contrarian investing

A 10% Correction is Coming!

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There is an amazing thing about the performance of the stock market this year. Looking at the S&P 500 Stock Index, it has hardly dipped more than a few percent from its peaks. There has been a little wiggling, but far less than usual.

We human beings have a remarkable capacity to get used to current conditions, and expect them to persist. This could make trouble for us when the 10% market correction does eventually come around.

Long time clients know we believe that these market drops can neither be predicted nor traded profitably. Many of you call when the market does drop, seeking to invest in any bargains that appeared. We know how this works!

(Of course, we do not own ‘the market.’ Our holdings—and your account balances—sometimes deviate from the direction of the market. In 2016 we were fond of the difference. 2017 so far, the market is a little ahead of us. The point is, the market wiggles up and down, and our performance relative to the market also moves around.)

Commentator Morgan Housel recently wrote “every past market crash looks like an opportunity, but every future market crash looks like a risk.” Our experience after the 2007-2009 downturn demonstrated the first part of that statement. It is the next market crash that we must be concerned with.

Our research process is focused on finding bargains. We’ve taken steps in many portfolios to dampen volatility by changing holdings. Cash levels are generally higher, too. But none of these things will eliminate the temporary fluctuations that are an integral and necessary part of long term investing.

The market will decline. Our portfolios will decline. These declines will seem like a risk when we are going through them; we may see later that they really were an opportunity. The relative calm we’ve experience recently will give way to more volatile times—we know this, and should not be surprised by it.

We’re working to be in position to profit from opportunities that arise. Clients, if you would like to discuss your situation in greater 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 performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Investing involves risk, including possible loss of principal.

Investment Success and EQ

© Can Stock Photo / Mark2121

We write about productive investment attitudes and habits because we have seen first-hand their power to improve one’s position. Knowledge improves behavior, effective behavior increases account balances, growing balances raise our revenues. Everybody wins.

Behavioral economists have identified ways in which humans seem wired to make poor financial decisions based on emotions. We know from our work with you that this neither dooms our investment performance nor requires us to settle for mediocre results.

Communicating ideas and perspectives is therefore at the very heart of our enterprise. So we were excited to find the work of author Justin Bariso. He wrote the following concise wisdom about his field of expertise:

“Emotional intelligence is the ability to make emotions work for you, instead of against you.”

Some propose that emotional intelligence and its measurement, EQ, is more vital to success in business and life than one’s intelligence quotient, or IQ. This makes a great deal of sense to us, generally, although brains are wonderfully useful in our work, too.

We think Bariso’s statement has special meaning in the world of investing. Many people let emotions work against them; behavioral economics demonstrates this. Our approach, which explicitly seeks to avoid stampedes and embraces unpopular viewpoints, absolutely seeks to let emotions work for us. Emotions create anomalies in market prices, and that is where our opportunities live.

Legendary investor Warren Buffett once said, “Be greedy when others are fearful, and fearful when others are greedy.” Isn’t this just another way to say ‘make emotions work for you instead of against you?’

Clients, if you would like to talk about this or any other pertinent topic, please email us or call.


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

Investing involves risk, including possible loss of principal.

What We Learned from You

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One of the privileges of working with you is the opportunity to get to know your life stories. Over the decades, we’ve met a lot of people and heard many stories. We learned a lot about about productive financial habits and instincts from you, our clients.

We have noticed that people who are successful in retirement have some habits that helped them get there. These factors do not guarantee success, of course, but there seems to be a strong correlation. Here are three habits that seem to be key:

1. For all or most of their working careers, they invested regularly—every month, every payday. 401(k) plans, automatic deposits to Roth or other accounts…these put wealth-building on autopilot.

2. They spent less than they made. One client told us, it isn’t how much you make, it is how much you keep. We all know people who make good money and spend all of it–and others who manage to save on modest incomes.

3. They adapted to unexpected surprises without impairing their long term financial planning. Having an emergency fund, realizing that life has uncertainties…these are key to getting back on track through all kinds of times.

The three habits go a long way towards building financial security. In addition to those, some clients were apparently born with helpful investment instincts:

A. A native sense of confidence that the country works through its problems, that economic slowdowns give way to recovery sooner or later. Those who believe that seem to have an easier time waiting for markets to rebound.

B. An aversion to needing to do what everybody else is doing. Fads (or stampedes, as we call them) can be a dangerous way to invest.

We got done at the university a very long time ago. Thanks to you, however, we are always learning. One of the gratifying aspects of our work is the opportunity to pay it forward—to deliver the good news to the next generation. Clients, please email us or call if you would like to discuss this or any other topic.


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

The Tactical Bubble

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 Our long-time friends know that avoiding stampedes is one of our fundamental principles. We human beings know how to take things too far, history suggests. So we are always on the lookout for trends that may have become too popular.

A year or two ago, in the investment product market, “unconstrained bond managers” were all the rage. With interest rates near all-time low points and risk high, these magicians would own only the smart parts of the somewhat risky bond market. It turns out that all the money that poured into this idea would not fit into just the smart stuff.

We see a new trend today. Solicitations and information about investment concepts and products comes at us all day long, every day. Organizations would like us to send your money to them; human nature being what it is, they usually emphasize popular ideas, or ones that sound great. One term dominates these pitches nowadays.

You know we are contrarian—if everyone else likes something, we believe that alone is a reason to be cautious.

The trendy term is “tactical.” One of the dictionary definitions is “adroit in planning or maneuvering to accomplish a purpose.”

It is out of fashion to simply acknowledge (as we do) that the markets are volatile and fluctuate, an inherent feature that long term investors must face. The popular delusion is to pretend that a “tactical” manager can own stocks while they go up, then sell out to avoid the damage from the inevitable downturn.

It is a great story. Unfortunately, as a wise person noted a very long time ago, “They do not ring a bell at the top.” Is a 1% decline the first step of a 20% bear market? Or is it just the typical volatility that jerks the market around every week or month? No one ever knows.

The risk is that a small decline shakes the tactical investor out of the market, right before it turns around and makes new highs.

We have no issue in being ‘adroit in maneuvering.’ We think our work over the past couple of years shows that we are, hopefully, more adroit than ever. But it stretches credulity to believe that vast amounts of money can all be adroit at the same time.

Investors who have been fooled into believing that volatility can be sharply reduced or eliminated with no adverse effects on performance are likely to be disappointed. We are studying the potential impact if and when the “tactical” fad unwinds. Clients, if you would like to discuss this or any other matter, please email us or call.


Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction cost. Investors should consider the tax consequences of moving positions more frequently.

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

When Dark Clouds Fill the Sky

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Warren Buffett’s latest shareholder letter contained a remarkable paragraph:

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”

Long-time clients saw how this worked in the recovery from the 2009 crisis low point, and the post-9/11 lows in 2002. You are a remarkable group: when others panicked and sold out, many of you stayed the course. There is no guarantee, of course, that history will repeat, or that past performance indicates future outcomes.

Like great chess players, we need to be thinking many moves ahead. In our opinion, the economy in the US and around the globe is pretty good. We do not buy the whole stock market, we pick our spots. And we are excited about those spots.

But we do need to be steeled to both occasional market corrections of up to 10%, and the deeper declines that occur from time to time. They cannot be reliably predicted. What is in our control, however, is how we react. Do we sell out at low points, or get in position for a possible recovery? We are taking steps that may mitigate a general market decline—no guarantees, of course.

We are a little more prone to keep a little cash in reserve, to diversify into lower-priced markets, to continue to prune holdings that may be extended and add names we believe to be bargains. Most of our holdings are not sitting at all-time highs, although overall market averages are–the S&P 500 for example reached a new high as recently as March 1st1. You can read about our current themes here.

In the very best case, markets and our account values fluctuate. This is the tradeoff we accept in order to seek the returns we need to pursue our goals.

We have a great partnership with you, our amazing group of clients. You understand living with volatility can lead to long term rewards. We think we know what to do, whether the skies are blue or the dark clouds have gathered. If you have questions or comments, please write or call.

1Market data from Standard & Poor’s


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.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Fear and Greed

© Can Stock Photo / Andreus

Two of the primary emotions affecting the stock market, it is said, are fear and greed.

Facts and figures are prominent in our work of assessing and ranking various investment opportunities. But in the day to day action of any market, buyers and sellers and their motivations have an oversize impact.

In our view, fear has dominated most of the last eight years in the US stock market. Many investors sold out after the double drubbings beginning in 2000 and in 2007. Money flows from retail investors, reflecting withdrawals from the market in most recent years, seem to confirm it.

Anecdotally, we also noticed burgeoning interest in strategies that hoped to avoid exposure to the stock market yet still make money. Commodities, derivatives, factor investing, bonds at low interest rates and other fads drew in a lot of money. This, we believe, reflected fear of the stock market.

For much of the market rise since 2009, it was said to be ‘the most hated rally in history’ because so many people missed out.

Knowing Warren Buffett’s famous dictum, “Be greedy when others are fearful, and fearful when others are greedy,” we stayed the course through the downturn. None of us hated this rally, did we?

Now the market sits at all-time highs. This probably makes sense when earnings are high and rising, and interest rates remain fairly low. But we are on the lookout for signs that greed has become the dominant force in the market. When others become greedy, perhaps we need to become fearful.

We are also doing other things, as well. You may have noticed winning positions getting trimmed back, and potential new bargains (we hope!) being added to portfolios. Owning bargains is no guarantee against loss, but we believe it helps. We are also nibbling at other markets in other lands, ones that have lagged and may be at low levels.

Our new portfolio design, accommodating layers of cash and more moderate investments as well as our traditional research-driven core layer, is another way to attempt to mitigate future downside.

The markets go up and down. We cannot build wealth over the long haul without facing that, and living with it. If you would like to talk about your portfolio or situation in detail, 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.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Professionalism? Or Pandering?

© Can Stock Photo / stokkete

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.

Memento Mori

© Can Stock Photo / boggy

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.

Stealthy is the Bull

© Can Stock Photo / KarSol

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.

Annual Market Forecast

© Can Stock Photo Inc. / ShutterM

It is that time of year. Prognosticators and pundits issue their forecasts for the year ahead. Wouldn’t it be nice to know what the future holds! Some forecasts are hedged, and don’t really say much. Our prediction is quite specific.

Many of those who have visited our offices know that we actually do have a crystal ball. It forecasts the direction of the stock market for the coming year. It does not say how far the market will go, but it always predicts the direction.

If you knew which way the stock market was going to go, could you make money investing?

Here’s the catch: our crystal ball has only been 76% accurate. So perhaps the question should be, if you knew which way the stock market was going to go 76% of the time, could you make money investing?

Without further ado, here is what my crystal ball says about the direction of the stock market for the year beginning January 1: it will go up.

Long-time observers will not be surprised. The crystal ball always says the market is going up. It has never predicted a down year. And checking back over the past hundred years, according to Standard & Poor’s, it has been right 76% of the time.

We don’t know how well its track record will hold up, but we believe this presents a favorable backdrop to buy bargains, avoid stampedes in the markets, and seek to own the orchard for the fruit crop. In other words, to keep on keeping on, following our plans and strategies.

It is tempting to include a discussion of the economy, the strengths we perceive, and the faint possibility of recession. We’ll leave that to people with more time on their hands. If your plans or planning will be evolving in the new year and require our attention, please 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.

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