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.