Case Study: The Portfolio of Mr. X

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Over the last year or so, you taught us a lesson. We are a little embarrassed it took us so long to catch on. But learn we did, and now we are enjoying the payoff.

The lesson is, some people require a layer of cash or other cash equivalents in their accounts to reduce the volatility and risk of the overall portfolio. We used to see this as a form of heresy against our beloved three fundamental principles. Clients were encouraged to maintain their safety blanket somewhere else, so that we could concentrate on our traditional research-driven, focused approach to investing.

We still aren’t comfortable with market timing, and selling in a panic will always result in an invitation to do business elsewhere. But we finally have started listening to those who desire a portion of liquid assets inside their portfolios, or a layer of less volatile investments.

Mr. X is a patient man who has stuck with us despite our stubbornness. His philosophy nearly matches ours—but not quite. When he visited the shop recently to discuss his desire for a little less risk (again), we explained that we had adapted to preferences like his, and how much cash or liquid assets did he want to maintain in his account?

Mr. X could scarcely believe what he was hearing. He asked if we were really going to skip the part where we argue. When we assured him we would simply carry out his wishes, he was surprised and pleased.

Of course, we discussed the central tradeoff. Higher cash levels will generally result in lower long term returns. Mr. X pondered the issue, and specified a relatively modest fraction of the account to be in cash.

Trading lower returns for less volatility can have desirable effects. The cash layer may enable a person to stay with the overall plan in tough times. Financial confidence is a very nice thing to have, and the cash layer may help address it.

We have not abandoned our principles. We simply came to the realization that we could help more people invest more effectively if we listened to them more carefully. Life is better for us, and more pleasant for Mr. X as well.

If these issues are pertinent to you, please write or call 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. All performance referenced is historical and is no guarantee of future results.

Professionalism? Or Pandering?

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Two popular trends in the investment business may be affecting the financial health of clients. In my opinion the use of “risk tolerance assessment” tools, combined with the trend toward model portfolios, may be good for advisors and bad for the customer.

Many advisors use risk tolerance assessments. The issue is that when markets are lovely and rising, these tests have the potential to show that risk tolerance is high based on the client’s response. When markets are ugly and falling, they have the potential to show risk tolerance is low based on the client’s response. These tests measure changing conditions, not some fixed internal thermostat.

The potential for mischief comes into play when the results are tied to model portfolios. A lower risk tolerance potentially gets you a portfolio with less chance for long term growth, lower exposure to fluctuating but rewarding markets, and more supposedly stable investments with smaller potential returns. So the market goes down, risk tolerance goes down, and people may sell out at low points.

Conversely, when markets go up, risk tolerance goes up, and people may buy in at high points.

The old rule is ‘buy low, sell high.’ It is my opinion that the supposedly scientific approach of risk tolerance assessment tied to model portfolios encourages people to do exactly the opposite.

It appears to be objective, almost scientific. The pie charts are impressive. But the process panders to the worst elements of untrained human nature—and actual investment outcomes may show it.

It is as if the cardiologist, upon learning that a patient dislikes sweating, prescribes sitting on the couch instead of exercise. Or if a pediatrician first assesses a child’s tolerance for icky-tasting medicine, then tailors his prescription accordingly.

We believe that people can handle the truth. Our experience says people can learn to understand and live with volatility on some fraction of their wealth in order to strive for long term returns.

So the first step in our process is to determine if a prospective client can be an effective investor. It doesn’t matter to us whether they were born with great instincts or are trainable—we provide support and education through all kinds of markets. It takes a lot of effort, but we do it because of the results it may provide.

If you need a refresher on the ‘buy low, sell high’ thing or would like to discuss how this affects your plans and planning, please write 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.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal.

If You Always Do What Everybody Else Does…

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Our clients know we are not like most other financial advisors. We used to be content to let people discover the differences at their own pace, if ever. But changes in the world have made clarity about the distinction a crucial matter—vital for us, vital for you.

The financial industry is responding to regulatory and competitive pressures by adopting standardized approaches for all investors. This ‘safe’ approach based on conventional thinking supposedly reduces risk of fines or litigation.

Consequently, many advisors spend no time reading SEC filings or analyzing financial statements or managing portfolios of stocks and bonds. Instead, they try to find people to stuff into one of three or five pie charts filled with packaged products.

There are more than 300 million people in the country. We do not believe you all fit into one of these pie charts.

Our principles-based approach is based on building custom portfolios for each client. We are contrarian—we do NOT want to do what everybody else does, and get what everybody else gets. We hope this is why you continue to do business with us.

With different methods, we get different outcomes. Client results generally do not match “benchmark” returns such as the S&P 500 Index, or what the pie chart would have gotten you. Sometimes we do better, sometimes we do worse, and over the long term we hope to come out ahead. No guarantees, of course.

Our portfolios also experience volatility. We all understand that this is an integral part of long term investing. We do not sell out just because the price goes down. Warren Buffett loves to buy when the price of a good opportunity declines, and so do we.

Since each client has a custom portfolio, there is a range of returns even among clients with similar objectives. We are constantly improving our portfolio process hoping that all clients receive as much benefit as possible from the opportunities we identify. But with our approach to portfolio-building, there are still nearly infinite variations in holdings. Money comes in at different times, and client preferences are taken into account when investing. Naturally outcomes differ one from the next.

Bottom line: if you want the benchmark return, or to end up with what everybody else gets, or to avoid volatility, you should find an advisor to slot you into a pie chart. Don’t worry, it is easy to find one—they are all over the place.


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.

Memento Mori

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In ancient Rome, it was customary for the city to throw lavish triumphal parades in honor of victorious generals. The whole city would turn out to celebrate those who had brought glory to Rome. For a successful general, it was an intoxicating reward.

Lest their generals become too intoxicated with success, however, the Romans would assign a servant with a unique task. Their job was to follow the triumphant general throughout the festivities and periodically whisper in their ear memento mori: “Remember, you are mortal.”

It is humbling advice, and one that we would do well to remember. The markets have had several great quarters lately, leading to the Dow average topping the dizzying benchmark of 20,000 points for the first time last week. We have no way of knowing how high it may get in this rally or the next, either.

We do know one thing, however: no rally lasts forever. No matter how high the market soars, it can always drop back down. We don’t know when, and we don’t know how much, but someday that day will come. There is always a recession in our future.

Our goal is to try to minimize the damage by avoiding stampedes when we see them. When investor sentiment gets overly exuberant, when we start hearing people say “You can’t lose money in the stock market”, this is when we must pay heed: “Remember, market rallies are mortal.” We are confident that in the long run the markets may bounce back from future downturns as they have always done before and we can potentially be better off afterwards—but the recovery will undoubtedly be slower and more painful if we fall into the trap of thinking that our portfolios are invincible just because they’re doing well now.

We’re thrilled with our performance over the past year and excited about the continued evolution of our portfolio strategies. At the same time, we know that nothing lasts forever. At some point in the future, we will have to reckon with another downturn. It might be in a year, or it might be in five years. Either way we must keep this inevitable fact in mind if we hope to try to mitigate the damage. If this weighs on your plans and planning, give us a call or email us to discuss 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. 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.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The Big Payoff from Automobile Evolution

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Clients know we’ve been investing in different facets of the auto business for years. It is a vital industry. People need to go places, after all—to school, work, and play. The more we research, the more interesting the future becomes.

Here are some of the surprising things we have learned:

Going a mile in an electric vehicle, or a hybrid in electric mode, costs only three cents. Gasoline takes a dime. The seven cent difference adds up to $175 billion dollars annually in the US. 1

The idea of ‘autonomous vehicles’ or self-driving cars seems fantastic today. Rapid advances in radar, other forms of sensors, artificial intelligence, and communications are making the technology a reality. We will see it, at least in some form, in some places, in the not-too-distant future.

Engineers project that autonomous vehicles will experience a 90%-to-95% reduction in accidents compared to human-driven vehicles. We thought about what this could mean, and ran the numbers. Across the whole country, this means thirty thousand fewer traffic fatalities per year. Two million injuries would be avoided. In economic terms, $135 billion in property and human damage would be prevented every year, if the accident rate were reduced 90%.2

In a related development, the cost of solar electricity is falling about 10% per year3. This makes sense, because solar power is a technology and the price of technology tends to fall year by year. So the cost advantage of electric propulsion may grow even larger.

With these compelling economic factors, it is easy to forget that the price of electric vehicles is not yet low enough to be competitive with internal combustion engines. But as a client reminded us recently, “Wide screen televisions used to cost $12,000, too.” As volumes go up, prices will come down. We know how this works.

The benefits we’ve cited above amount to thousands of dollars per year, per household. This doesn’t count the time we might gain from not having to drive, or the significant health advantages from reduced vehicle emissions.

The prospects for a healthier, wealthier society are exciting. Change usually creates winners and losers. You know we will be studying these issues intensely and watching closely. Please call if you have questions or comments about how this may affect you.

1Calculated from US Department of Transportation figures

2National Transportation Safety Board statistics

3Farmer, J. Doyne & Lafond, Francois. How predictable is technological progress? Research Policy, 2016. Volume 45, Issue 3.


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.

A 1-2-3 Approach to Investing

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At times we feel embarrassed to be learning so much at a mature age. But we are grateful for the energy to attempt to improve what we are doing. Here we discuss developments in our portfolio management theory and practice.

One. Recently we figured out that one of our investment themes may benefit from a 1% position in a more speculative holding than we usually want to own. (By that we mean that 1% of a client portfolio could be invested in this company.) While failure could cost a dollar per dollar invested, success might return multiple dollars back, in our opinion.

We believe this makes sense because success might come at the expense of our other holdings. So one investment may serve to offset losses in another. No guarantees, of course.

We also realized that the 1% idea might help us in another way. Value investors have trouble buying exciting growth companies that have yet to develop large earnings, or dividends, or book value. But taking a smaller position in companies with solid prospects for growth can more easily be justified than buying a more sizable position. Perhaps this will let us participate with more comfort in the ownership of faster-growing companies.

Two. The next portfolio development came from our research into the biotech industry. The biopharmaceuticals each have their own specialties, and new products in various stages of development. Based on current earnings and prospects for growth, we wanted to gain exposure. It was too difficult to choose one over another, even among the larger and established companies. So we decided to buy 2% positions in each of four large players.

Three. We reduced our core position size from 5% to 3% for mainstream holdings. After 2015 we became interested in avoiding excessive portfolio volatility. Owning smaller pieces of more companies lets us be more diversified. We will also have more flexibility to let potential successful companies grow into larger fractions of the portfolio over time.

We are excited about the evolution in our thinking about the best ways to put portfolios together. Combined with the development of our trading protocols, we hope to put money to work faster than ever before—and in new ways. We still research carefully and come to conclusions only after thought and study, of course.

If you have questions or comments about how your portfolio is affected, or any other question we might help you with, 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.

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.

Stealthy is the Bull

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The broad stock market indicators like the Dow Jones Average and the S&P 500 Stock Index reached a low point in March 2009, near the end of the financial crisis. Looking back a year or four years or seven years later, hindsight showed that the crisis was potentially a great buying opportunity.

Many investors missed out on the multi-year rise, however. (Or should they be called former investors?) In real time, nobody ever knows what will happen next, particularly in the short term. And rising markets, or ‘bull markets’ as they are known, seem to have many disguises.

After a rebound begins from a long decline, inevitably some pundits label the rise with an overly colorful phrase, “dead cat bounce.” The implication is that, while there might be a bounce, it certainly won’t go very high or last very long—the market is going nowhere.

Next comes the idea that if buying has produced a slight turnaround, it is just “short-covering.” This means that speculators who profited from the drop are now booking their profits, reversing their positions. Supposedly, there are no ‘real’ buyers.

When the market persists in the upward trend, the next excuse might be that “the market got oversold.” Therefore a temporary bounce is to be expected, before the market slumps again.

Then when the next slump fails to show, pessimists start saying things like, “We can’t know we are in a new uptrend unless the market reaches new all-time highs.” Or “It has gone up too far, too fast.”

When you take a step back and look at the big picture, those poor pessimists never could get back into the stock market. They had one rationale after another to doubt the recovery; meanwhile the market went up and up.

Do not worry about the bears, however: they have a new story. “The market is too expensive.”

Fortunately, we don’t buy the whole market anyway—we seek the bargains. You can read about our current strategies in this article. If you would like to talk about your portfolio or situation, please write 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 Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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

Should You Spend Like You’re Rich?

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When children think about rich people the mental image might be something like Rich Uncle Pennybags from the Monopoly game: a monocled fat cat in a top hat with bulging sacks of money.

Obviously, the reality is much different. As we mature we typically develop a more realistic picture, but there is one surprising realization: it is usually much, much cheaper to be rich than to be poor. Having money enables us to live more cheaply and avoid many painful financial pitfalls.

To begin with, paying cash is often cheaper than paying with credit. If you are able to lay down cash for major purchase such as vehicles or even houses instead of having to borrow, you don’t just save on fees and interest, you may even be able to negotiate a better price. If you are funding large items on a credit card, you are likely to wind up paying many times what they are worth. If you are hard up enough that you need to turn to high risk credit in the form of payday loans, things get even worse.

There are other ways that having money allows you to stretch your money out, too. Buying quality merchandise may take more money up front, but if the alternative is buying shoddy products need to be replaced more often, you may save money in the long run by paying more up front. (Of course, care must still be taken to select your purchases carefully: higher cost does not always correlate to higher quality!)

Also, when you have a life of plenty you have the luxury of being able to shop around and wait for a better price. If you have two of everything, it is not an emergency if one breaks or gets used up. Without that surplus, you may find yourself having to go out and buy a replacement whether you like the price or not.

These habits, paying cash and shopping carefully and not being in a hurry to spend, are ones that all of us can use to help us build and maintain our own wealth.

The wonderful conundrum that some have discovered is this: the less you spend, the more wealth you accrue; the more wealth you have, the less you need to spend. Please call or write if you would like perspective or conversation 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.

That’s a GREAT Question

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Recently, a client asked a very blunt question. Just in case anyone else is wondering the same thing, I would like to share the answer.

The client lives a couple states away. He was originally referred by a good friend of his, a person we’ve known for a very long time. We had been conversing about a notable investment success of the past year. I detailed the millions of dollars in gains across our whole client list, and then he asked the question.

“So with your ability to find opportunities like that, why are you talking to me?”

Great question. It gets right to the core of my being.

Obviously, it isn’t the money. I could run a hedge fund, or work on investments in an ivory tower somewhere on behalf of investors I never met and did not know. Instead of working with clients every day, I could have managed the people who talk to clients or managed the people who managed the people who talked to clients.

The fact is, back when I was still in my twenties I knew my ultimate aim was to find a group of clients to whom I could deliver sophisticated investment advice, for our mutual benefit. More than twenty years ago I started Leibman Financial Services to attain that goal. The lives I had touched in my previous, more wide ranging career affirmed the course I set.

The widow who was able to retire within weeks of our first meeting, and own her first home a couple years later—my work was key to giving her the confidence to act. I had a positive impact on her life. Nothing else in my career had ever gratified me as that did. Twenty years ago, a handful of experiences like that inspired me.

Now, our business is organized to maximize gratification from work like that. It might be for retired school teachers or truck drivers or business owners or big-company execs or bankers—we serve a niche market of the mind, not some narrow demographic.

This driving force, by the way, also explains why I persevere in my work despite other challenges we face—and why I want to work to age 92. My passion has provided us the material things we need in life—my bills are paid. Now it is about piling up the psychic rewards my work provides. THAT’S why I’m talking to you.


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.

Freedom to Decide vs Freedom to Debate

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One definition of ‘discretion’ is freedom to decide what should be done. 95% of our investment advisory clients have granted us discretion to trade individual securities on their behalf, for their benefit, in line with their objectives.

In 2016 this privilege was key to making bond purchases, which had to be done on a bulk basis. In other words, one large purchase in the market was divided among scores of our client accounts. The issue is that we cannot talk to eighty or a hundred clients in a short enough time frame to place a bulk order.

The logistics can be daunting. When we learn that a bulk purchase has been negotiated, then we must make sales that same day in all affected accounts to raise the money to pay for the bonds.

Fortunately, we developed a rules-based framework that enabled us to handle all the work on a timely basis. In late 2016 we used the same concept to develop a protocol for trading stocks. This new method is astoundingly effective.

On one day, we placed more than five hundred individual stock trades. We had concluded that a sector we owned was going to have a lot of trouble maintaining revenues and profits and needed to be sold. At the same time, we were excited about the bargains we had found elsewhere in the market. (You can read more about our strategies here.)

We have a high duty to advisory clients, whose situations and accounts we must monitor over time. Even with our new-found efficiencies, we have less and less time for commission-based brokerage business. Because we lack freedom to decide, we only have freedom to debate.

By that we mean to place calls, discuss potential investments, argue or not, and perhaps obtain permission to make a trade in exchange for a commission. The ‘freedom to debate’ part of our business is under $10 million and shrinking. The ‘freedom to decide’ piece is approaching $50 million and growing.

We are committed to our three key activities: talking to you, researching investments, and managing portfolios. We can do the most good for the most people if we have freedom to decide. This is why we ask you for that privilege and obligation. If you have any questions about this, or any other aspect of your situation, please call or write.


In a fee-based account clients pay a quarterly fee, based on the level of assets in the account. In deciding to pay a fee rather than commissions, clients should understand that the fee may be higher than a commission alternative during periods of lower trading. Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs.

Investing involves risks including the possible loss of capital. No strategy assures success or protects against loss.