providers

We have good news for those who would like us to use their products and services. We will help you use your time more productively. All you need to do is read this before requesting a block of our time.

Seven Things to Know About Us:
1. We work hard to attract, train and retain clients who understand and tolerate volatility as a normal and integral part of long term investing.
2. We believe that ‘volatility is not risk,’ in the words of Warren Buffett.
3. We are a research and portfolio management shop, not a sales organization.
4. We believe conventional wisdom is usually not wise.
5. We value liquidity.
6. The better our clients do, the better off we will be.
7. Our only business objective is to grow the buckets of the clients.

Three Suggestions:
1. Help us find ways to seek to build the client buckets over the long term, without regard to volatility or popularity.
2. Tell us what popular investments are drawing the most money and buzz; that may give us clues about what to avoid.
3. Share perspectives and research and resources, not sales ideas.

• Don’t try to help us find more people to talk to. We’re busy with our clients.
• Don’t show us new products that have no track record.
• Don’t call us if your organization lacks a stable history of ownership.
• Don’t bring information about non-liquid or high expense products.
• Don’t try to debate our beliefs or principles.

We are voracious consumers of ideas and information. If you can help us, please call. If in doubt, email Greg.Leibman@lpl.com. If we are not a fit based on the information presented here, find a better prospect than us. Thank you.

Bulls and Bears, Fantasy and Reality

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Some stock market lore is older than memory. The term “bull market” for periods of rising prices and “bear market” for falling prices may date to the inception of the London Stock Exchange, at the turn of the 17th century.

We’ve written often about the inherent volatility of the market and its cycles. Analysts at Ned Davis Research count more than thirty bull markets and thirty bear markets since 1900. The customary definition includes a minimum move of 20% up or down (for bull or bear markets, respectively.)

It is nice to think about selling out at bull market peaks and buying back in at bear market bottoms—enjoying the gains and avoiding the losses. But successful market timing is probably not possible, for many reasons:

1. The market fluctuates almost every day. Declines of 3-5-7% over three to seven weeks are commonplace, three times a year on average. Like 10% corrections, they cannot be reliably predicted, nor profitably traded.

2. By the time a bear market is confirmed by a 20% drop, most of the damage has probably happened already. It makes no sense to sell out at a low point.

3. The weight of the evidence says that people are generally most pessimistic at low points, when major gains are ahead—and most optimistic at high points, when major declines are in store. Thus most efforts to time the market reduce overall returns.

Although the idea of market timing is pretty much a fantasy, there remains a wonderful approach that has worked very well for a very long time. It can be illuminated with a simple question and answer:

Q. Remember that time the market tumbled and never recovered?
   A. Neither do I.

Shares of common stock are ownership interests in publicly traded companies—a piece of the action, so to speak. US companies operate in an economy with a remarkable record of growth over the decades.


Looking at the chart, it is kind of hard to see the wars, recessions, assassinations, bear markets and upheavals that we’ve been through. The lesson of history is that we endure.

We have no guarantees that the growth of the American economy continues, or what the future holds for any investment. Bull markets and bear markets will come and go, the economy will contract and expand, and winter will inevitably give way to spring. All of these things are beyond our control.

The thing we do control is our behavior. If we avoid the madness of crowds, the compulsion to sell at bad times or buy at peaks, we might see that patience wins. It helps to have some money in the bank, and to focus on portfolio income rather than statement values. If you live on your portfolio or hope to, it is the income that pays the bills, not the statement value. If you would like to see how this perspective can work for you, 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.


Persistence Pays in Many Ways

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We have noticed something so prevalent it borders on being a universal truth. In so many of life’s endeavors, persistence is the difference between success and failure.

Tenure in a career builds experience and skills and value to employers…and earning power. Building a reputation in business takes years but can pay off for decades. A friend tells us, a college degree tells potential employers one thing: a willingness to stick with something for at least four years. In a world where instant gratification is so dominant, persistence—or grit—is an asset.

Persistence usually implies effort, willpower, or self-control. But there are ways you can be financially persistent without much thought or effort.

A saver who commits to put $100 monthly into an investment or savings account will run into reasons why it would be OK to skip a month, perhaps intending to make it up later. Maybe they feel it’s not a good time to invest, the refrigerator will need replacing, or an auto repair popped up. So the commitment turns into 12 decisions each year, 120 decisions per decade, 480 decisions over a working career.

By simply setting up an automatic deposit from one’s checking account, one decision is made and it lasts for all time. It is much easier to get one decision right instead of twelve or hundreds.

Many people have 401(k)s, IRAs, or other voluntary retirement plans available to them. Here, too, inertia can help you build wealth. You sign up, and so many dollars go into the plan every payday without any sweat or effort on your part. Sometimes people nearing retirement find out they are in pretty good shape because a young person long ago put wealth-building on auto-pilot.

When you combine these automatic, systematic ways to invest with the power of compounding wealth, amazing things can happen. Call or write if you would like to discuss your situation in more detail.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.

Are You Getting Your Piece of the Pie?

© Can Stock Photo Inc. / Elenathewise

The Federal Reserve provides us with a quarterly report of household net worth. The latest number is $85 trillion, up 51% from the financial crisis year of 2008. I don’t care who you are, that’s a lot of wealth—and a nice increase.

The distribution of our wealth from person to person is the subject of some political debate, which we will leave to the politicians. It always has made sense to us to focus on the things within our control; let’s see what we can learn from the numbers.

Our $99 trillion of assets includes homes ($22 trillion), money in the bank ($10 trillion), bonds ($4 trillion), common stock ($13 trillion), mutual funds ($8 trillion), pensions ($20 trillion), and small businesses ($10 trillion).

We owe $14 trillion, including $9 trillion in mortgages and $5 trillion in consumer debt (vehicle loans, credit cards, etc.)

Net worth is simply the value of our assets minus our liabilities, or what we own minus what we owe. $99 trillion minus $14 trillion is our $85 trillion in net worth.

Here are the pertinent points, as we see them:

1. Having wealth in different forms is a good thing, a form of diversification. We the people have money in the bank, different kinds of investments, homes and businesses.

2. Debt can make sense when it helps us own assets of enduring value that we can afford to pay for over time. $9 trillion in mortgages is a large pile of debt, but that helps us own and enjoy $22 trillion worth of homes.

3. Since debt or liabilities are subtracted from assets to determine our net worth, it makes sense to minimize debt over time. One who pays off a car loan and then keeps putting the payment amount in savings each month might get by with a smaller loan the next time a vehicle is purchased.

4. Because assets are the starting point for determining net worth, one should seek to invest effectively for growth and income over time. Money does not grow on trees, but it may grow over time.

Our $85 trillion net worth is a very large amount of wealth. The decisions we make play a big role in determining whether or not we each get our piece of the pie. We have written about Four Habits for Financial Success which might help, and we encourage you to call or email if we can be of service.