Alphas & Betas

Some believe the economic bifurcation of America is well under way; billionaire investor Ray Dalio recently was interviewed on CNBC about this pressing issue. As the head of Bridgewater Associates, one of the largest hedge funds in the world, Dalio has a unique investment process championing "radical transparency," an approach that analyzes facts with stand-alone openess. It has provided him over the years with unique insights that have resulted in an enviable track record for his hedge fund. Bottom line, Dalio is right...a lot.

Economic bifurcation is a deeply troubling, even embarrassing, issue for many billionaires to address because it cuts to the very core of their social standing, success, and political leanings. Make no doubt, there is a growing and potentially violent Civil War 2.0 brewing in this country, although it is concealed in large part via faux political unrest...and something even worse. Let me explain.

Don Henley's song "Dirty Laundry" bemoans the intrusiveness of "journalism" into people's lives, and more importantly the exploitation of "news" for profit.

Fast forward from the 1980s and what Henley's song translates to is clicks, pure and simple divisive clicks. The money is made on Facebook and Google, indeed all advertising, on user engagement from advertising. And those dollars don't roll in unless the product is purchased, and in Facebook and Google's monopolies that means clicks. And lots of them. Billions of dollars resulting from clicks.

The economic bifurcation of America is in large part due to POLITICAL bifurcation which has pitted American against American while the oligarchs have consolidated wealth and political power. It has been said the "greatest" minds of our generation have been singularly dedicated to optimizing clicks. And optimizing clicks means feeding targeted content to users' mobile devices. Period. That content has been sliced and diced into an irresible curated feed specific to each, allegedly, non-idenfiable user.

What does all of this have to do with Investing Like A Farmer? A lot. Much of the bifurcation in our country has resulted in the loss, or perceived loss depending on your economic situation, of the availability of upward economic mobility...read opportunity.  Opportunity in America has traditionally meant blue color manufacturing jobs with quality wages, health care, and a retirement pension. The loss of these manufacturing jobs, and the swell in the opioid epidemic, I believe, is no accident.  The timeframes sadly overlap; over the past 15 years we have seen the utter collapse in blue color manufacturing jobs coupled with an unparalleled spike in opioid deaths.

What does big tech (Facebook, Google, Amazon, Apple) have to do with the loss of manufacturing jobs and the rise of the opioid epidemic? Consolidation in tech into niche monopolies of scale has eliminated many traditional manufacturing jobs, which has lead to a spike in slack human labor capital which no longer has access to quality wages, health care, or retirement pensions. This in turn has lead to a cultural shift into alternative sources of pleasure...or pain relief. Hence, a strong argument can be made that the rise of the opioid epidemic is a direct result of the loss in blue collar manufacturing jobs.

I believe there is a distinct relationship amongst opioids, tech, and manufacturing jobs. I suspect tech continues to prosper with further monopolization and consolidation. The tech titans will not willingly release their incessant drive towards full automation, ownership control, and elimination of human jobs. You can bet on further cannibalization of margins across retail and manufacturing...and any other industry with high are margins is susceptible to tech compression. Big Tech's cost of capital is virtually nil and their monopolistic scale is unprecedented in the annuals of human history.

Sadly, the most "promising" sector might just be in the inevitable misery that the loss of blue collar manufacturing jobs will cause, namely the rise of the Vice sector; tobacco, alcohol, gambling, etc. The Vice sector is poised to continue its recent trend of strong growth as the Caesars implore the masses to vote for them via appeasement with "bread and circuses." 

So what's the trade? How can you survive this economic bifurcation? Buy assets early and often, hold for the long-term, and leverage the power of compounding. Ownership interest is paramount to deriving economic benefit.

Serfdom

By 2020 the United States population is estimated to reach 340 million, but of that total some 300 million people will effectively be serfs; low-income, low-wealth members of a caste with limited social mobility. It will be nearly impossible to escape serfdom as wealth permanently consolidates amongst the richest ~10% of the population.

How do you avoid becoming a serf? Landowners from medieval times to now have fared well; the "lord of the manor" typically doesn't wind up becoming a serf, although it can happen if land ownership rights are abolished (think Soviet Union or China during their respective communist purges of the 20th century.) Education is key. Owning assets (cashflow positive) is vital.

Recently hedge fund billionaire Ray Dalio has identified this disturbing trend as being the result of two distinct economies in the United States; he is 100% right, but miserably late to identifying something that this blog pinpointed years ago. Mr. Dalio, however, is the lone billionaire voice this author has read even remotely advocating for a wealth transfer to protect the social order. Don't bet on it though, as hearty readers of this blog know, the Forbes 400 control vast amounts of global wealth disproportionate to their net value to the world...and along with that they control the politicians and media outlets. Make no doubt, the game is stacked.

The simple solution is to retroactively establish equity accounts for USA citizens composed of common stock transferred from ultra high net-worth individuals (say net worths of $500M+ are getting a hair cut.) Think of this as TRUE Social Security: shares in Google, Microsoft, Apple, Amazon, Facebook, Berkshire Hathaway, etc. are transferred into a retirement savings account for every USA citizen. The very companies that have been allowed to establish monopolistic businesses in the United States (and often globally) help restore the Middle Class. I think voters would be a lot more excited about $100,000 appearing in a bona fide personal retirement account than a measly $1300 tax savings proposal.

Under the guise of philanthropy many billionaires are stashing their stock in non-profits, which allow them to maintain control (or their heirs) with beneficial tax treatment (read: no taxes). This does little to benefit the Middle Class from which these billions are siphoned. A strong Middle Class is good for everyone, even the ultra rich.

But real farmers don't complain, and that's not what this blog is all about...so discard the idea of wealth transfer and instead think about wealth creation and protection. Wealth creation is the product of owning assets that are cash flow positive, beneficial tax treatment, and protection of said ownership interests. The future isn't going to belong only to those who can code, but also those who can secure a solid asset base composed of real estate, equities, and education. Seek these out for yourself and the ones you love, because the monopolies grow stronger by the day.

USA Farmland

 Is there any more fitting graphic for this blog than the price per acre of USA Farmland? A special "Thank You" to one of my blog readers for tipping this image out to me. Superb. And very revealing. As many of you know "Chinatown" is one of my favorite movies of all time. It deals with water theft in California to enrich a handful of greedy speculators. Fiction? Well dear readers read on.

As a California resident I find it odd that the highest cost per acre can be found in CA, despite the tremendous "drought conditions." How could that be? Indeed, probably no other state has had such massive disruption to its natural environment (the Hoover Dam does come to mind NV readers) as California. Aptly termed "Water & Power: A California Heist," this documentary by National Geographic is the true-to-life theft of water which makes California agricultural land just so valuable. Worth watching if you enjoy blatant political graft exposed.

The true value of the farmland is the underlying value of the water that services not only the land above it, but also the population surrounding it. Mineral rights in the United States have long been a contentious issue, and probably water has become the greatest concern.

When you take a look at this map consider two factors; what is the crop which grows and who controls the water? The answers to those two questions directly impacts the underlying value of the land. And as a Financial Farmer...what are the brands and who controls the cash flow?

Money Is Made In The Holding

What a bountiful harvest we are enjoying this year fellow farmers! I wanted to take a moment away from the fields and share with you a favorite quote of mine from my favorite book on investing.

Edwin Lefevre's masterwork "Reminiscences of a Stock Operator" has stood the test of time well and tells the story of Jesse Livermore, dubbed the "Boy Plunger," who turned his smarts, energy, and grubstake into an extremely successful career on Wall Street (up until his untimely death in the coat closet of the Sherry-Netherland.)

The primary take-away is this: "Money is made in the holding." And by that Livermore explains that the largest fortunes he made in his career were the result of buying and HOLDING the position.

Do some positions flop? Yes, many. Do some seeds fail? Yes, many. But the potential for an outsized return via an exponential winner dwarfed them all. The proverbial bumper crop that keeps a harvest going for years, generations in fact. There are many ne'er-do-wells reaping the success from seed planted generations before them. And why? They have held.

This ties in well with the Invest Like A Farmer philosophy of buying monopolistic dividend paying stocks with a steadily increasing left to right chart. Day-to-day a position may lose money. Over months it may as well, but over an increasing time period the confluence of inflation, consumption, and (hopefully) brand management those holding a position can harvest a bountiful crop.

So the is my mid-summer wisdom passed along from Jesse Livermore: "Money is made in the holding."

High Returns from Low Risk

     Well fellow financial farmers an investor after my own heart has finally codified what we have intrinsically know for years; that it is possible to achieve high returns from low risk. How? Frequent readers of this blog (thanks Mom & Nana!) know that the effects of compounding create a virtuous anomaly in investment returns. This alpha anomaly is the result of exponential returns from consistently adding shares via dividends, buybacks, and other shareholder-friendly actions which are natural occurrences when consistent strong cash flows are administered by prudent corporate management.

     Pim Van Vliet goes back many decades and crunches the numbers for us to prove this point in his new book "High Returns from Low Risk." He compares high volatility stocks with low volatility stocks (referred to as "beta" in the Wall Street world.) From this he backtests multiple scenarios which pictorially reveal what happens to "boring" investors over time...although even those dice-throwing, card-counting, wheel-spinning risky investors do well too IF they have the ability to HOLD positions over long periods of time.

     What's the take-away? Invest for the REAL long time and don't be afraid to put money in your financial farm in positions which have traditionally been labeled "boring." This book is a great read for those who wish to Invest Like A Farmer.

Reagan 2.0

On the surface it might not seem likely given the significant divergence in their public personas, but Donald Trump might just be Ronald Reagan 2.0

Behind the media's candelabra, there is a distinct similarity for the love of America and laser-focus on defense, infrastructure, and big deals between Donald Trump and Ronald Reagan. Obviously both are Republicans, but both weren't scions of the GOP establishment. Rather, both Presidents started off in that other party...the Democratic one, which left them and millions of other moderate Americans behind.

If history is any indicator, Reagan 2.0 should continue to be a boon for stock market investors as the government will ramp up spending on defense and infrastructure, while reducing regulation, lowering taxes, and putting America First (read as smart trade negotiation.) On the proverbial back of the envelop is the calculation of Dow 25,000 by the end of President Trump's 1st Term; there are estimates of Dow 30,000 too, but those make some really difficult assumptions.

It is going to be nearly impossible for President Trump to accomplish everything he sets out to do in his first term. Nevertheless, if President Trump can navigate the tricky deal of providing health care coverage for millions of Americans while simultaneously lowering taxes, reducing regulation, and securing our borders he'll have succeed in the bulk of his goals. Even on the belief that he will accomplish just some of these monumental tasks, the stock market has risen some 3,000 points in the past 4 months.

Investing in America has never seemed brighter; companies are regularly beating their earnings expectations and a pipeline of new incentives are on the horizon. Corporate tax reduction coupled with the ability to repatriate trillions from overseas is likely to bolster the corporate bottom line immediately, while the effects of ongoing, material reduction in regulations will provide intrinsic value which will materialize over time.

Financial farmers are in essence buying into the American Dream at a ripe time. Further prosperity via innovation and growth in the underlying fields of business should provide a bumper crop for years to come. How do I like them apples? I love 'em!

Monkey Business

Wall Street might just be the most vilified business, right after politics of course. Warren Buffett said as much today in his eagerly awaited annual letter to shareholders, calling members of the financial world "monkeys." Lest we forget dear readers, the 1956 Buffett Partnership Ltd. pioneered one of the highest fee structures in existence; a flat 2% for assets under management PLUS an additional 50% performance fee of any profits above a 4% return. 

Warren contributed $100 (one hundred) dollars of his own money from his savings of $174,000 in 1956 to the total partnership capital of $105,100. Over the next 14 years the Buffett Partnership did very well, but Warren Buffett did EXTREMELY well. Although it is impossible to determine exactly what his take-down was, according to multiple sources his personal profit was along the lines of $25,000,000. This grub stake would be leveraged into the on-going fusion of Berkshire Hathaway and GEICO into the modern day holding company. There was just one problem, his partners. 

May 29th, 1969...A Day That Will Live In Infamy

In 1969 the partnership was shut down, which coincidently coincided with the the consolidation and formation of the present day holding company of Berkshire Hathaway. Please note fellow financial farmers, at this critical juncture Warren advised his partners that there weren't any viable investment opportunities in the future and disbanded the partnership. His money, however, went into the holding company. This is probably one of the most important facts glossed over by the sycophant business media; Warren Buffett "advised" all of his limited partners to a magnitude almost incalculable, but I'll give you a back of the envelope number: $420 Billion in missed opportunity. It probably ranks as one of the greatest swindles of all time.

Today Warren Buffett is depicted as a grandfatherly investing sage championing index funds, although he has nearly his entire net worth in Berkshire Hathaway stock. Berkshire has the ability and desire to negotiate sweetheart deals (aka shareholder extraction) the likes of which could never be accomplished by ordinary mom and pop investors. 2008 was a seminal extraction year for Berkshire, it was able to succor dozens of deals; Goldman Sachs, General Electric, Dow Chemical, Bank of America, etc. all paid homage (on the backs of their shareholders) to secure funding from Warren.

History, in its purest form a trade blotter, reveals all; Warren Buffett changed career paths in the early 1950s from a stockbroker to partnership not to benefit clients, but rather to harness his "unique" investing ability as the son of a sitting Congressman, which coincidently paid one of the highest fees in the financial industry. At the juncture when his partnership provided an adequate stepping stone to leapfrog into total control of assets in which he could use the float from GEICO and simultaneously extract value out of those glorious old spinning mills Berkshire and Hathaway he didn't hesitate.

Without a doubt, Warren Buffett is one of the greatest investors of all time; his ruthless pursuit of profits is virtually without equal. Berkshire Hathaway has a market cap of some $420 Billion and generates billion in yearly profits. It is the the 4th largest company in the world. Buffett has extracted vast value from many, many companies via their existing infrastructure, brands, and workers; surely he is the leader of the monkey troop.

The irony in Warren's investing words and actual behavior is summed up simply by the residents of Fall River, Rhode Island and New Bedford, MA...the respective headquarters of Warren's launching pad for holding company Berkshire Hathaway...there are no bronze statues to this man, just crumbling factories and lost American jobs.

Mergers & Acquisitions

     Today's proposed merger of KraftHeinz (a product itself of the recent mega-merger of Kraft and Heinz) with Unilever begs the question of truly how many companies really control most of the consumer brands we use? Shockingly few is the answer, and looking like even fewer in the future as jobs and workers are replaced with autonomous factories, warehouses, and shipping. The drive in recent deals has been to laser focus on logistics, remove any friction to seamless inventory control, and vertically integrate operations.

     After squeezing every nickel out of manufacturing efficiencies, the next logical step is to squeeze the workers out of their jobs. This has been the hallmark the M&A world for decades, and has become an art form amongst some of the biggest private equity firms. Much of the cost savings of vertically and horizontally integration comes from reducing headcount, traditionally the most expensive cost in a manufacturing operation.

As the above graphic illustrates, only about a dozen global conglomerates control nearly every major food & beverage brand in the world; the economies of scale in terms of their ability to manufacture, market, and distribute are undoubtedly the purest definition of a monopoly. The big winners are the direct owners, the losers are phased out workers and ultimately consumers that become price-takers.