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.

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!

Truett Cathy

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.

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.

Buy Assets

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. 

Buy assets.

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!

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.