Monday, December 22, 2014
From June 19th's high of $115.06 per barrel, we've seen oil fall over 50% to $55.26; this is probably the most important financial news of 2014.
Assuming we don't see a "V" recovery in the price of oil, and I think it is highly unlikely we will because supply to the market is significantly stronger than demand, this should bode EXTREMELY well for consumers, manufacturers, and transportation. A glut is nice is you're a price taker.
No doubt there has been carnage; just take a gander at any number of the North Dakota small to mid-cap plays and those charts are simply horrifying, especially for investors who had been purchasing on the entire way up. The global players though, have suffered glancing blows. Down single to low-teens, the majors stand to benefit if they can leverage M&A deals out of this bust to gobble up domestic fields.
Previous posts on this blog identified the fall in oil as a massive tax cut; that is without question true for the vast majority of Americans who regularly drive anywhere or own small businesses with light manufacturing or are dependent on transportation. From a macro view, the "trickle up" effects should be significant to large manufacturers' direct bottom lines (unlikely consumers will realize a price cut in the aisle, that's for sure!)
Ultimately, the crude bust should have meaningful effects on GDP, consumer sentiment, and socioeconomic advantages inclusive of a better hiring environment. What politics has often failed to do, a crude bust just did.
As a financial farmer there are a multitude of looming advantages; the labor rate, harvest and planting expenses, and seed cost will be all lower. Net positives all around to those who wish to Invest Like A Farmer. This should position 2015 & 2016 into meaningful extensions of the existing bull market. My long-standing call of Dow 20,000 by the end of 2016 may now be too low.
Sunday, December 21, 2014
Great Returns Breed Complacency
If there has been one truism consistent in the investing realm it is that great returns breed complacency. Many of you who have chosen to Invest Like A Farmer have realized significant gains over the past several years by investing in large, monopolistic companies with healthy dividends. Now what?
Yearly, or better yet on a quarterly basis, financial farmers should survey the farm and conduct a thorough review of holdings, seed capital, and expected harvest returns. Action isn't necessarily warranted, but rather a game plan, no matter how perfect on paper, should be routinely reviewed in the field to see if execution is proceeding as planned. Course corrections may or may not be warranted.
Those who survived any of the numerous "setbacks" in the markets over the past decade (or longer) well remember the pain of a correction and the ensuing panic which destroys accumulated wealth in the stock market. Seed capital is best to have on hand sitting in the silo well in advance of a downturn, though it may draw little interest in the interim.
Multiple prosperous years don't necessarily warrant a change in strategy, but rather a top-level review of holdings, seed capital (cash) available, and coming cash flow needs. As readers of this blog well know, I champion having a healthy silo of seed capital at the ready. It has tremendous value in terms of peace of mind and potential to invest when the economic winds change.
Selling into weakness is not a pleasant experience, one that many old farmers can recall with a tinge of heartfelt pain. Make hay while the sun shines, but silo some of those gains too.
Saturday, December 20, 2014
Double V is a W!
Like Halley's Comet, investors were recently treated to a surprisingly rare event--two sharply defined "V" patterns. I consider this oddity to be a "W" (WIN!) for investors. If the existing trend line stays in place we should see Dow 18,000 prior to the end of the year.
As the investing season grows long in the tooth, and with the S&P 500 and Dow at record highs, those who Invest Like A Farmer should consider any tax-loss selling in the coming days as well as rebalancing portfolios to established benchmark allocations.
Cash on hand (seed capital) has proven to be a valuable resource over the past year, with spurts of sell-offs proving to be excellent times to deploy new funds.
Remember, Investing Like A Farmer is simply the sum of short term successes (additive wins) that are harvested throughout the year in terms of capital gains, seasonal crop sales (dividends), and holding the plow steady in turbulent conditions (long-term, unrealized gains.)
It's all about the epsilon.
Thursday, December 4, 2014
Well my fellow financial farmers, it was just a short 45 days ago when we were (once again) in the throes of another doomsday scenario; ebola, ISIS, mid-term elections, and oil still in the triple digits. What a difference a month-and-a-half makes; Dow record, S&P 500 record, and virtually all of the above concerns have dissipated.
In terms of historic "Vs" this one will probably go down in the stock market annuals as one of the most defined patterns of a sell-off and subsequent recovery. To put it plainly, this "V" is the proverbial textbook example. (It might even be in the next textbook!)
What can we pull from this "V"? A couple observations; after a multi-day decline leading up to the free fall that constructed the back edge of the "V," volume increased markedly, the advance-decline ratio fell precipitously, and just as the "V" marked its bottom the market recovered to close well-above its low for the day. The market actually then opened up lower the following day, but closed higher. The "V" notch was in and off to the races we went!
Essentially from Oct. 16th until yesterday we have seen an unrelenting move higher, with only a handful of modest down days. So just over 200 S&P 500 points in 45 days. To put this in another perspective, if you only invested for 45 days this year you would have notched an 11.3 return (the high-end of the average YEARLY return!)
Take note those who wish to Invest Like A Farmer; great returns can OFTEN be had by having seed capital ready to deploy at a moment's notice if your "buy" scenario emerges. Many pundits disparage investors who keep dry powder (cash) at the ready, but reality dictates that the "opportunity of a lifetime" comes around a lot more frequently than that adage suggests. Be prepared.
The big question, what's next? Given the macro climate I suspect analysts are being conservative on their existing 2015 and 2016 S&P 500 earnings calls. This leads me to believe we have a very good chance of not only meeting but possibly exceeding my call of Dow 20000 by the end of 2016.
In the meantime, I think the existing "up-trend" will moderate into the holiday season and pick up again into the New Year; a key question is whether vital elements of this macro environment (low interest rates, cheap oil, and political gridlock) will hold into 2016. Additionally, will retail investors return to the markets and deploy some of the cash currently sitting on the sidelines? All of those factors would prove to be bullish catalysts.
Wednesday, December 3, 2014
The Oil Boom (for the Rest of Us!)
Welcome to QE4; $65 bbl oil! Nothing like cheap oil to help a financial farmer's portfolio. Consider rough "back of the envelope" numbers of 0.25-0.50% GDP increase for each $10 bbl oil fall from $100 bbl oil and we're looking at some very rosy numbers indeed.
Frequent readers of this blog know that I've had a Dow 20,000 call on the market for well over a year, specially I'm predicting Down 20,000 by the end of 2016.
If we see sustained oil prices below $65 bbl, well my friends, that would imply S&P 500 earnings of around $1250 forward looking into 2016 and even a moderate P/E of 18 yields…wait for it…Dow 22,500. That's nice.
The fall in oil prices is in effect a MASSIVE tax cut across the board for: gas-car drivers (still plenty of them around), raw material consumers (read as nearly every major non-financial S&P 500 component), and secondary iterations like logistics, transport, and fulfillment.
What's very strange about this existing scenario is given the turbulence in the Middle East many investors would expect $120 to $140 bbl oil right now. Why aren't we seeing this? Two theories come to mind; first, somebody is dumping large quantities of crude on the market at cut-rate prices to raise significant capital. But even that theory wouldn't account for the global sell-off, it's just too amazingly big a move. If we look to classical economics with our good friend Adam Smith, then supply and demand should tell us everything; bottom line there is a glut of oil with middling sustained demand.
Combine the oil QE4 scenario with a dovish Fed poised to keep rates low indefinitely and low inflation (except in health care and education, but why measure those when "tons of soybeans" is available?) as well as a political environment almost guaranteeing gridlock and we're sitting on the heels of another bull run higher.
As the end of the year approaches, this sure looks like a fine time to take stock of your financial farm and adjust allocations accordingly. A quick refresher for new readers of this blog:
1. Boring is undervalued. Look for companies with established brands. If they are exclusive, finite, hard-to-get, vital, addictive, and/or monopolistic, so much the better.
2. I prefer companies that pay me to own them. Specifically, I want to buy companies that pay quarterly dividends that have historically risen over time.
3. Of the four possible outcomes; high margin, high volume is best.
4. A steadily moving higher and higher left to right stock chart is a good thing; the inverse it not.
5. Inevitably, and by definition, more time is spent holding a losing position than is necessary. Cut your losses.
Monday, December 1, 2014
Described as "monetary inheritance that is passed on to generations that didn't earn it," dynastic wealth gets a bad rap. It is so "burdensome" that most billionaires feel compelled to increase it and disperse it via a number of nonprofits controlled by their heirs to maintain it without having to "pay their fair share." Please. Let's be honest, dynastic wealth is an enviable goal and one which most investors strive to obtain, if not fully in their lives, then at least in the lives of their children and grandchildren.
Dynastic wealth, in terms of monetary abundance, offers many significant advantages to poverty; better access to health care, education, safety, etc. It has, and will always be, one of the primary goals of our species. It is fundamentally Darwinian. In many ways, dynastic wealth is the American Dream; an increasingly better quality of life for generations to come with the ability to pursue one's own happiness.
Those who wish to Invest Like A Farmer are particularly well-suited to accomplishing this goal. It is a worthy goal and one that is obtainable. Here are the basic elements that I have seen succeed:
1) Longevity is key as both time and health are vital assets to establishing dynastic wealth.
2) Self-Discipline to repeatedly contributing to compounding investments, rarely taking distributions.
3) Financial Savvy; a lifetime hunger for knowledge about investing in a number of asset classes.
That's the quick 3-step process; there are undoubtedly thousands of ways to become wealthy. But mastering the above elements are always a significant part of the equation when establishing initial education, income, passive income, starting a business, owning equity, leveraging equity, tax-advantaged investing, developing multiple cash flow streams, strategically passing along assets to heirs, and ultimately establishing dynastic wealth.
Very few of us (suspiciously enough, probably around 1%) have privileged connections. And although that definitely matters, particularly the influence which can be wielded by those connections, almost anyone can lay the seeds for dynastic wealth in his or her own generation.
There is an old adage of "From shirt sleeves to shirt sleeves in three generations," implying that many a family struggles, builds a some wealth, and it is subsequently lost by the third generation. There is a flip side to that coin though, dynastic wealth creation that is lasting. Strive for the latter.
Sunday, November 30, 2014
For those traveling home for the holidays and busy shopping, it was probably quite possible to miss a fabulous article in the Wall Street Journal on November 26th, page D6 entitled "The Bruiser and the Billionaire."
If you are new to investing, download it, print it, and keep it handy. For those old hands who have mastered the fundamentals, download it, print it, and keep it handy. It details one of the most important life lessons; the higher you ascend in life, the higher circles of access you can obtain. Football player Ndamukong Sun is taking advantage of this wholeheartedly, and so should every individual who hopes to Invest Like A Farmer; leverage your contact base and increase your knowledge exponentially.
Very few of us have direct access to Warren Buffet, Elon Musk, Tony Robbins, Mark Cuban or any of a number of gurus; this is not to say, however, that you cannot learn from them indirectly via their direct writings, interviews, and commentary. Barring a direct line, for the 99.9% of "average people" the best method is going to be getting your hands on derivative works.
Along those lines, some of the best financial books on the market now include: Berkshire Hathaway Letters to Shareholders, Money Master the Game, and Rich Dad Poor Dad.
Don't let anyone fool you, even in America it is difficult to transcend your economic class. Difficult, but not impossible; although economic mobility in this country has remained the the same (about 50% of Americans born into the lowest economic spectrum stay there for life), there are definite steps that one can take which make a significant difference.
Privileged Access is indeed one of them, but one which many of us can take advantage of at least indirectly via building our own resource rich knowledge base. I encourage readers of this blog to pick up copies of the above-mentioned books and read about the techniques and learn the core thought process of how, what, and why investment decisions are made.
Thursday, November 27, 2014
"Our harvest being gotten in, our governor sent four men on fowling, that so we might after a special manner rejoice together after we had gathered the fruit of our labors. They four in one day killed as much fowl as, with a little help beside, served the company almost a week. At which time, amongst other recreations, we exercised our arms, many of the Indians coming amongst us, and among the rest their greatest king Massasoit, with some ninety men, whom for three days we entertained and feasted, and they went out and killed five deer, which they brought to the plantation and bestowed on our governor, and upon the captain and others. And although it be not always so plentiful as it was at this time with us, yet by the goodness of God, we are so far from want that we often wish you partakers of our plenty."
Sunday, October 19, 2014
Nibble, Don't Bite
My advice for beginning investors and those that come into random fortunes is the same; nibble, don't bite. For those individuals who ultimately wish to Invest Like A Farmer, it is prudent to deploy capital strategically, thoughtfully, and over time. Dollar cost averaging works, especially if you are entering the market for the first time or putting a significant sum of capital to work and plan, in both cases, to be in the market for some time.
It is nearly impossible to perfectly time the market; there are obviously better times to buy than others (nearly every correction or depression has proven to be an excellent time to buy for long-term holders), while some peaks has been good, and some not so good. (Imagine "selling on the high" in January 1982, 1983, etc. The bull market ran almost unabashedly higher for nearly 20 years!)
Nibbling offers superior advantages, in my view, to going "all-in" or "all-out" on any particular day, trade, or philosophy. It allows investors to test the water, build positions over time, and gradually construct a meaningful portfolio while still having plenty of seed capital in reserve.
Thursday, October 9, 2014
For those faint of heart, the past couple weeks have not been kind; up, down, spin around, back up, only to fall down again. Yikes!
What's an investor to do who wants to Invest Like A Farmer? Keep the plough steady and keep your eyes level on the horizon that's what!
The fact of the matter is that the volatility index has been particularly quiet through the summer and just as the classic entry into autumn begins the VIX is at it again moving up hundreds of points one day and just as much (or more) down the following day.
In spite of these often drastic movements, dividend flows have remained consistent (and rising.) Positions of monopolistic companies often improve during chaos as the most damage is typically inflicted on small capitalization companies (if you want to see something really scary, take a look at the Russell 2000 Small Cap Index.)
Framing all of this is the concern of a major economic slowdown in Europe (probably true) which will spread to the United States (probably true) that will ultimately derail the recovery and impact the real estate market (maybe true, especially in regards to the real estate market which looks poised to triple dip.)
Blue chips here look REALLY appealing as well as select names in the tech and biotech sectors. It's tough to get bullish on small caps in the face of a slowing economy. With the Fed most likely remaining dovish for the foreseeable future real estate should muddle along, except in a dozen areas where it clearly has extend itself. Pockets of wealth, affluence, and creativity will continue to bloom, get funding, and launch exciting new products and services; that roadmap has been in place for quite some time.
For those who wish to Invest Like A Farmer, keeping the plough steady and your eyes level on the horizon should pay off once again in the months to come.
Tuesday, October 7, 2014
For opportunity at hand, it is best always to be prepared. The Boy Scouts have it 100% correct, and their motto should be adopted, practiced, and preached by those who wish to Invest Like A Farmer; Be Prepared. The opportunity of a lifetime usually surfaces about once a month, and having ready cash as a resource can greatly improve your linear rate of return.
A great example was the recent selloff in bonds triggered by the departure of a famous portfolio manager. More money was made over the past 10 days buying on that dip than the annual return for many funds over the course OF A YEAR!
Eagle-eyed investors with cash at hand may be criticized for "wasting their funds" by not being fully invested at all times, but having ready cash--and by ready I mean ready to purchase in an account fully set-up already--can be a massive advantage.
In my experience, a sharp sell-off in a security is most intense the first day, continues to fall the second day, and on the third day a capitulation point is reached. This should serve as a good model for those trying to time either a "dead cat bounce" or build a position in a quality piece of equity over several days.
Sunday, October 5, 2014
The Rule of 72
The Rule of 72 is an essential concept for investors to master who wish to Invest Like a Farmer; it is one of the, if not THE, most important proverbial "rules of thumb" that can be used on nearly every investment opportunity you'll encounter.
Simply stated, The Rule of 72 approximates your investment's doubling time. It accomplishes this by a rough (yet oddly accurate) approximation of factoring compounding interest which is a logarithmic function by using a relatively simple linear calculation. What? OK, basically if you know your interest rate or rate of return, divide 72 by that number and it will give you an approximate time to double your investment.
Why is this important? As financial farmers we want to know our projected yield ahead of time; it allows us to allocate capital, plan for land expansion, and a variety of other tasks and goals. The "double time" is also important because it helps separate the wheat from the chaff; all things being equal, a faster double time is better (we want the return of principle as soon as possible, with the resulting yield or growth then becoming a matter of self-sustainment.)
Besides "Buy Assets," the next most important tool in your financial farmer work shed is "The Rule of 72"; it quickly and accurately gives a financial farmer a quick idea of the viability of an investment.
Wednesday, October 1, 2014
Ebola's Impact? If we're Lucky, Only 1% of GDP
Readers of this blog, all five of you, were alerted to the potential dangers of inbound Ebola on September 17th's post. As any financial farmer well knows, there are plagues and pestilence that strike every farmer's fields. The frustrating part of this unwelcome news that hit across the wires yesterday was that it was completely preventible; why this country is receiving flights from West Africa is beyond me.
From a portfolio perspective, 2 weeks ago was a great time to hedge out entire portfolios via either selling covered calls or buying puts. For now though, investors unhedged are in a bind; hedge out after 250 points, 500 points on the Dow? I suspect this will have ripple effects throughout the economy, particularly alarming is the seemingly uncoordinated response from the CDC and more importantly our political leaders.
My thoughts? Dig in, we're probably headed lower, and probably going to sustain across the board damage to the economy. Sectors which offer protection; not many, but your addictive, necessary, branded monopolies most likely offer the LEAST damage. Small Caps? Watch out, they are the most vulnerable with weaker balance sheets and dependent, traditionally, on discretionary spending. Upside? Not the airlines, travel industry, or restaurants. MAYBE niche pharmaceutical companies, especially those that can secure federal funding.
Dig in fellow financial farmers, I think this is the long-(un)awaited correction. The question on this one, though, in a Brave New World, what's the recovery timeline going to look like? For the time being, a full-hedged portfolio with plenty of cash on the sidelines is king.
Let's hope things don't deteriorate from here, but I'm not particularly impressed with our leadership's response or (lack of) planned path forward.
Wednesday, September 17, 2014
Another Day, Another Dollar
…as the Dow DJIA hits yet another record close. Is the end is sight? Is this mighty bull due for a breather? Probably not.
Frequent readers of this blog (all five of you) know that I have been bullish from the start of this run and have consistently predicted Dow 20,000 by the end of 2016. I see no reason to modify this standing call; the Fed's dovish tone, the real estate market's recovery, and the job picture all point toward higher and higher closes.
Clouds on the horizon? Plenty. The U.S. involvement in the never-ending Middle East wars is the most obvious concern, particularly to what lasting role this country will play in the region and also the net migration of a clear and present danger to our own shores keep this investor up at night. The response to the conflict in Ukraine was tepid at best, and fading by the day. Finally, the biggest potential danger from a macro-standpoint is an ebola-like (or just actually ebola) jumping in form-factor and consequently delivering a knockout blow to our medical response system.
Of these three concerns, only the last is probably one that can be adequately addressed and communicated with a valid solution to the American public; let's hear the plan to fight an inbound devastating pathogen. Lay out the blueprint Mr. President. The former concerns present no clear solutions, and we will undoubtedly be mired in Middle East conflict for years in one form or another until the utility of oil has been exhausted. The situation in the Ukraine only leads one to suspect it will fester and possibly grow to other regions as there seems to impetus to contain aggressive expansion.
With that said, it is hard to believe the that the path forward will not be up; every couple weeks there is a momentary pullback of several percent which has proven to be an excellent time to add to existing positions. The incremental gains of several years now are compounding both in valuation/dividends and more importantly, even hiring; expect that to continue. The IPO market is robust and technology (thank you Silicon Valley) keeps introducing better ways--both to do things and things themselves.
Make hay while the sun is shining fellow financial farmers!
Saturday, September 13, 2014
Founder of Chick-fil-A, arguably the finest and fastest chicken sandwich, Truett Cathy died on Monday September 8th, 2014. From many aspects readers of this blog can learn a great deal from this man.
Starting from nothing as a Depression era child, Truett founded Chick-fil-A which is now one of America's largest restaurant chains grossing over $5.5B a year in sales and consistently laser-focused on quality.
Muhtar Kent, CEO of Coca-Cola, had this to say about Truett. He was "an irrepressible optimist…he saw work as a privilege and made a point of enjoying it…he understood, like few others, what it meant to be a steward of a great brand. If a brand is a promise, then a great brand is a promise kept. Truett kept his promises."
For those readers who wish to Invest Like A Farmer, I encourage you to read up on Truett Cathy. His formation of a brand, his devotion to service, and probably the greatest compliment, his faith in God and his fellow man were remarkable. In terms of lasting influence in American business, there are few better.
Monday, September 8, 2014
Diamonds in the Rough
How as an investor can you find a potential diamond in the rough? An asset that is undervalued with the potential for exponential returns? Well, according to efficient market theory, it ISN'T possible because at any given time all assets are considered to be perfectly priced. Reality, however, dictates otherwise.
Efficient market theory does not take into account every possible future scenario based on unique perspective or insight; there are literally hundreds, if not thousands, or as some theoretical physicists believe, infinite distinct, discrete factors that go into determining any future event. It would be safe to say then, that by definition future events are unknown even to the smartest amongst us.
With that said, then, how can an individual investor ever hope to beat the legions of professional analysts on Wall Street and literally pick a diamond in the rough? Einstein said it best when he commented that knowledge was power, and perfect knowledge is not possible to mortals. What is possible, however, is experience.
Malcolm Gladwell's Outliers is a fascinating book based on what factors help influence success. In it he argues that repeatability, or perfect practice as defined by Lombardi, makes perfection (or at least extremely high outlying returns on an endeavor) possible. I believe the same holds true when selecting equities for your portfolio.
Finding companies whose brands are not yet fully established, yet focus on "perfect practice," I believe, offers the best opportunity for discovering those hidden diamonds. Successful branding takes time to take root, and it is in this time where execution of the business model can help score big points for early investors. The natural result of perfect practice is increasing brand awareness, increasing profitability, and increasing share price.
If it is diamonds in the rough you seek, look for emerging brands laser-focused on perfect practice.
Wednesday, August 20, 2014
One of the best pieces of financial advice, for investors of any age, is simply two words; buy assets. By definition, an asset is an economic resource. But for the individual who want to Invest Like A Farmer, an asset has a slightly different definition.
An asset for a financial farmer is something that produces cash flow, or income, for its owner. Historically, assets have been directly linked to physical land in terms of the ability to produce income from the earth itself via farming. Over the course of many years in which the storage and preservation of food increased rapidly, wealth became portable in different forms enabling greater and greater commerce.
Although land itself can still be a viable asset, from owning rental properties to commercial real estate to actual farms, many portable forms of wealth are assets too. A great example of this is a share of stock. Shares of stock are pieces of a larger whole company which may pay a recurring dividend and thus qualify in the purest form as an asset.
As financial farmers we like assets, especially if they don't require labor (farming), extensive regulatory barriers (setting up a personal business), or oversight (constant monitoring as found in a manufacturing process.) By owning shares of companies we enjoy the benefits of a collective income stream as well as significantly lower maintenance requirements compared to running a farm, a manufacturing company, or even just a job itself.
Over time, a successfully implemented portfolio, what we refer to as a financial farm, becomes self-sustaining in terms of its ability to produce higher and higher recurring returns for the owner. This passive income stream, for anyone who has ever worked a miserable day at the (fill in the blank: office, farm, factory, etc.) passive income is pure magic. The asset essentially works around the clock generating income for the owner! This philosophy also fulfills one of my primary rules; namely, that boring is undervalued.
One would think there would be a rush at the door to purchase up every single asset producing passive income, but that is surprisingly not the case; assets can be found in nearly every industry on every corner of the globe (often at very reasonable prices.) The challenge for the up-and-coming financial farmer is cobbling together enough of these assets, or creating them, to initially to sustain a decent income stream. The solution? A prudent financial farmer should have the discipline to restrict purchases, other than necessities, to purely assets. The longer and truer this discipline is maintained, the larger the asset base will grow.
Tuesday, August 5, 2014
Investing with the NSA
Although this blog post is written half in jest, it should serve as a shot across the bow in terms of our steadily eroding freedom. In many parts of the world we witness on a daily basis fiat and draconian rule by dictators who have cobbled together their authority from the stolen freedoms of their citizens. It is important to remember, as aptly cited by Winston Churchill, that "democracy is the worst form of government, except for all the other forms that have been tried from time to time." Today, it seems more true than ever that the concentration of power in terms of wealth, political influence, and data has seemingly been consolidated against the very principles of our United State Constitution; it is fair to say that we do indeed need change. As the Rothschilds have known for generations, your financial farm is only as viable as the security of the country in which it resides. The future is always opaque, but let's hope as financial farmers we can still harvest the fruits of our labor. Press on Brave New World reader!
It's an odd thing; force a tracking device on people and they rebel, but offer mobile communication and it is embraced. Hence we have the rise of the modern metadata capture, track, store, profile, and geolocate system for nearly every human on Earth. The push into mobile communication devices coupled with social network applications is the mother of all data troves for the NSA.
What Snowden's leaks indicate, along with recently published legal documents, is that we are well on a course to a Minority Report culture, but rather than using precogs, we have the NSA as a predictive law enforcement system; our very own combination of Judge Dredd and Robocop with drones far more likely to issue speeding tickets than deliver packages. One of the most shocking developments from last year's aptly termed "Summer of Snowden," was the complete media inattention to the very real sarcasm that Snowden was so prominently portrayed in Heller's novel Catch-22. Pity what the media has become; Orwell's 1984 has nothing on what the NSA has evolved into today!
The question arises, not whether this is legal, against any human rights, or whether the legal system itself has been compromised (secret laws, secret courts, lifetime appointments, mid-six figure salaries, full healthcare and benefits = bought), but rather how can you as a financial farmer can benefit? Following our initial rule set of looking for ways to plant profitable seeds to harvest one day in our own retirement years and possibly pass on to our heirs, there seems to be three general trends to investing along side the NSA if we want to salvage something from the fall of democracy in our republic.
First, we should take a strong look at the telecommunications companies and their buddies the BIG desktop software company and the search giant. There are only a handful of truly global-scale companies and it is a safe bet to assume they have all been compromised whether willingly or not. The bottom line is that people both need and want to communicate. Traditionally this has been done over telegraph and telephone lines, but increasingly (like 100%) the shift has been made to almost a pure internet backbone. So we can put some telecoms in the portfolio, as well as the software company never convicted of running a monopoly, and the company that claims to "Do No Evil." Check.
Second, these new-media social networks are a global data mine! With users signing up for "free" to share their thoughts, opinions, and basically any other personal details, this proves to be the ultimate spiderweb of connectivity. What's really cool is that individuals volunteer this information and it can be scooped up by the terabyte, correlated, analyzed, and processed with supercomputers. Check.
Finally, it is probably a good idea to look at promising medical device makers which focus on neuroscience. Given that the next frontier is to capture thoughts and biometrics, medical device makers that are developing wearable systems that can capture, transmit, and store cognitive electrical impulses have great utility to the NSA; this data provides a looking glass into your soul and clearly indicates a user's intentions. The wearable "fitness" devices currently offered by some of the large athletic companies are a good start; all the users biometrics are being captured and transmitted via Bluetooth to a mobile device with social network apps installed. Perfect!
These three areas of investment all look promising, and don't worry, no doubt the NSA has already logged your IP address for accessing this blog (I would expect no less!) Consider what possible investments can be made alongside the NSA's portfolio, but don't think too loudly...because they're listening!
Friday, June 20, 2014
The Shamrock Sanctuary
From 1830 to 1914, almost 5 million Irish emigrants left Ireland bound for America. The United States offered opportunity; it was a fresh start for many based on their personal ability to succeed and not tied to land holdings, hereditary title, or custom. America offered one of the best environments for success; indeed prior to 1914 there existed no income tax and land itself was often given away via homesteading grants.
Triggered by the Great Famine of Ireland, the mass emigration, termed the Irish diaspora, landed many new entrepreneurs in our county. America was so good in fact, that Irish emigration actually increased following the end of the famine. As word trickled back across the Atlantic of the opportunities so abundant in America, those willing to make a go of it for themselves found the land was indeed fertile for planting their future.
Almost exactly 100 years later, however, the tide has turned; American companies want out of the United States and are even willing to pay significant premiums to buy rival companies based in Ireland to accomplish this goal. What has triggered this corporate diaspora? In a word, opportunity.
The business tax environment in Ireland is significantly more favorable than in the United States, and luring foreign companies to headquarter in Ireland has proven to be bountiful to the country in many ways; from securing the added revenue of the companies themselves to adding additional, traditionally higher-paid, jobs immediately to the local economy. The secondary and tertiary effects cannot be ignored either; commercial real estate prices have increased, additional local service industries are needed, and probably most importantly, other corporations are silently recruited to the environment which serves their needs best. A virtuous cycle takes deep root in fertile ground; coupled with a benign corporate tax environment and skilled employees, it is tough for companies to forgo this opportunity. Ireland beckons like America once did for many corporations.
As investors keen to turn a profit and steadily increase holdings, dividend streams, and acreage in our own financial farms, it behoves the prudent investor wishing to Invest Like A Farmer to take heed of what is happening in this corporate diaspora.
Just as water seeks it own level, businesses, and people, will ultimately vote with their feet. Corporations are without a doubt voting with their feet, moving completely offshore. Realistically, however, rather than moving offshore small business owners and professional employees have a single choice; they can work in pro-business environments (States) or not. They will either further polarize into business friendly parts of the country and/or minimize taxable income or not. I'm betting they will.
As indicated in this morning's WSJ article "The Asset-Rich, Income-Poor Economy," neither scenario benefits the country as a whole going forward. The insatiable hunger for tax dollars needs to be addressed as well as the extreme hoarding of Midas-sized fortunes; the solution resides somewhere in the middle, and until these scenarios are met head-on, expect more corporate and individual diaspora.
Sunday, June 8, 2014
"Results of proper pruning are graceful, vigorous growth with distinctive shape."
With the Dow Jones Industrial Average (DJIA, "the market," "Wall Street") hovering at just under 17,000 it is probably a good time to do some portfolio pruning.
For those investors who chose to Invest Like A Farmer, this year has proven to be particularly fruitful. It comes on the heels of last year's 32% run in the S&P 500 and puts this Bull Market easily in the Top 5 and perhaps even the Top 3, depending on when you benchmark the start, of all-time Bull Markets.
Frequent or even occasional readers of this blog know that I have a long-standing target for the Dow of 20,000 by the end of 2016. (Dow Twenty Thou by Dec. 31st, 2016 to be exact.)
Why am I suggesting taking a pair of pruning shears to your portfolio now then? Simply put, growth rarely continues on a linear path indefinitely. After a long and sustained period of growth, it makes sense to trim some positions in a portfolio either by directly selling said positions or alternatively writing (selling) options on those securities to at least establish a partial hedge.
You want your "money tree" to look like the example in the lower left corner of the above chart. To help accomplish this, for equity positions with significant gains, I prefer the options-writing strategy. For losers in the portfolio, I prefer the outright sale approach. It is common to use both techniques in a portfolio; pruning the losses with direct sales and hedging the winners with an options strategy.
Pruning by its very nature is a selective process that helps identify weaknesses in a tree, shrub, and yes, even your equity portfolio! Often several positions have gained appreciably and therefore they now comprise a significant portion of your holdings. Alternatively, some positions may have completely disappointed you and now are underwater. Both cases offer the opportunity to reduce further exposure by either hedging the position or selling it outright.
As financial farmers who espouse the theory of Investing Like A Farmer, the slow summer months with volumes at one half or even one third their traditional "working months," are prime time for evaluating your holdings and pruning as necessary. A well-pruned portfolio is like a well-pruned bonsai tree; a beautiful living piece of work that can last for many generations.
Friday, April 25, 2014
Roll Out the Sod
With a dismal week in the markets behind us, it is important to consider what the 1st quarter represents…it represents the end of Winter and the beginning of Spring! And as anyone who wants to Invest Like A Farmer knows, Spring is the time to plant!
Probably one of the closet things in life to buying time is rolling out sod. It is the pre-grown result of 18 months to 2 years worth of work, effort, sun, nutrients, and transportation to your door. In its most beautiful form it is green, and we like green. And right now across the investing spectrum there are multiple examples of companies that can act as sod for your financial farm.
Take a close look at the Dow 30 components and a lot of the larger tech names in the NASDAQ that have recently sold-off. Many are established brands with monopolistic pricing with significant barriers to entry. Financial farmers love companies like those, especially ones that have a consistent history of grabbing additional market share, a growing quarterly dividend, and the marketing muscle to introduce new products that help redefine the user experience.
Even laying down a couple rolls of quality sod should prove beneficial, especially if the financial farmer is prudent and patient. As Mr. Dryden remarks in Lawrence of Arabia, "Big things have small beginnings." Getting a jump on the compounding cycle and compressing time is a rare opportunity, and one that shouldn't be passed up when it does occur.
Tuesday, April 15, 2014
Repeal the 16th Amendment
Citizens of this republic deserve better than the 16th Amendment. Repeal it and start over from scratch with a new approach. A flat tax on annual income similar to the Revenue Act of 1861 that Congress introduced to fund the Civil War, with an added asset component, would serve this nation better.
No citizen of this great country should be virtually required to hire a professional accountant to complete a civic duty as simple as voting. Unfortunately, as President Reagan once said, "a government bureau is the nearest thing to eternal life we'll ever see on this earth."
To help ease the growing civil unrest in labor inequality, and hence income inequality, this country can quell brewing class warfare by simplifying the tax code. It should be transparent, simple, and easy to understand. America is, and should be, known for her innovation, democracy, and compassion not for the complexity of the tax code. We shouldn't be proud as Will Rogers said "...of not getting all the government we pay for."
The good news is that many ultra wealthy liberals and conservatives agree that now is the time to act. Warren Buffet is a great example of a liberal who wants to change the law so that his secretary isn't taxed at a higher rate than he is. But as Mr. Buffet, and all ultra wealthy well know, income is a switch that can be turned on and off; it can be delayed, reclassified, or gifted. If this country truly wants a "fair" taxation system, then an individual asset tax needs to be considered as a component to the tax code.
A flat income tax of 10% for individuals with less than $10M in assets and a flat asset tax of 10% for individuals with assets over $10M should work just fine. This reformed civic approach would alleviate the tax burden on the middle class (this country's lifeblood), ensure even the poorest in our nation are not marginalized by rhetoric claiming that they don't contribute, and it would fulfill the wishes of the ultra rich like Mr. Buffet who want to pay their fair share.
Wednesday, April 9, 2014
Follow the dancing ball…and three 2-1 splits later and you now have 8 times the number of shares originally owned! As a quick, and hopefully meaningful post, I have noticed a significant bullish trend developing. There are now a tremendous number of S&P 500 companies approaching levels where they have historically either performed a 2:1 or 3:2 split. This seems to lend credence to my hypothesis of hitting Dow 20,000 by December 31st, 2016. It is time for investors to embrace Log Base 2 (chart above.)
A quick review of the S&P 500 component list will quickly identify multiple candidates for potential splits, the vast majority of which haven't had a stock split in 10-14 years. Along with higher profits and increasing quarterly dividends, a great additional barometer is an equity's share price in relation to its last split. As many equities hit or are near their all-time highs, this litmus test should prove profitable to financial farmers.
If history is any indicator, those who wish to Invest Like A Farmer should see considerable split action in many of their high-quality, high-priced stocks in the next 18-24 months as the Dow Jones Industrial Average is driven higher due to continued easy money, increased corporate earnings, and stabilization of the housing market. Couple all of this with a backdrop of a considerably stronger employment picture, and I think Dow 20,000 should become a reality by the end of 2016.
The Power of Branding
The diagram above created by Convergence Alimentaire provides a powerful mental image of many of the brands we enjoy on a daily basis, and in particular, how very few companies actually control vast branding power.
As financial farmers, powerful branding is important to us because it leads to cash flow. Cash flow in turn leads to compounding (seed growth in our vernacular), which is the entire purpose of planting your own diversified financial farm.
There are several companies above that own multiple billion dollar brands, brands that if spun off on their own would be world-class enterprises. The success of these conglomerates, however, is greatly enhanced by their ability to vertically integrate various product lines under a single umbrella. Theoretically, cost savings can be harnessed in advertising dollars, marketing, technology, manufacturing, distribution, and most importantly personnel.
There are many advantages to owning quality brands, the individual who plans to Invest Like A Farmer should consider establishing the core of his or her financial farm with multiple high-quality brand-centric companies. Several advantages include significant barriers to entry, established shelf positions, mental identity from the consumer, and proven track records to name a few. What this typically translates into is revenue, and more importantly, profit for the financial farmer.
Brands successfully marketed and sold lead to strong cash flows, increasing dividends for shareholders over time and considerable market share. These are all good results that any prudent farmer would love to plant and harvest.
Saturday, March 1, 2014
Russia Seizes the Crimea
With the highest medal count in the Olympics already realized, the Russian Federation took one more leap for the gold today seizing the Crimea after the effective collapse of the Ukrainian government. All of this occurred on the watch of an obviously unprepared Western Europe and a milquetoast U.S. Administration.
Investors ignore situations like this at their own peril; students of history are well aware of how the Balkans helped launch World War I with the assassination of Archduke Ferdinand. This catalyst caused a domino effect nearly 100 years ago. It isn't a far conjecture to see the chess board set-up quickly in 2014 as an early decisive move has already been made. Frankly, it baffles the mind of this Western pro-democracry supporter of how the entirety of Western Europe and the United States could have been caught completely on their heels as a Russian Military force in excess of 15,000 troops effectively invaded an established democracy and seized power.
The most likely result will be the solidification of the Crimea into the Russian Federation along with other pro-Russian areas of the Ukraine where ultimately only pockets of unsupported pro-Western Ukrainians will remain. If recent history is any indicator, neither the rhetoric or economic sanctions proposed by Western Europe or the United States will have any stopping power and Ukraine may in its entirety fall under Russian control. There is a good possibility given the response from the West that Ukraine could be taken without a shot. Why? Simply put, Western Europe needs Russia more than Russia needs Western Europe; Russia supplies over a third of all power to Western Europe in the form of its natural gas and oil pipelines. This does not bode well for Ukraine.
Obviously this invasion is a serious problem for democracy in Ukraine, but it also further establishes a terrible precedent of U.S. and Western Europe weakness and unpreparedness. Neither are good traits against a Russia that is clearly capable of immediate action. Investors take note; the Russian Federation is proudly wearing their laurels as we sit on ours. Besides the clear violation of Ukrainian sovereignty, the very real possibility of further unimpeded annexation exists, all the while the West conducts meetings on what to do that should have occurred months ago. Raising some cash here probably isn't a bad idea, and it is hard be believe that both the oil and gold markets won't pop on Monday. If anything is going to take some steam out the recent bull market, I suspect this is the start. I'm very curious to see what China will do in reaction to this invasion of a democracy by the Russian Federation. Watch this situation closely, obscure maneuvers in far-off lands often ultimately have dire global results.
Berkshire Hathaway Annual Letter to Shareholders
As we endeavor to Invest Like A Farmer, there is probably no better example of an investor who has successfully invested like a farmer than Warren Buffet. Once again, his annual letter to shareholders proves to be a seminal work on investing experience, strategy, and lore. Enjoy!
Wednesday, February 26, 2014
"Ignore the chatter, keep your costs minimal, and invest in stocks as you would a farm."
I couldn't have said it better myself! In CNBC's recent interview with Warren Buffet, he identified three of the most important concepts in investing. Namely, he suggested ignoring the chatter, keeping costs minimal, and investing in stocks as you would a farm. We've been discussing this approach for several YEARS now and it is truly refreshing to see such prominent investors such as Mr. Buffet reiterate what he considers to be THE fundamental elements of successful investing. The braggarts and hotheads seem to get the airtime and ink, but the those who Invest Like A Farmer reap the profits.
Sunday, February 16, 2014
Cool Hand Luke
I'm often asked by hedge fund professionals and other extremely active traders why my turnover ratio is so low; my response is simply "self-discipline." In a market where extremely fast, and active, trading has become the norm, research, insight, and self-discipline have all taken a back seat to the "fast money." "Fast Money" however, implies several things. It suggests you have superior insight (rarely true save for illicit information), better timing (also hard to quantify), or simply experience in similar trading scenarios (this, however, I do lend credence to.) The end result of these often rapid moves by tax law alone results in significantly higher capital gains, transaction costs, and hard to justify sudden moves.
In my opinion, well-researched positions implemented over time on a thoughtful and consistent basis are the best bets. Benjamin Franklin had a great quote about marriage, saying "keep your eyes wide open before marriage, and half open afterwards." I think the same adage can be said of long-term holdings for investors who do not style themselves as day-to-day traders. For those of you familiar with the move "Cool Hand Luke" the value of self-discipline, self-reliance, and sticking to your instincts rings true time and again; if you haven't seen this classic yet watch it. Investors who fashion themselves financial farmers who would truly like to Invest Like A Farmer there are few better examples of a character study than Luke; he is ridiculed for his principles but ultimately turns the tides in his favor. As an investor trying to reap the consistent returns found in compounded growth, dividends, and favorable tax-treatment under long-term holdings it behoves you to adopt the principles of a financial farmer.
As posted previously, the possibility of Dow 20,000 by December 31st, 2016 is good; the possibility of even further gains in select securities is even better. Given the economic climate, continued low interest rates, and implied political stability for the next ~2 years the prudent investor should still be weighted more heavily on quality, monopolistic companies with consistent dividends and well-branded products.
Wednesday, January 22, 2014
Ethos derives from the Greek word for "character" and it is used to describe the core beliefs that guide a person, culture, and even a nation. For those of us who wish to Invest Like A Farmer, identifying companies that have an established corporate ethos is vital. It is so important in fact, that nearly all of my investing decisions revolve around whether or not a possible addition to a portfolio has in fact demonstrated a corporate ethos. It will make the difference of whether I buy or sell a stock, whether I stick with a losing position, and whether or not I add to a position. Corporate ethos is that important.
What is corporate ethos exactly though? Corporate ethos is a way of doing business that has usually been instilled from the founder and passed along through several, if not many generations, of corporate leaders and managers. Simply put, it is "the way we do things at _____" (fill in the blank.) Corporate ethos also simultaneously implies a virtuous cycle rather than a vicious cycle; the very fact that a company has a corporate ethos suggests that it is successful and therefore had demonstrated the characteristics of a virtuous cycle.
Let's delve deeper into exactly what I mean by a corporate ethos; it is both the way a hamburger is made, the logistical process for getting the ingredients, the way marketing is conducted, and even how the ingredients are sourced. You can substitute out hamburger for automobile, package delivery, and any number of services or goods. The corporate ethos also includes a certain passion for accomplishing the service or production of the good; the ethos is never satisfied with "good enough." Typically these companies become leaders in their respective industries through constant improvement, refinement, and horizontal growth of their customer base. The corporate ethos becomes a repeatable, proven process of success.
Typically (we'll call it 95% of the time) this corporate ethos has derived directly, without question, from the founder. It is what drove the founder to become successful; the continued success of the business almost always as well is dependent upon the founder's ability to either directly or indirectly pass along the corporate ethos. Show me a a successful company, and I'll show you their ethos. By the same note, show me a flailing company, and I'll show you a breakdown in their corporate ethos. Occasionally, the corporate ethos is so effective that is changes how an entire industry, and likely a society, functions. In these cases the corporate ethos itself now becomes the paradigm on how to do business in that industry. This in turn spawns other start-ups which can dramatically change the existing structure by pursuing a unique corporate ethos.
As financial farmers one of the first rules of investing we look towards in guiding our portfolio selection is the "boringness" of repeated successful earnings from branded companies. These earning streams don't come about by accident, though; they are a direct result of a successfully imparted corporate ethos that propels a virtuous cycle onwards and upwards. By the same token, my ears always perk up when I read about a company seeking an outside CEO; for me that indicates that the internal structure of training, leadership, mentorship, all of it, is broken.
The corporation that needs to bring in outside management is broken on the inside. As a financial farmer one should pay particular attention when senior leaders are sourced from outside the industry, and in particular from consulting firms or management companies. A corporate ethos is the lifeblood of a company and top-level outside leadership implies a transfusion. The flip side of this coin, however, is whenever I hear about the return of a founder to company; pay attention. There is almost a magical, palpable change in the corporate structure where "this is how ____ does things" returns to the lingo and culture. Take a couple hours and go over the returns of founders to the CEO position; very interesting things occur in the stock price.