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14
Nov

A Rising Tide Lifts All Boats…(But It Doesn't Mean They Are All Seaworthy!)

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We have all heard the saying. There is some truth to the idea that when the economy is doing very well most of the people benefit in some way to some degree. This doesn't mean that all people benefit equally or even proportionately. Even when things are going very well there are bumps in the road or waves on the ocean. We need to remember that if the economy is doing well it indicates that the country as a whole is doing well based on averages. Anytime you average any numbers, you’ll come up with an average for the set but it will also have a median. Averages can be misleading; the median tells you that half the numbers are lower and the other half of the numbers are higher. The median acts as your center point or your balancing point. Why is this important?

b2ap3_thumbnail_boats-port.jpgIt is important because if you only look at averages you will be missing a great deal of the statistical information that is available to you no matter what the subject matter is. You could be researching investments or you could be researching Fantasy Football or Fantasy Baseball players. Let’s say a baseball player had a batting average of .302 the previous season. Most people would say he hit 302 but it is actually .302 which represents the average of all his visits to the plate. If he steps in the batter’s box 1,000 times he’ll get 302 hits. Let’s make this simpler and say for every 10 at-bats he’ll get about 3 hits. Here’s a very important question: Can you deduce from this batting average that this ballplayer will get a hit for each of his next 3-at-bats if he has not had a hit his last 7 trips to the plate? No!

Where are we going with this? If the S&P 500 Index has gone up an average of 14% in the previous 20 years does this mean it will go up about 14% this year or next year? No! We put too much emphasis on the average and we don’t look deeper. There are 500 stocks in the S&P 500 Index. If the Index climbs 14% in one year does this mean that every individual stock in the index climbed exactly 14%? No! One stock might have risen 80%, another 40%, another 10%, and another 1% while several others could have had negative returns yet the index climbed an “average” of 14%. Would you rather invest in the index and take the average of 14% or would you rather invest in the individual stocks that returned 80% and 40%? What about when the index is negative? Does this mean every individual stock had a negative return in that year? No! Would you want to invest in the index knowing it would return a negative average for the year?

The best investments are those which can stand on their own no matter what the overall economy is doing, and no matter if the tide is going in or out. Over time I have slowly shifted my thinking away from indexes and geographical investments. I learned the hard way that just because there were compelling reasons why the Brazilian economy should perform strongly the last few years leading up to the Olympics and World Cup, it doesn't mean that a Brazilian ETF will realize a great return. China may have a bright future but it doesn't mean you should invest in an ETF that invests solely in China. It would be wiser to invest in individual solid companies which would benefit from a more successful Chinese economy.

You might believe that a collection might be a wise long-term investment; there are many physical items that you could choose to collect such as cars, coins, stamps, paintings, sculptures, etc. Would a Yugo command the same return over time as a Ferrari? No chance! So you would invest in a “collection” or “index” of cars if you knew they could own Yugos, AMC Pacers and Pontiac Azteks? Research is key to making sound decisions no matter the subject matter. Asking the right questions and seeking the necessary information is critical to success. The next time you hear or read that this is the perfect time to make some investment ask yourself all the prerequisite questions. If investing were so easy we would all own some index funds and there would be no advisers, wealth managers or hedge fund managers.

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25
Oct

Others Ask If This Is A Great Investment; I Ask Is This A Great Investment Now?

Posted by on in Investments

After hearing the current events of the past week in the financial field it made me wonder if most people understand the concept of when profits are made with any form of investment. We saw stocks like Google, Amazon and Microsoft do very well after announcing quarterly results. Google (GOOG) shot up 14% in one day (Oct 18th) to close over $1,000 for the first time. The market value increase in Google stock in one day was greater than the total market value of most publicly traded companies. What changed from one day to the next that investors quickly decided that Google should be worth 14% more that day? Was Google stock really worth that much less only two days prior?

This question is at the heart of understanding what makes Wall Street tick. One would imagine that folks who invest money professionally do so in an unemotional way and only focus on facts and figures. If this were true, how do you explain a stock moving 14% in one day? Many stocks don’t move that much in months or a year. Is it possible that these professionals had no idea that Google would announce the numbers they did? Emotion made people take profits and other people jump on the bandwagon. Gordon Gecko would call it greed. There is only one way for you to have made a 14% profit on Google stock on that day…you would have had to purchase the stock at least the day before. Simple right?

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What’s my point here? The profit on Google stock was not made on Oct 18th, the day it shot up so much.  It was made on the day whoever bought the stock before October 18th. Profit in stocks is determined at the time of purchase rather than at the time of sale when the actual gain is realized. The calculation of your profit in any stock trade is dependent on the price you paid versus the price at which you sold. This is very similar to the market value of homes. Let’s assume the average house on your block is valued at $400,000 today. Who would you imagine would be a happier homeowner, the person who purchased the house at a cost of $300,000 many years ago or the person who purchased a house several years ago at a cost of $475,000? Both are worth approximately $400,000 today. The homeowner who paid $300,000 and sells for $400,000 realizes a $100,000 profit. The purchase price was key to this profit.

The next time you read or hear about a great real estate deal, a great stock, or any other great investment, just remember that every investor’s personal profit is determined based on the date of purchase. This is true of the market returns you hear about every night on the news or see on your smartphone. If you read Yahoo Finance after the market close today (10/25) you’ll see that the S&P 500 Index is up 19.81% for 2013 year-to-date. Does this mean that everyone who was invested in a S&P 500 Index fund or ETF is up almost twenty percent? Sure, if you purchased the fund or ETF at the closing price of the last trading day in December of 2012. It is more realistic to assume that people buy investments at different times and sell at different times than the first day of the year.

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17
Oct

Macro vs Micro: A Study in Economics (and Investments)

Posted by on in Investments

If you think back to your college economics class, you'll remember the difference between macroeconomics and microeconomics. Microeconomics is the study of people and businesses with respect to the decisions they make regarding the allocation of resources and pricing of goods. Macroeconomics is the study of the economy as a whole including entire industries and economies.1 In simpler terms, micro is looking at individuals or specific companies where macro is looking at the big picture. When you research an investment, whether it be a stock, bond, ETF, mutual fund or any other security, you must look at the specific investment as well as the entire market as a whole. Macro and micro forces affect the price of securities on a daily basis.

Let's look at an example. Suppose you wanted to invest in a company that supplied parts or machinery to the oil industry. The individual management of the company would be important to you to ensure effective leadership going forward. The financials of the company would be important to make sure the company will grow, be profitable and which will increase the stock price over time. The product line and the pricing would be important to you so that you would be confident that this company could compete well for new business. The reputation of the company would be important in helping it grow. These are all factors that the individual company can control in some way. Can the company control the price of oil? No! Would the price of oil affect the sales of this company? Yes!b2ap3_thumbnail_economics.jpg

This company you are researching may be the best managed supplier to the oil industry and it might be the most competitive company in its field. But if the price of oil were to suddenly drop precipitously, this company's sales might also drop substantially because oil companies would drill and pump less oil at lower prices. Actually, at this time oil companies are producing and refining more oil than ever before because of the continued high market prices. Market forces drive prices up as well as down. What we are saying is that the stock price for the company you are researching may rise or fall based on macroeconomic conditions that have nothing to do with its own management and financials. This means you are investing in not only the individual company stock but the oil industry and the U.S. economy (and world economy) as well.

Timing is critical to making a sound investment. It is our belief that money is made when a security is purchased not when it's sold. The price at the time you sell a stock represents the proceeds you will receive upon the sale. The profit you make depends on the price you paid when you bought the stock. The key to any successful investment strategy is the discipline behind it.  Warren Buffett invests in companies that he can understand, that are superbly managed and which are highly competitive in their respective industries. Once he invests he is committed for long term. He knows that the decision to invest was made based on a sound discipline and that over time his investments will perform. His track record is pretty remarkable.

Building a solid portfolio that outperforms the market is not easy. If it was every investment manager would outperform his/her respective benchmarks. Comparing your investment returns to some outside benchmark is not as relevant as it used to be. Would you happy losing only 10 percent of your portfolio value in a year where the overall market went down 20 percent? No! Simply outperforming some index is not enough. Buying the right stock at the right time and holding on to it will yield great value over time. Sometimes stocks move quickly and sometimes they take a long time to move. By investing in well managed competitive companies that have solid financials you give yourself the ability to outperform the average companies. We strive to do this for our clients every day. We focus on solid investments that we believe will perform well in the long-term no matter what the macro market forces do in the short-term.

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03
Oct

Loss Leaders Are Not Only Found in Your Supermarket or Big Box Store

Posted by on in Investments

I'm sure you have seen all the discount brokerage ads on television, in magazines and journals...heard the radio ads...and read them on the internet, on your tablet and on your mobile device.

Each one promising a lower cost per trade than the next. Think about it.  Can any brokerage company, whether it's exclusively online or if it has physical locations, survive with the revenue from trades that are priced at $3.95, $4.95 or $7.95?  Do you think it's possible for any brokerage company to survive and prosper from selling their trading services for a fee that is lower than what Starbucks and your local ice cream shops sells their products for?Your Local Big Box Store

Obviously discount brokerage firms need to supplement the very low trading fee with other revenue.  It's like a loss leader in a retail store.  A supermarket will advertise a popular item at a very low price to get you in the store.  It is their hope that you not only buy the sale item but that you buy many other items at full price, since you are there already.  We shop this way and we are used to it.  The supermarkets know this.  They aren't looking at the profit they make on the sale items but the profit they make on all the items being sold each day or week.

I'm sure you have read the fine print.  Don't you think the discount brokerage firm, or any trading firm, has a list of charges for anything else that you may need?  Don't you think they plan on making money on your cash while it's sitting there waiting to be invested?  Of course in this low interest rate environment making money on idle cash isn't as profitable as it used to be.  The low trading ticket charge usually applies to buying and selling stocks or ETFs.  What about mutual funds?  Is there a "preferred" list from which you can trade without any fees?  Why would there be a preferred list?  Because the brokerage firm must make money on that list of funds in some other way in order not to charge you any trading fees.  Otherwise they would not need a preferred list at all.  Compare the expenses for each share class...you'll be shocked when you read the numbers.

Cost is always important.  What is much more important is the bottom line.  In working with our clients, we strive to use the lowest cost share class available.  We don't only consider cost.  It doesn't matter how low the trading fee is if you lose money on the trade.  Then again, if you make money on the trade, you probably aren't as concerned about the trading fee.  The trading expenses should always be considered but they shouldn't overshadow the investment goal.  The main point here is that costs are important but the main overriding concern should be to invest in the lowest cost share class of whatever fund or security is appropriate for your situation.  When dealing with individual stocks, the purchase price and the selling price are much more critical to your overall portfolio success than the ticket charge.

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26
Sep

What Exactly Is Wealth Management?

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We should begin by defining the mostly misused term of wealth management.  Most people assume that wealth management automatically means it must have something to do with the well off and the rich.  The word "wealth" seems to have that effect on people.  Wealth management is the comprehensive oversight of the entire assets of a person and/or a family.  The assets could consist of cash, stocks, bonds, real estate, businesses, royalties, inheritance, collections, art, automobiles, aircraft, boats/yachts and so much more.

 

Most people normally equate wealth management with the asset management (portfolio management) of more than $1,000,000 in bonds and equities.  Would it make sense to hire a wealth manager to oversee the investment of several million dollars when you might own your own company worth $25 or $50 million?  An Investment Advisor can manage investments for a client without managing the client's other interests.  This would be a dedicated investment based on a certain risk tolerance and style of management.  Comprehensive wealth management would incorporate the several million dollars as well the privately held company worth $25 or $50 million because they are both part of one person's total wealth.  The taxes that this entrepreneur would pay would be based on his investment income and business income.  Tax issues should be considered when making certain investment decisions.

 

I'm not suggesting that the Wealth Manager is going to run his client's company just because he was hired to provide comprehensive wealth management services.  The Wealth Management Advisor will review the client's entire holdings and formulate a plan to proceed with the client's goals in mind.  Whether or not a Wealth Manager has direct oversight of certain assets shouldn't prevent those assets from being part of the client's overall total picture.  A true Wealth Management Advisor will focus on bottom line of the entire client picture and not just focus on the portfolio of stocks and bonds he/she may personally manage.

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