Enduring Value

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We think a lot about how to make things last. It is a key concept for your assets, our relationships, and the securities in which we invest.

But our enterprise here at 228 Main has to endure so we may continue to be of service. We therefore work diligently on its sustainability.

Thinker Morgan Housel wrote about the sources of sustainability in business. Relative to the competition, these attributes provide an enduring competitive advantage:

1. Learn faster.

2. Empathize more with your customers.

3. Communicate more effectively.

4. Be more patient.

These things resonated with us because they represent much of what we strive for. Patience is a prerequisite of successful investing. It is free, but not easy to practice. It also is what lets us be content to work with you at your pace, on your schedule, since we are talking about your money.

You know by now how highly we value effective communication! Listening to you and talking to you in various ways is one of our three core activities. We put a lot of effort into it.

Empathy—understanding what you are going through, where you want to go—is perhaps the key to being able to meet your needs.

We are surprised at how much we are still learning after so many years of experience. In this rapidly changing world, continuous learning is required in order to be able to survive and thrive.

Clients, we are not claiming perfection in any of this. But we are mindful of the things we must do in order to be a reliable partner for you through the years. If you would like to talk about this or anything else, please email us or call.

We Are All Globalists

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Global trade and international relations have dominated the news lately. The president signed a pair of sweeping tariff proclamations and issued a number of statements about trade.

Each of us has been mostly free to buy the goods and services we choose, regardless of origin. Chanel, Honda, Burberry, Adida, Mercedes Benz, Nestle, Armani, Samsung, Phillips, LG, Toyota, AXA, Bayer…these global brands earned their position because enough of us voted for them with our wallets.

If you are of a certain age, you remember when ‘fruits and vegetables’ meant about a dozen things. Now the produce section features products from dozens of countries.

Trade is not a one way street, either. Within forty miles of beautiful downtown Louisville, the small town of Valley Nebraska hosts Valmont. The company began in the irrigation equipment business in 1946. Today Valmont does business in one hundred countries on six continents.

Likewise, the farms surrounding these towns help feed the people of many nations.

Many of the most iconic American companies like Caterpillar and Boeing produce for the whole world, too. As with those international brands, they earned their position by being valuable to their customers.

We could buy Fords instead of Toyotas. And people in other lands could buy Kubotas instead of Caterpillars. But what would be the point? The U.S. and the whole world has steadily gotten wealthier and more prosperous by doing business in a relatively free system of global trade.

Because citizens of each country may or may not choose to buy and sell equal amounts to other countries, so-called trade deficits result. You have a trade deficit with the grocery store—week after week, you are in there buying things. Yet the grocery store never buys anything from you. This is not a problem, is it?

Trade has made us richer and our lives better. Less trade will make us poorer and life more difficult. (A trade war and collapse of trade was at the heart of the Great Depression, after all.) We are watching current developments carefully.

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

Win, Win, Win

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Remember ‘win-win thinking?’ This phrase became popular in business a long time ago to describe interactions in which everybody comes out better. Our favorite example is as familiar as the grocery store. The grocer wants your money more than he wants the can of beans. You want the beans more than you want the money. A trade is made; everybody wins.

“Win-Win” is a fair description of how our business works. In our investment advisory accounts offered through LPL Financial, we are compensated by a percentage fee on account value. Our best path to growing revenues is growing account values. When you do better, we do better.

In the old brokerage model, products are sold to investors for a one-time commission. We think of this as the Good Luck plan, because the salesmen get paid up front and can wish you good luck, as they head down the road to find another prospect. They have no skin in the game, so to speak.

This does make sense in some situations. If you know what you want and do not plan on trading it, the one-time commission model probably works well for you. In a brokerage account, after you pay the sales charge you can hold on to your investment without paying ongoing management fees as you would in an advisory account.

However, we are in the business of trying to figure out how to grow your bucket, which often involves many trades over the course of a year. This creates a conflict for us: the more we trade in a brokerage account, the more commission charges add up, which is great for us but not for you. But our advisory accounts do not pay us on commission. When we switched to focus on advisory business, your interests and ours became much more closely aligned: we were free to make trades we believed would help you without worrying about commission costs. Life got simpler for us and better for you, we believe.

Win-win thinking also led us to introduce longevity discounts to our fee schedule. The longer we are in business with you, the better we understand each other. Longer time horizons and longer relationships are good for you and good for us. Another win-win deal.

It runs deep. From time to time we find that a client is paying for advice which they do not care to follow. This is win-lose, not win-win. We endeavor to get out of these situations as soon as we figure them out.

The biggest advantage of win-win thinking is that all of our energy can be devoted to striving to improve your situation. Relief from worrying about our position is quite liberating. 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.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs.

The 5 W’s of Carl Braun

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Legendary investor Charlie Munger once spoke of a great business builder, Carl Braun, and the story of the five W’s. His company was a specialized engineering firm. His rule for all communication became known as the five W’s.

You had to tell who was going to do what, where, when and why.

We write about a great many topics. It makes sense to get back to the basics from time to time.

Who: We manage wealth to try to help people live the lives they desire. To do that, we have to understand your life and your objectives. We do arithmetic, we research things that need to be learned, we think about alternatives. Most importantly, we consult with you—we talk.

What: We listen to you about the things on which you are the expert. We explain clearly and simply the things that need explaining. Together we figure out if we might be of service to you. (Our investment approach is not for everyone. Determining suitability in advance is better for you and for us.)

Where: The center of our business universe is at 228 Main Street in beautiful downtown Louisville, Nebraska. The phones and the internet go everywhere, of course, and work can be done from many places.

When: Nearly every business day until I am 92.

Why: The little answer is that we get paid to manage wealth. (The talk and the arithmetic and all the rest is just to get to the place where we might manage wealth, no separate charge.) The big answer is that this work is an obsession of mine.

The five W’s are a useful framework, but there is one more feature that is different than most of our colleagues. We believe the best way to grow our business is to grow your buckets—not look for new buckets. This has worked well for a long time. We do not plan to change.

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

Here We Grow Again

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We spend a lot of time thinking about business. Shares of common stock are percentage ownership interests in businesses, after all. But lately we have had to spend some time thinking about our business. It keeps growing.

Our idea has long been that growing your buckets is the best way to grow the business. So we put all of our energy into that task, and talking to you clients instead of strangers. You evidently talk about us–word of mouth is an amazing thing.

We think the best strategy to manage growth is a concept we learned by revamping our communications beginning in 2015. The digital venues like 228Main.com are scalable. In other words, when we communicate to dozens of clients, hundreds or thousands of others can listen in with no additional cost or effort or time on our part.

Scalability in our operations means systematizing the things that would be done better if they were systematized. Scalability in our staff means getting understudies in place for every human activity, and documenting those processes.

When you think about it, our efforts in these areas will make our enterprise more durable and resilient. These are good things for everyone.

The first steps in the scalability project:

1. Hire an understudy for Larry, to work in client logistics (forms, paperwork, and organization). This will happen soon.
2. Develop a custom operating system for the business. Portfolio analytics, our longevity-driven fee administration, task management and client contact records will ultimately all be in a single system. This is in development, and will probably take many months to complete.
3. Hire an understudy for Greg, to work in research and trading. This will be a longer-term project.

Of course, we all pitch in on many different activities as needed to meet your needs. Clients, if you have questions about this or anything else, please email us or call.

Burning Up Money

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No doubt you probably noticed the turmoil in the stock market over the past several weeks. You might have assumed, if you watched the stock indexes hit a low of more than 10% below their peak, that some particularly ugly piece of news had hit the market.

If so, you would probably be surprised to hear that the biggest news stories leading to the correction were that the economy was booming and unemployment was at record lows. So why were investors panicking at this seemingly positive news? The answer is inflation.

You see, as the economy grows, increasing wealth leads to increasing demand. This means higher prices–or, in economic terms, inflation. This creates a couple of problems for the stock market. In the long term, rising prices make it harder to maintain economic growth and may contribute to an eventual crash. In the short term, both economic growth and inflation increase the pressure on the Federal Reserve to raise interest rates, making bonds and other interest-driven investments more attractive relative to stocks.

We are deeply skeptical of this short-term rationale. While bond investors may salivate at the prospect of higher interest rates in the future, we think this is short-sighted. Tomorrow’s higher interest bonds may sound attractive, but you would be foolish to buy them if the interest rate is going to be even higher the day after. On February 5th, when the stock market was posting headline-grabbing declines fueled by interest rate paranoia, investors were actually buying up bonds–bonds that stood to lose purchasing power as soon as better, higher interest bonds started being issued!

The longer term concern, that inflation may spell the beginning of the end of the current economic boom, is a bigger threat. We have warned for a long time that the Federal Reserve was likely to wind up overshooting the mark on its 2% inflation rate target. We think this is even more likely now that the government has passed a very stimulus-minded tax package. Cutting taxes during the middle of a boom is likely just throwing gasoline on the fire: it is possible we may see some explosive growth, so in the short run we are excited about the market, but in the long run the economy may just burn out that much faster.

Clients, many of you have been in business with us long enough to remember the roller-coaster years we saw around 2007. The dip at the start of February may potentially be forgotten as the market forges on ahead, but it will not be the last one. The roller coaster is coming back, and although we look forward to the ride we will keep a mindful eye for the day we may need to think about getting off. Call us if you have any questions about the market and the broader economic outlook.


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.

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

Coal Museum is Powered by What?

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In the heart of Kentucky coal country is Harlan County. There you will find the Kentucky Coal Mining Museum. Thousands of artifacts depict the industry, the people connected with it, and the role coal played through history. Notably, the collection of Loretta Lynn, “The Coal Miner’s Daughter,” occupies a floor.

Over 90% of the coal used in the US is for the production of electricity1. The museum had electric bills that were running $2,100 per month, on average2.

In 2017 the museum acted to reduce its cost of electricity by $8,000 to $10,000 per year2. Solar panels went on the roof. The museum will be able to offset its power costs by selling excess electricity back to the local utility.

One might guess that alternative energy sources which compete with coal would not be popular in the very heart of coal country. But compelling economics usually triumph in the end. The museum made a business decision. Investors should pay attention.

The cost of electricity from solar is declining about 10% per year3. We concluded from this trend that the next energy revolution is taking shape. The combination of solar plus batteries may be the dominant source of electricity at some point in the future.

Change produces winners and losers. Our portfolios are already being shaped by the energy revolution. Many more opportunities and threats will become apparent as the future unfolds.

Our sense is that the pace of change is not fully appreciated by consensus wisdom. Some of the losers in the energy revolution may now be overpriced; some of the winners may be bargains. We are studying this situation intensely.

Clients, if you would like to discuss this or anything else on your agenda, please email us or call.

1Institute for Energy Research, https://instituteforenergyresearch.org/ Accessed on January 30, 2018.

2Washington Post, “Kentucky Coal Mining Museum in Harlan County switches to solar power”. April 6, 2017.

3The Guardian, “Solar panel costs predicted to fall 10% a year”. January 1, 2016.


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.

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

Average Is Not Good Enough

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There is a split in the investment world. One camp believes people should just buy passive products that seek to mimic the investment universe at low cost. They think it is not possible to gain any advantage by actively managing portfolios. The other camp believes there IS a benefit to actively managing portfolios and choosing particular investments.

You know where we fit: investment research, the selection of securities, and managing portfolios is about all we do—except talk to you. We are in the “active” camp, not the “passive” one. The debate rages on.

One thing is certain. The passive camp enjoys lower expenses, because they ordinarily only do a fraction of the work that we do: we research about individual companies, read annual reports, sell this and buy that to try to gain an advantage.

When you think about it, the whole universe of active investors cannot all deliver above-market returns—with their higher expenses. So the idea is the whole universe of passive investors must therefore do better than the whole universe of active investors, due to lower costs.

Our view is that the average performance of active investors is determined by some investors who are above average and others who are below average. So it is imperative for us to be above average—to be worth more than our freight—to have a sustainable business.

Once upon a time an active manager purchased a bond that had declined after it was issued, for 50 cents on the dollar. It was purchased from another active investor, who took a 50 cent loss. The bond later matured for a dollar, so the bargain-buyer had a 50 cent gain. On average, active investors broke even. But one active manager did better than average, and one did worse than average.

We do a whole lot more than manage investments, of course. Planning to help you work towards your goals, putting market action in context, answering your money questions, coordinating with your legal and tax advisors… these things are also part of our work. But striving to grow your bucket is why we get up in the morning.

Average (ordinary, middling, mediocre, unexceptional) is not good enough. Active investors need to be above the line over the long term. We have no guarantees to offer. But our goal is to be exceptional.

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. All indices are unmanaged and may not be invested into directly.

All investing, including stocks 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.

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.

 

But is it Investable?

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One of our key tasks on your behalf is the search for bargains. Seeking the best bargains is one of our fundamental investment principles.

When we spot an idea, product or trend that is likely to become more prevalent or profitable in the future, we end up trying to figure out whether that knowledge can be effectively put into client portfolios. In other words, is it investable?

To invest is to put money into something in which you have a reasonable expectation of a return. This is different than speculating, which involves a high risk of large losses or large gains. Last and least, there are many ways to simply flush money down the toilet.

For example, without debating the merits, medical and other uses of marijuana seem increasingly likely to proliferate. But we believe the political risks inherent in federal government policy are so high that it is speculating at best—not investing.

When we look at specific marijuana securities, most of the buzz is about penny stocks. These, in turn, look to us to be more in the “down the toilet” category than either an investment or a speculation. So we have concluded that the proliferation of marijuana is not investable.

Another facet of investability has to do with price. A trend that everyone seems to be talking about is likely already reflected in the price of investments, leaving little room for gains. “What everyone knows usually isn’t worth knowing,” as the saying goes.

By 1999, everyone knew the internet was going to change how we live and work. The internet did indeed transform life in many ways. But related investments were trading at extremely high valuations, resulting in losses to investors in subsequent years.

We are selective—one might say picky—about the things in which we choose to invest. Our standard of investability is high. We sometimes talk to people who are enthusiastic about an idea that sounds exciting, but is not investable. No matter how good an idea is, if we cannot get it into your portfolio on an efficient basis, it is not investable.

Clients, for examples of things we believe are investable, look at your statements (or positions in LPL AccountView). If you wish 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. 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, including stocks involves risk including loss of principal. No strategy assures success or protects against loss.