Category: Investments

Stephen Moore, who is a conservative economist, wrote a book last year titled Trumponomics: Inside the America First Plan to Revive Our Economy. 

He defines Trumponomics, “as a new economic populism that combines some conventional Republican ideas–tax cuts, deregulation, more power to the states–with more traditional Democratic issues such as trade protectionism and infrastructure spending. It also mixes in important populist issues such as immigration reform, pressuring the Europeans to pay for more of their own defense, and keeping America first.” 

At the core of Trumponomics, is bringing back jobs lost due to globalization.  President Trump’s bold economic policies are beginning to reshape the U.S. economy. The adjustment has not been easy for investors nor the Federal Reserve Chairman Jerome Powell. It has given him fits. He has taken a sharp U-turn on his policies and went from potentially raising interest rates twice this year to potentially cutting interest rates twice.  

The stock market rallied sharply this week because for the second time Chairman Powell caved to Trumponomics. The first time also resulted in a monster stock market rally.  For Trumponomics to work, interest rates need to stay low. For example, you can’t negotiate hard with China over trade if the Federal Reserve is not expanding the U.S. economy.  There is a major drawback to Trumponomics, which is excessive borrowing. The U.S. Federal deficit is expected to grow by $1 trillion and this is during booming economic times.   

President Trump believes that the U.S. economy is bulletproof as long as the Feds cut rates and the federal government keeps printing money.  But the uncertainty surrounding the trade war with China is beginning to put a strain on the economy. Economists expected a job gain of 178,000 on Friday, but employers only added 75,000 jobs. This time last year the 2018 May jobs report added 270,000. The economy and stock market has been resilient because expectations are that trade tensions will ease.

If you are a banker, real estate agent, or a mortgage broker, you have to love Trumponomics. The housing market couldn’t be any hotter. There hasn’t been a better time to sell your home. Mortgage rates have collapsed  back to 3.75%, housing inventory is very low, and the demand for housing remains high as incomes rise. Another refinancing boom is also coming. It’s no surprise that this is all happening with a real estate tycoon in the White House. He wrote the book.   

Trumponomics has caused the stock market to become extremely volatile. Next week, the stock market could lose all the gains from this week, or it could make new highs. It really depends on President Trump’s next move. I strongly believe that trade wars will not end with just Mexico and China. He has also said that he wants to make new trade deals with India, Europe, and other countries. He is just getting started. 

If you support President Trump, you likely believe that Trumponomics is in the best long-term interest for the future of our country. If you don’t believe in Trumponomics, you likely believe that our country is being destroyed by these policies. I don’t think there is much of a middle ground. You either love it or hate it. 

My clients fall on both sides of this line.  Trumponomics could unleash growth as President Trump cuts a deal with China and Mexico, and now that interest rates are low, the economy would boom and the stock market would reach new highs. President Trump’s poll numbers would jump and he would be tough to beat in the 2020 election. 

The bearish scenario is that the trade war with China escalates, which causes a global slowdown. Goldman Sachs wrote that trade jitters have dampened business hiring and investment could begin to take a political toll on Trump as the 2020 presidential campaign heats up. Higher tariffs could also cause inflation to return and the economy could become stuck in a stagflation type of environment of high prices and no growth. 

The truth is nobody knows what will happen next. In the coming months, any economic expansion will be countered by any economic harm from Trump’s escalating trade war. I believe that President Trump’s focus may not be on the stock market and that he is fulfilling promises to his strong base of supporters. If he can get both to happen, a rising stock market and investors to look past trade wars, like he pulled off this week, it’s a huge win for Trumponomics. 

I’m managing client portfolios with more of a focus on higher dividends and income. Trumponomics also calls for higher diversification in stocks as well as bonds. It’s difficult to make any big bet in either direction. For retirees, it’s difficult to over-allocate into equities because a long term time horizon is needed just in case Trumponomics fails. I’m not saying that it will fail, but the underlying risk in the stock market has not been greater than at any point in the last 10 years. There is a scenario on the table that wasn’t there before which is that China doesn’t bend to President Trumps will. Mexico, as everyone expected, caved to President Trump’s demands, but I’m not so sure on China. Most investors believe that there will be a truce called and that the timeline will be extended to reach a deal. This is shaping up to be more of a long term battle.  

I expect market volatility to continue and that it’s impossible to make any sense of these short term moves in either direction. My advice is to not pay much attention to the day-to-day and week-to-week market volatility. I’m comfortable with taking a balanced approach and if markets become cheaper, I’ll add to more dividend paying stocks.  I hope that Trumponomics will be successful and that President Trump can continue to grow the U.S. economy, while at the same time, make fair trade deals. 

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I recently spoke with someone that had attended a free lunch offered by a financial advisor. This lunch was touted as an “educational” retirement seminar. I don’t want to knock all financial advisors who offer these free lunch seminars because not all of them are high pressure sales presentations that push unsuitable financial products. But I got a good laugh out of this one. This financial advisor was pushing annuities as a way to generate retirement income. He used Warren Buffett as an example of someone that would buy an annuity. The advisor said that Buffett has been selling stocks because he is holding $110 billion in cash. Buffett supposedly believes that markets are overvalued because the yield curve is inverted. When the short-end of the yield curve is higher than the long-end, it’s time to get defensive. Moreover, the stock market is at an all-time high and if Buffett is selling stocks you should buy an annuity to protect your capital.

Here is a consumer alert on annuity sales presentations – Annuity salespeople are trained to exploit your fears. To quote an instructor at an annuity training conference, “They thrive on fear, anger and greed … Show them their finances are all screwed up so that they think, ‘Oh no, I have done it all wrong.’ This will make you money.”

I learned something new reading through this consumer alert on annuities. The sales representatives will station spotters in the parking lot to take note of who arrives at the lunch driving expensive cars. Those people are marked as potential “clients” and frequently the sales representative will show up uninvited at their homes for a follow up consultation.

The person that I was speaking with had done a great job saving for retirement and was not fooled by this annuity salesperson. But they did believe what the financial advisor had said about Warren Buffett. It took me a few minutes to explain that Warren Buffett is holding $110 billion in cash because he is waiting for the right time to buy what he terms an elephant size takeover. He has come close a few times, but nobody wants to sell to him anymore because the terms of the deal will not be in their favor. He thrives more in times of illiquidity and panic when companies are desperate for a bailout. Buffett has been a buyer of equities recently and is on the record as saying markets are undervalued relative to low interest rates. This is the exact opposite of what was said at the free lunch seminar.

It’s always best to get a second opinion before purchasing an annuity.  Do not make a significant financial investment without talking to different financial advisors and consulting with friends and family members you trust. The Massachusetts Securities Division shared a very good warning on the dangers of annuities that you can read here.

The funniest part of the annuity sales pitch was Buffett buying an annuity for himself or Berkshire Hathaway. I’m happy that I wasn’t in attendance, because I would have lost my lunch. 🙂

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All of the long-term bleak market forecasts have something to do with the debt piling up on government balance sheets. Seth Klarman, who is the founder and portfolio manager of the Baupost Group, a hedge fund with over $25 billion in assets, and who is compared to Warren Buffett, and is nicknamed the Oracle of Boston released a letter this week that gave a bleak warning on global division and debt.  The full story of the letter can be found here.

Klarman’s warning is very similar to that of Jeffrey Gundlach, CEO of Doubleline Capital. Gundlach said in a recent Barron’s interview, “One of the reasons the economy picked up was the tax package and increase in government spending. Those are one-off things—unless if you keep doing it. If you keep having a delta of incremental spending and deficit, you’re going to end up with trillions and trillions and trillions of dollars of debt—precisely when the Fed has raised interest rates. I’ve been calling it a suicide mission: You’re issuing increasingly more debt and the cost of that debt is being voluntarily raised.”

The investment implication is likely to be diminishing growth expectations. This is the message coming out of the World Economic Forum that was held in Davos this week. This is not a short-term dire warning, but one that will take time to play out. Seth Klarman also wrote that since the worst does not frequently happen, you cannot let the fear of a monster storm completely paralyze you. I expect that governments around the world can just keep printing new money as long as interest rates remain low.

The biggest risk to most financial plans is above average inflation. A CD or short-term bond that pays 2% is not much of a return if inflation jumps to 3%. The real rate of return, which is inflation adjusted, is the true goal of all investors. Over the long-term, the best hedge against inflation is a diversified stock and bond portfolio. Fixed annuities and low rate CD’s will reduce market risk but do increase inflation risk.

Political risk and inflation risk will become more intertwined in the coming years. We are seeing signs of politicians trying to address higher deficits with unrealistic solutions.  This week Alexandria Ocasio-Cortez proposed a 70% tax rate. Elizabeth Warren proposed a new “wealth tax” on very rich Americans with $50 million in assets. As I’ve written before, I’m less worried about a China trade deal or government shutdowns. If these new tax proposals were to gain in popularity, the stock market would fall even faster than December’s “correction” and there would be no “V” recovery this time.  Liquidity would just disappear and it would not reappear until market levels were much lower. Investors will eventually turn their attention to government deficits but the timing is unknown. This is a long-term concern but it does shape how I’m constructing portfolio allocations to hedge against some of this potential risk.

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Markets around the world have rebounded and recovered about half of the loss from the prior few months. The technical picture looks like a “V” type of recovery which started with a 20% correction, followed by a sharp 10% bounce. Liquidity also returned to bond markets which recovered with the lowest quality High Yield bonds and Bank Loans leading the way.  The market crash in December was no surprise to investors after the onslaught of selling in October and November. It was the extent of the sell-off, which was stunning. It was the worst quarter of returns since the Great Depression!

Most of the 2019 market outlooks warned about the ongoing trade war with China, aggressive Fed tightening, and a material global growth slowdown. I’m less concerned about these risks and more concerned about the dysfunctional U.S. Government.

President Trump will likely reach some form of a trade agreement with China. The Federal Reserve is not going to raise rates this year. And the risks of a material global slowdown in China and Europe are already well known. The biggest portfolio risk going forward might be the U.S. Government. This risk has been building over the years and seems about to erupt.

This week Federal Reserve Chairman Jerome Powell said that he is very worried about the deficit, but it’s a long-term issue that we definitely need  to face, and ultimately, will have no choice but to face it. This risk was echoed by DoubleLine Capital CEO’s Jeffrey Gundlach, but not on the long-term time horizon. In his 2019 outlook, he believes that this year might mark the time when investors wake up to this risk and the bond markets will reckon with the rising federal deficit. He said the exploding national debt and liabilities involving pension funds, state and local government governments and Social Security have reached a stage that is “totally unthinkable.”

As we approach the longest government shutdown in history, I believe we are at a stalemate. It’s horrible that 800,000 federal unpaid workers find themselves in the middle of this fight.  I wrote a few weeks ago that the stock market would not be focused on the shut-down and it has been up 8% during this time.  We are now in uncharted territory and if this government shutdown continues much longer, volatility could return and markets might force a compromise if this impasse continues.

Investors have become more frustrated with politicians inability to compromise or come up with any solutions.  Even though the market is more focused on the news about the upcoming trade deal or changes in interest rates, it might end up being the dysfunction of the U.S. Government that will be to blame if the U.S. economy begins to slow.

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There is no shortage of opinions on what went wrong with former blue chip companies GE and IBM. This week GE broke below $10 and slashed its dividend to one cent. Over 2 year’s GE’s stock is down -70%. IBM has fallen, but not as much. It’s only down -29% over the same period. On Monday, IBM acquired Red Hat in a deal that is valued at $34 billion. This hail mary deal equals the purchase price of almost 40% of IBM’s market cap.

My answer to the demise of these two companies can be found by studying their cash flow statements. Over the last 10 years, both companies gave all of their profits away and didn’t properly reinvestment back into their businesses. In the last 6 years, IBM has paid $30B in dividends and bought back around $43B in stock. The market cap of IBM is now only $105B. I bet they wished that they had that $75B in cash back on the balance sheet. GE in the last 6 years paid $48B in dividends and bought back around $35B. The market cap of $80B is now less than the amount of money that they returned to shareholders in the last 6 years!!! They could have taken themselves private.

The management of these companies did what was in the best interest of short-term shareholders and not for the survival of the company. At the other end of the spectrum is Berkshire Hathaway. They have never paid a dividend, and up to this point, never bought back much stock. Buffett has used the profits of Berkshire to buy other companies that can pay him dividends. For those of you that have read the book Rich Dad Poor Dad, know that the differences between his real father (poor dad) and the father of his best friend (rich dad) is that the rich dad created enough passive income so that people were paying him dividends. In my example, IBM and GE are the poor dads and Berkshire is the rich dad.

A strong case could be made that buybacks have been the main driver of the equity rally this cycle. Goldman Sachs wrote that companies are set to buy back $1 Trillion worth of shares this year. Much of these buybacks are being fueled with all the extra profits from the lower corporate tax rate of 22% from 35%.  Google searches of “buyback blackout” hit an all time high on Monday. For those of you not familiar with blackout periods, it’s when a company can’t buyback their stock because they are within a window of releasing earnings. As companies reported 3rd quarter earnings, they were unable to buyback stock as markets fell. Investors were hoping that stocks would rally as this blackout period ended. Maybe it’s a coincidence that stocks bounced this week, but the number of Google searches for “buyback blackout” is no coincidence The Wall Street Journal reported, net buybacks in the month totaled just $12 billion by Oct. 19, but jumped to $39 billion by Oct. 29, according to estimates from JPMorgan Chase & Co. That is more than the $30 billion recorded in September and just under the $48 billion recorded in August. Some analysts hope a resurgence in buybacks could help support share prices during a period of geopolitical and economic uncertainty. Others are skeptical that companies can continue purchasing their own shares at the current pace, particularly as the stream of repatriated cash that helped drive the year’s buybacks slows down. Critics say they are motivated by executives’ desire to boost the value of the stock options and allocations in their remuneration packages. Buybacks also channel profits away from the research and capital expenditure that could improve productivity in the longer term.

Steve Jobs was a critic of share buybacks. He preferred to keep all the cash on the balance sheet. He learned his lesson when Apple almost went bankrupt and he lost his job. Steve needed to go to Microsoft for a $400 million loan to survive. After this hard lesson, Steve’s strategy was to hoard cash for a rainy day. Apple’s new management has went in the opposite direction. They once had over $250b in cash and they are now down to $130B net cash. They are going spend another $100B and take cash to zero. I wonder if they haven’t been paying any attention to what happened to IBM and GE?

I believe the key to any successful buyback or dividend is that it is not done with issuing debt. It’s no different than a consumer spending on a credit card. At some point, the bill will be due and to make matters worse, interest rates will likely be higher. GE and IBM would have been much stronger companies today if they had channeled their profits back into the business. I’m very confident that in the next few years we will be reading about other companies that fell overboard buying back too much stock at over inflated values. I’ll continue to monitor buybacks closely as I expect markets to remain volatile with extreme moves in both directions.

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“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” – Warren Buffett

The S&P 500 hit a -10% correction level and most of the gains are gone for the year. It took 3 weeks to lose all the unrealized gains that were made over the last 40 weeks. Everyone in equities lost money, even Warren Buffett. He probably lost the most money out of anyone. His quote should serve more as an investing mindset on how to invest. If you invest or buy something overvalued your losses will likely be permanent. If you gamble or buy something you don’t understand, you will never dig out of the hole. What Buffett’s quote means to me is that you need to understand your risk profile, time horizon, and most important, what your capacity to take a loss is. Capacity is how much can you afford to lose without falling short of your goals. As bad as it as been, all of my clients are still on a path to meet and exceed their goals.

Buffett can never lose. He bet on America and the only way he loses is if we all have to go out and buy guns. If markets fall, he has enough cash to buy at discount prices. If markets rise, his investments will chug right along. The key to his strategy is holding enough cash to buy investments for the long-term. These 10% corrections are very common. This is the second one just this year. The first one was already long forgotten and this one will be a distant memory, I’d say in about the next 6 months. The only way a portfolio will never recover is if this rule was violated or there isn’t enough cash to dollar cost average into a stock that was bought at too high a price.

For all my clients nearing retirement or that have lower risk profiles, I wrote a few weeks ago that I had increased cash and bonds.  I sold before the sell-off and bought t-bills. For a few clients that are in retirement and have a much lower capacity for loss, I reallocated into more bonds. This begs the question am I timing the market?

My strategy is not market timing, but having the mindset of Buffett’s quote. I can’t time the market because I have no idea what the market will do in the next day, week, or month. All I know is that I’m well prepared for whatever happens next. I have cash to buy at lower prices. For my younger clients just starting to invest, I always remind them that they prefer falling markets to rising markets. For older clients, they all want stability and to own solid investments. There is no stability to this market right now, but it should return very soon. There comes a point in time when prices fall so low that you will need much worse economic news to reach the dreaded -20% correction. We are at or near that level where prices are looking attractive as long as the economy continues to grow above 2%. At this time, GDP is the highest it’s been in years and unemployment is at its lowest level. Markets would have a much harder time recovering if people were out of work and companies were not hiring. I believe the reason for this sell-off is that markets became slightly overvalued and China and Europe’s economies are slowing.

The stock market is not the only real asset that is losing value. The same goes for the housing market. I expect that house prices will soon cool in price. The home-building stocks have been hit the hardest.  I’m not going to make a prediction for when the market will recover or even stop falling. The future direction of the market will be determined by what happens next in overseas markets. The losses need to stop piling up in Europe and Emerging Markets. These indices are now down -12% and -16% year-to-date, respectively. This could happen next week or next year, but it should be sooner rather than later. There could also be a boost after the midterm elections when that uncertainty is removed. We are in a  similar pattern to what happened after the last election. Markets moved higher once people understood what the policies of the government were going to be for the next two years. I’m ready for either a Democrat or a Republican to lead the government. My investments should do well long-term under either party. If you buy high quality stocks at rock-bottom prices, you will do well over time. The one thing that would turn me even more cautious is if I start reading about corporate layoffs. As long as people can keep paying their mortgages, this correction should prove to be another great buying opportunity.

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This week I’d like to share a personal lesson that I learned by comparing the choices of an existing client and someone who was unwilling to pay for investment help. This was such a real life contrasting example of someone who understood the value of advice and the other who didn’t.

It was sad so see one of my clients recently move into a nursing home. This client is very wealthy and has done a tremendous job saving throughout life. He was more of a do-it-yourselfer and planned well for anything that life threw at him. The book the Millionaire Next Door was written with him in mind. I had another meeting with an elderly gentleman who was not a client that had done everything well in life, but couldn’t give up control of his investments.

The best move that my client had made was hiring a team of financial experts before he became ill. He was willing to give up control of his finances.  He hired an accountant for taxes and a Chartered Financial Analyst (me) to manage his investments. My client researched and assembled his team well before he became sick and found the experts that he believed would carry on the types of financial decisions that he would have made for his family.

The elderly gentleman that went down the wrong path didn’t want to give up control and was unwilling to pay for advice. There are many people that become better investors as they age like a Warren Buffett type, but most will lose interest and begin to make unwise investment decisions. I wanted to write on this subject because this is now the second person that I met with that made this mistake. We all know an elderly family member or a friend that had to fail an eye exam to give up their freedom to drive. At least there is an eye examination test to determine whether someone can still see the road. For investments, the money will be long gone before you figure out that you have lost your cognitive ability. It makes a difficult situation even worse when the spouse is left with almost nothing.

I cringed when I reviewed all of the poor investment decisions that this elderly man had made and I felt terrible for the spouse who was left with a broken nest egg. My general advice is if you don’t know what you are doing, then buy a CD or the S&P 500 index fund. You can’t find any better combination of investments. Do not invest in individual stocks unless you closely follow the company earnings calls, read financial publications, and closely watch the news. Contrary to belief, buy and hold investing does not work well for individual stocks. It only works for investments in the S&P 500 or another similar type of broad based indices. Most of the nifty-fifty stocks of the 60’s and 70’s are long gone. This advice that I give to buy an S&P 500 investment is more to the masses who don’t want to pay for any help. It’s very similar to Warren Buffett’s advice to buy only the S&P 500, but he hasn’t invested $1 of his own money into it. He hired two portfolio managers to manage his money when he is gone. Most people who don’t follow markets or don’t want to pay for advice should buy an index at the minimum.

I would much rather pay for advice from a qualified advisor. If something happens to me, my wife will receive the same investment help from the advisor that I have selected to help my clients as part of my business continuity plan. This advisor shares the same investment philosophies as me and views risk-return much the same way. The key is finding an advisor while you are healthy so that you can follow their investment decisions as markets change so that you can confirm your choice. As my clients well know, I enjoy communicating all of my investment decisions and partner with them on any important portfolio decisions.

I realize that many of the people that read my posts are existing clients and have already made their wise choice in advisor. 🙂 However, I thought if I could help save even one person from the type of losses that I reviewed from someone who was unwilling to give up the keys to their portfolio, then I would have helped save a spouse from losing everything.

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This weekend Europe will be hosting the 42^nd Ryder Cup. The 12 best U.S. golfers are up against the 12 best European golfers. On paper, the U.S. golfers are heavily favored, but playing on an unfamiliar course on foreign soil, anything can happen. Not only do we have more of the top golfers in the world, we also have the best companies. If you had to choose between the top 12 U.S. companies vs. the top 12 European companies, the U.S. would win hands down. If the U.S. companies were a Ryder Cup team, we could give the Europeans a few strokes and still win. Actually, forget strokes, we could give them a 5-match lead and win by a landslide. Even if President Trump took over the leadership of Europe he couldn’t make them great again.

In my clients’ portfolios I have had only slight International exposure, if any.  I don’t believe in international diversification for the sake of holding a place in an asset allocation. My preference is to own the best businesses and they all happen to be located in the U.S.. There will always be a few exceptions, and at some point in time, valuations might make sense, but not at the moment.

My two main concerns continue to be rising U.S. interest rates and the escalating trade war. These tariffs are starting to have a negative impact and are beginning to pressure some U.S. businesses. I’m sure that we will hear more about the impact of tariffs on profits as companies report earnings next quarter. These concerns were raised during Federal Reserve Chairman Jerome Powell’s press conference with reporters Wednesday, after the Fed increased interest rates for the third time this year. When asked about the impact of tariffs on U.S. businesses, Powell replied with the following comments that he has heard from corporate executives.

“We’ve been hearing a rising chorus of concerns from businesses all over the country about disruption of supply chains, materials cost increases, and if this, perhaps inadvertently, goes to a place where we have widespread tariffs that remain in place for a long time, a more protectionist world, that’s going to be bad for the United States economy.”

Despite the negative impact of these tariffs, U.S. companies are continuing to grow profits. Marc Benioff, the founder and CEO of Salesforce, said in an interview on Monday that the U.S. economy is still ripping. He said that he talks personally to hundreds and hundreds of CEO’s, not just in our country, but all over the world. He gave credit to President Trump’s lower tax rate for the gain in confidence and that more companies are investing because of it. While everyone is on the lookout for a market correction, my view is that it won’t happen until corporate profits begin to slow or if interest rates continue to rise.

If you’re a golf fan, enjoy the Ryder Cup this weekend. Go USA!

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It’s upsetting when I read about financial advisors that steal money from their clients. This week there were two different Ponzi schemes uncovered that targeted unsuspecting clients.

The first Ponzi scheme was a former math teacher that defrauded her clients. Most of the victims were teachers themselves. This advisor promised high returns if they invested in an unregistered company. The private company eventually went bankrupt and her clients lost everything. The second Ponzi scheme was the largest ever to hit Maryland at an astounding $364 million. These three advisors bought mansions, 20 luxury cars, diamonds, and other lavish items. This dirty bunch sold debt portfolios consisting of credit card, auto, and student loans among other things. Most of these ponzi schemes almost always have the same thing in common, promises of high returns for taking very little risk. The easiest way for an advisor to pry on new victims is to promise an easy way to get rich quick.

This post is not about how to identify and avoid bad financial advisors. Most of my readers are clients, so they already understand the importance of a third party custodian and working with a qualified and experienced advisor. There is no doubt that other ponzi schemes are happening at this moment. But there are other ponzi schemes happening right in plain sight that are easy to spot. Cryptocurrencies come to mind as a massive ponzi “like” scheme that the government failed to stop. Most people that bought into cryptocurrencies knew it was some type of ponzi, but they thought they could get out in time after making profits.

There is another massive ponzi scheme going on in many popular marijuana stocks. I’m finding many similarities between the investors in cryptocurrencies and marijuana stocks. The common thread is that these speculators pay ZERO attention to valuation. These investments don’t fit the definition of a ponzi scheme, but I believe they are close cousins. You need to find another investor to pay more for an investment at a higher price. Both will collapse if new money doesn’t materialize and they are illiquid at the very core. It’s the classic greater fool theory.

There was a marijuana stock this week that went on a rollercoaster from around $115, touching $300 in a few days, only to finish the week at $123. At the high, the market capitalization of this company hit $27 billion. Gross sales last year for this company was only $20 million. To put this absurdity into perspective, a $27 billion company should generate around $1.2 billion in profits every year. For those investors that are buying in hope of striking it rich, they will need that company to sell a ton of pot!  This was so foolish that I’m surprised the SEC did not stop trading for a few days. I highly doubt that any of the speculators in this stock ever cared to look at the financial statements and could even tell the difference between a cash flow statement and a balance sheet. An analyst went on CNBC’s “Closing Bell” and summed up the insanity the best by stating that owners of this stock were effectively buying air.

There is a investment warning in all of this stupidity. It’s that all bull markets and market cycles come to an end when silliness takes hold. Massive speculation is the ultimate killer of all bull markets. You can begin to tell when the market party is getting into the late hours when you  start to notice all of the drunken fools. My advice for any speculator buying into a $27 billion marijuana company is to donate the money to charity before it goes up in smoke.

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I’m not a big fan of non-fiduciary financial advisors. I’m confident that all of my clients are not fans as well. This week I was reminded of how much I dislike them. I helped a new client who purchased a fixed annuity by a financial advisor who positively was not providing advice in their best interest. The annual rate of return on this fixed annuity will not be much higher than a 3-year CD. In this case, the financial advisor didn’t take the time to understand their full financial situation before selling them this product. The day before I met another client who likewise needed help with an annuity.  This 90 year old client purchased a fixed annuity by another advisor when she was 80 years old. The annual rate of return for the last 10 years has been a measly 2%. There is so much atrocious advice out there not being given in the best interest clients.

Nowadays people are on alert for bad advice. It’s akin with cable news, you don’t know what’s fake or real. This freezes many people into not taking any advice, even if the advice could make them a fortune. The utmost example of missing out on great advice happens regularly on my favorite TV show, Shark Tank. The sharks are some of the best business people in the world that are all self-made millionaires and billionaires. They offer their capital in exchange for ownership in an entrepreneur’s big idea. There are countless success stories of people becoming millionaires overnight by making deals with these sharks. If you want your children to learn about business, this show will teach them as much as a good MBA business class on entrepreneurship.

This month I watched one entrepreneur make the mistake of a lifetime. He just couldn’t pay up for advice. He apparently didn’t know that when the incentive structure is in-line with the advice that is being given, it will likely be in his best interest. Mark Cuban, who is worth around $3.7 billion, and is well regarded as one of the most astute business people, was the only shark willing to make a deal with this college student. Mark sought 30% of his business in exchange for $100,000. This company had no sales and all the other sharks couldn’t believe that he was even making an offer. This poor entrepreneur was somehow stuck up on giving up 30% ownership of his company. When the college student countered Mark’s offer of 20% ownership, Mark paused for dramatic effect, and said nooooooo. And that was it. This college student had just passed on a deal of a lifetime with one of the greatest entrepreneurs of our lifetime. If this amiss entrepreneur had a phone to call me, here is what I would have said.

If you give Mark 30% ownership, he will have a greater incentive for your business to succeed. Your interest will be aligned with his. Your remaining 70% ownership stake is going to have a much greater value with Mark as a business partner. He has a vast network of connections to launch your product overnight. You will also benefit from learning from one the greatest entrepreneurs of your generation.  Mark will also have access to more capital required to grow your business. Or you can go back to your dorm room empty handed without the $100k and still have no sales.

I felt as bad for this college student as I did for my clients who purchased the annuities. What they both had in common was they didn’t understand the incentive structure of the person providing them the advice. In the case of the advisor, the incentives were clearly in favor of him making an immediate 7% commission. If there was no commission, I doubt there would have been a sale. In the case of turning down Mark’s offer, the incentive structure was perfectly in-line to make him wealthy beyond his wildest imagination. This lesson was a good teaching moment on incentives for my own kids (don’t ever turn down an offer from Mark Cuban or someone like him) and to be cautious when taking advice from a non-fiduciary advisor who is selling products.

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