Tim Duncan’s 8 Investment Lessons

This week future hall of fame basketball player, Tim Duncan of the San Antonio Spurs disclosed that he lost $25 million over the course of his career due to an unscrupulous financial advisor and personal friend. We can learn from his losses. Here are my investment lessons:

Lesson #1 – Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. – Warren Buffett

Investment Interpretation – As Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t …pays it.” If you lose money, you can’t compound it. Before making any investment, first think downside risk, then only consider the potential for profits.

Tim’s case – I peg Tim’s losses closer to $100 million if he had slowly grew his wealth by 5% on his investments. Going forward, these losses will compound throughout the remainder of his life.

Lesson #2 – Trust but verify

Investment Interpretation – Never place your full trust in anyone. If you don’t understand your investments, get a second opinion from an accountant or seek the opinion from another financial advisor.

Tim’s case – He had no idea how to track his investments. If you are unsure of how your money is being invested, seek a second opinion.

Lesson #3 – Invest only when there is full transparency

Investment Interpretation – Your money should be held at an independent entity such as a brokerage account that separates your money from your advisor.

Tim’s case – A best practice is to have an accountant or attorney value privately held investments. Tim never assembled such a team.

Lesson #4 – No conflicts of interest

Investment Interpretation – Investments should be made that are in your best interest and are made to achieve your goals.

Tim’s case – He invested in companies in which his advisor was part owner. The advisor made investments that benefited him, not Tim.

Lesson #5 – Avoid complex and complicated investments

Investment Interpretation – If you don’t understand it, don’t invest in it. Keep it simple and invest in what you know.

Tim’s case – Tim was making investments in private equity – hotels, beauty products, sports merchandising and wineries. Non-public investments should only be made by specialists who have assembled teams that have shown a significant track-record of success.

Lesson #6 – Pay attention and review your investments

Investment Interpretation – You should review your statements every 3 months and have an annual review with your advisor. Don’t wait for an “event” that causes these losses to be uncovered.

Tim’s case – All of Tim’s losses occurred over a 8 year period (2005-2013). These losses were discovered as part of his divorce proceedings.

Lesson #7 – Monitor your investments against a benchmark

Investment Interpretation – You CANNOT manage risk in your portfolio if you do not set an appropriate benchmark.

Tim’s case – He would never play basketball without boundary lines nor should he invest without a benchmark.

Lesson #8 – Make investments with qualified investors

Investment Interpretation – A good practice is to invest with a Chartered Financial Analyst (CFA) or with a qualified advisor that has shown a successful track record of investing.

Tim’s case – He invested with an unqualified advisor who was a personal friend. If you invest with a friend, be sure they have the academic background, experience, and qualifications to provide you financial advice.

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.

Should you invest with a Robo-advisor?

There is currently a race to see which company will launch the first self-driving car. Artificial intelligence and automation have become the two biggest business opportunities in the next decade. The financial planning industry has it’s own version of a self-driving car – the “robo-advisor”.

“Robo-advisors” are a new version of a financial adviser that provides portfolio management and financial planning through apps and fancy websites. “Intelligent Portfolios” are showing tremendous growth. Fidelity, Charles Schwab and other firms have recognized the threat and have recently made major strategic decisions to offer more automation. The current leader in the field is Wealthfront. They have gained over $2B in new assets in only a few years.

This week one of my clients asked me if I thought the “robo-advisor” was a good alternative to traditional asset management. Would these services eventually replace financial advisors? To answer this question, I decided to do a little research.

My first step was to sign up for these services as a prospective investor. The technology was amazing and I could see why they have been an overnight success. The account opening process was quick and easy. These “robo-advisors” had me signed up in 5 minutes and had uncovered all of my investable assets and knew every detail about my financial life. The goal setting calculators were the best I had seen. The “robo-advisor” goal setting technology was better than the financial software used by many financial planners.

My second step was to see how they were going to gauge my risk tolerance. I ran various allocations for different goals and changed my age to see how this software would adjust to my risk profile. Surprising, the results were terrible! If this new automated asset allocation was equivalent to a automated self-driving car there would be a 10 car pile-up. The claims of better returns and diversification were unfounded. In one case, my moderate allocation looked like an aggressive allocation. All the services made unwarranted claims of offering a smarter way to invest with better returns over your “typical investor”. They showed how tax loss harvesting was going to add to returns and more global diversification and smart rebalancing would increase returns by over 4%. These claims may not hold in actual practice.

My last step was to review their asset allocations and back-test how they were constructed. How were they going to diversify my portfolio? How were they going to produce “better returns” as they stated on their websites?  I blended all the asset allocations using my tools and compared it to other diversified portfolios in the Morningstar database. What I found was that any of these allocations would be the lowest rated in major categories.  Two of the leading “robo-advisors” had a moderate model of almost 38% in developed markets and 10% in Emerging Markets. These moderate allocations over 5 years offered much more risk than the S&P 500 index and trailed the S&P 500 by over 40%!  The fancy “robo-advisor” software that didn’t miss a detail on my goal planning had somehow failed to show me the 3, 5, and 10-year trailing returns. Calendar returns and a benchmark would have been nice to see as well.

At my wealth management firm, we don’t sell you pie charts or make claims of “better returns”. Our asset allocations are created to seek the best investment opportunities and not just give you market exposure. Now to answer the question that my client asked me earlier this week on:  if he should invest with a “robo-advisor”.  I believe that these automated services will help you to organize your finances, track your spending, and set goals for the future. However, if you are seeking a customized asset allocation, I’d invest my wealth with a real advisor who had knowledge of how to create a model portfolio and one that could ask me more in-depth questions of my risk tolerance.

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

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market.
They are methods used to help manage investment risk.

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.

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

How to Choose a Financial Advisor

I believe that the best chance that you have to retire and to stay retired is to have a personal investment manager oversee your entire investment portfolio. The selection of your investment advisor should be just as important as the selection process of choosing your doctor. You should place just as much emphasis on making medical decisions as you do your finances.  You should not place your trust in any financial advisor because they dress well, are a smooth salesperson, or work for a large organization.

A few years ago, the National Football League (NFL) created a Financial Advisor Program because they recognized that there were too many financial advisors who were unfit to provide investment advice. Many current and former players complained that they had lost their fortunes to investment advisers who hung out a shingle and tried to pass as a qualified expert. Most financial advisors claim to be an expert in something – banking, insurance, financial planning, taxes, estate planning, or retirement specialists.  I believe that it is very difficult for you to distinguish between who is qualified and who is pretending. I believe the first step to select a financial advisor is to use the eligibility requirements set-up by the NFL, which is as follows:

  • College Degree – Bachelor’s degree from an accredited four- year college (many financial advisors might not qualify!). I would personally add an MBA as a bonus but not a requirement.
  • Work Experience – A minimum of eight years of relevant work experience and have relevant graduate education training in the field of expertise. I believe 10+ years is a more appropriate experience level.
  • Professional designations – Certified Financial Planner, Chartered Financial Analyst, Chartered Financial Consultant, Chartered Life Underwriter, Certified Public Accountant, Certified Investment Management Consultant, Certified Investment Management Analyst, Chartered Mutual Fund Counselor (I would add most important are CPA, CFP, CFA, and a bonus if you have more than one of these designations).
  • Other important qualifications – Insurance coverage or surety bond coverage, no past regulatory discipline, and no personal bankruptcy.
  • My personal considerations (not NFL’s requirement) – If your financial advisor is managing your portfolio, they should be able to tell you the price and value off-hand of 100+ businesses and investments globally without looking them up on the internet. They should understand most major industries, macroeconomics, politics, finance, and have shown a personal track-record of success in life.
  • More tips – Consider the financial advisor’s pay structure – avoid commission based advisors and investment professionals who are not fiduciaries. If your advisor is from a large broker, then they are most likely held to a lesser suitability standard and is not required to do what is in your best interest.

If retirement is important to you, then I believe you should take the necessary steps to screen and interview your advisor. Work with a financial advisor who spent over half of their life acquiring the knowledge and experience to provide you financial advice. You should not settle for anything less.

Please feel free to review my work experience, qualifications, and full bio here. I’m also open to any of your questions on my investment process and my investment philosophy to help give you the financial confidence to achieve 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.

Planning for Retirement

You have worked hard and saved your entire life. How can you make your money last in retirement?

Step 1: Visualize the lifestyle you want in retirement

You need to paint a picture of what your retirement will look like. What is the lifestyle that you want to live? Where do you want to live? How do you want to stay active? What type of legacy do you want to leave?

Step 2: Make a budget

The next step is determining your spending needs. Write down a list of your daily living expenses. This cash flow analysis will help provide you with what your monthly expenditures will be. This analysis needs to be thorough and it is best to work with a Certified Financial Planner™ to compile this list. A good online worksheet calculator can be found here.

Step 3: Determine your cash inflows

This income typically includes Social Security, pensions, dividends, annuity flows, retirement account distributions, and general savings spend down. We recommend that you speak with a Social Security specialist before you make this decision. There are multiple strategies that you can take to maximize your benefits.  The Social Security website has online calculators if you want to do it yourself.

Step 4: Construct your portfolio

Asset Allocation and diversification is critical to staying retired once your retired. The most common mistake is only considering stocks. The proper asset allocation may include real estate, stocks, bonds, annuities, artwork, mutual funds, life insurance policies and exchange-traded funds. It is critical that you understand that you can’t control market returns, inflation, taxation, and other government policies. However, you can control your portfolio risk and the income that you will need. In my experience, a Chartered Financial Analyst (CFA) is the most qualified investment professional to help you with this step. Trusting a CFA, who is an asset allocation specialist, is equivalent to trusting a cardiologist to work on your heart. In my opinion, you need to work with someone who is an experienced investor and understands markets. Interview multiple advisors before you make your final decision. Do not trust the internet or a computer to provide you with this type of advice.

Step 5: Monitor for changes

Markets change and so will your budget in retirement. You need to continuously monitor the first four steps and make adjustments. Work with a financial advisor that can help keep you on track. The main question that you need to determine is how will your asset allocation change? This is a tricky question and needs to be addressed before you begin spending. Your personal risk profile will help answer this question. How much loss can your portfolio withstand? How can you manage downside losses in your portfolio? Again, you need a professional who can actively monitor markets and do their best to adjust your portfolio accordingly.

Other key considerations

We believe that it is in your best interest to create an entire estate plan as you enter retirement. Working with a Certified Financial Planner™ and estate attorney will help you to solidify steps 1-5. Most important, an estate planning takes into consideration saving on taxes, protecting your assets, and insuring your assets are used for your benefit. Trusts are not just for the wealthy. A well written trust will help eliminate concerns and give you peace of mind.

Mitch is a Certified Financial Planner™ and Chartered Financial Analyst whose passion is investing and helping others achieve their financial goals. Give us a call to schedule your free consultation and we can help give you peace of mind.

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.

Avoid these 7 Financial Mistakes

In my fee-only investing practice, I help my clients avoid many of the common mistakes that people make on their road to retirement. Below is a list of the 7 most common investing and financial mistakes that you should avoid as you save for retirement.

Mistake #1 – No tax sheltered income
The best way to save for retirement is through deferring as much income as possible through an IRA or work retirement plan. In 1997, the Roth IRA was established which has turned out to be the best vehicle to save for retirement.  No matter your income level, you can contribute to a Roth IRA. Affluent investors utilize “backdoor” contributions as long as they don’t have existing pre-tax IRA’s. (please contact a tax advisor or myself for a full explanation)

Mistake #2 – Tax inefficient investing
It is best to avoid paying short-term capital gains. Instead use short-term losses tactically to offset them. Tax-loss harvesting is a technique used by the best investors to lower taxes while maintaining the risk/return profile of their portfolio. We believe that you should invest in a separately managed account or personalized portfolio rather than a mutual fund to maximize your tax treatment.

Mistake #3 – Investing with no investment philosophy
9 out of 10 portfolios that I give a second opinion on either take the shotgun approach to investing or are not properly diversified. The over-diversified portfolios are invested in six or more mutual funds across the world with no care for valuation. The other investment philosophy that I see is portfolios overweight in the hottest stock that has the most momentum. These portfolios are marked by low returns and high fees.

Mistake #4 – Not Keeping Score
What all the best investors have in common is that they keep score.  These investors select a proper benchmark and monitor those results to determine if their strategy is working. They understand the tremendous power of compounding and how exceeding this bar will make more money over time.

Mistake #5 – Not having an Estate Plan
Most of us are guilty of lacking a contingency plan because we believe nothing bad will ever happen to us. Trillions of dollars will be transferring generations over the next decade. While this conversation can be uncomfortable between family members, I advise that you should bring up this topic before your possible inheritance goes to the state.

Mistake #6 – Not fully understanding Social Security rules
With less companies offering Pension Plans, more retirees are relying on Social Security than ever before. Social Security is one leg of your retirement plan and you should work with an advisor who can maximize the most money out of the system.  Be sure to work with an advisor who understands the basic techniques to maximize social security.

Mistake #7 – Going it alone
The most successful investors have assembled their own team of all-star professionals. It is in your best interest to hire different professionals to prepare your taxes, invest your savings, and plan your estate. Your team should have letters after their names such as CFA, CFP®, and CPA. These designations mark professionals who are knowledgeable, believe in continuing their education, who maintain strong professional standards, and champion strong ethical behavior.

If you would like to have an accomplished investment professional with a Chartered Financial Analyst (CFA) designation personally manage your investments and a Certified Financial Planner™ advise you on retirement plan, feel free to give me a call at 508-207-8049, visit CGFadvisor.com, or email me at mitch@cgfadvisor.com.

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.

The Key to Financial Success

The single most successful character trait that trumps them all is preparation. We have all heard the phrase that success is where preparation and opportunity meet. Whether it is preparing for a game, test, meeting, interview, presentation, or saving for retirement, the most successful people are the ones who are the most prepared. There were two noteworthy news items this week that apply to early preparation and there was also another example that received no press. The first story is when 2014 PGA Player of the Year Rory McIlroy, who was preparing for this years Masters tournament, found his way to the gym early one morning — only to be joined by Super Bowl-winning quarterbacks Tom Brady and Peyton and Eli Manning in their off-season workouts. “Friday morning, I got in the gym about 6,” McIlroy said Wednesday, “Brady walked in at 6:15, and the Mannings walked in at 6:30. That was my time to leave.” Tom Brady has said on record numerous times that he has gained his edge by being better prepared than the competition. The other news item this week that you can apply in a business context was a tweet sent from Apple’s CEO Tim Cook before the iwatch launch that got retweeted 6.2k times, “Got some extra rest for today’s event. Slept in ’til 4:30.” If the foundation of your company’s corporate culture is built on preparation, you are more than likely working for a successful organization that is differentiated from the competition.

The other not so newsworthy headline yet clear example of how preparation trumps all other character traits came from a personal experience. One of my clients started saving early and often and is now on their way to a comfortable retirement. While some of my clients are fortunate enough to accumulated stock options over their careers, most have to grind it out by saving a few percent of their wages each year. These clients are not accomplishing this through buying gimmicky insurance products, or other high expense financially engineered products. They are keeping it simple by investing in a diversified, high quality basket of companies via a Roth IRA and company retirement plan. This is the winning formula I try to replicate for all my clients – defer paying taxes and compound wealth over time. I believe the key to your current or future retirement plan starts with the investment decisions that you will make today and how well you will be prepared to meet your next challenge. If you would like me to help you prepare your retirement plan, feel free to give me a call at 508-207-8049 or email mitch@cgfadvisor.com.

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.

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 CGFadvisor.com. 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.