Make Things Better

Blog post #390

Better implies that what you have right now can be improved. It is an assertion that requires confidence to say it and the optimism that it’s possible. 

Make implies that it’s up to you (and us). Someone needs to make it better. Better requires change, and change can be scary for some people. 

These are thoughts from a recent blog post, Make Things Better, by Seth Godin. Seth writes a daily blog, which I highly recommend, and is a prolific author.

Godin’s blog post about “make things better” is meaningful to us for what it represents about the values, goals and service that WWM provides to our clients.

We started WWM in 2003 to make things better. We entered the financial advisory business because we knew there were better ways to provide comprehensive financial and investment advice.

Investing can be complex. You may have had bad experiences in the past. You may have had advisors or brokers you thought were doing a good job, but something went wrong. You may not understand how to choose your 401(k) plan investments.

The financial world can be daunting and ever changing. You may not know what stocks, mutual funds or other investments are best for you. Tax and estate laws change. Retirement planning requires understanding and coordinating many types of data. 

You may not know the actual costs of your investments and whether you are paying hidden fees. You may not know how your money is really invested, especially if you have accounts at multiple places or brokers. 

Fees and costs are important and a critical component of investment success. We are transparent about our fees and the costs of the investments that we recommend to clients. When we meet with prospects, our fees and the total costs are generally much lower than the prospects current situation. We are not compensated by the investments we recommend, which is very different than traditional brokerage firm models. 

We believe your investments should be coordinated, so you have a real financial plan, which we call an “Investment Policy Statement.” We will advise you on your 401(k) plan and the many retirement decisions and issues you face. We can help you plan for Social Security and develop retirement projections. By having advisors develop a coordinated plan for you, this should reduce your financial anxiety and stress.

Working with a firm with a long-term investment philosophy which we feel is understandable, disciplined and rationale can help to provide you with confidence and security, regardless of how the financial markets are doing. We explain things in English. We communicate with you regularly, such as this blog, in a manner that helps you understand what is going on in the financial world. We know that clarity and understanding are important. 

We are very pro-active in our efforts to reduce and minimize the taxes related to your investments. We utilize tax-managed asset class mutual funds, which strive to minimize the taxes distributed from the fund, without hindering the performance. This type of fund is still relatively rare in the financial world. When appropriate, we place trades to recognize tax losses or avoid taxable fund distributions. We did a lot of these for clients last year, as applicable. 

For those clients who are now working with us, in Seth Godin’s terms, these people reviewed their situation at the time they first talked with us and thought working with us could make their financial lives better. They took the initiative to change, even if the change was difficult to do. 

We work hard at getting better. We take our role in providing you and your family with financial advice and guidance very seriously. 

If you are a current client, we hope that we have made things better for you. That is certainly one of our goals. If you have friends or relatives that could benefit from the advice, clarity and guidance we provide, please let them know about our firm. Forward these blog posts or share with them. 

If you are not yet a client but a reader of these posts and think you may be ready to consider a “change for the better,” please call or email us to schedule an appointment. 

Jeopardy phenom continues at record pace

As a follow up to last week’s blog post, James Holzhauer has continued with his incredible pace of Jeopardy winnings, as he has won $697,787 in 10 straight wins. Holzhauer now has the 4 highest winning games, including 3 games of more than $100,000 each. He is averaging almost $70,000 per night, while 74 game winner Ken Jennings averaged below $34,000 per game.

His speed, knowledge and confidence in betting are remarkable. My big question is when he eventually loses, will he be beat by a smarter and faster contestant, or will the cause be his own overconfidence? 

“All in” on must see Jeopardy phenom

Blog post #389

A professional sports gambler set a Jeopardy single game winning record of $110,914 on Tuesday’s episode. 

But that one day win is only part of the story. 

James Holzhauer has won an astounding $298,687 in 5 wins. His aggressive betting, different game strategy and vast knowledge has resulted in must see viewing. He is averaging almost $47,000 in his other 4 wins, which is far higher than typical winners. For perspective, Ken Jennings averaged $34,000 per night during his record 74 game win streak in 2004.

Holzhauer has turned the game upside down with his strategy. Most contestants start at the top of the board, starting with the small dollar clues in each category. Holzhauer picks the most valuable clues across the entire board first, which can earn him the most money the fastest. This enables him to bet super aggressively if he gets one of the 3 Daily Doubles, which he can bet up to his full winnings at that point in the game. He has repeatedly gone all in with huge bets, even at critical points in the game.

His change in strategy, how he plays the board, is interesting. I wonder why no other contestants, particularly those who have been very successful on the show in the past, have not tried his strategy? 

Similarly, for many of our prospects, and now clients, we present a different approach to investing than most had used in the past. However, once you understand it, you see the logic in our investment strategy. It will be interesting to see if future Jeopardy contestants adopt Holzhauer’s strategy in the future.

On Jeopardy, speed and information are key. Holzhauer is very fast with the buzzer, which then gives him an advantage, so he can try to answer the question correctly. And he is certainly well informed, as he correctly answered 129 of 133 attempts, through the 4th game. 

In investing, we do not feel that speed or certain information matters. Company specific information is supposed to be public and disseminated to all at the same time. Unless you have inside information, which is illegal, speed should not be an advantage. Earning announcements are generally either before or after the markets open or close. Major financial institutions can react quicker than individuals can, but they all get public information simultaneously. We rely on academic data and historical information for our investment philosophy, so speed is not critical. At times, we feel patience can actually be an advantage over speed. 

Holzhauer can have a significant advantage by being faster with the buzzer. However, he cannot control what categories he will face each show and the knowledge or expertise his fellow contestants have. He may be very skilled, but he may face a competitor that is even faster at the buzzer or smarter than he is on certain topics. He can only control his ability. 

In our investment strategy for stocks of using asset class mutual funds which are globally diversified, we take the view that active money managers cannot provide added value to you by being smarter than the market, over long periods of time. Active managers do research and charge higher costs to their investors, but extensive data shows that these active managers generally underperform their respective benchmarks.

Holzhauer has made very aggressive bets. So far they have paid off spectacularly. But his overconfidence may cost him a win at some point.

During his record breaking one night win, he bet all his money, about $34,000, early in the second “Double Jeopardy” round. He was far ahead of the two other contestants, but if he had answered the question incorrectly, he would have blown his insurmountable lead.  When he made this $34,000 wager, he must have felt that if he answered wrong, he was very confident he would recapture the lead because he was faster at the buzzer and then could answer subsequent questions correctly. He did get the question correct and went on to win.  His great confidence has resulted in huge success, so far. To keep winning, he will have to balance his aggressiveness without being too overconfident.

For many investors, investing in individual stocks has great appeal. You think you know what company, store or product will be successful, so you invest in it. Many years ago, before I began this firm, I thought I could identify mutual funds based on their past track records or reading about the money managers. All too often, this overconfidence in our abilities to pick financial winners does not prove out to be as successful as we would hope. Unexpected things happen to companies or sectors that we think are good ones. The world changes. Amazon comes along and online shopping has hurt the stocks of many retailers, for example. 

Holzhauer has made huge bets, relative to what others contestants have done in the past. I went back and watched online the previous highest single game winner, from 2010. That contestant bet $7,000 when he had $25,800 and $5,000 when he had $33,600. In comparison, Holzhauer bet his entire $14,600 early in the game, $25,000 later in the game and then wagered $38,314 on the Final Jeopardy question (though he could have bet more), as his goal was to win $110,914, as the total represented his daughter’s birthday, 11/09/14. 

Holzhauer is a professional gambler and he may already be wealthy. He obviously is a risk taker. He told ESPN “…my work is similar to an investment bank, except that I’m the analyst, trader, fund manager and day trader all into one.”**

In our investment firm, as we work with clients, we want to take appropriate risks, but not more risk than is necessary. We plan and discuss with you how much risk you need to take, and are comfortable with, to reach your various financial goals.

James Holzhauer is a highly intelligent person and professional gambler. I hope he continues to win, as he is great to watch.

This contestant is playing a game. He may be ok with “risking it all” on one question or taking outsized gambles on his ability to answer a single question, which may lead to huge success or failure. 

We feel strongly that broad diversification is prudent and advisable for your financial future. We are not “going all in” on one stock or any particular financial sector. 

As we manage your investments and provide you with financial advice, we want you to be comfortable and be able to sleep well at night.

Cite:

**”Sports Gambler James Holzhauer Shatters ‘Jeopardy!’ Winnings Record”,www.huffpost.com, 04/10/2019 by Ron Dicker

Sources:
“Professional sports bettor sets ‘Jeopardy!’ record”www.ESPN.com, 04/10/2019 by David Purdum

The secret weapon of the sports gambler who just broke the single-game ‘Jeopardy!’ record?  Children’s books.“,www.washingtonpost.com, 04/10/2019

www.jeopardy.com

Spring Investment Fundamentals

Blog post #388

The 2019 baseball season has just begun. 

This means that spring training has just concluded, which is the time when experienced players and rookies alike focus on the fundamentals of the game. Even though these players are the very best in their sport, they have just spent many weeks practicing baseball basics under the direction of their coaches.

The players went through repeated drills and practiced skills they have been doing ever since they were youngsters first playing baseball. Repetition. Reinforcement. Remembering the basics!

In that spirit, let’s review some investment fundamentals. 

Over the very long term, returns from stocks in the US and Internationally have far outperformed the returns of investment grade bonds, by a significant margin. 

It thus makes sense to own stocks, and not bonds, if you want your investment portfolio to grow over the long term.

The long term return of the S&P 500, representing large US based companies, is around 10% annually. We believe in a well diversified global portfolio, which includes small and large companies, as well as value companies. This type of globally diversified portfolio has future expected returns that should exceed that of the S&P 500 alone, over the long term.

To get the reward of the long term returns of stocks, you must endure the volatility that comes with owning stocks. This is a temporary risk, as diversified stock markets have climbed higher over time.

  • For example, the S&P 500, an index of 500 US-based companies, of which the companies in the index change over time, has increased over 25 times since the beginning of 1980.
  • The S&P 500 has increased from 108 on January 1, 1980 to greater than 2,800 in April, 2019.

The temporary risk is the challenge. The hard part for most investors is dealing with the volatility, like when markets drop by 20% or more. This has happened and will continue to occur, about once every 5 years since WW II. 

Helping you to deal with this volatility is one of the key benefits we can provide to you.

As stock markets cannot be consistently or accurately forecasted, the only way to benefit from the returns of the stock market is to remain invested in stocks, in accordance with the stock allocation that is determined to be appropriate for your specific situation. You can’t time stock markets. It doesn’t work. 

During the baseball season, a manager and coaches will continually remind their players of the key fundamentals, to help them succeed.

We remind you of these concepts to help you reach your financial goals. 

  • Risk and return are related.
  • The better your ability to emotionally handle the temporary drops of the stock market, the greater your chances are to reap the long term rewards that stocks can provide.
  • We will be here to guide and advise you.

Talk to us.


Handling recession and interest rate fears

Blog post #387

The economy and investment worries are always changing. 

Last year, many feared the impact of trade wars and rising interest rates to their portfolio. 

Most investors had portfolios that declined in 2018 but have seen a strong rebound so far in 2019.

Recently, there has been growing concern that due to slowing economic growth, stock portfolios may be at risk if there is a recession. If the US or global economies continues to slow, that could worsen and turn into a recession, which means at least two quarters of decline in the economy. 

Interest rates have dropped recently, so that some longer-term rates are now paying less than some short-term interest rates. For example, the three-month Treasury bill is yielding 2.439%, while the 10-year Treasury note is yielding 2.374% as of Wednesday afternoon. This is called an “inversion” of part of the bond yield curve. Some forecasters feel this type of “inversion” is an early warning sign of a future recession.

Should you be worried about this?

If you are not working with an experienced team of financial advisors, you could be worried. 

If you do not get clear and timely information, you could be worried. 

Why we don’t think you should be worried.

If you get advice and guidance from a financial advisor such as WWM, you have a long-term investment plan in place which is based on sound philosophies, so we don’t think you should be worried. We plan with you for these types of occurrences, even though we cannot predict when they will occur.

Recessions are very hard to predict. And when recessions do occur, they usually do not last that long, ranging from 6 months to less than two years. Since the Great Depression in 1929-1933, which lasted 3 years and 7 months, the longest recession was 18 months, from December 2007- June, 2009.*

And there is not necessarily a direct correlation between the timing of recessions and the impact on your investments. The stock market can decline before a recession starts and rise before a recession ends. We do not feel that what happens in the next 3-6-18 months, to the economy or your investments, should impact your ability to reach your long-term financial goals, with sound financial planning and investment advice. 

A recession does not mean that the stock market will necessarily incur the huge declines that were experienced in 2007-2009. That is always a possibility, as major declines generally occur at least once every 5 years, but again, these types of downturns cannot be reliably and accurately predicted in advance. 

Thus, fears about a potential recession should not translate into a change in your long-term investment plan of action. In a CNBC interview on Thursday, March 28th, Warren Buffett was asked about a potential recession and the impact of that on his investment strategy. He reiterated his belief, which we agree with, that you can’t predict when events like recessions will occur and it would not change his long-term desire to buy and hold stocks.

If you work with WWM, you have an investment plan that is developed for your personal situation. We view these plans as long term, to cover your financial goals and objectives for many years. You would have a globally diversified asset allocation mix (the amount of stocks and fixed income investments) that is appropriate for your goals and risk tolerance. 

If you work with WWM and you are in retirement, your investment plan is designed for decades, to support your desired standard of living. 

If you are saving for college or retirement, your plan is intended to suit you for many years or decades, during both good and bad stock market periods. 

We understand that at times you may have concerns or worries. If you are still worried after reading this, that is what we are here for. Call us and let’s discuss it. 

Working with WWM, we strive to guide you through the always changing economy and financial markets with a solid investment philosophy.  We strive to provide you with advice, re-assurance and clarity. 

We don’t want you to panic and sell because of fear. That could be detrimental to your financial future. Selling because of fears and downturns could reduce, not increase, your long-term goal of financial success. 

We want you to understand what is happening in the financial world, so that you will have the fortitude to adhere to your long-term financial plan. We feel that sticking to a long-term plan that we develop for you is much more likely to lead you to financial comfort and success. 

If you are not working with WWM and not receiving our financial advice, we encourage you to contact us. See the difference that we can make in your financial life. 

Source:

* “List of recessions in the United States“, Wikipedia


Major Financial Plot Twist

Blog post #386

In December and the fall of 2018, the Federal Reserve played the role of villain.

They had raised short term interest raises for five consecutive quarters and were projecting more increases for 2019 and 2020.

As a result of these increases, the Federal Reserve appeared to be Grinch-like just prior to last Christmas, which contributed to significant stock market losses in 2018. See our blog post, Is the Fed acting like Grinch?, from December, 2018. 

But in January, the Federal Reserve began changing the plot in this economic story. They went from villain to hero, at least as far as global stock markets and investors are concerned. 

Since their late December meeting, Federal Reserve officials have signaled in speeches and meetings that further rate increases may not be needed in the near term. 

This change in the Fed’s stance, though caused by their concern that US and global economies are slowing in growth, are a large factor in the strong performance of major US and global stock indices so far in 2019.

To reap the long-term benefits of investing in a globally diversified stock market portfolio requires patience and discipline. If you were patient and disciplined in late 2018, and didn’t overreact to the 2018 stock market declines, you have likely been rewarded in 2019.

The Federal Reserve announced no new short-term interest rate changes this week and projects no increases for the remainder of 2019, after their recent two day meeting. The average member now expects a single .25% increase next year, in 2020, and no increases for 2021. 

This is a major change from their position in December, 2018, when Board members forecasted two .25% rate increases in 2019, which was a reduction from their projections earlier in 2018 for three 2019 increases.

The Fed reaffirmed its stance that it “will be patient” in determining future interest rate changes, based on observed economic data (past economic activity) and expected future conditions.

It is clear once again that economists are not able to accurately predict the future.The Fed is supposed to have some of the top economic experts in the country, yet their “dot plot” forecasts of future interest rate expectations have consistently been inaccurate over past years. 

How will the economy act in the future? Will the Fed play the role of villain or hero?

We know that the future story will likely not play out as currently forecasted. There will be events and changes that can’t be anticipated. No one really knows the economic future, how the trade issues will be resolved or the pace of growth. It is likely that the Fed’s current dot plot forecasts of future short term interest rate changes will be different than they predicted this week. We don’t know when or if they will raise or even reduce rates, or the pace of the actual future changes…from what they predict now. 

This reaffirms our philosophy of not investing based on interest rate predictions. This is why we believe in using laddered fixed income holdings, spread across various maturities, and not betting on interest rate moves. This is why we don’t make stock market investments and recommendations based on predictions. 

Fed Chair Jerome Powell still expects the US economy to “grow at a solid pace” in 2019, but at a slower pace than in 2018. This is causing longer term interest rates, such as the 10 year bond, to decline even further than expected. The rate was over 3.24% in early November, 2.77% in late December, 2018 and was 2.54% Wednesday afternoon, which was the lowest level since January, 2018.

We always stress that investors need to be focused on the long-term. Commenting about these Federal Reserve changes may appear that we are focusing on the short term. However, we feel that it is important to share our thoughts and analysis about current market news and actions.

You want investment and financial advice. You want reassurance and confidence, with a future that is uncertain.

We can provide you with clarity, perspective and solid answers. 

We can guide you through financial complexity and work toward increasing your changes of meeting your financial and retirement goals. 

Talk to us.

Investing and Brackets

Next week, much of the country will participate in the annual fun of trying to choose which college basketball teams will do best in the NCAA national basketball championship tournament.

They will get the brackets, print them out or make their picks online. Have fun! And hope for the best. 

Picking the winning teams can be like investing. There are many different approaches. Some make sense. Some don’t. Some are effective, some are not. 

We cannot help you to have the top, most successful bracket selections to win your basketball pool, but we want you to do well. To outperform all the other people in a basketball pool, you have to take risk, and likely a lot of risk at some point. You have to get lucky. You probably need to choose some long shots and try to predict some upsets that you hope will occur along the way. You have to take some chances, if you want to outperform all the other entrants. 

We work with realistic goals and we want to help you to succeed financially.  When we make investment recommendations and structure a portfolio for you, making you the absolute most money is not our goal. That would require taking on too much risk for most people. That is not our approach or our philosophy. 

Our goal, and we think yours as well, is to perform well. It means that we make solid decisions and use processes and philosophies that strive to set you up for the best chance of financial success, in an unknown and unpredictable world. 

We believe in globally diversified portfolios. We believe that utilizing low cost mutual funds is vital, as striving to minimize your costs makes a difference over the long term. We use tax managed funds when possible, to strive to reduce your taxes. 

When you fill out your brackets, you can use different approaches. 

You can choose teams that you know. You can base your selections on past winners or the team colors. You can choose against Duke, if you don’t like them, just because. All of these are emotionally based decisions, not a rational process for decision making. We use rational thinking, not emotions, when making investment decisions. 

You can go with the favorites. This would be quite logical, the vast majority of the time. The college teams are seeded by a group of people (the selection committee) that spends a huge amount of time to analyze the teams, their records and all sorts of other data. The committee seeds the teams in each of the four regions from 1-16. 

If you do this every year, and you base your picks on the seedings and choose the favorites until the Final Four, you will most likely do pretty well. You will probably not win a pool in any given year. But we doubt that you will be consistently near the very bottom of your pool most of the time. You will likely have far more success than failure, in terms of your overall long term performance. 

This is similar to the strategy that we adhere to for picking stocks. We don’t strive to pick the major upsets. We don’t pick individual stocks. We go with the approach that the “committee” is pretty smart and that will lead to good long term performance, better than most others over the long term. 

This is in contrast to people who actively try to pick and choose lots of upsets and underdogs. Who they think will do the best, even though the future is unknown. You can spend hours reading all sorts of “experts” on various websites or listening to other “experts” on TV or talk radio programs. You could even pay for access to certain websites or information, because you think they are really in the know. 

You can follow this type of advice, but do you know how they performed last year? Or the year before? And even if you identified an “expert” who did well in the past, how do you know that will lead to good (or outstanding) performance in this year’s tournament? It probably does not! They most likely got lucky one year. They picked a team that turned out to be hot and rode that to glory. Or, it’s just their job to be the “expert” and they are good at doing predictions and interviews in the media. 

So even if you find the best expert and follow their advice, wouldn’t others eventually also learn about them? Over a few years, if someone was really able to consistently be the best at tournament picks (which is highly unlikely), their advice would become so well known that the value of their advice would diminish. Information spreads rapidly and everyone has access to it. 

This is how the stock market and active money managers and mutual fund managers work. You pay a lot for their management with the hope they will deliver better performance, but in the long run, the vast majority underperform their benchmarks averages, which is the equivalent of the tournament committee’s seedings. 

We hope you enjoy the NCAA tournament and your picks are winners. It’s supposed to be fun. You can take some chances and risks. Your future is not dependent on it. 

But for investing, for your serious money and your financial future, we hope you understand the analogy here and follow our rational approach and investing philosophy. 

Let’s Talk

Checking up on things

While we regularly monitor our client’s investments, there are some things you should be regularly checking up on. Just like your annual physical, we recommend that you review the following on a regular basis.

Social Security….For most people, Social Security benefits are a key component of their retirement planning. If you have not yet started collecting Social Security, you should regularly review your Social Security information and future benefit projections. You should verify that the earnings data on record is accurate. You should review this information with your financial advisor.

Social Security stopped sending everyone annual paper statements a number of years ago. To review your data online, go to: www.ssa.gov/myaccount to establish your own Social Security account. Each individual needs to do this. It cannot be done as a couple. You will need to create a user name and password. SSA’s password requirements are very strong, which is good. Be sure to save it, and they require you to establish a new password every 6 months.

Credit scores…You should regularly monitor your credit score and credit report activity.

There are now many credit cards that provide you with your credit score for free, so this is much easier to obtain than it was years ago. It is a good idea to track your score, to monitor if there are changes, and especially declines. Again, if you are married, you should check the score for each spouse, as scores can be quite different.

Your credit score is not influenced at all by your income or assets. Credit scores are based on formulas which factor your total debt, the age of your various types of debt, how much of your credit you have used, the type of debt you have and your payment history, including late payments.

We recommend that every adult should have some credit cards in their individual name only, in addition to any joint credit.

You should review your full credit report at least annually. This way, you can review all of your current and past credit and to see if anyone has established credit cards or other debt that you did not authorize. Each spouse should review their own report, as they are separate.

The best website to obtain a free credit report is: http://www.annualcreditreport.com/. This site is governed by the Federal Trade Commission (FTC). You may also call 877-322-8228.  This site will provide you with a link to get your credit report and you will need to answer a number of personal questions, for identification purposes.

The Fair Credit Reporting Act guarantees consumers access to their credit report information from each of the three credit reporting companies, once per year, for free. The best and only way to ensure that you are getting this information for free is to use the above website, http://www.annualcreditreport.com/.

One member of our firm uses Credit Karma. Credit Karma can be accessed through their website, https://www.creditkarma.com/, or you can install the app on your smart phone. Credit Karma gives you free access to your credit scores, reports and monitoring. You can get your scores and reports from TransUnion and Equifax with weekly updates. The app is free to use.

We hope these are helpful reminders. 

If you have any questions on the information you gather from getting these reports, please let us know.

Lessons from Warren Buffett, 2019

Warren Buffett’s Berkshire Hathaway Inc.’s 2018 Annual Shareholders Letter was released last Saturday morning. This letter has been required reading for me for as long as I can remember. There are always lessons to be gleaned from his letter which can help all of us to be better investors and smarter financially.

Below are my comments, followed by selected portions of Buffett’s writings (in italics) from the 2018 Berkshire Hathaway Annual Letter.

WWM: It is clear that Buffett realizes that not all of his investments will succeed. He knows that many of the companies, or trees as he refers to them below, will not be able to adapt and be successful in the future.

  • Buffett: Investors who evaluate Berkshire sometimes obsess on the details of our many and diverse businesses   – our economic “trees,” so to speak. Analysis of that type can be mind-numbing, given that we own a vast array of specimens, ranging from twigs to redwoods. A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty.

Buffett knows that having ample cash on hand is critical for Berkshire, but is important to our clients as well. We often stress to clients that having many years of their annual withdrawal needs in fixed income should enable them to be able to sleep better at night.

  • Berkshire held $112 billion at year-end in U.S. Treasury bills and other cash equivalents, and another $20 billion in miscellaneous fixed-income instruments. We consider a portion of that stash to be untouchable, having pledged to always hold at least $20 billion in cash equivalents to guard against external calamities. We have also promised to avoid any activities that could threaten our maintaining that buffer.
  • Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash.

Berkshire Hathaway grew in value during the 1970s through the early part of this century based on Buffett’s stock investments in many large US companies, as well as the success of its vast insurance companies. During most of this century, he has focused more on buying large companies outright, as well as making many opportunistic investments during times of crisis, such as during the financial meltdown of 2008-09. Now he has had to focus more on stock purchases again, due to the higher prices of buying companies outright.

  • In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.
  • That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities. We continue, nevertheless, to hope for an elephant-sized acquisition.

Buffet does not try to make predictions or forecasts on the short term direction of stock prices, and does not pay attention to other short term issues, such as the Federal Reserve and economists. We agree with this approach!

  • My expectation of more stock purchases is not a market call. Charlie (Munger) and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price…
  • Charlie and I do not view the $172.8 billion…. (their 15+ top stock investments) as a collection of ticker symbols – a financial dalliance to be terminated because of downgrades by “the Street,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.

Due to their large insurance business, Berkshire has built up huge cash and investment reserves, called float, which is the excess of premiums paid to them greater than the claims they have paid out. Berkshire is well prepared with funds for a major insurance loss, as we want you to be prepared for stock market declines. Both will occur. You just don’t know when a huge insurance loss or market decline will occur or the cause, in advance.

  • As I have often done before, I will emphasize that this happy outcome (the build up of insurance float) is far from a sure thing: Mistakes in assessing insurance risks can be huge and can take many years to surface. (Think asbestos.) A major catastrophe that will dwarf hurricanes Katrina and Michael will occur – perhaps tomorrow, perhaps many decades from now. “The Big One” may come from a traditional source, such as a hurricane or earthquake, or it may be a total surprise involving, say, a cyber attack having disastrous consequences beyond anything insurers now contemplate. When such a mega- catastrophe strikes, we will get our share of the losses and they will be big – very big. Unlike many other insurers, however, we will be looking to add business the next day.

In his letter, Buffett tells how he started with his first stock investment in 1942. He emphasizes the importance of savings and the compound effect of the long term growth of US companies, despite political and other challenges over the decades. He attributes some of his success to “The American Tailwind,” but hopes there are bright futures worldwide and stresses that we all benefit if countries around the globe “thrive.”

  • If my $114.75 (in 1942) had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1.
  •  Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3.25 ounces of gold with your $114.75.
  •  And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.
  •  Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history….
  •  Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make such claims.
  •  There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.
  •  Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back.

 

Source: 2018 Berkshire Hathaway Annual Shareholder Letter, released Saturday, February 23, 2019. See Berkshirehathaway.com.

Disclosure: Brad Wasserman, author of this blog post, owns a small number of Berkshire Hathaway shares, which were purchased to enable me to attend Berkshire’s annual meeting. All my other stock investments are in DFA mutual funds, which is one of the primary mutual funds companies that we recommend to our clients.

The Real News About Charitable Deductions

There seems to be some mis-understandings about the tax deductibility of charitable contributions due to the Federal tax changes that were enacted in late 2017, which are now effective for 2018 and going forward. Let’s try to clarify this matter.

There were no changes in the new tax law that specifically affected charitable contributions. 

What changed is whether you can itemize or not.

We know that the financial world is continually changing. We know that the tax laws changed, and we hope this information provides you with clear and useful information. We want to help you overcome complexity and enable you to make better financial decisions.

If you can itemize, which means that your various deductions total more than the increased standard deduction amount, then you would continue to get a direct tax benefit from your charitable contributions.

The Tax Cut and Jobs Act (TCJA) vastly increased the standard deduction amounts. The 2018 and 2019 standard deductions amounts are as follows, respectively:

  • Filing Single….$12,000 and $12,200
  • Married Filing Joint couples….$24,000 and $24,400
  • Head of Households….$18,000 and $18,350

What is deductible to determine if you can itemize has changed, but how or what charitable contributions can be deductible has not changed.

  • State and local taxes, such as property taxes and state income taxes are now limited to $10,000 per year (previously, there was no limit).
  • In general, mortgage interest is still deductible.
  • Most miscellaneous itemized deductions have been eliminated.

If the total of your deductions exceeds the standard deduction amount for the filing category that is applicable to you, then you would benefit from itemizing. And if you have charitable contributions as some of your deductions, then you would get a tax benefit from those contributions.

If the total of your deductions is below the standard deduction amount that is applicable to you, then you would not be getting an incremental tax benefit from your charitable contributions.

If you are married, your standard deduction amount is $24,000 for 2018. If a couple paid $10,000 of state and local taxes and had mortgage interest expense of $10,000, any charitable contributions above $4,000 would enable this couple to itemize. If they made $10,000 in charitable contributions, which includes cash and property contributions, like used clothes donated, they would benefit as their total deductions would be $30,000.

If the same deductions were made by a single person, the $30,000 of deductions would far exceed the standard deduction amount of $12,000, and clearly this person would itemize and benefit from their charitable contributions.

This is really a case specific issue. Each person or couple will need to review the impact of the new tax law to their own specific situation and determine the impact on their deductions.

What we want to clarify is that many people will continue to be able to itemize and will continue to get real tax benefits from their charitable giving.

If your deductions are going to be far above the standard deduction amount each year, then you should continue with your annual charitable giving, as the tax law change really will not impact the deductibility of your charitable contributions.

Bunching strategy…

If you do not think you will exceed the standard deduction amount each year, but could be close, then more planning may be beneficial. In this situation, we recommend that you consider bunching your contributions every other year, if that will help you exceed the standard deduction amount every other year.

For example, let’s say a couple will have $15,000 of deductions in 2019, not including their charitable contributions of around $8,000 per year. If they make the charitable contributions each year, they would have $23,000 of deductions, and thus utilize the standard deduction amount of $24,400 in 2019.

However, if they bunch the contributions into an every other year cycle, they would get a significant benefit. If they gave most of the prior annual contributions of $8,000 into one year of $16,000 of contributions and then skip making most of the contributions in the following year, they would get a significant tax savings.

In the above example, they would have $15,000 of deductions in 2019, not including charitable contributions….and would still get the $24,400 standard deduction amount. In the next year, they would have deductions of $31,000 (the $15,000 + $16,000 of bunched charitable contributions), which would far exceed the 2020 standard deduction amount. You probably cannot or would not want to skip some contributions in a year, but you could let the charity know your plans, if they are counting on your annual gift.

If you have questions about this topic, you should consult with your tax advisor and review the figures.

For more advanced or significant charitable tax planning and giving concepts, please contact us. We have advised many clients on charitable giving and the interaction with their investments, estate planning and retirement accounts. This is a high value service we provide.

Obviously, charitable giving is a very personal matter.

We hope that you give to charities which are important to you and will continue to support their worthy causes and efforts, regardless of whether you get a tax benefit under the new tax law.

We welcome you to share this blog post with others, so they will have accurate information about charitable giving.

Let’s Talk

Will you even remember this occurred?

Late last year, most global stock markets dropped sharply. On Christmas Eve, the US markets had their worst Christmas Eve ever.*

Since Christmas, 2018, worldwide stock markets have risen dramatically and have recouped a large portion of the late 2018 decline.

In 66 trading days leading up to Christmas Eve, the S&P 500 declined 19.8%. However, in the 33 trading days December 26th to February 13, 2019, the S&P 500 has increased 16.6%.**

The chart below represents the above trading period, from 09/20/2018 to 02/13/2019.***
 

 While we believe that holding a broadly diversified global portfolio is in the best interest for most long term investors, I’m using the S&P 500 only for the illustrative purposes in this blog post, even though the S&P 500 consists of only US based large companies.

Global stock markets have increased significantly over the past 7 weeks despite many concerns about trade issues, the US government shutdown and worries about slowing economies in the US and globally.

This is a good reminder that even though you and others may be worried, and rightfully so, it does not mean that the stock market has to decline at that same time you have worries. The past few months are a terrific example of why we often remind you to focus on the long term, and not on the short term.

We believe it is nearly impossible to consistently and accurately time the stock market, to know when to get out and then when to get back in. You have to be right twice. To be a profitable market timer, you have to be able to do that over and over, and be correct to time the high and low points. This is not a game we advise you to play.

Though it can be difficult to handle markets when they decline quickly and sharply, we recommend that you adhere to your personal stock allocation plan, and not react to short term fluctuations and volatility.

Do you remember the decline in stocks which occurred in early 2016? Do you remember what caused this….3 short years ago? I assume that most of you do not remember that decline.

Just to refresh your memory, it was because of worries about China’s economy in January of that year. By early February, 2016, worldwide stocks began to climb again.

Three to five years from now, most investors will likely not clearly remember the late 2018 drop in stocks. It may have been worrisome for you to experience, as most major declines are scary to experience. But over time, the markets generally recover and go higher. And the memory of these declines fade.

But if your focus is on your long term future and long term financial plan, you will realize that declines like this are normal.

If you are in retirement, this is why we discuss with you the amount of fixed income savings that you have, and how long that can last you. We refer to this as your “Foundation.” For example, assume you are withdrawing around $80,000 annually from a $2 million portfolio. If you have $1 million of that portfolio in fixed income investments (50%), then you have over 12 years of annual withdrawals which are not subject to the volatility of the stock market….and that is without even including any interest on the fixed income investments. So you would really have 13 or more years of safe funds to rely on for your annual living.

If you think like this, you will hopefully be better able to tolerate the down periods in the financial markets, as you would know that you don’t actually need the stock portion of your savings for many, many years, for at least a decade in the example above. Thus, while the decline of 2018 was not pleasant for anyone, with this type of framework, you would realize that it is not directly impacting your current ability to live or your future standard of living.

It is this type of perspective and planning that we strive to develop with you, based on your age, income, expenses and savings.

We cannot predict when future major declines will occur, but we know there will be major declines in the future. On average, a major decline of around 20% or more occurs at least once every 5 years.

We want to work with you to develop a financial plan that begins to resolve your financial issues and concerns, such as how much money you may need to retire. And then we want to provide you with a plan and solution to live through your retirement years with the goal of reducing your stress that is related to financial issues.

We cannot eliminate down periods of the stock market. But we can work with you so you can strive to better handle down periods.

Let’s Talk.

*“The Stock Market just booked its ugliest Christmas Eve plunge-Ever”MarketWatch.com, by Mark Decambre, 12/24/2018

**“Stock Market Counterfactuals”awealthofcommonsense.com, by Ben Carlson, 2/08/2019

***S&P 500 ChartMorningstar.com