As Good as it Gets

The S&P 500 has never gone a full calendar year without a month of negative returns since it’s inception in 1926. Through the first 10 months of this year, the S&P 500 hasn’t had a single month of negative returns. The index is already up for 12 consecutive months starting from last November.

Since the start of 2013, 18 of the past 19 quarters have been positive. Volatility has virtually disappeared. Bloomberg reported, “there has yet to be a 2 percent move up or down on the S&P 500. For a frame of reference, in 2009, there were 55 separate 2 percent up or down days and there were 35 in 2011.” There is now an entire new generation of naïve investors born, that believe markets can only go up.

This week Fidelity Investments released a new survey that shows that wealthy young millionaires have staggeringly high expectations for the coming year. Millionaires who are either millennials (roughly 20 to 36 years old) or Gen X (37 to 52) expect their investment portfolios to return 16.4% next year!!! (Fidelity’s 2017 Millionaire Outlook Study)

I’ve maintained a very positive view on the stock market, but this is not even close to my expectations.  This study is a sure sign that unrealistic market expectations are taking hold on this bull market. If a potential client met with me and expected a 16.4% return, I’d politely ask them to go visit another advisor that manages money based on past performance. I’m always hesitant to provide any future market return. Any financial advisor that promises a future return or even a past return, is most likely providing a misleading statement.

What is most important is not returns, but risk-adjusted returns. If a wealthy young millionaire wants to achieve a 16.4% return next year, they better be willing to lose their title of “young millionaire” and fall into the “once millionaire” category. When markets go up for 12 consecutive months and volatility drops to nothing, investment risk is no longer being considered. I would argue that this is the point when investment risk is the highest.

Other asset classes are also showing signs of extreme risk. Bitcoin, which I have written about often, is up another 40% in the past month. Over the past year, Bitcoin has leaped from around $778 to $6,000.

Many mortgage brokers and real estate agents have commented that home buying activity this October is higher than the spring season. They don’t know if it’s attributable to the warm weather or things are overheated.

We are entering the end of the year with investment risk nearing a very high level. The belief that politicians will pass tax reform, and a friendly business environment has placed a floor under the market. I remain positive on equity markets, but I’m not projecting anything close to a 16.4% return next year. I’m certain that this new generation of investors who believe markets only go up, will turn out to be very disappointed.

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

Keeping it Simple

The Harvard Management Company (HMC) recently reported an investment return of 8.1% for the fiscal year ending June 30, 2017. While the endowment is one of the largest in the world at $37.1 billion, the return is one of the lowest returns compared to other endowments. Other endowments such as Yale’s returned 11.3%, Duke’s 12.7%, MIT’s 14.3%, and one of highest returns was University of California’s at 15.1%.

Ever since Jack Meyer left in 2005, investment returns at HMC have been inconsistent at best. Jack managed HMC from 1990-2005, and during his tenure, the endowment earned an annualized return of 15.9%. He was forced out because many alumni were upset by the size of his annual bonus. The HMC endowment has struggled since his departure as other managers have either left to find more lucrative opportunities or were fired.  It has gotten so bad that HMC is laying off approximately half of its 230-person staff.

If there isn’t a Harvard Business case study on what went wrong, then one should be written. But there have been other outside business consultants who have conducted internal reviews. The Harvard Crimson wrote back in January, “Beyond its lackluster returns, the firm’s employees also privately criticized HMC’s workplace culture as “lazy, fat, and stupid” in a 2015 internal review conducted by McKinsey and Company, accusing their employer of setting artificially low benchmarks and overcompensating its executives.” 

This is a very harsh assessment. I believe that the real problem with HMC is that it’s portfolio construction is too complex. They invest in internally-managed hedge funds, direct real estate investments, natural resources, and other types of alternative investments. In my opinion, HMC has outsmarted themselves. HMC has been overhauling the endowment for five years running. My biggest lesson learned from HMC’s poor returns, is to keep it simple. Here is a good example of what I mean by keeping it simple:

Steve Edmundson made headlines last year when the Wall Street Journal wrote an article on his success as a endowment portfolio manager. The title of the article was, How one man in Nevada is trouncing the Harvard endowment. He manages the Nevada State Pension fund, which is about the same size as Harvard’s endowment. The difference is that he doesn’t have any internal professional staff. He doesn’t take phone calls from outside managers and he only invests in low-cost exchange traded funds. He tries to keep investing costs low and does not trade too often. Other endowments are now beginning to mirror his successful investment model. There are even major U.S public pensions following his example.

I spent most of my entire career working with and researching the largest U.S. institutions and retirement companies. I gained firsthand insight that Steve’s investment approach was far superior to that of Harvard’s complex approach to investing. Much like Steve, I have never held a meeting with another company selling me a product. This would be a complete waste of my time. A better use of my time is helping my clients meet their goals through customized asset allocation.

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

The Next Big Idea II

Back in January, I wrote an article on a new technology that would have an enormous impact on the economy. It was that autonomous vehicles were going to change the automotive industry and disrupt transportation industries. What I failed to realize was that even car ownership in the future would change.

Two major ride sharing services, Uber and Lyft, have emerged as the leaders in a race to offer a new way of transportation. Uber believes that self-driving taxis could change the way millions of people get around. Ride sharing may become so inexpensive that people might not even own a vehicle. Uber has already decimated the taxi industry with a smartphone app and now it has its sights on upending the entire automotive industry. Google’s autonomous-drive company, Waymo, is also close to launching a ridesharing service.  In the state of California, there are 42 firms that have permits to test self-driving cars. The Wall Street Journal reports that Waymo now has the world’s largest fleet of self-driving cars, with over three million miles of testing on public roads so far. Uber has over 200 self-driving cars and has logged over 1 million miles.

Uber and Lyft’s vision is to offer a hailing service where customers can hail a ride on their app and a self-driving vehicle will be in their driveway within minutes. Much like a taxi service, they would receive a fee for providing these rides. Ford, GM, and other large automotive companies realize this competitive threat and have drastically increased their research and development in this area. This trend is speeding up the race for self-driving vehicles, which Is now happening faster than most analysts anticipated.

I believe that the entire transportation industry will be disrupted similar to what Amazon has done to the retail industry. The trucking industry will no doubt have less truck drivers employed over the coming decade. Even the pizza delivery job will not be spared. Last month, Domino’s Pizza Inc. and Ford announced plans to conduct a self-driving vehicle test for pizza delivery in the Ann Arbor market. Domino’s CEO said that he believes transportation is undergoing fundamental, dramatic change.

Investors seem more willing to look past quarterly earning misses and are focusing more on the potential for future market share. We are still in the early stages of developing these self-driving technologies. I believe that there will be many new investment opportunities in this area over the coming years.

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

Dow Jones Industrial Average 1,000,000?

Albert Einstein has been credited with a few powerful quotes on compounding interest. Whether he said them or not is up for debate. The first quote is, “compounding [interest] is the most powerful force in the universe.” The second quote is, “compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Warren Buffett’s right hand man Charlie Munger, said that understanding both the power of compound interest and the difficulty of getting it, is the heart and soul of understanding a lot of things.

Compound Interest will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount. Time is your best friend and the one thing that makes compound interest so effective. Warren Buffett recently spoke at an event commemorating the 100th anniversary of Forbes magazine. He said that “being short America has been a loser’s game. I predict to you it will continue to be a loser’s game,” He predicted that the Dow Jones Industrial Average will be “over 1 million” in 100 years. The legendary investor thinks that anyone betting against America is “out of their mind.” This optimist prediction of Dow 1 million isn’t even that bullish. Mario Gabelli, joked on Twitter, “one million in one hundred years … has Buffett turned bearish?”

For the Dow to reach the 1 million level, the compound annual return would only need to be 3.87%. The Dow has returned 5.7% annually over the past 100 years and 9.3% annually since 1980. Benjamin Franklin would also disagree with Warren Buffett’s bearish 1 million level in 100 years. Franklin’s magic number would be closer to 5%. How do we know this? When Franklin died in 1790, he left the equivalent of $4,400 each to the cities of Boston and Philadelphia in his will. His instructions were that a portion of the funds could be used after 100 years and they would receive the remaining funds after 200 years. When the cities received their balances after 200 years, the combined bequest had grown to $6.5 million. Had the cities followed through with Franklin’s exact instructions, the combined amount would be $40,000,000 at the end of 200 years. Boston’s fund grew to $5,000,000, while Philadelphia only had about $2,000,000. Franklin had estimated the number to be closer to $36,000,000. Franklin’s mistake was leaving the money to the government and not to an investment company. We should give Franklin a pass on this one since they didn’t exist at the time.

Buffett’s prediction will be recalled and celebrated 100 years from now.  Buffett and Franklin will both be remembered as eternal optimists. In Buffett’s words,’“That is not a ridiculous forecast at all, if you do the math on it, it’s an amazing country we live in.” I share Buffett’s sentiment and it is great working with so many clients that are doing their best to earn compound interest and not paying it.

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

The Equifax Data Breach: Was your identity stolen?

There is a very good chance that your one of the 143 million people that had your personal information stolen from the Equifax breach. I was not surprised to learn that I made this list. You can visit Equifax’s website at to check to see if your information was stolen. The hackers stole, Social Security numbers, addresses, birth dates, and driver’s license numbers.

You need to click on “Am I Impacted” which will direct you to the page to see if your information was stolen. Equifax is offering a free one year service of their TrustedID premier service. This isn’t much help because your information is now on the internet forever. A better option is to sign up for Credit Karma’s free credit monitoring to receive alerts. The best protection, if you do not want to pay a monthly fee the rest of your life, is to freeze your credit with all three of the main credit bureaus. Another alternative is to sign up for Lifelock. They are one of the best identity theft protection companies. They have seen a 10 fold in people who have signed up for their monthly services. There is a monthly fee to use their services.

There is no need to be concerned about a criminal stealing your money at TD Ameritrade. They will reimburse you for the cash or shares of securities you lost on your account due to unauthorized activity. There is the chance that your other accounts outside of TD might be vulnerable. You should check with other institutions to see if they offer the same guarantee as TD Ameritrade. If they don’t, I recommend that you move your money to a financial institution that does.

I decided to freeze my credit because I don’t plan on opening any new accounts. In addition, all of my assets are held at TD Ameritrade. There is a small fee to add this extra layer of security. A credit freeze only stops new credit from being opened in your name and does not impact the credit that is already opened. It can be a hassle to notify each of the credit bureaus to temporarily “thaw” your credit when you need to open new credit.

If you don’t have your credit frozen but had your identity stolen, I would recommend that you file your taxes early. The major identity scam in recent years has to do with criminals collecting refunds in your name.

Here are the steps that I went through to freeze my credit online. It took me about 15-20 minutes.

TransUnion – They charged me $5 to place the freeze and I had to set the PIN number

Phone number – 1-888-909-8872

Equifax – It was free and they gave me a  PIN number.

Phone number – 1-800-685-1111

Experian – They charged me $5 to place the freeze and I could set the PIN number

Phone number – 1-888-397-3742

If you want to learn more about this security breach, and what to do, follow this link –

Please feel free to reach out to me by phone or email, if you have any questions or concerns regarding this security breach.

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

$1 Million Dollar Bet

This week CNBC reported that JPMorgan became the seventh bank to cover Buffett’s Berkshire Hathaway, calling it a screaming buy. Its “businesses benefit from best-in-class managements, unmatched balance sheet strength, and many of the companies have strong brands, scale or low-cost competitive advantages,”. “Berkshire’s balance sheet strength is a significant competitive advantage, and its liquidity position is the highest ever,” analyst Sarah DeWitt writes. 

This is not a recommendation to buy or sell Berkshire Hathaway. In full disclosure, Berkshire Hathaway is owned by most of my clients.

In 2007, Buffett made a $1 million wager with Ted Seides who is a hedge fund manager with Protégé Partners. It could be the easiest money Buffett has ever made. Even easier than the millions in interest that he collects every day in the bank. He bet that a low-cost S&P 500 index fund would fare better than a collection of Protégé Partners hedge funds.  This week Ted conceded on his horrible bet early, which was winding up at the end of this year. The $1 million hedge fund investment has reportedly only earned $220,000 in 10 years, while Buffett’s S&P 500 investment returned $854,000. The timing of Ted’s bet couldn’t have been worse. We are now in the second longest bull market in history. If you could own one investment in a bull market, it would be the S&P 500 index fund. A typical hedge fund is constructed to offer downside protection in bear markets. Without World War III, there really was no way that Buffett could lose this $1 million bet. An analogy would be buying term life insurance and never dying. The good news is that you lived, but the bad news, is you lost money. The same could be said of Buffett’s bet. The markets never failed and the insurance was never needed.

The other reason is that the fees alone in a hedge fund are excessive. The typical fees for a hedge fund are 2 and 20. The 2 represents a 2% annual management fee and the 20 represents the 20% cut that the hedge fund gets of profits over a certain return threshold.

Buffett recommends that investors should own the S&P 500, but he didn’t make his billions investing in indexes. This is the one area where he doesn’t take his own advice on investing. He has hired two investment advisors to manage Berkshire’s capital. His managers, Todd Combs and Tedd Weschler, managed their own hedge funds before joining Berkshire. They have been credited for investing in Apple. They now mange over $20 billion in Berkshire capital and it will eventually be all of the money. The reason why Buffett won’t invest in the S&P 500, is he doesn’t want the downside risk of the S&P 500. He made his billions by making bets when the odds were tilted in his favor. The S&P 500 offers 100% upside risk and 100% downside risk. He prefers when the odds are 500% upside risk and 50% downside risk. The better the upside/downside ratio, the bigger his investment.

With markets near all-time highs, the odds of the S&P 500 repeating the same returns over the next 5 years is much less likely to happen. My $1 million bet would be that Todd Combs and Tedd Weschler stand a better chance of outperforming the S&P 500 over the next five years.

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

Market Anxiety over Natural Disasters

A headline caught my attention the other day. It was, “What to Tell Clients Feeling Market Anxiety.” The article began by stating that financial advisors have seen an uptick of clients calling about overwhelming fears of a possible market correction. There seems much more to worry about these days. Rising tensions with North Korea, an incoherent government, and multiple hurricanes striking the U.S within weeks have investors on edge.

Investment returns couldn’t really be any better this year. Both the stock and bond market have had monumental gains over the past year. I’d hate to see investors anxieties if they actually experience a loss! I find that the same cast of characters are warning of a market bubble and their warnings grow louder as investors turn their attention to these devastating hurricanes.

The short-term impact of these storms has been very negative for the markets. However, it’s much more difficult to predict the long-term impact. Warren Buffett remains optimistic. He predictes that the damage from Harvey won’t derail the relatively steady 2 percent growth in the U.S. economy, but it will be devastating to some individuals and families. In the interview, he went on to say, “Berkshire hasn’t written much catastrophe insurance in recent years because prices were too low, so that will limit the Omaha, Nebraska-based company’s exposure.” Insurance premiums will surely rise after these storms, as companies payout claims.

The inner workings of the economy are so complicated that it’s impossible to say for sure how the hurricanes will impact the stock market. The warnings coming from government officials to flee Florida ahead of the hurricane were very telling of what will come next. They stated that we can’t fix your life, but we can fix your house. The silver lining of the devastation caused by Irma and Harvey will be a massive rebuilding effort that will bring people together. It could even cause the government to begin to work together again for the people instead of serving their own self interests.

The real losses will be those lives changed forever by these terrible storms. In Houston, 80% of the homeowners lacked flood coverage. In the aftermath of Hurricane Harvey, President Trump tweeted that the storm had brought a “once in 500-year flood” to Houston, and expressed support for relief efforts. A 500-year flood does not predict the timing of a flood, but these terms refer to the chance of a flood occurring at all. A 500-year event has a 1 in 500 chance of occurring in a single year. A 500-year flood zones has a probability of 0.2 percent. These scales are flawed and out of date. They fail to take into account climate change. It is very difficult for government officials to update these flood plains because people buying homes don’t want to live in flood zones because property values will drop when maps are updated. Hopefully, the government will continue to step up and help many of these families that are in desperate need.

I expect market volatility to continue to rise over the coming weeks as investors monitor the economic impact of the hurricanes and whatever else might be lurking around the corner. As always, if you have any concerns on the market, please feel free to give me call or a schedule a meeting with me.

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

Presidential Concern

I’m fortunate that I have many retired clients who have had very successful careers in business in addition to helping many active professionals that are still accumulating their wealth. They all have different political views and I value all of their opinions.

After the November election, I spoke with many clients to gain their insight into President Trump’s victory and what it meant to them. A consensus emerged that President Trump was pro-business and there was confidence that since he had built a billion-dollar real estate empire himself, he could run the country. There were many other larger investors that I follow who had similar opinions. I was in agreement with them. Tax reform, rolling back of regulations, and infrastructure spending would all be a tailwind for future economic growth. I communicated this same pro-business message in many of my blogs.

Writing about politics is tricky. As one of my clients said, “It’s a touchy issue and you’re bound to set someone off with whatever you say.” Politics is an important topic this week because future earnings are now being negatively impacted because of the poor choice of words made by President Trump. His unscripted press conference on Tuesday alienated many voters and set this country into a direction that can cause long-term damage to our institutions. To borrow a quote from my client that I thought best expresses my own feelings, “we should spend less time tearing down the past, and work much harder on building, and unifying for the future.”

I have many clients that are strong Republican supporters and they are all very upset with President Trump. Many of my other clients that are strong Democratic supporters are going one step further and asking if it is time to go to cash. We are now in uncharted territory. Never has there been a time when most of the prominent business leaders of this country no longer can support the president. Offering any public support to the president has now become toxic to their businesses. Most CEO’s that were bullish on the president’s agenda can no longer advise him.

I believe that it’s impossible to predict politics. As soon as you think you have it figured out, the news cycle changes. I don’t play politics with my clients’ money. These types of events can create value, which will help to fuel future returns. It’s been impossible to predict this president. I’m sure that we are all hoping that he can lose the twitter account, begin to demonstrate some leadership, and act more presidential. If not, the stock market could experience a significant decline.

After all the mess in Washington, I’m doing the only thing a sane person can do – going on vacation with the family! I’m away next Friday and have a family wedding the following weekend. My next post will be the week after Labor Day. I hope that you all enjoy the rest of the summer!

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

Howard Marks latest memo

Howard Marks, who co-founded Oaktree Capital Management, writes a quarterly memo on investment markets. It’s one of the most widely read investment commentaries. He has earned a reputation among portfolio managers as one of the best market forecasters. Many traders consider him #2 as the best active value managers behind Warren Buffett.

There are 1,000’s of books written on how to get rich in the stock market. If someone asks me for a good resource to learn more about the markets, I always recommend them either Howard Marks memos or Warren Buffett letters. Warren Buffett letters are written every year and go back to 1977 and Howard Marks memos start in 1990. You will find many of the best investing tips buried inside of these memo’s. There are actually entire books written on summarizing Warren Buffett’s letters to shareholders

In Buffett’s letter this year, he remained positive on the markets as well as the economy. Howard Marks, on the other hand, just wrote a scathing memo that warns of an inevitable market correction. Mark’s latest memo is titled, There They Go Again….Again.

Back in 2005, he wrote a memo titled, There They go Again, which foreshadowed the market crash in 2008. He was a few years early in his call, but he eventually nailed it. I have no doubt that he will nail it again this time. The trouble is getting the timing right. There is no bell that rings at the top or the bottom of the market. I don’t agree with everything written in his memo, but he does make a very strong case for what can go wrong.

I’ve written often about the low volatility trade, speculative digital currencies, the FANG stocks, and the herd of investors moving into exchange-traded funds (ETFs). Howard covers them all in this memo, and reaches the same conclusion as I, which is investor optimism is a sign that we have to be on the lookout for a correction. The elevated status of markets gives him the most concern.

Many investors back in 2007 had a very easy time spotting the housing bubble. This time around, Howard Marks writes about many other areas starting to show signs of a bubble. The biggest and easiest to spot, is the digital currency bubble in Bitcoin. I first wrote about this bubble in May when Bitcoin was $2,800 and it’s up another 25% since that time. In that post, I wrote how I believed the currency could go up 400% more or possibly down 80%. The technology bubble in 1999 had very similar characteristics. Most Bitcoin buyers know that they are buying into a bubble and don’t care because other people are getting rich and they want in. The 1999 technology bubble was no different. At least the housing bubble put a roof over people’s heads. Howard Marks memo goes into great length explaining this cyber currency bubble. Howard gives a thorough explanation why there could be bubble forming in ETFs and to avoid illiquid bonds.

There seem to be increasingly more investment commentaries written about other bubbles growing in real estate, stocks, ETFs, and even bonds. There could even be a bubble in cash for all of those who have been scared into waiting for all these other bubbles to burst! I believe the likely outcome to all this recent wealth creation, is inflation. If there turns out to be no real bubble and markets are not overvalued, we could be at the start of an inflationary cycle. If I begin to see signs of inflation, I will be begin to make some adjustments in your portfolio to try to get in front of this change.

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


Is President Trump responsible for this market rally?

The Dow Jones Industrial Average is now up 4,000 points since the election. President Trump is taking a victory lap for this accomplishment. Here is a recent tweet from President Trump, “Stock Market could hit all-time high (again) 22,000 today. Was 18,000 only 6 months ago on Election Day. Mainstream media seldom mentions!

I’m quite confidant that if markets go down, he wouldn’t take the blame. The humble approach works much better, but we all know that’s not in President Trump’s DNA. Warren Buffett would have some astute advice for President Trump. Here is one of Buffett’s most popular quotes, “Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”

Buffett believes that it is earnings that drive stock prices and not presidents. The main reason why the market continues to hit new highs is that profit and sales growth continues to climb. Apple selling more iPhones and Boeing selling more planes has more to do with the recent rally than President Trump’s policies. The fortunes of Facebook, Amazon, Google, Netflix, Microsoft, and a few other large cap growth stocks are largely responsible for the gains this year. Large growth stocks have been on a tear this year.

According to FactSet a record-high 73% of S&P 500 companies are beating sales estimates to date for Q2.

The following headline from a Wall Street Journal article on July 30th sums up just how good earnings have been – U.S. Companies Post Profit Growth Not Seen in Six Years.  The article highlights, “strong earnings come as tax and infrastructure initiatives that were expected to spur economy have been sidetracked amid Washington infighting.” It’s no surprise to me that the S&P 500 is up 11% YTD, and earnings at S&P companies are expected to rise 11% this quarter.

The underpinning of this bull market is the U.S. labor market couldn’t get much stronger. The job report on Friday showed the jobless rate matching a 16-year low and monthly wage growth picking up. People are flush with cash and are feeling more secure in their jobs. The housing market is even stronger than the job market. House prices are rising twice as fast as wages and house prices are the strongest in nearly 3 years.

But there can be a good case to be made that President Trump has spurned the economy.  Jamie Dimon, who is the CEO of J.P. Morgan, has been a strong supporter of President Trump. He stated back on March 9th that President Trump’s economic agenda has “woken up the animal spirits” in the U.S..  A quote from this Bloomberg Television was that the President’s plans “will be good for growth, good for jobs, good for Americans. The caliber of Trump’s economic advisors gives him confidence, and advised observers to “forget the tweets” and instead focus on Trump’s policies to reduce corporate taxes, cut regulatory red tape and build new infrastructure.”

The case against President Trump’s brash tweet is that the rest of the world has staged an even stronger rally. The European stock market is up over 20% (IEV) and Emerging Markets (EEM) is up 26% so far this year. The victory lap by President Trump with the S&P 500 being up only 11.72%, doesn’t look so grand when compared to the rest of the world.

The case for or against President Trump being responsible for recent gains is a great debate. I’d rather continue to focus on what is most important to investors like Warren Buffett, which is the level of interest rates, employment, inflation, housing, and corporate profits rather than the sideshow in Washington. My eyes will remain watching the playing field.

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