liquidity

A Tender Proposition

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Investment owners sometimes receive confusing propositions in dense documents. We are talking about tender offers. Let’s cut through the fog.

A tender offer is when a buyer would like to purchase something you own for a specified price. There are three common types. Clients, many of you may be receiving tender offers now, of the first type:

1. Companies issue stocks and bonds to meet their needs at the time of issue. If the situation changes, they may want to buy those securities back from the public. For example, a company short of liquidity may issue bonds to raise cash. If they later have a more economical way to borrow, or simply want to pay down debt, they might try to buy those bonds back.

2. Sometimes an investment organization or hedge fund offers to buy shares in an unaffiliated public company.

3. Companies have obligations to each stockholder. Whether the stockholder owns a million shares or one share, the cost of providing annual reports and tracking proxy votes is the same. So companies sometimes offer to buy the shares of small holders, usually under 100 shares. These offers are called ‘odd-lot tenders.’

As a rule of thumb, be cautious when a stranger wants to buy something from you. A client once told me about an antique dealer wanting to buy one of her possessions. She said, “I knew one thing when he made that offer—it was worth more than that, or he wouldn’t have wanted it.” This could apply to the first two kinds of tenders.

If you own a small number of shares, you are under no obligation to sell them back in an odd-lot tender. You have the right to keep on owning your shares. The simple alternative is to just sell your shares any day if you no longer want them.

Tender offers may take away flexibility. Owners commit (‘tender’) their holdings. Then weeks or months later, they learn whether or not the tender will actually be completed. In the interim, the holding cannot be sold in the market and no money is received.

Clients, if you have questions about an offer you receive, please email us or call. We think it our job to understand those offers, and be available 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.

The Power of Patience

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One of the basic principles of investing is that the longer your time horizon, the greater the yield you can generally expect. On certificates of deposit at the bank, you get higher interest on longer maturities. If you are buying US Treasury bonds, the 10 year bond usually has a higher yield than the 1 year bond. Conversely, if you are taking out a loan, you pay higher interest on a 30 year loan than on a 10 year loan.

If you’ve got a long time horizon, this seems like an easy way to maximize your returns. But there is no such thing as a free lunch—the only reason issuers will pay you more for a longer time to maturity is because they are hoping to get something out of it.

Some individuals may have short term outlooks, and be easily spooked out of the market. That’s bad news for investment companies and debt issuers who find their money reserves drying up when investors start cashing out. If investors lock into longer terms the companies are free to implement longer term strategies with less of a worry about investors abruptly pulling the rug out from under them. That is why they are willing to pay higher yields to keep the money in for longer.

It sounds like a win/win situation, but there are risks to buying longer term investments. A lot can happen in thirty years! Maybe the investment landscape changes and what looked like great returns at the time turns into chump change when newer investments start yielding more. Maybe the issuer runs into trouble, raising questions about the security of the investment. If you were holding a shorter term instrument, you might have avoided those problems.

The good news is that you, too, can benefit from a longer term perspective—without needing to lock your money away in illiquid long-term investments. If you are not jumping in and out of investments in response to short term swings you can cut down the drag on your portfolio and potentially enjoy better returns. Even better, you can specifically seek out more volatile investments that are less popular with investors and may command higher returns than more stable, popular investments. By investing for the long haul, you may enjoy the higher returns that may be available on long-term money.

And, because you did not actually have to lock in your investments for decades, you are still able to react to major upheavals. You can ride through the small bumps without hurting yourself by selling out low and still be able to pull out if you need to.

Of course, staying the course may be easier said than done. Tolerating volatility has been a path to higher returns in the past, but not everyone is capable of doing that. We believe there is an advantage to investing for the long term. But one may retain liquidity—the freedom to change tactics—instead of committing to a course for years or decades to come. Clients, if you want to talk about your time horizon, please call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

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.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Investing involves risks including possible loss of principal.

When the Tide Goes Out

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A lot of money talk uses words that evoke water: liquidity, a wave of buying or selling, money sloshing around. We have described large sums of money going into a particular sector as a tsunami.

The extreme actions taken by central banks around the world, instead of goosing economic activity, have actually caused people to become more cautious, spend less, and save more money. The primary effect has been a huge increase in demand for supposedly safe bonds and other fixed income investments.

In our lifetimes, there have been several investment manias that featured large sums of money pouring into a single sector or type of asset. The real estate boom of the early 2000’s is fresh in our minds. The technology and growth stock boom of the late 1990’s grew into a classic bubble.

The biggest financial tsunami in history is the one we are in right now: the rush into bonds. Bloomberg recently reported on the International Monetary Fund’s concern over the global $152 trillion debt pile. The key for us is to understand how this happened: people and institutions demanded bonds in unprecedented quantities. Interest rates reached extremely low levels as the tsunami of money flooded the fixed income markets.

The market will supply whatever is demanded. Companies that didn’t need money borrowed, simply to lock up financing for years or decades ahead at the most favorable prices in history. Some consumers are taking on mortgage debt at the lowest interest rates ever just because they can. Governments around the world see little cost to borrow, so finance their deficits.

The global debt pile is like a coin with another side. That other side is the unparalleled tsunami of money into bonds and fixed income. Investors who believed they were being prudent have ramped up their holdings in the supposedly safe kinds of investments.

Some say you cannot spot a bubble when it is happening. We disagree. What cannot be known is when the bubble pops. To get back to our water words, we can’t know when the tide will go back out.

We believe that bonds will be punished severely in price when the tide goes out. There will be collateral damage to bond substitutes and other income investments. And other assets may rise in price, as money returns from the bond bubble and goes back into other, now-neglected sectors. Peril and opportunity go together.

This issue is the key to the investment markets for the next few years. We know that opportunities and threats are always present, and you know we’ll be working hard to sort out which is which. If you have questions about how this applies to your 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.

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.

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

Filling Your Investment Basket

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We believe in investing for the long haul. Regardless of your investment objective, having more money in the future is better than having less money. Our main focus is on maximizing total returns over a long time horizon.

However, sometimes we need to draw down investment assets, and investments tailored for potential long term gains may not be the best place to keep money you need soon. Planting grain will grow you more grain in the long run, but having seeds in the ground does you no good if you need grain to eat right now. So while we like investing for total return potential, sometimes you need a different mix in your basket to work towards your goals.

For immediate money needs, nothing beats cash. You may not see much (if any) growth on cash or equivalents, but it’s always right there if you need it.

If you don’t need money in your hand right away, but still expect to spend a chunk of money by and by, you have the potential to earn a little bit more with short term CDs and investment grade bonds. You can’t spend them on demand, but they have a face amount they’ll pay back in the not too distant future.

Diversified investment portfolios are a step between using lower-risk securities and more volatile holdings like individual stocks because they can include a wide variety of investments. They can potentially capture some market growth, without the same level of volatility presented by investing in only individual stocks.

Our total return philosophy is built around finding the biggest bargains in the investment universe, which sometimes leads us to more aggressive holdings such as individual stocks. These holdings are volatile in comparison and not good places to park money you may need to pull out suddenly.

We know that our preference for total returns does not always fit client goals. These other types of holdings allow us to build a basket that will accommodate your needs. Talk to us if you have any upcoming expenses looming on the horizon and we can help structure your basket to manage your goals.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

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.

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.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

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