What To Do?

WOW! What was once an equity market doing nothing but go up. Are now doing nothing but go down.

In my opinion, this situation is different than the 2008-9 crisis. In that the 2008-9 crisis was due to a complete financial system breakdown. Today the volatility is due to the coronavirus or COVID 19. This is a very serious situation. However, I believe it will resolve itself. When, I do not know.

What I do know it that now is NOT the time to panic. Selling now will do nothing but lock in your losses.

What I did learn during this current crisis is that I can live without sports on TV. The opinion of sports stars means nothing to me. The opinion of famous stars means nothing to me.

What does mean something to me is that we must be able to control our emotions to be successful investors.

Today’s message will be short because you have other things to consider. Like, will I have enough toilet paper? Stay Safe and believe the future will improve.

Almost forgot. Happy St Patrick’s Day!!!

From One Crisis to Another..

Well last week the market decline was caused by the coronavirus. Now this week the market decline is caused by the oil price war between the Middle East and Russia.

As always, we have a prudent process when developing your portfolios along with evidence-based design. Our goal is to remain disciplined to our long-term goal. No need to panic now.

Below is a sensible approach to dealing with the coronavirus by Dr. Vicki Rackner MD.

Fear about COVID 19 is spreading like wildfire.  What risk does this new virus really pose to you and your family?  Here are some thoughts from Vicki Rackner MD, FACS.

While we mourn the handful of US citizens who have died from COVID 19, please consider this: the CDC estimates that between October 1st, 2019 and February 29th, 2020, there have been between 20,000 and 52,000 deaths in the US from the flu.  https://www.cdc.gov/flu/about/burden/preliminary-in-season-estimates.htm

The good news is that a simple program of awareness, prevention and common sense can decrease your risk of succumbing to a viral illness in the months to come.

  • Wash your hands frequent—including before eating and after handling money 
  • Avoid touching your eyes, nose and mouth
  • Avoid people who are coughing and sneezing
  • Optimize the health of your immune system by getting a full night’s sleep, eating well and exercising regularly
  • Cover your coughs and sneezes
  • Stay home if you are sick
  • Stay informed by visiting reliable sources of ongoing updates as we learn more about COVID 19.

Manage your stresses–including the stresses associated with market volatility. It’s natural to make impulsive, emotional choices when the stock market looks and feels like a scary roller coaster ride.  Instead, give us a call.  When it comes to investing, we believe, “First, do no harm.” 

The coronavirus crisis as well as the oil price war will resolve themselves soon. So, remain disciplined and ignore the short-term volatility.

No Time To Panic…

The recent severe downturn has brought a renewed sense of pessimism to our country and the world. The coronavirus fear is becoming widespread. How this will turn out is anyone’s guess. As many of you realize I believe the future is unpredictable. The equity markets are random and unpredictable. Now is not the time for panic selling.

Many have told me that ‘buy and hold’ is dead. My response is that ‘buy and hold’ should never have existed.  Rather we must ‘buy and rebalance’.  As long term investors we must ignore the media and remain diligent to our process and strategy.  We must ignore short term volatility and focus on our long-term goals. 

Over the coming weeks we will hear from the ‘gurus’ that ‘I told you so’…’you should have sold equities and bought gold (or whatever)’. 

There will always be predictions that come true, unfortunately we do not know which predictors are right going forward. Because when someone makes a correct prediction it is a matter of luck and not skill.

Our country is going through some tough times however I continue to believe in America and I always will.  We must stop pointing fingers and get back to work. The free markets will work we must give them the chance to work.

Continue on with our long term goals own equities…globally diversify…rebalance.

How Will You Handle It?

The coronavirus crisis continues to expand. Many people are uncertain of the future. Many believe it is time to get out of the market. Many believe it is time to hunker down.

At least until things calm down.

Since there are over six billion people on this planet. There is always conflict/crisis somewhere. And there always will.

During these times of crisis we have a tendency to make emotional decisions. Decisions that are NOT in our own best interests.

Ideally, we should all just time the market cycles and only buy when the market is low and sell when the market is high. Unfortunately, few, if any investors are able to do this with any consistency.

We tend to make our investment decisions based on recent past events and how we feel about those events.

If the market has done well lately, like it has, we are comfortable buying stocks. If the market has done poorly, however, like today, we avoid them. Unfortunately, this is the exact opposite of what we should do if our goal is to maximize our long term return.

Once we feel “comfortable” with the market, we have usually already passed up large potential gains. The stock market is forward looking and usually starts trending upwards between 6 to 9 months ahead of the economy actually recovering from a down cycle.

There is an unholy alliance between the media and the large financial institutions to convince the investing public to continue trading by spreading fear and panic.

Many investors mistakenly believe that the big brokerage firms make money by trading in and out of the ‘right’ investments

The large financial institutions make money when YOU trade in and out, making money on every trade.

You should own equities…globally diversify…rebalance and believe that America and the capital markets will recover and prosper. We as a country have been thru much worse and we recovered and became stronger. 

The problem is no one can consistently predict what will happen and when.

During times of crisis should we cut and run or should we stand and fight? Historically the fighters are the ones that profit and prosper. Those that cut and run grasp unto their ‘guarantees’ and wonder why they are always behind.

To best deal with the inevitable ‘bad’ times fire your broker/agent and hire an investor coach/fiduciary adviser.

When Will The Next Crash Happen?

We are experiencing a great equity market up turn with virtually no end in sight. Many in the financial field are predicting an overdue downturn. There is no doubt that there will be a downturn. However, no one can tell you when.

Wall Street prognosticators are trying to do is strike fear into the investing public. These Wall Street bullies are looking for an increase in trading. The bullies want you to move your money from one asset class to another.

Remember they make money on every transaction, whether you make money or not. Even though most brokerage now offer zero-dollar commission. These brokerage firms make money on the bid/ask spread. Please call if you would like this explained.

Wall Street has a product for every situation. And they know the investing public is constantly searching for the next big ‘thing’.  

Investors’ real goal is stock market returns with Treasury bill risk.

This is unattainable. Remember, where there is no risk there is no reward. This is true in all other areas of our lives, not just the stock market.

What we must remember is that stock market or equity risk is only part of the problem. Inflation risk is the most destructive to your savings over the long term. It is constant and unrelentingly eating away at your purchasing power.

Owning equities or stocks may be the best way to combat inflation risk.

The most successful investors of all time have one strategy, a strategy that does not always look great, but over time leads to success. These successful investors are not always looking for the next great strategy. At times they will look like they do not know what they are doing.  These successful investors know risk is unavoidable.

It has been proven time and again that market timing DOES NOT work. Not only must you be right getting out of the market, you must also be right about getting back in. Research has proven that this is NOT done consistently.

I find it curious that investors see past ‘crashes’ as buying opportunities while current or future ‘crashes’ are seen as risk.

So if you want to keep control of your money and earn good market returns you must live with downturns. Because with downside volatility there is the upside volatility.

There are ways to control your risk while earning good market returns, long term.

Investing for a long term goal such as retirement requires patience, a prudent strategy and discipline. This, in most cases, requires the assistance of a good coach. A good coach will guide you in following these three simple investing rules.

Own equities….globally diversify…..rebalance.

If you panic and sell you are locking in any losses you have. This is a huge mistake. To succeed in reaching your long term financial goals you don’t need to know everything about investing, but you do need to know the right things.

You Can’t Manage Your Own Money

In the past we all have seen the commercials during sporting events, as well as other highly viewed shows the baby that picks his own investments. 

Obviously, these commercials are trying to convey the idea that you can trade your own account and make money for a low trading fee.  Even a baby can do it.

These commercials play on your emotions. These brokerage firms know that most people will trade excessively, making the brokerage firm more money. At the same time the investor will lose. Of course there are examples of some making huge profits. These examples are few and far between.

As an example there are people who win the lottery but for most it is a losing proposition.

Wire houses and discount on-line brokerage firms WANT you to believe you can manage your own money.  That keeps you speculating and makes them RICH.  Even the most intelligent investor with the best intentions and lots of time is likely to ultimately fail because of emotions, instincts, and propaganda.

These brokerage firms make money on every trade regardless of whether you the investor make money. In fact most lose. If you are investing for a specific long term goal you need to know two numbers. You need to know the expected return and the expected volatility (risk) of your portfolio. If you do not know these two numbers you are speculating with your money.

Just recently these brokerage firms have offered free trading. What used to cost $4.95 or $7.95 or whatever, now costs nothing. Investors should be asking ‘How do the brokerage firms make money now?’

The most important component of successful investing is controlling your emotions and most people cannot do this on their own. This is where a good advisor adds value, developing a prudent portfolio for your situation and keeping you disciplined to that strategy.

Remember there will be times when others have a better solution for the short term. Jumping from one strategy to another does not work.

To succeed in investing for the long term you must own equities….globally diversify…….rebalance.

What?? Another Crisis…

Numerous times over the last week investors have asked me if they should sell their stocks because of the coronavirus. As with all ‘crisis’ events I said no, you should remain disciplined to your investment policy statement and rebalance.

There is constantly a crisis somewhere in the world. There will be other events both good and bad that will send shock waves, both up and down, into the stock markets.

That is the point, there is no way to consistently predict market movements over the short term.

Keep in mind that in order to realize the superior long term returns of the equity markets we must control our emotions in both up and down markets. Warren Buffet has a saying I find helpful.

“Be greedy when others are fearful and fearful when others are greedy”.

In other words control your emotions there is no get quick rich scheme. If the ‘experts’ actually could predict the future why would they tell you? Fund managers, hedge funds managers, stock pickers, market timers all need investors to believe that someone can and does beat the stock market.

This is all part of their marketing strategy. When a manager actually does beat the market, (luck will allow some to win), the marketing department goes to work.

Unfortunately for investors there is no evidence that past performance correlates into future success or future losses.

Shows like Jim Cramer’s are based on their entertainment value and not on their value to investors. Investing is not a game as they make it appear. To succeed in investing for the long term you should own equities…..globally diversify….rebalance.

Stop listening to short term volatility.

Any time or money you spend trying to beat the market is time wasted. Time which you could be spent improving your job skills or developing new job skills or spending time with family and friends.

So turn 2020 into the year you become an investor and not a speculator. Hire an investor coach and reduce your investing anxiety and improve your long term results.

Why Diversify?

Given the stellar performance for the U.S. equities in 2019 many are questioning why we diversify. Below is an article by Frederick C Taylor that explains


Given the media’s trumpeting (OK, Trump himself as well) of the stellar performance of the U.S. market(s) this past year, one might be tempted to ask: why should or do I have any international stock exposure? After all, look how much more I might have made if I were not diversified and only exposed here in the U.S. Moreover, if I am diversified, why should I rebalance my portfolio when I could just keep a larger allocation or even 100% in the “winning” asset class? That is a fair question that demands a factually based answer, so here goes:

Rebalancing a diversified portfolio essentially addresses two very important investment issues:

1. It imposes a discipline on the portfolio of buying “low” and selling “high” and, after all, isn’t that the old Wall Street dictum of how you make money in the market? This isn’t rocket science and just about any individual with an IQ above room temperature knows this. It’s not the knowing part that’s difficult, it’s the discipline to sell someof those better performing ones and buying those that others find unfavorable at this particular time. This, of course is the emotional part of the equation and where the “discipline” comes into play.

2. There was a landmark study as to where portfolio returns came from. I don’t expect most readers to have any familiarity with it (unless you were taking notes at one of my presentations or read my writings very carefully with a fully retentive memory). The study showed that 94% of a portfolio’s return was due to it’s asset allocationpolicy. So, when a portfolio is structured with specific percentages allocated to specific markets or asset classes such as large U.S. companies or small ones or foreign companies or even emerging market ones, when you have a year such as last year or even this last decade, if you do not rebalance, the allocations you determined were appropriate for the level of expected risk and return the portfolio’s allocation will become skewed, which raises it’s level of risk above what was anticipated and ultimately has been shown to impact returns negatively over the long-term in comparison.

If you do not believe this is significant then you only have to look back to the 2000 – 2002 bear market correction of the 90’s tech and dot.com era, which to this day many have not recovered from or 2008 – 2009’s bear market.

Both events found non-diversified and/or non-rebalanced portfolios maximally exposed at the worst possible time     with risk far exceeding even the investors’ most optimistic assumptions with many paying a very dear price for the lack of diversification and discipline having been applied to their portfolios.

The late Nobel Laureate, Merton Miller advised and wrote publicly on many occasions that “diversification is your buddy.” And it is if one follows the dictates of that other Nobel Laureate, Harry Markowitz and his “Modern Portfolio Theory” which tells us that having a rebalanced, non-correlated, diversified portfolio can be expected to provide higher expected rates of return with lower expected risk — over the long-term. 

Diversified doesn’t mean having a lot of “stuff in only one asset class (i.e. lots of large U.S. stocks) but rather including various others, including international — where around (per Vanguard) 45% of all global stocks reside. Others estimate when emerging markets, frontier markets and others are included the total reaches upwards of 2/3’s. Thus, if you do not have any international exposure you’re missing out on a substantial portion of the equity universe and it’s potential.

It is somewhat difficult to give any credence to the idea of investing anywhere other than where the Apples, Amazons and Microsofts reside when one focuses only on recent returns.

It continues to be prudent to own equities…globally diversify…rebalance.

Preparing Your Business For The Future!!

Preparing for the future is as much about identifying market trends and understanding your customer base as it is about knowing where you’ve been. Healthy growth requires experience and a fundamental understanding of the nuances of your business. It’s your baby, after all, and is a reflection of your drive, passion and planning. You hope that each year, the business increases in value so that when it’s time to retire, your nest egg is secure. So then, what’s your business worth?

Knowing the value of your business is the cornerstone and first step in understanding the business’s past performance. An accurate valuation allows you to determine “Where am I today?” and “How do I get to where I want tomorrow?”. The tumultuous nature of the global economic environment is always a factor to consider, and has resonating effects around business operations. Over 170,000 small businesses permanently closed their doors as a result of the Great Recession, and trillions of dollars deteriorated from the US equity markets. One of the biggest hazards for small businesses during bear markets is what’s known as the “Stock Market Effect”. This describes the consumer behavior in response to equity market conditions. As stocks decline, people feel less wealthy and don’t spend as much. Just as this hurts the big companies it really hurts Main Street businesses as well.  Without a proper plan in place, the next bear market may cause the destruction of many hundreds of thousands more businesses and foster an economic environment of stagnation that will have far greater and further reaching effects than the collapse we saw in 2008-2010. Furthermore, after taking into account inflation and the normalization in population growth, the overall market value recovered since 2008 is less than half of that lost. For the 75% of business owners who plan to fund their retirement with the sale of their business, a proper plan in place to preserve capital, protect against suits and promote growth, is absolutely vital or else they will not have the funds necessary to survive let alone thrive.

US equity markets have seen tremendous gains over the last seven years. It has been one of the strongest bull markets in history and has fostered immense global growth as well.  But many argue that we are overextended the question remains, “Can the underlying assets support such lofty valuations?”.

  • The S&P for example has a P/E of 25.22, a valuation not seen since the Credit Crisis in 2008, Tech Bubble in 2001 and The Panic of 1893.
  • April equity valuations were a 76% deviation from the mean. The month prior to the start of the Great Recession, they were 64%. If we experienced a “crash” next month, it would be the second highest deviation from the mean we have seen before a bear market.
  • Consumer confidence in April missed estimates, representing the steepest decline in sentiment in the last 12 months.
  • The first quarter of 2017 grew at the weakest pace in the last 3 years at 0.7%. Compare that to 2.1% in the last quarter in 2016 and 1.1% for the first quarter a year before.

Whether you agree the outlook is bearish or not, you can agree that a solid plan and adequate preparation are absolutely necessary to have in place for every business. Any proper plan includes liquidity, and cash is king.

            A business needs cash to expand. In the public market, obtaining capital is not too challenging but middle markets and closely held companies often have a much more difficult time. Coupled with lingering fear in the banking industry, capital or loan acquisition can be immensely challenging. The catch 22 is that banks are more inclined to give loans to larger companies because it is less risky. Small businesses, however, need cash in order to grow into those middle market companies. Small businesses rely more heavily on bank loans for working capital, whereas bigger companies have a myriad of options to obtain loans from. (The acquisition of a SBA 7(a), or multi-purpose business loan, actually requires a valuation done before it is even considered.) Unnecessary acts of desperation are often taken when cash flow is under pressure. Roughly 16% of business owners have taken equity from their home and used it as collateral to finance their business. After the business value is understood, plans can be put in place to secure funds, prepare the business for a capital acquisition or simply save and build cash reserves for the future. Money buys freedom and gives you, the business owner, leverage when seeking a loan. The point is to always have a plan. Starting with the valuation, understanding what the value is today and laying out a business plan, builds value moving forward.  

             By identifying the value of the business before a bear market, we can identify what the business can withstand, but more importantly, what it cannot. Insurance coverage and capital preservation are two important areas to consider. A lawsuit even in prosperous times can be a big threat to a business. A lawsuit during a recession can be a knock-out punch. You can see where your business is lacking in coverage and fill those gaps before they become an issue. Mishandled Key Man and Buy/Sell agreements can cause shockwaves resonating throughout all facets of the business and operations. Often, such a disturbance permanently shifts the businesses ability to generate the desired benefit stream. Maintaining adequate coverage keeps operations running smoothly and protects against unforeseen circumstances.

Capital preservation is one of the most important aspects for a business to effectively manage. The secret to capital preservation is a lean business model, or one that creates the most value per dollar spent. A simple Google search yields a clear and concise definition: “Simply, lean means creating more value for customers with fewer resources. A lean organization understands customer value and focuses its key processes to continuously increase it. The ultimate goal is to provide perfect value to the customer through a perfect value creation process that has zero waste.” The key is efficiency and leverage, getting the process as smooth as possible while maximizing each dollar spent. Pooling for example, is a great way to lower inventory costs. Speak with competitors who purchase from the same supplier you do. Combine your purchasing power and agreeing to work with a supplier for a set period of time, can dramatically decrease your inventory costs. A full-time employee is valuable but only if they are effectively utilizing their time. Often when business is slow, salaries go toward idle time and not revenue creating activity. By contracting out certain work you make sure to pay only for time worked and often for high quality skillsets that contractors bring to the table. Finally, simple bottom line cognizance and responsibility will help run a lean business. By stressing the importance of cost cutting and waste to the team, along with encouraging the team to bring ideas to the table around how the business can run more cost effectively, waste can be removed leaving more cash in hand. These are just a couple ways to save money but are still vitally important. Frugality is key to making it through a recessionary period and can be the difference between a happy retirement and a boarded up storefront.

Some of the greatest buying opportunities occur when everyone else is running for the hills. As the markets decline, the smart money starts to look for opportunities and undervalued investments they can scoop up for cheap. Opportunities like these don’t come around often and to seize them requires great preparation and foresight. Periods of economic downturn are often some of the greatest periods of merger and acquisition activity and truly distinguish the strong businesses from the weak. Planning ahead and being able to make a position on a failing operation could pay dividends later on. The main purpose of an acquisition is execution of company strategy and to increase the strength of the core business.

I hope that this article has shed light on the importance of knowing your business’s value. It is the most important step in a business owners plan for the future. Deterioration in the US equity markets over the next two years is going to become a headwind for business owners. Without a solid plan in place to account for decreased profits, fewer capital infusions, increased credit risk and growth opportunities, it is unlikely the business will remain profitable and may even cease operations.

NFL Predictors…..

As I do many times prior to watching the Green Bay Packers beat the Seattle Seahawks I was watching the NFL pregame show. Each week the ‘experts’ pick the winners of specific games. These ‘experts’ are made up of Super Bowls winning players as well as coaches. There ‘experts’ should be able to correctly pick the winners of any game each week.

After all there are only 16 games to choose from. These ‘experts’ have access to all the statistics. Who is playing, who is hurt, who is playing well and who is not. Past performance is there only criteria. Given the past these ‘experts’ make their predictions.

Now that we are in the playoffs there are even less choices.

Well Last week Terry Bradshaw, Super Bowl winning quarterback for Pittsburgh Steelers back in the 70s. He was also MVP of 2 Super Bowl(s). These credentials should give him the credibility to pick the winners with ease.

Terry said that the Minnesota Vikings had no chance against the New Orleans Saints.  Terry gave many reasons This was a sure thing.

He was not alone all the ‘experts’ picked New Orleans to win easily. In fact, if you were to keep track, these ‘experts’ have a terrible record.

You can guess what happened. Minnesota won the game easily.

Investors can learn a lesson here. There is no such thing as a sure thing. The equity markets are random and unpredictable. Just like NFL games. Even if you have all the statistics supporting your position. You cannot consistently pick the direction of the equity markets, nor can you consistently pick the stock winners.

If the NFL ‘experts’ cannot pick the winners out of 16 games each week and much less in the playoffs. What makes you think you can pick the right stocks and the direction of the equity markets.

I wonder what the ‘experts’ will predict in the conference championships. I hope they pick against the Packers, especially Terry Bradshaw.

When you build a prudent globally diversified portfolio a correct prediction is not required. Over the long term you will succeed. There will be, however, times when your diversified portfolio will under perform a specific asset class.

Investors need to remain disciplined and maintain their long-term view of the equity markets. Most cannot do this alone.

It will require the help of a fiduciary adviser/investor coach. Your coach will keep you disciplined and remain focused on your long-term goals.