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.

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.

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

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.

2019..Events That Did NOT Happen..

During 2019 we were worried about several things that would have a negative impact on the financial markets. The financial media made sure you were fully aware of these ‘negative events.’  

After all, the media’s strategy is, if it bleeds it leads.

Given these possible events the stocks around the world had a solid year in 2019.

Many of the people I talk with remain pessimistic about the future. What if this happens or that happens? They ask. I’m not sure what will happen either short or long term. What I do know is that things will change. The only thing that doesn’t change is that things change.

Rather than trying to predict the future, which no one can consistently do, I follow my investment philosophy, which is that markets are efficient.  In that all the knowable information is in the current price of securities. Any predictions made are a guess. The markets going forward are random.

I believe that free markets work. I believe that economies around the world will continue to grow. What I do not know is what sectors or industries or products will grow.

Therefore we must remain diversified and disciplined.

There will always be short term volatility, both up and down. My role as an investor coach is to keep investors focused on the long term. Trying to time the markets or pick the right stocks will lead to poor results, long term.

Your goal as an investor is to reach your long-term goal. This is not done by earning the highest return possible. Earning the highest possible return can be accomplished in the short term, however it cannot be accomplished long term.

UNLESS, you believe that earning the market rate of return is the highest possible return.

The markets may not be perfectly efficient at all times, however they are far too efficient to take advantage of and improve returns.

Let’s reduce your anxiety in 2020 and improve returns, long term.

To succeed long term you must own equities..globally diversify..rebalance.

Too Good To Be True!!

How many get rich quick schemes have you learned over the last 12 months? Many profess that you can get rich quick if you follow their lead. Remember the old trading adage, ‘pigs are led to the trough and hogs are led to slaughter’.

No one can consistently predict the future!!  Because the equity markets are random and unpredictable.

There are no high return/low risk asset categories or investments.  No matter how sound the logic or plausible the story, this just does not exist

Investors want stock market returns with Treasury bill risk. What they end up with is Treasury bill returns and stock market risk.

To reach your long term goals you must diligently save….own equities and high quality short term fixed income….globally diversify…..rebalance.

Market Timing Has Huge Risks!

There are many risks associated with your money. Inflation risk, equity risk, capital risk and others. However, the greatest risk an investor can take on is market timing.

When assets are moved in the portfolio, based on a forecast or prediction about the future, this is market timing.

For example, you’ve become convinced by economic forecasts that the market is heading down over the next twelve months. You decide to sell your stocks and put all of the money into cash. That is market timing!

Market movements are random. No one knows what the market will do tomorrow or over the next twelve months. It bears saying again: Nobody knows with any degree of certainty what the future will bring and if they did they wouldn’t tell you.

Let’s look at another example. Because of a war, you or your stockbroker predict that international stocks are going to lose big, so you move all of your stocks into the United States. Once again, this is market timing.

This doesn’t “feel” like speculating. It often feels like wise stewardship of your assets.

If over the last two years, you have watched your portfolio take large losses in any one asset category, and every news program, investing magazine and stockbroker says this is the time to get out – it feels like prudent investing. Nothing could be further from the truth.

In many cases, if not most, staying disciplined and staying the course is the best thing to do. That assumes that you currently have a prudent mix of assets. This is a huge assumption, because most people don’t.

To keep you disciplined to your strategy, you will need the guidance of an investor coach/fiduciary advisor. In my opinion, this is where your advisor adds the most value. This is why you pay their fees.

To keep emotions out of your investment decisions. Investing is a long-term process and a true advisor will keep you grounded to your plan.

It Is Prediction Season…

This bears repeating as the predictions are coming fast and heavy. They include a service that says based on Elliott wave principles the S&P500 will fall to 2700 soon, currently around 3100. Morgan Stanley predicts the rough 2020. Many investors I talk with are saying the market is high and due for a decline.

A few years ago, John Bogle, inventor of the index fund and past chairman of Vanguard Investments was speaking at an advisor conference. Now 80+ years young, Mr. Bogle, shared the best investing advice he ever got while a young man working as a runner for a brokerage firm, a fellow runner, about the same age as Bogle is now told him the secret ‘Nobody knows anything’.

During his interview Mr. Bogle warned attendees that “we give too much credence to past returns; past is not prologue,” saying instead “it’s the source of the returns” that is more important. He then quoted Samuel Taylor Coleridge that history is like “a lantern on the stern, which shines only on the waves behind us.”

Discussing investing opportunities, Bogle pooh-poohed private equity, saying that there are “a lot of sellers, but not many buyers.” He still believes that “performance chasing” is one of the most deadly of investing sins, that “I grow more concerned about target-date funds every day,” is skeptical about 130/30 funds–“it’s not that easy”–and on exchange traded funds, “my skepticism is increasing,” saying that his reading of the data shows that “ETF investors do badly relative to mutual fund investors.”

The problem is not the product but the investor. They need a coach to guide them through the maze of financial media and hype.

Basically what Mr. Bogle is saying is that stock picking, market timing and performance chasing do not work. Developing a customized portfolio, with regard to your comfortable risk level, using a scientific approach and remaining disciplined will maximize your opportunity for a successful outcome.

Remember at any one time there will be an asset class or stock picker or market timer or hot strategy or……..that is outperforming. Successful investors are not always right. They have an investment philosophy that they believe in and stick to it.

My clients understand this and will succeed in the long run. We must remain diligent and stay focused. Own equities…… globally diversify…..rebalance.

Going Broke Safely!

Recently I overheard some recent retirees discussing where to out their money. The discussion centered around risk free investments, such as, CDs or U.S. Treasury Bills.

The historic “Risk Free Rate” is about 4%.  In fact, the most recent sale of 5-year Treasury Inflation Protected Bonds sold at a negative yield, first time ever. 

The risk-free rate is the historic return on government guaranteed T-bills.  Think of them as CDs issued by Uncle Sam.  They have a very low return but virtually no volatility.

They seem like a sure thing, but after inflation and taxes, the only thing that’s for certain is long-term losses.  It’s the safest way to go broke.

Investors continue to search for the investment that gives stock market returns with Treasury Bill risks. The Wall Street bullies know this and continue to market exactly this. This type of investment comes at a huge cost to the average investor.

 Really because there is no way to offer a product that avoids risk while providing stock market returns.

Owning a globally diversified portfolio at your risk tolerance level will give you the results you seek, long term. To realize these great long term returns, you must deal with the ups and downs of the equity markets.

To accomplish this, in most cases, you hire an investor coach/fiduciary adviser. Your coach will keep you disciplined during market extremes, both up and down.

To succeed long-term you must own equities….globally diversify…rebalance.

Wall Street Bullies Need You!

Every week I look for a subject to discuss what I have heard from clients/prospects. Some are questions, some are comments. This week I am going to discuss ‘The Efficient Market Hypothesis’ written by Dr. Eugene Fama in his Phd. Dissertation. Partly because Dr. Fama won the Nobel Prize in Economics for 2013 and partly because I continue to hear questions on market timing, when to get into and out of the market. I actually had someone ask for the current hot stock(s). YIKES!!

I have mentioned ‘The Efficient Market Hypothesis’ , now Nobel prize winning, many times before. It has also been referred to as Free Markets Work. Dr Fama’s definition of the efficient market is as follows:

“In [a free] market at any point in time the actual price of a security will be a good estimate of its intrinsic value”.

This is just a brief definition because I do not wish to bore you with the entire dissertation. What he is saying is that price of a stock today represents its true value today. It does not represent a forecast of the future, because we all know no one can predict the future. Therefore, all the knowable information is already in the price of the stock (security).

Any future movement of that stock is random and unpredictable.

Given this information we know that if you are trying to use

  • Stock picking
  • Market timing
  • Track record investing

You are gambling and speculating with your money. Anyone who recommends you use these tactics with your investment money should be considered a Wall Street bully.

When my financial services career began in 1992 I found it very curious why not one firm that I worked for recommended using ‘The Efficient Market Hypothesis’ or any other academic study I learned in finance classes in both college and graduate school. The research I learned proved these concepts work and making predictions does not.

What I concluded was the Wall Street bullies need you to continue to gamble and speculate with your money because this generates the most fees for these firms.

It has been proven numerous times that there is zero correlation between a stock pickers/market timers ability to pick the right stocks or correctly time the market in the past and their ability to do so in the future. This means that just because any adviser/agent has a good track record in ‘beating’ the market there is no evidence that they will repeat. It is not impossible but highly unlikely.

If this is true, then why do investors continually seek out the ‘best’ investments for right now?

Why do these same investors look for someone to beat the market?

The markets offer great returns long term why not concentrate your investment money on capturing market returns?

Most of these questions can be answered by the fact that the Wall Street bullies continue to market gambling and speculating.

There will always be someone making predictions about where investments are going. Stop being a victim of the Wall Street bullies. Learn about the most recent Nobel Prize winning concept along with other academic concepts to engineer a portfolio for you.

Are You An Investor or a Speculator?

There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. This is another attempt by the Wall Street bullies to keep your money on the move.

There are an increasingly amount of ‘experts’ extolling the underperformance of equities for the near future. Any are predicting an imminent recessionary period. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.

I even heard of a late-night show comedian saying that there is a recession coming. Unbelievable, Now, there may be a recession coming but no one can predict when and how long, not even a celebrity.

True investors are much better served using a passive management strategy and utilizing Modern Portfolio Theory and ‘buy and hold’. This strategy, over the long term will lead to success. It should be emphasized that ‘buy and hold’ should really be ‘buy and rebalance’.  ‘Buy and hold’ might signify set and forget and we must rebalance back to our target allocation periodically. This entails buying low and selling high, automatically.

When we rebalance we sell asset classes that have done well and buy asset classes that have done poorly, short term. Buy low, sell high. This is done periodically and eliminates the need to forecast the future.

There is some confusion as to what is an investor? Many believe that a successful investor makes more than their peers all the time. This they believe is measured on a short-term basis.

A true investor will make comparisons of 10-year performance and perhaps longer. It might be ok to compare 5-year performance. But investing is a long-term disciplined process. When you compare performance on a short-term basis. Like monthly or worse daily, you are really a speculator not an investor.

Now its ok to be a speculator, but if you have a long-term goals like retirement planning. Being a speculator will lead to disappointing long-term results.

To e successful, investors, no matter how large, would be far better off using a passive strategy with Modern Portfolio Theory as part of the process. Modern Portfolio Theory is actually part of a larger strategy called Free Market Portfolio Theory. 

Remember no strategy always looks like the right thing to do. We must continue to believe the free markets do work.  Most importantly we must believe in our strategy and remain disciplined.

We must own equities….. globally diversify ……. rebalance.

Celebrate Uncertainty!!!

Right now, we are experiencing an equity market that seems to, for the most part, go up. Eventually we will experience a longer period of down market.

Many investors lament the downs of the market.  They feel that the randomness is cause for complaint and pain. 

It has been said that people want to avoid down markets or risk much more than any potential reward. That said there continues to be many people avoiding the equity markets because of this fear

Emotions drive many investors to make the wrong choices. Emotions cause them to buy high and sell low. Which of course, is opposite the number one investor rule. Buy low and sell high.

Conversely many investors observe an asset class that has done very well during a relatively short period of time. They then want to concentrate their investment portfolio in that asset class. This is usually another case of buy high and sell low.  

Investors should remember that the equity markets are random and unpredictable. The unpredictability makes stock picking and market timing unprofitable over the long term.

In reality the unpredictable ups and downs of the market are part and parcel of its superior long-term rate of return.  Volatility is the only reason the market offers a risk premium. 

Celebrate the uncertainty.  It contains the seeds of growth and wealth creation.

To reach your long term goals you must own equities….globally diversify….rebalance.