contrarian investing

Four Trends for Fall, 2018

© Can Stock Photo / Elenathewise

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

One year ago, we wrote about four trends. The next energy revolution (solar + batteries), long range prospects for the world’s most populous democracy, the airline industry, and rising interest rates continue to play roles in our thoughts and portfolios.

Other ideas are also in play.

1. Thinking about the next few years, our highest conviction idea is inflation will exceed consensus expectations. Some of the ways we act on this belief may provide some counterweight to other portfolio holdings, since inflation hurts some industries while it helps others.

2. As the economic expansion lengthens toward record territory, the desire to extend our lifespan tends to be insensitive to the business cycle. Biopharmaceutical companies, working on cures for everything from Alzheimers to various forms of cancer, seem attractively priced.

3. The trend toward rising interest rates, noted last year, may have an effect on weaker and more leveraged companies. We are looking to avoid the second-order and third-order effects that higher rates may have on some borrowers.

4. US stocks have become popular relative to international equities, with dramatic outperformance over the past decade. At some point the trend changes, and better value usually wins out.

One of the difficult things about being contrarian–going against the crowd–is that we sometimes look silly. When everybody else is having more success in the short run while we search for bargains, it can be tough. But that is what we do. We’re excited about the continuing evolution of your holdings as the future unfolds.

We can offer no guarantees except that we will continue to put our best effort into the endeavor. Clients, if you have any questions or comments or insights to add, 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.

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.

 

Steering the Herd

© Can Stock Photo / carla720

One of our core investment principles is to “avoid the stampede.” If you read this site regularly you have heard us say this over and over again, but we think it bears repeating.

As part of our work we talk to many product representatives who want a slice of our business. There are countless product providers out there competing for our attention, and your money. There are limited amounts of both to go around, so inevitably most of the wholesalers that talk to us are going to be disappointed. However, we still like talking to them as they do us a vital service: they tell us which way the stampede is going.

We are contrarians by nature. When we hear someone tell us that a lot of people are buying something, our instinct is not to line up alongside them. When a lot of people tell us that a lot of people are buying the same thing—our instinct is to run far, far away.

Lately, what we are hearing from the product wholesalers is that everyone is piling into exotic alternative investments. Everyone is looking for exciting new products that are not correlated to stock market returns, and boy, are the product providers ever ready to sell it to them.

We live in uncertain times, and it is understandable to be spooked at some of the troubling headlines we see. We understand the desire to seek safety. But, we believe that safety is not to be found from following the herd. Omaha is famous for its stockyards and slaughterhouses; we know that when the cattle are all getting steered together, it rarely ends well for the cattle.

We know there are always uncertainties with the economy and the markets. But the sales pitches we hear for everything non-correlated to stocks makes us feel a lot more secure in our traditional equity investment philosophy. There may come a time when the herd starts stampeding back towards equities and it will be time for us to look elsewhere. For now, though, our equity focus puts us in lonely company when it comes to wholesalers—and that is just how we like it.

If you want to talk about any market trends or sales pitches you may have noticed, please feel free to 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.

You Are Somebody, Not Everybody

© Can Stock Photo / Bialasiewicz

Our pursuit of effective strategies for successful investing covers a wide range of disciplines. Economics and mathematics are obviously needed, but history and psychology play surprisingly large roles.

As contrarian investors, avoiding stampedes is a fundamental principle for us. We often find ourselves going against the crowd. It turns out that there is a lot of conventional wisdom with which we disagree.

The world is complex; humans use shortcuts all the time to keep things simple enough to handle. The problem arises when characteristics of a group are ascribed to each individual within the group, as a shortcut way of dealing with people.

For example, Americans on average are sedentary and overweight. But if you watch who enters the door of the YMCA at 6 A.M., you know that the group characteristics do not apply to every individual. We use this same principle to find clients who will not sell out at low points or fall for the latest overpriced fad.

Behavioral economics indicates that humans tend to behave in counterproductive ways when it comes to investing. But just as the “Y” does not treat each member as if they were overweight and sedentary, we know that counterproductive behavior is optional at the individual level. We choose to try to avoid it.

We were reminded of this recently in reviewing some studies about happiness. The studies show that people quickly take new things for granted, homes and cars for example, so the initial happiness soon wears off. But in our experience, this is a matter of choice.

When in Louisville, I live in the humblest quarters ever since I graduated from college. I am grateful to have an abode that meets my modest needs. In Florida, my days are spent in a nice home that is wonderfully suited to our family. My gratitude and appreciation and happiness about that never flags. This just puts me right in the middle of the pack of the greatest clients in the world. (Our opinion.)

When we read studies about behavior, we will always remember that you are somebody, not everybody. Economists and psychologists can prove all they want about human tendencies, but we will not accept their findings as your fate or ours.

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

Prepare for a Changing Market

© Can Stock Photo / kerdkanno

When we began in business twenty-one years ago, we recommended a wide variety of investment products. Over time, our efforts have increasingly focused on platforms in which our investment philosophy and research may be more effectively employed. Most of our time and energy now goes into the investment advisory services we offer through LPL Financial.

Clients, many of you have assets outside of LPL Financial. We believe it is time to re-examine these arrangements and determine whether they are still appropriate. We might have recommended strategies in the past that may not be the best ones for the future.

• A generous bull market over the past decade meant that other arrangements generally remained beneficial to you, in our opinion.
• But market conditions are likely to become more hectic, sooner or later.
• We have greater flexibility to seek bargains, avoid stampedes, and pick our spots when assets are in the LPL Financial platform, instead of another institution.

The better off you are, the better off we are likely to be—this has been a guiding principle at 228 Main. Our motivation is to be in the best position to keep your portfolio responsive to changing conditions.

If we may possibly improve your situation by taking a more active role in managing your assets, we welcome those duties. If you decide that outside investment accounts remain your best option, we’ll still be happy to work with you on that basis.

We would like to talk, having no pre-conceived notion about what is best for your specific situation. 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 economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including loss of principal.

Why Not Both?

© Can Stock Photo / stockcreations

We keep reading a curious idea promoted by some in the financial industry. It goes like this: “Managing investor behavior is the key task for advisors, not managing investments.”

That framework assumes there is a choice between one or the other. There are two flaws in the assumption. It does not have to be an either-or deal. And some fraction of people don’t require babysitters for their natural investment behavior, which is effective.

We believe in BOTH of these roles. It may be true that raw human nature is generally counterproductive to sound investing. (Behavioral economists tend to think so.) Our theory and experience says that the attitudes and behavior of individuals can be deliberately shaped to their benefit—and ours.

What may apply as a general principle to all people does not necessarily apply to you as an individual. You have free will. And we believe people can learn.

So we spend a great deal of time and effort talking to you, and communicating about the mindsets and strategies and tactics we believe are effective. But that is only part of the job.

Legendary investor Charlie Munger said, “We wouldn’t be so rich if other people weren’t wrong so often.” By avoiding stampedes in the market, we may sidestep a poor situation that others are getting into. And by seeking the best bargains, we are looking for holdings that others may be wrong about.

In other words, two of our fundamental principles about investment management are founded in a belief that investment selection matters because people are often wrong. We see investor behavior as a creator of opportunities for our clients—not a problem to be managed. Clients, we keep saying you are special: this is why. We believe your investment behavior is exemplary.

Knowing what you own and why you own it, operating in accordance with sound principles and strategy, makes it easier to behave effectively. These things reinforce each other.

Manage behavior, or manage investments? It isn’t either-or—we need to pay attention to both. Clients, if you would like to discuss this at greater length, 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.

YOU Haven’t Missed Out

© Can Stock Photo / rustyphil

The Wall Street Journal recently highlighted “one of the biggest surprises of the US stock market’s relentless rally…how many individual investors have run away from it.” This is from the January 4, 2018 article “Individual Investors Sit it Out.”

The article cites industry sources about where people have been putting their money the last several years. While nearly $1 trillion got pulled out of investment products that target US stocks since 2012, almost the same amount has gone into bond investment products.

Clients, would you trade your results over the past three or five or seven years for bonds with low potential interest and growth?

Our fundamental rules have guided us. Avoid stampedes—and the stampede into the supposed safety of bonds may be one of the biggest in history. Seek the best bargains—interest rates near the lowest levels in four decades1 hardly seemed like a bargain to us.

A strong contrarian streak encourages us to think about doing the opposite of what everybody else seems to be doing. We’ve been buying stocks when others were selling.

We’re focused now on getting the next big thing right. If we seek to avoid stampedes, we need to be careful if the stampede joins us. What we now own may become too popular and get over-priced. A 30% or 40% gain from current levels might put us in risky territory.

By continuously seeking better bargains in other sectors and trimming back holdings that are no longer cheap, we seek to reduce the potential for loss. No guarantees, of course: the next poor year is out there somewhere.

On investment advisory accounts managed through LPL Financial, our revenues are a function of your account value. When you capture an opportunity or avoid a loss, we are better off. This focuses our attention wonderfully.

Clients, if you would like to discuss how this applies to your circumstances, please email us or call.

1Interest rate data from Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/FEDFUNDS (as of January 2018.)


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

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

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.

Who’s the Expert?

© Can Stock Photo / imtmphoto

We listen to you about the things you know best, we talk to you about the things we know best.

You are the expert on certain topics. What are your thoughts and feelings about retirement? Where do you want to live? What is your philosophy about a legacy to future generations? We respect your expertise about your personal goals and objectives.

Our business proposition is that we are the experts on certain topics. Of course, there are many experts on every topic. But what may set us apart is this: we won’t pander to your thoughts and feelings when we know better. Penny marijuana stocks? The latest technology hype? That hot concept that everybody is talking about? If we believe it won’t be good for you, we aren’t participating.

It would be easy to go with the flow, to deliver whatever anyone might desire. But one of our fundamental rules is ‘avoid stampedes.’ As contrarians, we believe the crowd is sometimes very wrong. When an investment idea is at the peak of popularity, it may be overpriced and due for a fall.

Our attitude about this may cost us in the short run. When we refuse a transaction, it sometimes upsets people. But if it turns out that we helped someone avoid a potential loss, they may connect the dots and reward us with a higher opinion about our intentions and integrity.

We aren’t this way because we are saintly. It is simply a more effective way to live. When we put you in charge of certain things, we do not have to worry about them.

For example, somebody recently asked us about our goals for the year—how much new business, how many new clients, and so forth. We think you are in charge of where you do business, not us. We learned a long time ago that the best way to grow our business is to grow your buckets. That is our goal, and it has nothing to do with chasing strangers around.

This helps us focus on getting better, on being more deserving of your trust. It frees us of wasting time on things we cannot control. We have more time to communicate with you about the things on which you are the expert—your goals and aspirations.

When we communicate freely back and forth about our different areas of expertise, good things may happen. Clients, if you would like to discuss this or anything else in more detail, 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.

Our Book Report: “The Big Short”

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Back in the Mesozoic Era when we attended elementary school, it was common practice to assign book reports as homework. On the appointed day, students were called to the front of the class to read their report aloud.

This may surprise you, but fourth graders often seized on one small part of the book, a particular event or character. The rest of the story, perhaps even the central theme, might be neglected. We are trying to tell you that this book report is fourth-grade style.

The Michael Lewis epic about the last financial crisis illuminates how nearly the entire financial world can get it wrong, while a tiny group of free thinkers or eclectic contrarians digs into the facts and gets it right. The people who figure the deal out in real time usually get castigated and abused—and rich.

The contrarians are usually as noisy as they can be. But they might as well be speaking Etruscan to the coffee klatch at B’s Diner in beautiful downtown Louisville. It is as if nobody can understand them.

The moral of the story is that being part of a broad consensus may provide a sense of security. We humans are social creatures, and we crave acceptance and a certain level of conformity to group norms. But the crowd might be terribly wrong, to its eventual detriment.

Meredith Whitney, a previously obscure analyst, was the voice in the wilderness on the sub-prime rot in the financial system in 2008. She had been trained by Steve Eisman. These two had a history of looking at reality, and finding the gap between it and the prevailing perception.

Clients, you already know these people are heroes to us. They were selling when the stampede was buying. They did their own thinking. The consensus meant nothing to them. These are the things to which we aspire.

Of course, the renegades turned out to be correct, the conventional wisdom was actually ‘wisdumb,’ and a few people did well while many suffered losses. Again. “The Big Short” by Michael Lewis is a wonderful telling of this tale.

We have written enough already about our differences with the current consensus views. Clients, if you would like to discuss this or anything else on your agenda, 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. 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.

Any named entity, Leibman Financial Services, Inc. and LPL Financial are not affiliated.

The 61% Syndrome

© Can Stock Photo / phildate

A few weeks ago we studied a report from a large institution. It stated that 61% of baby boomers preferred minimizing taxes to getting higher investment returns1. We wrote about this being a false choice: the rational object is to achieve the highest after-tax returns, thereby incorporating both goals sensibly.

But there is another problem with the 61% syndrome. There is a tendency for 100% of the attention to get focused on the 61%. It seems that the number is eventually forgotten. The formula is simplified to “The top priority of baby boomers is minimizing taxes.”

In other contexts, ugly words are used to describe the process of attributing perceived characteristics of a group to each individual in the group. Stereotyping and bigotry are costly to society to the extent that they hinder any of us from unlocking the highest fraction of our own potential, the secret sauce of American prosperity.

The forgotten 39% of baby boomers is 29 million people2. That is a lot of people to ignore.

We hear again and again that investors repeatedly do the wrong thing. But we don’t care whether most investors behave rationally; we just need you to do so. (In fact, when others behave foolishly that can create opportunities for us.)

It seems sort of insulting to start a relationship by attempting to prove to people that they will do stupid things and are incapable of learning. But when you attribute a perceived characteristic to every member of a group, you fail them in some way.

You may be familiar with Thoreau’s formulation: “If a man does not keep pace with his companions, perhaps it is because he hears a different drummer…” Many of you have seen the hand-lettered illuminated version of it hanging on my office wall. We are all about people as individuals, not stereotypes.

(Did you know my girlfriend lettered that saying and gave it to me when we were both seventeen? This has been fundamental for as long as I can remember. Extra credit question: what was the girl’s name?)

My unique story gives me respect for you and your unique story. It is how we aim to avoid the 61% syndrome and its related costs and lost opportunities. Clients, if you have questions about this or any other topic, please email us or call.

12016 U.S. Trust Insights on Wealth and Worth survey, U.S. Trust Bank of America Private Wealth Management

2Federal Reserve Economic Data, Federal Reserve Bank of St. Louis


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

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.

Have We Mentioned How Wonderful You Are?

© Can Stock Photo / mikdam

The foundational theory here at 228 Main is people can gain effective perspectives and productive attitudes about investing. It doesn’t matter if you were born that way or were capable of learning, you as a group are special. We believe your behavior is one of the keys to long term investment results.

Consequently, while some colleagues live with frustration as untrained customers fall prey to counterproductive behavior—selling out low, chasing performance, jumping on fads—you and we are appreciated for our mutual faith in each other. No wonder some advisors are looking for an exit strategy, and I’m planning to work to age 92!

You do the difficult things, like going against the crowd, listening to people at the salon or barbershop or café or water cooler, and yet still stay the course. A benefit of my long commute is time to think about the business. I spent a day recently pondering this: how might we make things better for you?

If we change our pricing philosophy to reflect total household assets under our management, including results through the years, we honor your role in creating those results. And if we price new clients a little higher for an initial period, we can offer small discounts for longevity to you longer-term clients. This would better reflect our values.

This presents two issues. One, we tinkered with the schedule over the years, and sometimes failed to update existing clients to the new schedule. Two, our general philosophy has been to use a volume discount based on net invested capital, excluding changes due to investment results. We need to figure out how to implement changes in a way that makes sense to you. We have no intention of chasing anyone down and asking them for more money. Our growth allows us to offer breaks where they have been earned (after all, it is ultimately you to whom we owe that growth!) without needing to claw back money from any clients.

Clients, you have heard us express admiration for the very special group to which you belong. We talk about the mutual benefits of our shared perspectives on investing. We have said in as many ways as we know how that your behavior is large factor in investment outcomes. The one thing we have not done is align the economics of our shop with those noble sentiments.

We are committed to doing so. We will be communicating the results of our work in the near future. If you have any questions about this or any other pertinent topic, 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.

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