Sunday, April 12, 2020
How to Invest
It is important to understand the fundamentals of investing if one is going to commit hard-earned money to the investment process. Like any worthwhile endeavor, it is helpful to first ask questions. One of the most important questions to ask is "Why?" Why are you investing? What are your goals? Are you willing to learn the investment process?
Before reading any further, get out a piece of paper and write down answers to these questions. Consider this a contract with yourself listing your reasons for investing, your goals, and your commitment to the investment process. This "Investment Contract" is a living, breathing document that can be amended and improved over time. Carry it with you in your wallet or purse. With your Investment Contract in hand, let's begin.
Typically an investor buys something (real estate, stocks, gold) with the anticipation of it going up in value over time. Some of the most successful investors in the world, however, consider investments in terms of cash flow. This means they classify investments as assets; an asset being in the strictest definition of the word something that pays YOU to own IT. I will focus this post on the asset class of stocks because they are my speciality. Although there are multiple other asset classes in this world, stocks are what I live and breath, so I feel comfortable discussing them in depth and at length as an asset class.
What is a stock? I consider a stock to be a small, almost infinitesimal or atomic-level, ownership of a company. A stock is a piece of corporate DNA. What this means is that those shares you own represent not only fractional corporate cash flow, but also its management, brand, locations, industry, and employees. And they ALL matter.
As we're experiencing right now with the coronavirus pandemic, owning a single stock in a portfolio can be very dangerous (airlines, hotels, casinos, etc.) or lucrative (video conferencing, supply chain, logistics, etc.) Most investors, and mathematicians, support the belief that owning a basket of stocks helps to reduce the risk associated with owning a single stock. Traditionally this has been pitched as owning an index or mutual fund or fund of funds with hundreds, if not thousands, of positions. This approach championed by the index fund companies seeks to "own the haystack and you'll also own the needle." Basically, own everything and something will work.
Historically, passive investing has proven to work. Passive investing works primarily because over time the stock market has risen in lockstep with inflation. Also, if you buy everything something usually does work. That would qualify as the growth component of passive investing. Indexes drop the losers and keep the winners in a Darwinian rebalancing. It has several advantages: you can buy stocks in bulk and on the cheap. For many people this is an easy solution. For other people they prefer to actively choose what companies they own. I am of the latter persuasion.
Active management builds custom portfolios. I prefer this approach because I want to know the companies I own, I don't want to own the entire haystack. I prefer to concentrate my firepower (cash) into a handful of viable ideas. Building your own portfolio offers several advantages. Transparency: You know exactly what holdings are in your portfolio. Liquidity: You can typically sell without a minimum holding period. Cost: Most firms have eliminated trading costs or they're negligible. With that said, what do I look for when building a portfolio?
My investment philosophy is biased towards profitable companies, ie I typically only buy companies (stock) that are profitable. It is difficult for a company to pay a dividend or buy back their own stock if they aren't profitable; both of those factors are key tenants for me. There are very few exceptions to this rule. In the quest to find explosive growth, however, this rule is often violated.
A key question investors should ask themselves is: "Am I buying an asset (cash flow positive) or am I paying to help raise money?" Many IPOs fall into the second category. With few exceptions, a company without a plan to profitability doesn't survive. That's not to say founders or insiders in these companies can't become fabulously rich, they can. It's just that they sold their shares to the public to extract their wealth. Know what type of company you're buying.
There are five primary traits I look for when purchasing a company: Do I trust the brand? Does it pay a dividend? What type of sales profile does it have? What does the chart look like? Finally, what type of management is in place? In an ideal situation all five of these factors align; a well-trusted brand that pays a dividend with a high margin/high volume sales cycle having an increasingly higher left to right chart with strong management in place is a dream scenario. A successful combination of these variables lead to the formation of a shopping list. Although many companies may make the cut, the timing might not be right....and as they say, timing is everything.
There are many adages as when to buy a stock. We're often told "it's a matter of time in the market, rather than timing the market," or "the stock market is perfectly efficient," or "long-term investors don't time the market." To some extent all of these sayings are true, but as an investor that has seen multiple Bull Markets and multiple Bear Markets, I can say with absolute certainty that long-term gains (ie time in the market) can be wiped out in weeks, if not days. The stock market is definitely not perfectly efficient; otherwise there would be no volatility, there would simply be a perfectly smooth line. And finally, anyone who has bought before a crash will tell you, holding through a Bear Market is psychologically almost impossible. Couple all these factors with the truth that as you live you will need money for cash flow, very few, if any, people can start investing in their teens and hold until their 60s or 70s. I say again, very few people can simply buy and hold indefinitely. The vast majority of investors, therefore, need some element of timing in their portfolios.
Realistically you have several decades to actively build a base of investments; once again the spectrum is wide in terms of choices. Real estate, stocks, commodities, etc. should ALL be part of your master portfolio. From the stock market perspective in which I operate, however, I can tell you that concentrated portfolios can be wiped out in weeks, sometimes days, and we encounter catastrophic events like these "one-in-a-million" scenarios every 8-12 years. This is why it is essential to build gradually, have multiple irons in the fire, and be prepared. One catastrophic loss should NOT derail your entire future. The Rothschild's proverb was "buy when there is blood in the streets." That is a good one to keep in mind. Warren Buffet famously remarked it is prudent to be fearful when others are greedy, and greedy when others are fearful.
Buying at a dip's nadir is almost impossible because it is a finite moment in time, but buying in a lull is quite possible. I refer to these buyers as "mountain men." Mountain men come down from the mountains during times of crisis, pick up assets on the cheap, and then disappear for a decade until the next crisis. Cheap assets offer a buffer of safety, ie the premium has evaporated due to fear. Many businesses can be had for significant discounts at the right time, usually chaos. This happens often enough as to make the strategy viable. Historically the only assets worth having are gold and cash in the height of a correction. Everything else sells off hard. This is why having a "shopping list" on hand is always a good idea; know what you'd like to buy and at what price.
This leads to one of the more controversial theories I have regarding purchasing stocks; simply put, you shouldn't buy out of habit, but rather by feeling the price is right. Only you know what that is, but "correct" pricing is typically associated with a feeling, and that feeling is nausea/fear...if you feel nauseous buying because there is so much fear in the market most premiums have evaporated. If that isn't possible, consider the default approach of dollar cost averaging a basket of stocks. Although not ideal, it has worked over the long-term for many investors. The danger to long-term investors, however, is always the market cycle.
For those who haven't experienced a Bear Market, where every day is worse than the previous, the concept of a market cycle might be meaningless. Retiring into a Bear Market, however, is brutal. Forced selling into a Bear Market is brutal. Looking for work in a Bear Market is brutal. Bear Markets are good primarily for Mountain Men, for most other investors it is a horrible experience. Many sell and and never return...once mauled, twice shy. What is an investor to do? A lot depends on your risk tolerance, time horizon, and investment goals.
If you have a high risk tolerance, where suffering a loss to your net worth of 50%+ within a month doesn't faze you, I don't believe you. For most investors, the percentage loss to a portfolio to cause panic is actually relatively small; somewhere around 5-10% elicits immediate concern. For those who haven't experienced an economic collapse, a 20% loss seems apocalyptic. Keep in mind though, fewer than 50% of all small businesses survive 5 years. So from a stock market investor standpoint, a 5%, 10%, even 20% drop isn't irrecoverable. The problem with selling is that typically once sold, the cash flow ends. This leads me to my final point. Time.
Time is the most valuable commodity. If something looks like a bear, walks like a bear, then it probably is a Bear Market. In answering the market cycle/timing postulation, an investor needs to be able to sleep at night. Being dead is bad for business. Time fixes most long-term problems in the stock market and your portfolio, but there are interludes, however, that are so volatile that many investors are shaken out permanently. Permanence is a long time. A way to avoid this is to buy a basket of quality, diverse, cash-flowing businesses over time. Have ample cash on hand (preferably with a healthy slug of gold too), and avoid leverage. These strategies can increase your resilience to selling, and increase your propensity to BUY in times of distress. When to sell? Holding periods should be thought of in decades, if not generations. Take a dynastic view of your gold dragon egg.
Friday, April 10, 2020
The Nation State of California
Governor Gavin Newsom accurately referred to California as a Nation State this week in a news conference. What is a Nation State? A bordered geography whose economic and political powers are so great as to make it equivalent to its own sovereign nation. Cue the statistics.
California is the most populous state with over 40,000,000 residents. It is vast; California's 160,000+ square miles make it the 3rd largest state. The California economy? Well with a Gross State Product of over $3 Trillion it is considered the largest NON-national economy in the world. To put that figure in perspective, The Nation State of California's economy is larger than the United Kingdom, France, or even India. But perhaps its greatest (or worst, depending on who you ask) asset is its culture.
That culture has spawned multiple, diverse industries concentrated in several major hubs, while also leveraging abundant natural resources. As a trendsetter, California amplifies both the best and worst extremes. What is rarely mentioned, however, in the formation of this Nation State utopia is the wealth and income inequality.
How California got to be California is in large part due to the discovery of gold in 1849 which literally acted as a magnet drawing people from all over the world; in fact at the time it was easier to travel from China, Australia, or South America than it was from the then-distant East Coast. The hard scrabble life of a 49er helped create the first economic boom which resulted in California's statehood just a year later. It could be argued California never stopped drawing people from all over the world to throw their lot in and make a better life.
By definition a gamble is taking a chance, and with that very few will reach the higher echelons of wealth (power), while many will fail or succeed only enough to subsist. Over time, a generous social net has emerged as well as increasingly numerous regulations; the former provides a minimum level of survival, the later prevents small successes from becoming large successes as regulation is the friend of monopolies. How can a Nation State survive this dichotomy?
It has been said that all wealth derives from the land. Sometimes it is hard to see this when software companies make billions, while farmers are lucky to harvest peanuts. But the Nation State of California as well as the rest of the United States is built, both figuratively and literally, on the land.
A land of rights and opportunities should offer citizens equal access to the possibility of success without favoritism. It will be increasingly difficult to succeed in this Nation State for future generations when opportunity is locked up by either government via regulations or aristocratic wealth; the success of our Nation State depends on incentivizing small businesses, repatriating manufacturing, and investing heavily into intellectual capital. These investments will provide the infrastructure for future success. Invest like a farmer.
Monday, March 30, 2020
Where is Bill Gates?
Although I enjoy a TED Talk just as much as the next guy, it really makes you wonder if it is the best use of your time if you're the head of a multi-billion dollar charitable health foundation in the midst of a global pandemic. Rather than fielding questions as to what you'd do if you were President of the United States, perhaps it would be better to go through an action plan of what the Gates Foundation is proactively doing to help fight the coronavirus. Where is Bill Gates?
As the beneficiary of hundreds of millions of dollars in both Federal and State tax exemptions, the Gates Foundation holds a special place in global philanthropy. For the liberal elite, it is an invitation-only pass into the highest echelons of philanthropy. But the hairs on the back of your neck should tingle when you hear the words "philanthropy," especially when it coincides with massive tax breaks that would otherwise be funneling much needed funds into a government that is actually fighting the coronavirus with surges in public/private manufacturing of N95 masks and ventilators, an unrelenting pursuit of vaccines amongst big pharma, and most importantly, the frontline heroes (nurses, caregivers, EMTs, firefighter, doctors, etc.) who are completely overwhelmed. Where is Bill Gates?
Philanthropy, and foundations in particular, are touchy subjects. At face value, they are supposed to be the engines of direct, unbureaucratic good. And many, many are just that...they have minuscule operating budgets, shoestring infrastructure, and provide a world of good for many. To those, God bless you! My concerns, however, arise when an institution by its very mandate, say helping to alleviate global pandemics, does nothing when its very reason for relevance appears on the global stage. Then it is only morally right to ask questions. Where is Bill Gates?
A higher power lens needs to focus on the billions of dollars pledged and committed to private foundations when operating expenses run into the hundreds of millions, corporate infrastructure is grandiose, and financial control of donated assets remains intact to the donor(s). As taxpayers on the hook for capital gains and income taxes, we all should wonder why the U.S. Treasury isn't the first choice for billionaire philanthropists...especially when foundation mandates are ignored in the face of calamity. Something is seriously wrong when citizens of this great country are deprived of the economic and social benefits of hundreds of billions in sheltered assets. Where is Bill Gates?
When the last vestiges of the coronavirus are ultimately mopped up throughout the world, including the inevitable secondary and tertiary waves, we're going to need a "Marshall Plan" of restoration. Similar to post-9/11, there will be societal changes. The economy itself will shift, and survive. A reckoning needs to occur right quick, however, answering the question of why those with so much did so little. COVID-19 is going to leave generational scars on this country, especially in terms of income and wealth inequality. The salve, echoed by Truman and Reagan alike, was the philosophy Gen George C. Marshall coined with the comment: "There is no limit to the good you can do when you don't care who gets the credit." It's time to strip mega foundations of their tax-exempt status and restore accountability to the taxpayer. Where is Bill Gates? Who cares.
Friday, March 27, 2020
Climbing a Wall of Worry
It has often been said that stocks climb a wall of worry. Coronavirus is going to put this maxim to the ultimate test in the weeks, months, and years ahead as investors digest news cycles that seem to circulate in discrete 15-minute increments of despair, hope, jubilation, and despair again.
Coronavirus appears to be the most challenging wall of worry for bullish investors to climb in at least a generation. What to do? Like any good coach will tell you, having a playbook is essential. In terms of relevant coronavirus playbooks, I am a big fan of Laura Spinney's "Pale Rider" which describes the course of the Spanish Flu.
As previously mentioned on this very blog several weeks ago, COVID-19 closely resembles the spread of Spanish Flu from 100 years ago. Although not identical, both diseases share eerily similar traits. More importantly, in my humble opinion, is what we can glean from a societal impact and recovery timeline as useful takeaways.
Given the exponential growth rate of infections throughout the globe, and the denial still present in many countries (Mexico/Sweden) that the "Pale Rider" is coming, I think there is the distinct possibility it could be much worse. Ignorance may be bliss, but denial is not a good strategy. I also believe there are vast societal changes coming our way along the scale of 9/11. You know a crisis is real if it affects behavior. This one will.
Prior to 9/11 airport security was present, but for all intents it was simply a quick screening...i.e. gun/no gun. After the Twin Towers fell, the world as we knew it fundamentally changed in terms of security protocols. I suspect something similar will happen in regards to coronavirus. This brings us to the proverbial "wall of worry" that stocks need to climb in order to regain their highs. What will lead to an economic recovery?
I think a two-pronged solution is in order to beat the coronavirus. First, we need to flatten the curve nationwide immediately. Although roundly criticized, Bill Ackman's interview on CNBC last week (18 March 20) was spot on; much of what he said came to fruition rapidly, several of his ideas still need to be implemented. His thesis: The coronavirus cannot live (long) without a host. If you want to flatten the curve, shut down the USA for a month.
The second prong, which needs to be worked concurrently, is to laser-focus on restoring positive cash flow on a national level; from large companies to small business, cash flow is essential to survival. There are undoubtedly certain industries which are going to take longer than others to recover, especially customer-facing ones which have significant exposure to geographic movement and human sanitation. Via paradigm shifts in behavior and societal norms, however, many industries can be up and running within weeks. Success in flattening the curve and an economic "jumpstart," however, both rely on a key factor: Trust.
One of the first questions many portfolio managers are asking is: "What will survive?" From there a lot of speculation ensues as to: "Who has the best balance sheet" or "Who stands to gain market share?" But ultimately all that matters is: "What brands do I trust?" That's the lynchpin to the entire economy. Trust. Trust is going to result in sales which will result in cash flow which underpins survival. Trust is essential.
The founder of Salesforce, Marc Benioff famously remarked last year that "trust" has become the coin of the realm, commenting that "Trust has to be the highest value in your company." I echo this philosophy, and also believe that is exactly what will help investors climb the wall of worry ahead. Logistics, supply chains, manufacturing, safety, sanitation, all of them and more, are completely dependent upon trust.
Saturday, March 21, 2020
Every Day is Prime Day Now
As Coronavirus shuts down most of the United States, Amazon's vertical integration with retail sales, Whole Foods, streaming video, AWS, and logistics has effectively made EVERY day Prime Day now.
What was once a yearly event to find any, and all, the products that you needed at special prices with fast shipping and backed by a brand you can trust, has become the de facto method of survival for thousands of households in America. Every day is now Prime Day.
Jeff Bezos left the hedge fund D. E. Shaw & Co. in 1994 to start Amazon as an online bookstore, three years later it went public. Over the next 25 years Amazon aggressively moved into retail sales, grocery sales, streaming video, internet infrastructure, and logistics. These "five pillars" have now formed the backbone of one of the most valuable, and essential, companies in history.
The coronavirus spread has laid bare the value of vertical integration in terms of a stable supply chain that can be accessed at any time, anywhere. Through thousands of incremental improvements over the past 25 years Amazon has harnessed the "new" technology of the internet to leverage the customer experience.
As its namesake implies, virtually anything can be purchased on Amazon now including vital food and beverage supplies online while Whole Foods adds a large physical footprint across the country. Not only can consumers purchase needed physical goods and supplies, Amazon also offers arguably the best video streaming platform. Prime Video allows viewers to select from thousands of educational to entertainment videos which are included in its membership, but also the ability to purchase or rent virtually any digital product ever produced. Finally, for those working from home AWS offers a compelling platform to build a business and work. Tying all of this together is one of the best logistics systems in the world.
Amazon's laser focus on being customer-centric has allowed it to leapfrog the competition in multiple industries, grabbing market share from staid businesses and transforming the retail landscape. Along the way it has built tremendous trust with the consumer allowing it to dovetail into seemingly disparate business lines like streaming video, food, and logistics which in hindsight all helped to cement the consumer experience into one where every day is now Prime Day.
Friday, March 20, 2020
The Wuhan coronavirus (COVID-19) will go down as one of the most effective acts of bioterrorism in history. If you want to destroy global capitalism and democracy, viruses are the ultimate Trojan Horse. Viruses destroy the very fabric of an open society by concentrating power in the hands of a few to make vast economic, societal, and political decisions without a single vote. Basic freedoms, like movement, are restricted.
Viruses are especially dangerous in countries that value human life highly because those countries are willing devote almost limitless resources to testing, treating, and caring for all segments of their society, especially the most vulnerable. If you want to take down a democratic society, a viral pandemic is an extremely effective agent to accomplish that goal.
Whether accidental or strategic, the results of the WuFlu have been dramatic; from an economic and social impact its devastation is global in scale on par with a World War. The story of "the Wuhan," however, starts not in November or December of 2019, but rather several decades before, when the seeds of destruction were first sown with something so seemingly benign as counterfeit goods.
The New York Times has an excellent article entitled "The Chinese Roots of Italy's Far-Right Rage" that helps frame the current disaster in terms of product theft, industry destruction, and ultimately killing of the former residents. In summary, the article details the initial theft of hundreds of Italian textile brands (linen, shoes, clothing, etc.) by visiting "tourists" who took pictures of all the products and factories while in Milan, then subsequently began making identical copies in the 1980s. The result was a flooding in the market of counterfeit goods. These goods led to the destruction of the industry because the Italian factories had a higher cost of goods for raw materials and labor; the authentic Italian goods, however, couldn't survive against their inferior clones despite the value difference in quality.
In the decades that followed, Italian factories were systematically purchased by Chinese Nationals who brought over their own family and friends thus displacing generations of Italian families. While the New York Times story was written specifically about the Italian fashion industry, it applies generally to nearly every industry in every country with particular emphasis on manufacturing and pharmaceuticals. If there was a branded successful product, the strategy over the past 40 years has been to clone it, sell it, and capture the industry. In recent years this has been prevalent noticeably in software platforms.
Over the past 40 years global manufacturing has largely moved offshore. Coronavirus is simply the icing on the cake; not only have the products, jobs, and industry been destroyed, but the very residents of those areas are now being killed. The coronavirus pandemic is the final indication of what has happened to democratic Western Society since globalism has pushed industry to embrace "free trade" agreements like NAFTA...cheap goods and executive comp were the costs of losing a nation's self-reliance.
In times of crisis, allies evaporate, borders close, and citizens are left wondering why a country isn't self-sufficient. Fear, panic, and hate are not going to be the answers in the weeks and months ahead that will make this country stronger. Rather, it will be the collective awakening of our society, especially amongst GenX, of the need to seek greater political power and rapidly ween the United States off of dependence on foreign manufacturing; we have an abundance of God-given resources in this country capable of making the USA self-sustainable. A "New New Deal" should be a sustainability movement laser-focused on repatriation of industry. "Made in the USA" means a lot.
Saturday, March 14, 2020
The United States of America has entered a period of severe negative demand shock. Negative demand shock occurs when demand collapses across multiple economic sectors simultaneously. As the Wuhan coronavirus has spread in this country it has triggered a panic not seen in the stock market since 1987...and it presumably will last significantly longer. Much longer. Think 1929ish.
Entire industries have been laid low, namely: airlines, cruise lines, hotels, casinos, restaurants, sporting events, and education to name a few. There undoubtedly will be secondary and tertiary impacts such as the hundreds of thousands of small business that cater to these industries as well as the millions of employees whose livelihoods are intricately woven into supply/demand chain of our economy.
From an economic standpoint, Wuhan coronavirus has most likely triggered a recession. It is hard to conceive of our economy, which is 70% consumer-dependent, bouncing back from the Wuhan coronavirus quickly, especially since there will be many lingering concerns in regards to travel, safety, and trust.
The path forward is an arduous one. First, large segments of the American population will be exposed to the Wuhan coronavirus. Second, many Americans will undoubtedly be infected with this disease, with victims typically being the elderly and/or those with underlying medical conditions. Our most vulnerable. Third, it's not going away quickly.
Self-quarantine time alone is running at a minimum of 2 weeks, but there are staggered results popping up all over the country. What I mean by this is that another cluster might easily pop up in a month, or 2 months, or even next year. Wuhan coronavirus is the proverbial "whack-a-mole" scenario.
What does this all mean? Based on the existing infection rate it is probable that many millions of Americans will be infected with the Wuhan coronavirus and thousands will die. As America is a country that values life highly, this will have severe economic and social ripple effects; demand shock is the most obvious initial wave. Another rational wave is going to be societal push-back against viral originators responsible for deaths and economic destruction. Human nature is what it is. As previously stated, it is highly likely we entered a recession last week. We definitely entered a bear market.
What's an investor to do? Price discovery has significantly altered the trading prices of many stocks, especially in the most affected sectors such as airlines, cruise lines, oil, etc. to name a few. Given that nobody really knows when the Wuhan coronavirus will be contained, it is important to focus on sustainability and that usually translates to quality of balance sheet and earnings.
There are many industries that do not seem sustainable if all of their demand collapses. I would avoid them. Survivors? There will be many survivors, namely in the food and beverage industries, many of which are actually experiencing tremendous demand. I like those sectors. Finally, there are some sectors (like tech) that have extremely large installed userbases which don't disappear overnight and given quarantine conditions might add to their installed userbases. I like those as well.
In times of uncertainty, having cash is a good thing; you might miss out on a quick turn of events and maybe not capture all of the upside, but when survival is on the line it is better to survive. Ultimately the Wuhan coronavirus will be contained at some level. The jury is still out on what level. Until that time it makes a lot of sense to focus on quality cash flow and survivability.
Tuesday, February 25, 2020
Global pandemics, real or perceived, have a nasty habit of rattling investors out of solid, long-term investment strategies; historically, however, within a six-month period, the stock market usually recovers ALL of its initial losses PLUS tacks on additional GAINS.
The trillion-dollar question though, is whether "this time" things will be different. Do we have the global health infrastructure and political will as well as decisiveness of fiscal leaders (I'm talking to you Federal Reserve) to mitigate the Coronavirus? I believe we do.
Although China has been criticized for acting too slowly, when they finally did act to contain the coronavirus, the Chinese didn't fool around; they went into full lockdown with a population zone size in the hundreds of millions. Of course several thousand or perhaps even hundreds of thousands of infected individuals had already left the country, which leads us to the current situation of initially small pockets of infection popping up all over the world. As we have become an increasingly interconnected world, literally within weeks travelers from almost anywhere in the world can go anywhere in the world. What used to take years now happens in weeks.
Now we're playing a global game of "whack-a-mole" while simultaneously trying to develop a vaccine. There are several advantages we currently enjoy over the virus, mainly due to panic and luck; reporting of new cases is broadcast over social media almost instantaneously, we "kinda" have a plan in place in nearly every pocket of the world to isolate and contain, and thankfully the fatality rate seems lower than comparable respiratory infections. That's the good news.
The bad news? The three weeks of lag time in shutting down the Chinese flight from Wuhan probably increased by one or perhaps even two orders of magnitude the GLOBAL impact of the spread. Also, keep in mind, China itself has largely slowed economically...many, many manufacturing operations have ceased. Consumption inside China, save for food, beverages, and the internet have largely collapsed. In terms of a baseball analogy, China is probably in the 5th or 6th inning in terms of containment/eradication while the rest of the world might be in the 3rd inning. A lot is going to depend on how many other clusters of coronavirus pop up, how those are contained, and also whether a vaccine can be developed in a safe and timely manner. A big wild card is whether the virus mutates.
For an interesting, and quite scary, historical perspective the Spanish Flu ranks probably second only to the Plague in terms of total human deaths. It ravished almost all of the known world over a period of several years (1918-1920). It literally went to almost every single patch of Earth where humans lived, particularly devastating remote island communities once it arrived there. It changed the fabric of human civilization in the 20th Century. Yet there were a handful of places it never arrived simply from the absolute remoteness of the places. Check out the hyperlink above to learn more...it is a fascinating story of viral infection, spread, and ultimate containment.
What's the average investor to do? Don't get rattled out of your long-term plan. If history is any indicator, there might even be some excellent buying opportunities in the weeks ahead!
Monday, January 27, 2020
The United States of Taxation
The United States of Taxation has become a reality. One of the last engines of growth that launched massive, nearly incomprehensible global trade prosperity and solidified America's internet commerce strength was struck down in South Dakota v. Wayfair, Inc. on 21 June 2018. It was a horrible decision from our U.S. Supreme Court that once again stole liberties from American Citizens. Its lasting effects and reverberations will be felt for decades if not generations to come. When we discuss "days of infamy" in history, 21 June 2018 is one of them.
Closing the last meaningful sales tax loophole cemented the United States into a solid slab of taxation, increasingly WITHOUT representation. President Reagan nailed it when he said "No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth!"
Taxation is the ultimate government program. President Trump has reset many of the corporate and personal income tax rates, but the future is clearly on the horizon of what political candidates WANT to impose. Take a look at the following chart of proposed rates. These rates would essentially cut the legs off of wage-earning Americans (basically 99% of the population.) The Top 1% can easily move assets around to draw income at will or delay income or take no income and instead borrow thereby writing off the cost of income itself.
Taxation is ultimately a filter which transfers income and wealth from hard work into Government coffers. From these overflowing coffers the Government then finds a way to spend the funds. Please notice that I wrote "finds a way to spend." Not NEEDS TO SPEND. Budgets increase like clockwork because Government agencies know that if they don't spend all the money they were allocated, nigh MORE than allocated, then their next fiscal budget will be less. It is a fundamental breakdown in integrity and the Republic when this happens. And it is happening 24/7/365.
What can you do as part of the R.I.S.E. Movement? As a USA Citizen? Well theoretically you can vote. That's the "long game" if you can build a consensus that is also fiscally responsible with taxpayers' money. About 50% of the population already doesn't agree with this approach. Even though almost 100% of people are fiscally responsible in terms of their own money. (There are hundreds of "Progressive" Liberal billionaires; Bezos, Gates, Buffett, Soros, etc.) With significant social and political ramifications playing the "long game" it is a tough, tough way to win in the short term. And sadly the short term ultimately becomes the "long game."
There are only a handful of pro-growth, libertarian-leaning, fiscally responsible States remaining. In fact, the country is becoming increasingly economically polarized as mass migration from some States to others is occurring. Many people CAN'T move from State to State for various reasons (they're anchored because of a job, family, health, etc.) Others simply WILL NEVER move because they too are anchored; the benefits are just too good...the American Dream is alive and well for many, many millions of people.
But for the "coalition of the willing," there are opportunities to be had in several remaining States. Below is a map of the various opportunities to be found in these remaining States, assuming a citizen has the means, ability, and desire to take advantage of "voting with your feet." It is a biter pill for many whose relatives or friends or business helped build one State to then move to another based solely on economic reasons...a lot of absolutely beautiful coastline has been locked up by political sabotage.
My final commentary is on regulation creep. This is the mortar that binds and seals the fate of many millions of Americans. Via no vote, or in many cases even zero feedback from voters, additional departments, regulations, codes, and enforcers are hired to build the hive of government. Be wary of this fellow citizens, these agencies come at the cost of YOUR freedom. Another famous Reagan euphemism comes to mind: The nine scariest words in the English language..."We're from the government and we're here to help."
Vote, hold your elected officials personally responsible, speak truth to power, champion liberty, and be willing to "vote with your feet" if necessary! America was built as government for the people, by the people. Not the other way around!
Sunday, January 5, 2020
Are you converting deal flow or sales or income from your profession into recurring cash flow? By selecting a basket of dividend-paying stocks which pay quarterly dividends you can stagger dividends into "paychecks" to help supplement your income or build an asset base for retirement.
Here's how it works: Screen for quality dividend-paying stocks you'd like to own. From that master list, which should include a couple dozen stocks, consider picking out handful from various non-correlated industries. For example, from the master list pick a couple from energy, some from consumer, some from tech, some from medical, some from aerospace, etc.
Your final list obviously can have as many stocks as you'd like, but having about a dozen stocks paying four times a year would result in 48 dividend payments per year. If you stagger them both by industry and payment date you could receive a dividend payment ("paycheck") every couple weeks from a diversified base of holdings.
What's nice about setting up a dividend stream is that you can tailor the stocks in the portfolio to the specific industries you enjoy investing in, offset the dividend payment dates to concentrate or separate the dividend stream as you'd like, and also mix-and-match the holdings to include either more value stocks or growth stocks or even form a hybrid of that...plus...many dividend stocks increase their dividends over time.
Done successfully you should be able to establish a recurring dividend stream that gradually increases over in time in terms of both value of the underlying asset base and the value of the income stream.
Friday, January 3, 2020
One of the greatest challenges in creating wealth is sustaining it. A BIG part of that challenge is trying to compress time by leapfrogging traditional linear investing techniques. In reality wealth creation is AT LEAST a 3-dimensional solution.
The traditional compound interest model assumes that there are simply only 2 variables; time and the interest rate on a initial principal amount. Below is a typical example of a fixed initial savings amount of $5,000 compounded monthly at an 8% annual rate for 45 years.
Visually this looks nice, but virtually no one can succeed in a 45-year holding period. Life just throws too many variables, whether opportunities or disasters, to leave capital alone for such a long stretch of time. Not to mention the interest rate will vary. And the instrument itself (whether it is a CD, Bond, common stock, etc.) also has signifiant systemic risk over that period of time.
My argument is this: wealth creation is much more a function of at least a 3-dimensional solution. In addition to time and interest rate applied to capital we need to incorporate chance. Chance is the missing variable that helps explain the implementation of luck, knowledge, experience, struggle, and failure in the wealth equation.
So rather than a linear result, consider modeling your wealth creation as a 3-dimensional reservoir of time, interest, and chance. Life is far too complicated to rely on a linear approach to building a significant store of wealth.
Adding this 3rd dimension of wealth creation allows R.I.S.E. Movement members to leapfrog many years, if not decades, of traditional simple or even low-rate compound interest and compress time. By that I mean by successfully implementing chance you have the ability to progress to the leading edge of the traditional compound interest chart rapidly.
Thursday, January 2, 2020
The story of Carlos Ghosn will hopefully become legendary, it already stands in the annals of history as one of the greatest escapes of all time. From a larger context, it shines a searing spotlight on regulatory overreach, denial of basic humans rights, and the failure of at least one nation-state in providing any semblance of a just trial. It is also emblematic of not only the Japanese government, which obviously needs an entire reboot of its judiciary system from the top down, but also of many, many national and state governments around the world.
The root cause of Ghosn's flight from captivity was a total and utter lack of due process. That basic human right, perhaps the most important, didn't happen from day one. Working backwards, it is logical to assume that a judicial system like this is flawed by its very existence, meaning anything so repressive has at its heart a flawed democracy. Japan doesn't hold the monopoly, however, on government failure.
In the United States with increasing frequency year after year additional laws, rules, codes, regulations, guidance, and such are "passed" without a vote from the citizens. Elected officials appoint bureaucrats who then expand the regulatory environment. The cost of this largess is your freedom my friends.
Freedom is eroded on a daily basis, and it often takes a stark example like Carlos Ghosn fleeing injustice to wake the world up to what it would otherwise ignore for the common citizen. The common citizen would have sat in prison for years and under Japan's legal system the prosecution has upwards of a 100% success rate. But there are plenty of agencies, commissions, local authorities here in the USA that aren't much better for a small business or citizen.
A big part of the R.I.S.E. Movement is identifying threats to your portfolio and asset base. Sadly, your own government is a signifiant threat. Don't pay your real estate taxes and see who owns your house. Or your commercial real estate. Or your savings account. Or your brokerage account. There are numerous abuses of power that can result in forfeiture of your assets without you seeking legal recourse...and legal recourse is expensive and takes precious time. A government or regulatory agency has limitless resources from your tax dollars at their disposal.
So how did Carlos Ghosn do it? How did he escape captivity? What can we learn from him? First, he had the means. But, from what I've read his wife probably would have found a way to help him regardless. He had multiple passports and citizenships. He had a vast network of friends. He was/is a successful businessman. This plan seemingly took weeks to implement. The takeaways for the average person faced with a challenging dilemma?
Family fighting for you is vital. Having assets your family or friends can access to pay for your defense is essential. Being in the right helps. Having a network of friends helps. Essentially, Mr. Ghosn did not "dig his well" when he was thirsty...he had a lifetime of building relationships with his family, friends, and government officials. I think this is something we can all aspire to, especially family.
The Ghosn story is troubling for many patriots across the world as it clearly illustrates the abuse of power by government agencies and the lack of accountability. It is just plain scary what happens when unelected officials have the ability to regulate the population without just democratic principles. It should be a warning shot to us all about the danger of complacency; complacency encourages governments to expand their powers and reduce your freedoms.
As Will Rogers once said, "It's a good thing we don't get all the government we pay for." Amen. Let's all make a concerted effort in 2020 to find out what exactly our elected politicians are doing in their respective local, state, and federal positions to eliminate bureaucracy. Our liberty depends on the American voter, not an unelected bureaucracy.
Wednesday, January 1, 2020
Join the R.I.S.E. Movement!
Retirement Income Starts Early (R.I.S.E.)
The R.I.S.E. Movement
New day, new year! Have you joined the R.I.S.E. Movement? Retirement Income Starts Early (R.I.S.E.) is a new movement helping people around the world better understand and prepare for financial security. Although tailored to my readers in the United States, the R.I.S.E. Movement's mathematical and psychological principles are universal.
Depending on where you live, however, there are either some distinct advantages or disadvantages to financial security. The R.I.S.E. Movement is most effective in geographies with established rules of law protecting property rights, the ability to own assets, and the ability to migrate with those assets to other regions. Simply put, the R.I.S.E. Movement works best in democracies because they typically allow for the two great advantages of compounding wealth, namely time and owning the asset.
Let's get right into it. For the vast majority of both young and older readers of this blog I have stressed the importance of "Investing Like A Farmer," and by that there are ample descriptions of the value of buying compounding assets. The R.I.S.E. Movement is an implementation of those writings unified into a financial roadmap. There are several key tenants that I think are essential to both understanding and applying to your financial preparation.
First, happiness in life (at least from a financial perspective) is positive cash flow. What is joyous is passive positive cash flow. The ultimate goal of the R.I.S.E. Movement is to help you construct a portfolio with recurring and increasing passive positive cash flow.
Second, the cavalry is not coming. You're on your own in this life in terms of creating this portfolio. It is a bad assumption to rely on a friend, relative, or (gasp) the government to bail you out in time of need. As Johnny Cash once sang "Son, this world is rough. And if a man's gonna make it, he's gotta be tough."
Third, basket weaving is underrated. College students who take basket weaving to help boost their GPA get a bad rap, because not only is basket weaving quite useful it is also quite educational. From a financial perspective, the basket we're weaving is our portfolio. It is composed of many different reeds and together they will form a strong basket to hold our wealth and generate cash flow.
When is the Best Time to Start Saving?
As most financial companies will tell you, the earlier you start saving the better. This is because one of our greatest resources in life is time. The more time you have the more compounding can occur.
The chart above helps visually illustrate the value of compounding interest, that is interest upon interest upon interest ad infinitum. The real "juice" savers get is from the compounding effect of interest. But that chart, however, only tells part of the story. It is based on a single initial lump sum that isn't touched for 20 years. Let's take a look at a little more of a real world example, in which case we start with some small sum of money and then add to it over the years. (Click to Enlarge.)
Obviously the take-away from contributing regularly over time is that a decent chunk of change can be generated assuming we get a modest rate of return and do not touch the funds thus allowing them to grow.
A HUGE challenge of course is NOT touching the growing asset base. It is virtually impossible, however, for most R.I.S.E. Movement members to accomplish this goal because life, especially over a (hopefully) very, very long time will throw significant challenges at all of us; it could be health problems, education costs, vehicle breakdowns, children, parents, taxation, etc. There are literally thousands of challenges that arise over time which require utilization of our assets. That's the major flaw in most financial roadmaps, there is zero accounting for life itself.
This brings us back to the initial question posed, when is the best time to start saving? The best time to start saving is before you are born.
Weaving the Basket
Starting to save before you are born is difficult, because you don't have many of the educational tools yet to land a job. Obviously I'm writing to all the parents out there. And grandparents. The R.I.S.E. Movement champions independence, but there are significant advantages provided to those starting out in life who are able to leapfrog twenty years into the future. And what I mean by that is nearly every wealthy family has resources put aside for their heirs; whether it is cash, gold, real estate, the family business, etc. in either a Trust Account, 529 plan, life insurance, or other mechanism. The path to creating a solid asset base that can generate cash flow starts early.
Now for those of you who weren't able to choose your parents or the country you were born in, well there is good news. If you're reading this then you probably have a vested interest in improving your lot in life, possibly to a significant degree. Read on.
As we've already discussed, time is one of the greatest commodities in life. Another one is education. Education allows people to transcend from their existing condition. This can result in a better job. A better job typically means more salary. That's a good beginning. With a decent salary excess income can be applied to building your asset base. Depending on how good of a salary, you can then start compressing time.
Wait, did he just say "compressing time?" Yes. The more excess income (income that exceeds your cost of living expenses) you have the more assets you can purchase. What is an asset anyway? An asset is something that pays you to own it. The world is full of assets just waiting to be purchased! There are dividend paying stocks, small businesses, real estate, mining claims, etc. The list goes on and on and on.
Whether young or old, there are certain tips I'd like to share in regards to "weaving your basket." Just as a little can be turned into a lot over time, the inverse is also true...namely a lot can be turned into a little quickly. The construction of your basket is going to be unique for almost all of us, but there are common elements to success.
Create moats. By that I mean have different types of assets which are not correlated, not held in the same place, and are secure. For example, "diversification" isn't just having an Index Fund. Consider owning dividend paying stocks, bonds, real estate, gold, and a small business. Together they form a sturdy basket to hold the totality of your asset base, yet are not held in the same place.
No single event should (or could) destroy your basket. Barring a meteorite or health pandemic of Biblical proportions, your basket should be able to withstand the test of time and what life has in store for you. See the paragraph directly above regarding creating moats. Chain reactions can be very, very nasty. Having liquidity on hand is a good thing (think cash money.)
Building a castle or a spaceship or a robot starts with one Lego. Remember that. Young or old we all have a certain amount of time left, act accordingly. Buy assets. Live. Add to your assets. Live. Buy more assets. Live. Use income from assets to buy more assets. Live. Get more education. Live. Use excess income to buy more assets. Live. Teach others. Live.
Your Future Starts Today
In the preamble of this post I mentioned that the R.I.S.E. Movement was tailored to my readers in the USA, but applicable to readers around the world. Each country will have its advantages and disadvantages in terms of educational opportunities, health care, and freedoms.
Generally speaking, the greater the educational opportunity, better the health care, and more freedom one has the greater your ability to harness all the facets of the R.I.S.E. Movement will be over time. Luck and hard work, however, can and often do trump many of the advantages of living in a democratic country with wealthy parents, opportunities for education, health care, and fundamental freedoms. If you have the self-discipline and motivation to harness the power of time you can compound opportunities.