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.

Portfolio Pruning

"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.

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.

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.

Splitsville?

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.

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!