$1 Billion Tax and an Incredible Investment Story

John Paulson, a large hedge fund manager, owed Federal and state taxes of $1 billion this week. And he owed $500 million a year ago, April 2017.

Incredible. That is so large that the IRS cannot even process it all in one check, as the IRS cannot accept a check for more than $999,999,999. A problem we should all have!

But there is much more to this story, which you should know about.

Paulson’s huge tax liabilities are from $15 billion of profits he and his hedge funds made by betting against subprime mortgages prior to 2008-09.  He was able to defer the payment of those taxes until 2016 and 2017 because of a tax law which no longer exists.

How have Paulson and his firm, Paulson & Co., done since 2008?

This is where the story gets even more interesting than the huge tax payment.

After Paulson’s 2008 success, investors flocked into his funds. By 2011 his hedge fund firm was one of the industry’s largest, managing $38 billion seven years ago, according to the Wall Street Journal.  Today however, Paulson is managing less than $9 billion and most of that is his own money.

Why the huge reversal of fortune?

Paulson’s oldest fund, Partners Fun, has underperformed the S&P 500 every year since 2008.

For 9 straight years, from 2009-2017, his main hedge fund underperformed the S&P 500 and often by incredibly large margins.

Chart Information above is found in WSJ Article $1 Billion Tax and an Incredible Investment Story.

The Partners Fund underperformed the S&P 500 by more than 40% each year during 2016 and 2017.

His fund underperformed the S&P 500 by more than 10% in 4 of the 9 years, in 2009, 2011, 2013 and 2014.

Paulson Partners Fund S & P 500
2009 6.12 26.49
2010 11.69 14.91
2011 (9.88) 1.97
2012 9.88 15.82
2013 18.39 32.18
2014 0.8 13.51
2015 (3.14) 1.25
2016 (27.23) 11.82
2017 (20.27) 21.67

How did this occur and what are the lessons for you?

Paulson’s strategy has been the opposite of many of the philosophies of WWM.

  • We believe in diversification.
  • We stress that it is difficult to outguess the markets consistently over long periods of time.
  • We do not make huge bets on single stocks or on specific industries.
  • We don’t believe in shorting stocks (betting that a stock will go down).
  • We use a consistent and replicable investment strategy.
  • All these factors worked against Paulson, since he struck it rich in 2007 and 2008.

After 2008, John Paulson and the hedge funds he manages have made huge bets, most of which have not been as successful as a broadly diversified investing strategy.

He made huge investments in gold stocks, which got crushed after 2009. In 2011, the funds lost more than $100 million on a Chinese forestry company, of which they owned 14%.

In 2014, he advocated a theme of drug industry consolidation and invested heavily in Valeant Pharmaceuticals International, Inc. The stock went higher from $140, but by April, 2016 it was under $36 per share. That month, he told his investors he would change his risk management strategy and would no longer put more than 35% of the funds assets into any one industry. It was too late however, as that strategy had contributed to years of vast underperformance. Then he invested more in Valeant and it went down much further.

The more I read about this series of events and investments, the worse it got. It is almost unbelievable that Paulson and his firm could have appeared so smart (once?) and then make so many very bad investment decisions for so many years.

Paulson’s Partners Fund lost over 10% during the first two months of 2018. Paulson Enhanced Fund, which uses borrowed money to invest in merger deals, is down 20% this year, fell 30% last year and lost about 49% in 2016. Their use of leverage amplified their incorrect bets.

It appears that he made over $1 billion in bets in 2016 and 2017 that the S&P 500 would go down. The opposite occurred, as stocks broadly rallied, and his opposite bet again was a huge loser.

The moral of this story is Paulson got very rich due to his gut instincts prior to 2007 and 2008. He is still very wealthy. He has made large donations to NYC institutions and donated $400 million to Harvard University’s School of Engineering.

However, for those who invested in his funds after 2008, which is nearly all of their outside investors, Paulson’s firm had been a disaster on a comparative basis to financial industry benchmarks.

The key for us and the clients of our firm, and for the friends or relatives of yours who do not yet use our firm: We are investing the right way…for the long term.

Others may have strategies that may work for a year or a period of time. The strategies may work temporarily.

But you are not investing for one year. You need to know and understand the strategy that your financial advisor is using for this year, and the year after that and 5 years from now. You are investing for the long-term.

If predictions and guesswork or forecasting are their strategy, or what is really underlying their actions (even if they don’t use those terms), then you are using the wrong investment strategy for your serious money.

If you are not sure what strategy your advisor or money manager is using, ask him or her. You need to find out. If you are still not sure, ask us. We can figure it out.

I’m sure that many of Paulson’s investors after 2009 would have benefited from understanding this, if they would have known how and why he was temporarily successful and been willing to understand the answers.

And now you know “the rest of the story.”


WSJ article, Worried About Your Tax Bill?  Hedge-Fund Star John Paulson Owes $1 Billion. By Gregory Zuckerman 04/11/2018

Paulson Partner Fund data from WSJ article citied above.

S&P 500 performance information is from Vanguard 500 Index  Investor fund, VFINX, per Morningstar.com as of 4/19/18, net of fund fees.

Major change to credit cards coming

Starting later this month, most major credit cards and large retailers will stop requiring signatures on credit card transactions.

Due to the broader use of chip technology, signatures are now largely irrelevant. You may still be required to sign at locations that do not use chip technology.  

Visa, American Express, Mastercard and Discover will stop requiring signatures to complete credit card purchases later in April.

Signatures will not disappear completely, as retailers will have to decide whether they want to stop having you sign to complete a transaction. Target plans to eliminate them this month and Wal-Mart has already stopped them for most transactions.

The rules will vary by card network. Visa is making card signatures optional in all of North America for retailers with chip technology. American Express is dropping signature requirements globally for all its cards. Mastercard is ending the signature requirement only in the US and Canada. Discover is ending the signature requirement in the US, Canada, Mexico and the Caribbean.

In addition to chip technology replacing the need for signatures, dropping the signature requirement speeds up check out, which is an added incentive for merchants.

Smaller retailers may continue to require signatures, as Square and other small retail payment systems may not abandon signature requirements so soon.

Credit card industry experts do not feel that dropping the signature requirement will have any effect on credit card security, as signature matching or checking is now done very rarely.

We strongly recommend only using credit cards with chips. You should try to make purchases at locations with chip readers, as they have greatly reduced credit card fraud for in-store purchases.


Trade wars, volatility and the stock market

As President Trump and his administration have discussed placing tariffs on various products, and China has reacted with similar tactics, worldwide stock markets have generally gone down.

First, a quick example of what you should not do. You should not over-react.

Wednesday morning I woke to CNBC reporting that the futures for the DJIA 30 stock index were down more than 600 points in pre-market trading. That represented a decline of 2.5% from the prior day’s close of 24,033.

However, by the end of Wednesday, the DJIA increased nearly 1% for the day. Other indexes were up even more. The broader large company S&P 500 was up 1.16% and the small company Russell 2000 gained 1.42%.

Those who reacted and sold stocks before 2 pm on Wednesday likely lost real money. Those who were patient and did not react to the early am news of the intensifying trade dispute ended the day with nice gains.

What is going on with International trade?

Irrespective of your politics, we are going to start with the assumption that trade should generally be fair and free between all companies and countries. Unfortunately, there is currently not a level playing field between countries. We are not going to deal with the specifics in this post.

How President Trump and other worldwide leaders resolve this issue remains to be seen. There is no way to predict an outcome. US leaders have threatened, but not yet actually imposed any new tariffs. This is an important distinction. No tariff changes have yet to be imposed by either the US or China. Each side has developed lists of products and potential tariffs, but these are all subject to negotiations which could take months to resolve. They will likely continue to add or modify these lists and threats for strategic purposes. For further reading on the topic, see below.***

Whether the actions by the Trump administration are successful in improving the US trading position with China, as well as addressing intellectual property rights, remains to be seen.

In the short term, the loss in stock market value has been significant, but not devastating. No one can accurately predict the long term impact to stocks from the trade battle which is brewing.The trade dispute is causing the stock market to be more volatile.

But let’s look at the word volatility. Volatility actually means when something changes quickly or unpredictably. You didn’t see the words “down,” “loss” or “gain” in that definition.

Volatility does not just mean when the markets suddenly go down.

Most people thought 2017 was NOT volatile because markets generally only went up. Last year was technically quite volatile, based on the true definition, as stocks did change a lot and few predicted the large increases.

Investing in stocks inherently involves volatility, both down and up. You must be prepared for this, for all sorts of reasons, both expected and unexpected. We work with you and structure your portfolio and asset allocation so that you can handle the volatility.

For more on handling volatility, you may want to watch this videoTuning Out the Noise.

Our general investment philosophy emphasizes smaller companies over larger companies more than most traditional financial advisors. We recommend this because historical financial and academic data shows that smaller company stocks outperform larger company stocks, though small companies are inherently more risky.

In terms of the current trade issues, our tilt toward smaller companies could be beneficial, as the impact of the trade dispute, real or threatened, could be a greater negative to larger companies than small companies. Only as an example, a smaller company which sells products primarily in the US or not to China may be impacted less than Boeing, which would be directly affected by potential tariffs on aerospace.

As we often say, it is not beneficial to try to time the markets. That is not a winning long term strategy. So, we do not recommend any significant asset allocation changes in response to these trade issues if your portfolio is properly structured and globally diversified.

Whatever occurs in this trade dispute, we hope that the leaders of all sides consider the impact of their words, positions and actions on their citizens and companies, as well as the global community.

You can be assured that we will provide you with updates, advice and commentary, as it is needed.

If you found this helpful, please feel free to share it with your friends and colleagues.


***I highly recommend the WSJ  article”Tariff Showdown Shifts to Intense Negotiation Period,” dated April 4, 2018.

What are you earning on your cash?

You should no longer be satisfied with earning next to nothing on your cash sitting at the bank.

After years of very low short term interest rates, you can now earn meaningful interest on cash and short term money.

Unfortunately, the interest rate at your bank may not have increased and may not increase much in the near future.

Thus, this is a simple but important item you should review and possibly take some action on. It could be worth a decent amount of money.

The 90 day US Treasury bill is currently yielding around 1.75%.

If you have excess cash that you do not immediately need and you are not earning at least 1% on your funds at the bank, you should be contacting us to discuss this.

For example, if you have $100,000 in your bank earning a .01-.05% (which is likely your bank’s current interest rate), you could earn $1,750 annually, based on current interest rates, less our investment management fees, rather than a few dollars.

If you have significant funds in the bank, the money could be invested in short term fixed income investments and the interest rate could be higher than stated above if you may not need the money in the next 90 days.

A few factors to consider:

  • The Federal Reserve is likely to increase short term interest rates by .25% at least twice more this year, with additional increases most likely in 2019.
    • Thus, it is reasonable that the 90 day Treasury bill and other very short term investments will be yielding 2-2.50% by late 2018 or during 2019.
  • If you do not need the money in the immediate future, your cash could be invested in various short term conservative investments, such as Treasury instruments, CDs or corporate bonds.
  • As always, we act in a fiduciary manner.  This means that we would only recommend you take these steps if it will be financially beneficial to you and make sense for your overall situation.
  • For the short term investments we recommend, they can generally be easily liquidated within a few days.  So there is no reason not to take advantage of these better interest rates if your bank is not offering interest rates on your excess cash funds of greater than 1%.

Monitoring your short term interest income is not something that most people have focused on in recent years.

Now is the time to review and take action.

Don’t be content with earning pennies on your cash.

Give us a call or send us an e-mail and let’s talk about this!


Traveling and Investing Successfully

To be successful at both investing and travel, you should….
  • Be open minded and adaptable
  • Be willing to try new things
  • Plan
  • Be patient
  • Seek out the advice of experts.

If you want to go on a two week trip to a foreign country, most people would develop a plan before they leave. You would likely consult an experienced travel agent, even in today’s internet age, if you are going somewhere you are not familiar with. Working with a travel agent, you would set an itinerary, pick the cities you want to visit and possibly things you may do during the trip.

In planning for your investment future, this longer journey requires goal setting, discipline and should include using a skilled navigator to advise you and your family, as advice will frequently be needed. If investing is not your area of expertise, a trusted advisor will help you handle volatility and constantly changing markets.

While traveling, you may incur challenges that require adjustments. You may be hit with bad weather. You may have flight problems. Have you planned for these kinds of contingencies? How well do you handle change?

In investing, we know that the unexpected should be expected, but most investors don’t plan for this. Our philosophy and investment strategy alleviates a lot of these types of issues, as we recommend broadly diversified portfolios and discuss your tolerance for risk in advance.

In the last week, two events occurred which significantly affected certain investors.  The unexpected did occur.

Some investors who desire high current income from their portfolio (they focus on yield) invest in energy master limited partnerships (MLPs). Last week, many of these MLPs lost 10% because of a federal regulatory decision which will significantly reduce their cash flow. This was not expected and the underlying investments not only incurred large losses in value, but their future income distributions may be cut. These investors have been hit with a double whammy, as they lost principal and their income may be reduced.

Facebook lost approximately 10% of its value in the past week due to the disclosure that certain data was released to other companies.  While Facebook has been an outstanding stock and is held within the large company mutual fund which we recommend, a decline like this shows the risk of owning just a few stocks, rather than many.

Some people purchase vacation homes or are attracted to buying a time share after only a few visits to an area. Years after buying the time share or 2nd residence, the initial luster may wear off. You may tire of visiting the same place every year. The beach that once seemed exciting becomes routine. The restaurants don’t change. You miss the variety of seeing new things and having new experiences. While the logic of acquiring the vacation home may have made sense initially, after many years, it may no longer be optimal for you. But now you are stuck with real estate that may not be so easy to sell. In this case, change may be hard.

We see a similar pattern with many others we meet with (non-clients) who have held what we refer to as “legacy stocks” for decades. These are stocks which may have performed well for many years, but have significantly underperformed broad stock market averages for numerous years. Some of these stocks have not grown or even declined over the past 5-10 years, while the broad US and global stock markets have increased dramatically. They may no longer be optimal investments. Examples of these would be companies like GE, Proctor & Gamble, General Mills, IBM, many retailers and others in industries which have faced stiff new competition or have not adapted to change in the economy. Companies like Ford, Coca-Cola, Pfizer and Merck have either hardly increased in value over the past 5 years or have increased, but far less than broad market averages.

This is where adaptability and being open minded is vital. Are you willing to consider new or different investment approaches? To our valued clients, we appreciate that you were willing to consider our investment strategy, which at one time was new to you.

For those who hold these types of legacy stocks, or focus mainly on the dividend or yield of their investments, we encourage you to be open minded to other investment strategies. You may have unrealized capital gains and don’t want to incur capital gains taxes. You may like the dividends you receive, but they may decline in the future, as has occurred with GE. As we will discuss in a future blog post, focusing on your capital and the total return of your investments is much more important than your annual dividend income.

As your travel plans may have to change mid-trip and you may need to adapt for the duration of the trip, it is important to be open to reviewing your investment strategy. You should be willing to review if the companies you own have adapted and will be optimal as the economy is always evolving and changing. What may have been a solid strategy 10 or 20 years ago may not be the optimal strategy for the future. Our globally diversified investment strategy is structured so that you can benefit from changes in the economy, without subjecting your portfolio to unnecessary risk.






Uncertainty and Financial Planning

The future is always uncertain.

A simple concept. But it can be difficult to live with and can make financial planning challenging.

However, a close relationship with a skilled and trusted financial advisory firm can reduce your concerns and anxiety about future uncertainty.

Our role as a financial advisor is to assist you, through conversations, information and analysis you can clearly understand, so you can effectively deal with the realities of investing and your future. We want you to be able to live (and sleep) comfortably with the uncertainties of the financial world.

If you want to benefit from the rewards of the stock market, you will always have to deal with uncertainty. You will have to become comfortable with volatility. Our diversified, rationale and understandable investment strategy can help you deal with investment uncertainty.

We are pleased that we have clients who tell us they have been able to experience market ups and downs without worry. This tells us we have succeeded in helping them.

Uncertainty can take various forms, depending on what occurs in your life as well as in the world.

Let’s look at retirement. For many people, this is a potential source of uncertainty and anxiety.

Consider all the unknowns. You don’t know how long you or your spouse will live. You don’t know what future investment returns will be. You don’t know what your cost of living will be and how much it will increase every year. You don’t know what health care or senior living costs you will incur. You may want, or need to, assist your children or grandchildren in the future.

How can you resolve all of these issues and uncertainties?

We provide information, starting points. Understanding. Have discussions. Run projections. Evaluate different options, such as when you will retire and when to begin taking Social Security.

We work through these issues and factors with you. Over time, we analyze your sources of income, your assets and other variables and prepare financial projections. Through discussions and meetings, you will develop greater comfort and confidence….and have less stress about your retirement planning. You will get more comfortable dealing with the uncertainty of the future.

No matter what stage of life you are at, you will face financial decisions which we can assist you with. We can help you make better and more informed decisions, even in a world filled with uncertainty.

We can help you with your 401(k) investment selections. We can advise you on house decisions and mortgage options. As you save for college for a future generation, as a parent or grandparent, we can guide you on the best saving methods and investment choices (and there are many).

We integrate tax planning with investment management. This is a unique strength of our firm, as we are CPAs as well as experienced financial advisors.

As you get older, we help you deal with estate planning laws, which are frequently changing. What happens to your money and other assets in the future is vital and we have worked closely with many clients in this area. We provide significant value to clients in helping them with their estate planning and charitable giving.

If we advise the future generations of your family with their investments, you will have the additional sense of comfort of knowing that their investments are being well managed, now and in the future.

The financial world is continually changing. Tax laws change. Investments are inherently uncertain and volatile. We strive to provide you with advice and guidance so that you can effectively deal with all these forms of uncertainty.

What happened in February?

The cause of the quick and significant decline of worldwide stock markets in early February, 2018 of approximately 10% remains subject to analysis and discussion for some.

The decline may have been caused by many reasons. There may not be a specific reason.

Understanding the exact cause or reasons for the decline is not what is critical, though.

Understanding the cause of the decline may not even really benefit you.

Even if you knew the cause, what could you do with that information? Not much.

Would it change how we manage your portfolio? No.

Would it change how you invest? We doubt it and we hope not.

Why? Because for you to be successful investors, we plan and structure your portfolio in line with your long-term financial goals.

We do not react to current events and sudden market moves by making quick, reactive investment changes, except to rebalance your portfolio according to your written investment policy.

So while we could have a short or long conversation with you about what caused the February decline, we would much prefer to talk with you about the many benefits of our long term, disciplined and diversified investment strategy, which has withstood the test of time.

While we don’t know the specific cause of the February decline, we do know that our solid investment guidance and advice on many other financial matters are worthwhile and can be quite beneficial.

That is a conversation well worth having.

Learning from Warren Buffett

Warren Buffett’s Berkshire Hathaway Inc.’s 2017 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.

Berkshire Hathaway grew in value based on Buffett’s stock investments in many large US companies during the 1970s through the early part of this century, as well as the success of its vast insurance companies. During 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.

Buffett has not discussed his recent stock purchases or sales in the past few years’ Letters. However, his actions are quite instructive:

  • His purchases and sales shows that he is adaptable to changes in the economy and that he has not held onto stocks of certain companies, even though he likely intended to never sell them when he first bought them.
  • In 2015, he sold all of his massive position in Proctor & Gamble, which he obtained when P&G acquired Gillette many years before. In 2016, he sold more than 63 million shares of Wal-Mart. In 2017, he sold over 81 million shares of IBM, which when he bought IBM in 2011 he said he “was too late to the IBM party.” He sold his IBM shares at a loss, during a period when the general stock market increased by a huge amount.
    • He realized that the prospects for each of these companies had changed significantly from when he originally acquired them. This is an important lesson for all of us, to realize that times change and we must re-evaluate our investments, particularly if you own individual stocks which you purchased years ago.
    • Sometimes we all must change as society and the economy changes.
  • He has also shown willingness in the past few years to purchase two groups of stocks that he said he never would.
    • He has established an enormous position of over 166 million shares in Apple stock during 2016 and 2017, after years earlier stating that he would never purchase technology companies. He views Apple as a consumer products company.
    • He also started purchasing 4 airline stocks in 2016 after stating in 2007 that airlines are the “worst sort of business.”
    • Time will tell if these are good long term investments. He gets credit for being adaptable and flexible.

The following are highlights from Buffett’s letter and my commentary:

Buffett feels it is important to be comfortable with your investments and be able to sleep well every night. He said… “Charlie (Munger, his business partner) and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”

Buffett is OK with not buying just for the sake of buying stocks or companies: “Despite our recent drought of acquisitions, Charlie and I believe that from time to time Berkshire will have opportunities to make very large purchases. In the meantime, we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”

Buffett is positive on stocks for the long term but is clear that stocks can be volatile and unpredictable in the short run. Stocks should not be bought and sold based on short term predictions or analysis. “Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back.

The connection of value-building to retained earnings that I’ve just described will be impossible to detect in the short term. Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value. Over time, however, Ben Graham’s oft-quoted maxim proves true: “In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”

Buffett pointed out the huge temporary losses in Berkshire’s stock prices which have occurred since the 1970s. He included the following in this year’s Letter:

“Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure long-term growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips. Here are the gory details:

Period High Low Percentage Decrease
March 1973-January 1975
93 38 (59.1%)
10/2/87-10/27/87 4,250 2,675 (37.1%)
6/19/98-3/10/00 80,900 41,300 (48.9%)
9/19/08-3/5/09 147,000 72,400 (50.7%)


“In the next 53 years our shares (and others) will experience declines resembling those in the table.  No one can tell you when these will happen.  The light can at any time go from green to read without pausing at yellow.”

Buffett emphasized the importance of taking advantage of market declines as buying opportunities, not as a time to panic and sell:  “When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt.  That’s the time to heed these lines form Kipling’s If:

“If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you . . .
Yours is the Earth and everything that’s in it.”

Buffett’s comments often mirror the philosophy and investment behaviors we recommend.  He states… “Though markets are generally rational, they occasionally do crazy things.  Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta.  What investors then need instead as in ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.  A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”

His comments about risk:

  • “Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained.”
  • “I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”
  • “It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”

As Buffett often advocates, he believes that individuals should invest utilizing broadly diversified indexes, which track various benchmarks with extremely low costs.  We are confident that our investment strategy is the best way to capture the long-term expected returns of the stock market with the greatest chance for success.

Just like Warren, we sleep well at night.  We want you to be financially successful and able to sleep well at night.



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

Legacy and Change

What kind of legacy will you leave?

What kind of legacy will you leave your children and grandchildren? Will it be different than today? In what way?

Legacy can mean a gift you give to family members, people or organizations, for their future benefit. It is generally thought of as financial, but it can be much more than just financial. A legacy is anything passed from one generation to the next. Your ideas, stories, beliefs and life lessons can be an important form of your legacy.

All of these begin with conversations.

Will you talk to your family members about your own legacy? Share your stories?

Will you share your values and ideals with your descendants, your family members?

Will you talk to family members and friends about the good and bad financial decisions you made? There are troves of lessons to be shared. Future generations need to hear your stories, experiences and advice.

Will you tell your family members how a coach, friend, teacher or financial advisor had a huge, positive impact on your life….which may also result in having a major impact on theirs?

For example, if we as your financial advisory firm have had a vital impact in your financial well-being, should you share this with the next generations of your family?

If you will be passing down a significant financial legacy to your heirs, are they prepared to handle these funds? Should you take the steps now to work with us….to begin working with your heirs?

If you have conversations with your family members or next generations, would you leave a stronger legacy? We think so.

Would it make a difference in their lives, as well as yours?

Yes, it would.

And if you are younger, will you ask your older relatives some of these questions? You will be amazed by the discussions you will have. We can’t wait to hear about them.

Try it. What do you have to lose by starting a conversation about something important….past or future?

This is how we learn, evolve and change for the better.

How did you do?

The volatility of the global financial markets over the past few weeks was an important test of your ability as a long term investor.

It was a gut check for many, as there has not been a sharp decline like this for a long time.

How did you do? How did you handle it?

Did you react calmly or with great concern?

We hope that you remained calm. Among our clients, we did not sense significant feelings of panic or desires to make major portfolio changes.

That is encouraging to us, as we strive to provide you with education (like these blog posts) so you will be prepared for temporary market declines.

A few of you called with questions, which is what we want you to do, if you had any questions or concerns.

In early February, global stock markets declined over 10% and interest rates have risen a bit.

However, since the intra-day low on February 9th, U.S. and International stock markets have recouped some of their losses from the January peak. Many asset classes are slightly positive for the year, as of February 15th, 2018.

These are some of our key takeaways from these recent events and our thoughts on the future:

  • The US and global economies remain strong. Earning reports continue to be very solid. There are no signs of a recession or major economic collapse.
  • This type of pullback or correction was long overdue.
  • Interest rates and inflation are increasing, which we view as positive. This is a sign of a strengthening economy. Interest rates will likely continue to rise, gradually, over the next year or more.
  • As interest rates rise, this may cause occasional choppiness in the stock market. You should think of this as turbulence that an airplane experiences as it flies through a storm. The plane will make it through, but the ride is a bit bumpier. At the end of the flight, you have safely landed.
  • As long as interest rates and inflation do not increase too quickly or go too high, we do not view this as a problem.
    • The 10 year US Treasury Note is yielding around 2.9%, which is still historically very low.
    • Mortgage rates are around 4-4.5%, depending on the length and amount of the mortgage. Again, this is historically very low and should not dampen the housing market. For example, my first mortgage in 1990 was at 10%. Current mortgage rates are still a bargain compared to that.
    • Even if interest rates increase 1/2%-1% over the next year, we don’t think people will stop buying cars, trucks, technology and houses. Companies will not discontinue investing in their businesses.

Remember, risk and returns are related. To receive the long term benefit of greater expected stock market returns, you need to endure some down periods of holding stocks.

We invest and structure your portfolio for the long term. That should be your focus.

I made this baseball analogy with a client last week.  We invest successfully by enabling you to hit singles and doubles so you can stay in the game for a long time. Those who swing for home runs tend to strike out much more frequently. Those who look for quick, big gains in the stock market also tend to incur more significant losses over the long term.

Like a successful hitter with a good, solid batting average, we want you to be patient, disciplined and confident regarding your investments.