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!

"Ignore the chatter, keep your costs minimal, and invest in stocks as you would a farm."

--Warren Buffet

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.

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.

Corporate Ethos

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.