Investment Regrets?

The National Basketball Association recently released statistics that evaluated all calls and pertinent non-calls occurring in the final two minutes of games, including overtime, in which the score was within five points.

Out of the 288 plays, they found a total of 41 incorrect calls or 14.2 percent of the time. The number of no-calls was much higher and included 34 out of the 41 reviewed calls.  Warren Buffett would categorize these non-calls as “errors of omission rather than commission”. Applied to investing, it is hard to believe that Buffett often states he misses more big winners than he loses in bad investments.

Another big error of omission this week was the Dow Jones Industrial Average adding Apple to the index. According to Bloomberg, if Apple was added back in 2008, the 30-company gauge would have reached 21,944.66 on 3/10/15 — almost 4,300 points above its actual level.

Similar to NBA referees, we subconsciously are making decisions by what Behavioral Finance theorists term “regret theory”. This theory states investors experience regret if they make a wrong choice, then take anticipation of regret into consideration when making future decisions. Investors’ regret can result in unnecessary risk aversion or lead investors to irrationally take more risk.

This week also happens to be the 5-year anniversary of the Dow Jones index hitting a low of 6,507 in 2009.  We can all reflect back to this time and determine if our portfolios were shaped by “regret theory” through the investment decisions that we may or may not have made at this time. Many people may not realize the major impact this market crash had on whether or not they will be able to meet their retirement goals. If you did not sell through this storm you should feel no regret. However, many investors look back and wish that they had taken even more risk.

I believe there are a few ways to avoid this regret. Investors that pay absolutely no attention to their portfolios and stay diversified, normally do well over the long-term. On the other hand, investors that are looking for the next hot stock tend to experience the most regret.  As a fee-only financial planner, I do my best to help my clients accumulate wealth over time by investing in businesses at a reasonable price, do their own analysis, stay diversified, take a value approach, and slowly compound returns over time.  Feel free to give me a call if you have any regrets on your investments or if you want to see how a customized portfolio would look based on your personal risk tolerance, values, and goals.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.

Are you taking appropriate investment risk?

Since 2009, the U.S. equity markets have been on an unbelievable run – much like the 18-0 run the Kentucky Wildcats basketball team has accomplished this season. The similarities don’t end there.  The leadership in U.S. markets has been in Technology 2.0 companies, most of which have short operating histories. Similarly, the Kentucky Wildcats success is attributed to sophomores and freshman. This bull market has been frustrating to those investors who have either not participated nor taken enough risk. Even the Wildcat’s head coach, John Calipari, thinks his team is not taking enough risk. With only 3 turnovers in their last game, Coach Calipari thought his team needed to push the limits more and increase the amount of turnovers to around 11 per game in order to have continued success.

As a fee only financial planner, many investors have taken me up on my offer for a free second opinion on their portfolios. I find a majority of these investors are not taking the appropriate risks to reach their goals. These portfolios are either too conservative or are not diversified enough. Using the Wildcats analogy, these portfolios are either at 3 turnovers per game or risk 25 turnovers per game. I believe that in order to take appropriate risks, you first need to understand how to manage risk.  My job as a fee only financial planner and portfolio manager is to determine your risk profile, financial situation, values, and goals. Next, we need to make one of the following four choices to manage your investment risk.

1) Avoid it – Don’t invest
2) Transfer it – Shift the risk to an annuity or other type of insurance product.
3) Retain it – Invest yourself or follow Warren Buffett’s advice and invest in the S&P 500 index or passive fund.
4) Control it –Find an active portfolio manager who invests in undervalued companies that have high free cash flows, recurring revenues, increasing earnings, and defensible balance sheets. Even though Buffett recommends that the general public select option 3, all of his investments are in this option because he clearly understands risks and would rather buy companies that offer better value and have superior downside protection characteristics.

As a fee only financial planner and portfolio manager, all of my clients are put into category 4. Rather than follow the ETF trend, I believe that now is the time for option 4 and you need to invest with a fee only financial planner or in an active mutual fund. I believe the major drawback to investing in option 3 (major market ETF) is that your portfolio will likely participate in 100% of the downside. If you prefer to invest in a mutual fund, my recommendation is to review Barron’s Magazine The Best Fund Families of 2014. I believe investors with a long time horizon who are saving for retirement need to position for 11 turnovers per game because you will not be able to compound wealth over time if you don’t take calculated risks.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

Could Private Equity Put Your Career At Risk?

In my role as a fee-only financial planner and portfolio manager, I am continuously evaluating the investment landscape for threats and opportunities that could impact my clients’ financial plans. I see a new potential career threat on the horizon that could at the same time negatively impact your investments. Part of my process as a fee-only financial planner is to evaluate both career risk and investment risk. I need to plan for the worst case scenario which involves losing your job, and at the same time, your investments crashing by over 60%. This type of scenario has occurred twice in the past 15 years and odds are it could happen again.

The biggest career risk for you could be another asset bubble forming which eventually bursts and takes your job with it. Market commentators over the past week have turned their attention to a key index milestone. The NASDAQ index is nearing the 5,000 mark set during the technology bubble reached on March of 2000. Is this a sign that the stock market is once again overvalued? If so, you may not have as much job security as you think. The last time the NASDAQ hit this level the economy went into a recession. According to the U.S Department of Labor, the collapse in technology companies cost over 3 millions jobs between Q1 2001 to Q2 2002.

I believe new innovation is the reason why the market is now hitting all time highs. FactSet recently reported that there has been a divergence between future earnings and valuations. Valuations haven’t been this high since December 2004. In my opinion, the U.S. stock market might be high relative to the past but there is no bubble. My concern as a fee-only financial planner is that another unknown asset bubble could be forming out of sight which could be just as harmful to your career and your investments. For example, the housing bubble, which many said would be contained to the financial sector, spilled over to the broader economy and cost a net loss of 7.9 million jobs from Q1 2008 to Q2 2009.

I am closely monitoring the impact that private equity is having on the market and potentially your career. Similar to the technology bubble 1.0, today there are new paper multi-millionaires being created overnight. The Wall Street Journal billion dollar startup club cited that there are now at least 73 private technology companies worth more than $1 billion dollars, versus 41 a year ago. Immense wealth is now being created for many who have been insightful or lucky enough to take part. This potential private equity bubble is spurring new innovation which is changing multiple industries at a remarkable pace. As a portfolio manager, my best investments have been in businesses that have fewer employees, lower capital expenditures, and are disrupting industries with new technologies.

As I wrote in one of my prior posts, this type of creative destruction could lead to career risk if your company is not maintaining their competitive advantages. If you work or have worked at these companies, then you are very familiar with how swiftly these changes are taking place. Time will tell if there is a private equity bubble and what the ramifications might be for your career and investments. My advice as a fee-only financial planner is to keep your networks strong and continuously develop your skill-sets.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.

Open letter to Marie Holmes and Other Large Windfall Recipients

Hi Marie,

First of all, congratulations on winning Powerball! Welcome to the social class of the 1%. You are in some serious need of professional financial advice. Having hit Powerball for $188 million, your first step should be to consult a financial team of experts. Believe it or not, the statistics are not in your favor – on average, around 90% of winners go broke in less than 5-years.  We have all heard the horror stories of NBA stars squandering fortunes and around 70% of ex-NFL players are financially stressed after a few years. Sports Illustrated had the bankruptcy number as high as 78%.

My recommendations for Marie are no different than if you received life insurance proceeds or a substantial inheritance, sold a business or real estate, cashed out a retirement plan, exercised stock options or won a large lawsuit. What should you do with this large windfall?

For starters, I believe you shouldn’t buy an annuity, life insurance, invest in private equity, buy undeveloped land, concentrate your wealth or speculate in any type of investment that hasn’t been in operation for at least 5 years.  Family members might be pitching new business ideas such as car washes, restaurants, or websites. Nobody will be thinking in your best interest.

My first advice is that you need to consult a team of experts. Your new wealth has created a net set of potential liabilities. For instance, you are now a target for a lawsuit and need to think asset protection. Your #1 problem will be how to overcome your sudden wealth feeling of “overconfidence”.  Most sudden wealth recipients tend to believe that they can buy anything at anytime.  This feeling of irrational exuberance is what usually leads to the ultimate bankruptcy. The typical questions that you need to answer are not much different from all my other clients such as:

  • How do I not outlive my investments and leave a legacy for my beneficiaries?
  • Should I invest in bonds, stocks, CD’s or all the above?
  • With interest rates near 0%, how can I live off the income?
  • How much money should I donate to charity and through which means?
  • Where should I live and how many properties should I purchase?
  • Does it make sense to pay off my mortgage or set aside money for education?

An estate planning attorney will help you will rethink an estate plan that may include trusts, a will, power of attorney, health care proxy, and other legal recommendations. In addition, the team of experts will include a certified public accountant, certified financial planner or an experienced financial advisor.  It is critical that you understand the net after-tax value of your windfall because you need to take into account gift taxes, estate taxes, and the impact of your new tax bracket for both the federal and state levels.

I believe the key to a comfortable retirement is that you will need to create two different streams of income. The first stream of income will cover all of your essential expenses for the remainder of your life, and this money should not be risked in the market. A financial plan will be essential to categorize these expenses. The second stream of income is much more complicated. You should seek a financial manager who has experience managing various types of investments at a reasonable fee.

If you need financial advice or help with your investments, I would appreciate the opportunity to speak with you. Feel free to call my office to schedule a consultation. You can learn more about my practice and how I work with clients by visiting And for you Marie, I look forward to hearing from you. 🙂

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Applying Moneyball to your portfolio

One of the most profound business speeches I have ever heard was at a lecture given by Paul DePodesta. Paul recounted the lessons he learned when he served as an assistant to the general manager for the Oakland Athletics under Billy Beane. Paul was a key figure in Michael Lewis‘ book Moneyball.

Paul suggested a parallel between baseball and basic business operations that I believe also applies to investment portfolios. Paul’s reflection would revolutionize the game of baseball and how teams scouted for talent. His wise advice was as follows: if we weren’t already doing it this way, is this the way we would start? Rather than figure out a problem from a perspective of doing what has always been done, why not solve the problem by evaluating all the facts from an unconventional, completely fresh new perspective. This same reflection is exactly what occurred to John Bogle back in 1975 when he founded The Vanguard Group. John’s vision was to create a new type of mutual fund company that would serve as an alternative solution to the fund industry’s model of charging high expenses and commissions.

In his wildest dreams, John would have never have envisioned Vanguard growing to over $3.0 trillion in assets managed by 2014. Last week in Barron’s Magazine cover story, Vanguard was rated The Best Fund Families of 2014.  Vanguard absolutely blew the entire field away. Their funds/ETFs ranked 3rd in U.S Equity and 4th in Taxable bonds. Most other mutual fund companies would be satisfied with a top 10 ranking in either category. Vanguard was rated in the top 5 in both!

Not only was Vanguard ranked the best fund family in 2014, they also charge no commissions, and the average fund expense ratio in 2013 was 0.19%, which is less than one-fifth that of the 1.08% industry average.

If you don’t own Vanguard funds, maybe it’s time to apply Paul Depodesta’s wisdom and ask yourself this question: if I wasn’t already invested this way, how would I start? I believe you would:

  • Avoid any and all commissions
  • Find the fund family with the lowest expenses in the industry
  • Work with an experienced financial advisor that is accredited and has shown a track-record of success
  • Select the investment firm with the highest ranking funds over the long-term

Vanguard recently wrote a white paper on the benefits of working with a qualified financial advisor. I specialize in retirement planning and have partnered with Vanguard to offer my clients what I believe is the most appropriate solution for their investments. If either your company’s retirement plan or you are not personally utilizing Vanguard funds, feel free to give me a call for a complementary portfolio review.  I will show you how blending in Vanguard funds into your asset allocation could place you on the right path to reach your goals.


Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.


Maintaining Competitive Advantages through Technology and Professional Development

This week will go down as a classic case study of what happens to a company when they lose their competitive advantage. To nobody’s surprise, Radio Shack was delisted and is preparing to shut down and an announcement was made that Office Depot is being taken over by Staples. We believe that both of these companies were too slow to adapt to new technology and were unable to maintain their competitive advantage of mass distribution. Neither of these investments would have met our criteria of investing more like a shark.

Their tombstone should be a lesson to all managers:  Adapt to new technology and develop new leaders or suffer our fate.

We believe that businesses that are slow to adapt to new technologies and do not reinvest back in developing their employees will watch their competitive advantages erode slowly over time. Ten years ago each company had very talented managers and pristine balance sheets. What happened next can best be summarized in this Warren Buffett quote, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

The reputation of Radio Shack and Office Depot was lost because their management teams did not transition to the digital age. They lost what Buffett coined as “moat”. A company with a wide moat has one or more of the following advantages: brand name, pricing power, distribution, or cheaper access to natural resources. The best managers understand how critical it is to maintain and widen their competitive advantages or moat.  Companies with a narrow moat typically have unfavorable downside protection and low visibility of future earnings.

We prefer to invest in businesses that reinvest into technology and talented employees in order to build the long-term success of the organization. The best leadership teams shape and exploit their respective company’s competitive advantages and continuously try to improve their teams’ personal development. Companies that invest in professional development and leadership training have a better chance of recognizing changing competitive advantages in a fast moving economy. Our portfolio comprises of stocks that are developing tomorrow’s leaders and are continuously striving to differentiate their competitive advantages from the competition.


Please read our disclosure statement regarding the contents of this post and our website as a whole.


Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.



Investment Lesson from “Deflate-gate”

Both poker and investing are games of incomplete information. You have a certain set of facts and you are looking for situations where you have an edge, whether the edge is psychological or statistical. – David Einhorn

David Einhorn, who is the founder and president of Greenlight Capital, manages a $10 billion “long-short value-oriented hedge fund.” David started Greenlight Capital in 1996 with only $900,000 and he has generated roughly a 20% annualized return for investors.  David has taken advantage of misinformation from the media and used his edge to post outsized gains.  The media has recently turned its attention on deflate-gate. We will describe how Einhorn would make an investment decision using incomplete information on the subject of deflate-gate.

We believe that if the New England Patriots were a publicly traded company it would represent a once in a lifetime buying opportunity. The biased media coverage would have scared investors into a selling panic of Patriots shares. Since it is best not to invest with emotions, analyzing the known facts is your edge. Value investors use a method of discounting cash flows or calculating the asset value/replacement of a business. If the intrinsic value that they calculated is less than what the company is trading for in the open market than it’s a potential new buying opportunity.

The media has a very good track record of misinforming and confusing the public into making terrible investment decisions at some of the most inopportune times. As we have seen from much of the coverage of “deflation-gate”, many media members have labeled the Patriots as cheaters and liars. This rush to judgment may have tarnished the franchise brand and tainted the reputation of their hall of fame coach and quarterback but only temporarily. For an investor trying to determine whether or not to buy the Patriots stock, they would need to gain an advantage by taking all the known facts in the story and arriving at their own decision.

The one piece of information that they would need to make an investment decision would be to try and determine what happened to the air pressure in the football during the first half of the Patriots AFC championship playoff game. An astute investor would buy an NFL football and conduct their own experiment and put the ball through vigorous tests in different weather environments. One way to calculate the change in air pressure would be to calculate a physics equation called the Ideal Gas Law (pV=nRT).  This would give the value investor a statistical edge much the same how David Einhorn calculates the intrinsic value of a company. David would not rely on CNBC to give him a gut feeling whether or not to buy or sell. In the case of the Patriots, an investor would not watch and listen to ESPN talking heads test a football by throwing it around an indoor studio at room temperature.

If you were making this investment, you have done your due diligence and determined the probability of the football losing air in cold weather conditions and calculated the physics equation of the Ideal Gas Law. If the facts support your view that the Patriots are innocent than you have gained a statistical edge on incomplete information. Your new investment will have a huge payoff when the team is exonerated and the best part of it is that you just bought into one of the most successful teams in NFL history. Much like David Einhorn, we believe that the most appropriate way to make an investment decision is by using fundamental analysis rather than relying on the biased media for recommendations.

Go Pats!


Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.




The Shadow of the Crisis Has Not Passed

President Obama in his State of the Union 2015 declared an economic resurgence by stating, “the shadow of the crisis has passed.” We couldn’t disagree more with this statement. While the U.S. consumer has experienced a significant economic rebound, the central banks around the world have printed trillions of dollars and are still printing money to counterbalance weaker GDP growth and low inflation. The European economy is actually fighting deflation. With inflation too low, they face falling wages, and consumers holding off on purchases while they wait for lower prices.  The consequence could be companies not growing their profits which may result in lower employment. We are not out of the shadow of the crisis until the following occurs: central banks stop printing money; interest rates normalize to historical averages, currencies stabilize, and U.S. companies begin to raise wages.

Trouble in Europe

The European Central Bank just announced another round of quantitative easing which will include a 60 billion euro private and public bond-buying program until September 2016. The Euro has fallen to 1.15 to the dollar, which amounts to a 15% correction over the past 6 months. Not only has European consumers lost purchasing power, their investment markets are vastly underperforming the U.S. markets by nearly 12% over this same period. Moreover, interest rates have fallen to the lowest levels on record and energy markets have collapsed in the past few months. We believe that the credit crisis which began in the U.S. is actually still being played out around the world. All markets seem addicted to monetary stimulus and central banks have not disappointed as they have expanded their balance sheets by printing cash through asset purchase programs. Gold and silver prices have responded and are part of the best performing asset class this year up 9.38% and 15.34%, respectively.

Cash flow is king

Central banks seem to have lost their independence and are now reacting to each new data point rather than focusing on the long-term. They are behaving like many of the management teams of public companies and they feel the need to exceed the streets expectations or face the consequences from their constituents and markets. Investors over the past few years have feared that all of this money printing would lead to higher interest rates and out of control inflation. To the surprise of many investors, the opposite has actually occurred and prices have not risen as expected. Inflation has not occurred because companies have no pricing power to raise prices and wage growth has not occurred. In our opinion, the consensus view now seems to have went to the extreme in that many investors believe that U.S. interest rates will go to zero and energy prices will lose another 50%. We have maintained a zero weight in energy stocks and continue to hold this position until we see either a rise in energy prices or a correction to the current supply/demand imbalance. The cash flows and dividends of these energy companies could be negatively impacted in the coming quarters. We would rather not risk the capital of our clients on a bet that oil jumps 50% or falls 50%. At this time, we are closely monitoring what the impact will be on cash flows. We are still analyzing what the scale of falling energy prices will have on capital spending and employment in the U.S. states that depend on higher energy prices. We expect both will be unfavorable.

Portfolio positioning

We are not in the business of making economic predictions but we are trying to carefully manage risk and anticipate the best opportunities in our clients’ portfolios. Our investment philosophy is cash flow is king and that the companies that are consistently growing cash flows offer the best risk/return profiles. While we are not contrarian investors, we have added a few European companies to our portfolio as well as established a small position in silver. In addition, European companies are trading at relatively lower valuations to U.S. companies. We are doing our best to play the hand that is on the table – a weak Euro, low oil prices, falling commodities, low interest rates, and a strong consumer.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.


Have we entered a Deflationary Spiral?

As of January 12, 2015, the S&P 500 Index is down over 3% YTD and it is the worst start to the year for the S&P 500 Index since 2009. The major news that came from overseas was the Euro zone slipped into deflation as prices in the euro zone fell 0.2% percent year-over-year in December. The plunge in energy prices is causing concerns that we might be entering a deflationary spiral. Investors are clearly unnerved by the precipitous drop in energy prices and other commodities which have historically been a reliable leading indicator of future economic growth. These indicators could be foretelling a period of slower global growth. We believe that energy prices may need to stabilize before markets become less volatile and begin to move much higher. We believe that if energy prices fall even more from these levels, corporates profits could be negatively impacted. The Federal Reserves ‘beige book’ reported this week that oil prices are causing a slowdown in areas of the country sensitive to oil prices.

As energy companies cut back on production we will sadly see layoffs as well as huge cuts in capital expenditures. Schlumberger, which is of the largest oil services company said that it will be firing 9,000 workers due to the plunging oil prices. We believe that this is just the beginning of massive layoffs in energy companies if energy prices do not rise. We believe that many energy companies will also start to announce one-time charges related to the fall in prices. On the other hand, well-run energy companies should be in a better position to gain market share and pick up assets on the cheap.

Why have markets suddenly become so volatile?

Global markets are clearly out of sync and market turbulence is now flashing in red, “fasten seatbelts”. Volatility has returned with a vengeance. The  investopedia definition of a volatile market is, “an unpredictable and vigorous changes in the prices of stocks.” Our definition of volatile markets is quite different. We believe that markets become volatile when the equilibrium of the stock market gets thrown out of balance as investors become uncertain of the future. Analysts fear that consumers will hold off on purchases if they believe prices will continue to fall. Interest rates around the globe have fallen to nearly zero in many overseas countries. For example, in Germany, the 5-year bond rate actually turned negative. Deflation is the real fear. Would you place your money in the bank if they paid you less than what you put in? Your reaction would be to find the bank that would pay you the most for your money and had the best reputation for security. For an overseas investor that bank is called the US Treasury. These foreign investors who buy US Treasuries first need to sell their home currency to convert into US dollars. Hence, the result is the US dollar is now stronger than the Euro when it was first launched back on Jan 4th 1999 at 1.1789. The Euro has continued to weaken and US Treasury rates have dropped. A weak Euro is not welcome news to a US multinational company that relies on a large proportion of its sales from outside the U.S.. We believe that earnings estimates may fall for many of these multinational US companies. However, many of these same companies may see a boost in profit margins due to the lower cost of energy. We believe this quandary is confusing many investors who are trying to determine the net effects of these changes on future cash flows. This uncertainty will be a major reason why stocks may remain volatile in the near term.

Why did we anticipate a drop in energy stocks last month?

We believed the cash flows for many energy companies tied to the energy markets would drop substantially. In our last few investment updates back in November and December of last year, we warned our clients to beware the “Black Swan” in oil. We recognized major downside risks within certain industries that rely on high oil prices. We cited our favorite quote from Warren Buffett, “Risk comes from not knowing what you’re doing.” Our article a few weeks ago warned about the falling future earnings estimates of energy companies and that these companies represented a classic “value trap”. In the last week, many of these companies have fallen over 8%. Sentiment has suddenly turned extreme as investors are now focused on the short-term and they now could be missing compelling future buying opportunities. We stand ready to buy the panic. We will carefully be watching the cash flows of these companies. We believe that the managements of these companies may not be too forthcoming on their future plans but accurately reported cash flow statements may tell the true story.  There is a high stakes game of poker occurring at the boards of many energy companies. Do you cut production or do you hold out and wait for your competitor to cut production. Drillers are hardwired to believe that energy prices will always go higher. Our belief is that future cash flows will be what ultimately drive these stock prices higher or lower.

Our current portfolio positioning

In our portfolios, we remain zero weight in energy companies. We are very close to buying select energy companies; however, we aren’t necessarily there yet. We hope to use volatility in our favor if these companies become even more oversold. We believe low interest rates are an enormous positive for stable US companies with above average dividends and stable cash flows. Most of our investments are in companies not tied to a falling commodity but could be beneficiaries of lower oil prices. Low oil prices we think should be a huge positive for families who have constrained budgets. We envision many families thinking of hitting the road for the first time in a long time to go on long distance vacations. Companies along this road may see a bump in future cash flows. We are also starting to invest in Europe and are focused on companies whose cash flows may increase from this new this new market environment – low energy prices, weak Euro, and a strong U.S consumer. A weak Euro should be a positive for companies that sell to the U.S. We are also willing to pay a premium for companies that are showing strong future cash flow growth. Many active fund managers that we follow are actually outperforming the markets this year. We have nearly eliminated our ETF/index exposure. Our major market call this year is that a well-diversified active portfolio may be in a better position to take advantage of this extreme market imbalance and volatility than an index fund. We will continue avoid large market index positions because our investment thesis has been that many energy related companies are unsuitable investments for investors who do not want to speculate on the future price of oil.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.


Energy Stock Dividends and Falling Oil Prices – Something Has to Give

Energy Stock Dividends and Falling Oil Prices – Something Has to Give

The 60% decline in oil prices, which accelerated during the fourth quarter of 2014, has continued into 2015. This unexpected swift decline has left many investors flat-footed and utterly confused. Kenneth Rogoff, a Harvard University economics professor, believes oil prices are the big story for 2015 and this once-in-a-generation shock will have huge reverberations. We would add that this drop in energy prices could have serious implications on your investment portfolio. Thus far the exploration and drilling energy companies have dropped significantly in price but the stock prices of the large integrated energy companies have fallen more modestly. Many investors have considered the following reasons why energy prices have crashed.

  • Organization of Petroleum Exporting Countries’ (OPEC’s) decision to maintain production levels and market share vs. the US
  • Slowing growth overseas in China and Europe
  • Relatively warm weather
  • Too much supply from US producers
  • A geopolitical squeeze on Putin

The question that we are now examining is whether or not equity investors are still holding out for a quick rebound in energy prices. The last time oil prices was below $50 a barrel many of the integrated energy companies were trading almost 30% lower. It is possible that some investors are attracted to the high dividend yields of these companies as well as the low P/E’s. At this point, we believe that dividend cuts are at serious risk and P/E’s could rise. The future earnings estimates for the large integrated energy companies have already been cut by analysts and their valuations are not as cheap as they first appear. The table below shows the potential worst case scenario if dividends are cut back to 2009 levels based when oil was trading below $50 a barrel.

2009 P/E

2014 P/E

Forward P/E (Year)

Today’s Dividend Yield

Hypothetical Dividend Yield based on 2009 annual dividend and 1/6/15 stock price

Chevron Corp












Exxon Mobil






Source: Constant Guidance Financial and Morningstar. This is a hypothetical example that is demonstrating a mathematical principle. It does not illustrate any investment products and does not show past or future results.

We believe that the hypothetical dividend yield based on the 2009 annual dividend could be a possibility if energy prices remain low for an extended period of time. According to data complied by Bloomberg News, the tumble in crude prices has prompted energy-stock analysts to slash estimates for capital expenditure for the next year, cutting them as much as 9.1 percent since July. Typically, when capital expenditures drop so will the profits of many of these companies which could ultimately impact dividends. Another way we analyzed this question on the potential for dividend cuts was by illustrating the yearly dividend of the Energy Select XLE dividend since 2009 and comparing it to the change of oil prices and the price vs. the Energy Select XLE ETF. The last time oil traded at $50 a barrel dividends for the energy sector was over 50% lower. In 2009, the Energy Select XLE dividend was $1.03 and rose year over year until hitting $1.96 in 2014. We conclude that one of two things need to happen, either dividends could be cut or the price of oil will need to rebound significantly.


Source: Constant Guidance Financial and – This is a hypothetical example that is demonstrating a mathematical principle. It does not illustrate any investment products and does not show past or future results.

In our opinion, the table and chart show that there could be downside risk remaining for these stocks if energy prices do not rise. We believe these companies may represent a classic “value trap”. The following quote from legendary investor Benjamin Graham applies well to today’s energy sector,

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Many investors are voting that energy prices will rise and these large integrated energy companies will continue to pay their dividends. The weighing machine will be the ability for these companies to actually pay their future dividends. We believe that either those stock prices will need to adjust or energy prices will need to rally significantly.

Over the past few months, we have recommended a zero weighting in energy companies and we continue to believe that there are more attractive sectors within the U.S. stock market to invest. We are advising that our risk-averse clients continue to underweight much of the energy sector but remain invested in other industries that are benefiting from the drop in energy prices. Given the huge volatility in the energy sector, there could be more interesting buying opportunities sooner then we originally thought from just a few weeks ago.

We are closely following comments made by the managements of major energy companies on the stability of their dividends. If energy companies cut their dividends many investors may be forced to sell their positions. This could create a potential buying opportunity. There is a chance that many energy producers suffer the same fate that gold miners have experienced in the past few years. Many of these gold stocks have seen huge rallies followed by ensuing reversals. We believe that active traders might target many E&P companies in the Permian Basin, Bakken, and Eagle Ford shale areas as very good tradable opportunities.

Overall, we believe risks remain and it is prudent to remain overly cautious. We will gladly sacrifice any potential upside off the bottom in exchange for not risking the permanent impairment of capital. We believe dividend cuts and potential bankruptcies could be around the corner for highly leveraged explorers with higher marginal costs if oil remains at these levels.

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Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.