Trust, Winds of Change and Financial Advice

For any relationship to be successful, there must be trust.  This is obviously true for personal relationships, such as with a spouse, family members and close friends.

Trust and confidence in your financial advisor is also critical. 

For those who have worked with us for many years, we hope you have developed a strong level of trust in our advice and investment philosophy.

For those who are considering working with our firm, but have not yet made the decision to make a change to us as your financial advisor, trust may be a key factor in your decision. The other factor which you may need to overcome is dealing with a major change.

As I started writing this post, I saw a letter written by T. Boone Pickens, an 89 year old billionaire who decided to sell his huge 65,000 acre ranch in northeast Texas. In discussing his decision to sell this property, he said that “one of my keys to success has been the ability to accept and embrace change. That has been especially true in the fourth quarter of my life.”*

We view trust and change as elements which go together. As we reflect on the financial advice we have provided over the past 15 years, we are confident that our core investment philosophy and guiding principles led us to good decision making during a period of great change. Our clients have significantly benefited from our advice, consistent philosophy and discipline.

If the world, financial markets and technological change are happening so rapidly, how can you trust us to be able to handle these in the future?

We utilize an investment strategy which is quite adaptable to change, even if we can’t predict what the changes will be. By owning broadly diversified portfolios across countries, companies and industries, you will benefit from owning the companies which are successful in the long run. You will benefit from the long term economic progress which continues to occur both in the US and abroad.

Over time, we have reviewed portfolios of prospects who primarily owned stocks which we refer to as either legacy stocks (think of IBM and GE) or stocks which were purchased primarily for income and dividends, such as energy and gas stocks, telecommunication or other sectors.  These two categories, in general, have significantly underperformed major US and International stock benchmarks for many years.

These people have a choice. To paraphrase T. Boone Pickens, do you have the ability to accept and embrace the change which is necessary to switch advisory firms and modify your portfolio for a much better future? For those who were able to do this, they became clients. We worked with them, transitioned their portfolio and it has been very beneficial for them (and every one of our clients has done this at some point, when they first became clients!). They recognized that their former investments were not performing as well as possible and they recognized the rationale of our investment approach.

The winds of change: If you were using an investment advisor or mutual fund manager 5-10 years ago who was trying to pick stocks (let’s call them “active”), could that active manager or broker been able to accurately predict the seismic shifts which have affected vast parts of the economy? Would they have predicted the demise of numerous retail stocks over the past 10 years? Would they have predicted the drop in energy prices and vast underperformance of so many energy stocks? Would they have predicted which major financial institutions would outperform or underperform major benchmarks? Did they accurately recommend the correct technology stocks to own 10 year ago?

The winds of change are hard to predict, which is why we so strongly believe in the diversified investment philosophy we utilize. It is logical, disciplined and provides you with confidence.

Real energy change occurring: The following is another incredible example of change which is hard to predict, but which is occurring and affecting all sectors of our economy and lives.

A fascinating WSJ article on November 30th describes the transformation occurring in the energy sector. It describes how wind and natural gas usage are rising dramatically, causing record low electricity prices and the closure of older coal and other generating plants.**

The wholesale price of electricity in Texas last year was $25 per megawatt hour. A decade ago it was $55. In the Midwest, wholesale electricity prices are the lowest since 1999, which is as far back as the data goes. For a Midwest power grid, 8% of electricity was generated by natural gas in 2006. In 2016, that 8% grew to 27%. This is causing the closure of older coal and nuclear power plants.

For the Southwest Power Grid, which covers Louisiana to Montana, all the new power generation in 2016 was from wind, gas and solar. Wind is the fastest growing source of power even in Texas. Wind, which already generates 15% of the electricity in Texas, is expected to surpass coal as the 2nd largest source of electricity there by 2019.

What does this mean for you, as an investor? If major changes are rapidly occurring in the energy sector, how can someone accurately forecast which companies will either benefit or be hurt by these changes? If you own a portfolio of stocks, is your portfolio focused on companies which are reliant on the oil or gas business? Do you own stocks which are related to the production of wind turbines?

One of the major benefits of our investment strategy is that we do not have to be concerned with these issues. We are not trying to pick the winning stocks, hoping we will be right. We are focused on larger issues as part of structuring very diversified portfolios for our clients.

As we have often stated, we cannot predict the future. We do remain rationally optimistic and confident that in the long run, a globally diversified portfolio of stocks will be beneficial to you. We hope you share in our trust and confidence, and will benefit from our advice.


This week’s takaway: You must have trust and confidence in your investment advisor and their strategy. If you have the ability to accept and embrace change, you will be more successful. Major changes are occurring in the energy sector, especially the growth of wind generated electricity.



*T. Boone Pickens, LinkedIn post, November 29, 2017


Giving Thanks

As we will celebrate Thanksgiving Day next week, we hope you appreciate the good fortune that so many of us have, simply by being born and able to live in the US.

Warren Buffett has often cited what he calls “winning the ovarian lottery,” which he feels Americans win the day they are born in the US. In lengthier speeches on the same topic, he cites the many aspects of your life which are determined at birth: the political and economic system you are born into, your health, gender, skin color and your level of intelligence.

While our country is certainly not perfect, we are thankful for its many virtues and the opportunities it has provided to so many of us.


We are truly thankful and positive, and hope you are as well.


We are thankful for our clients, who have placed their trust in our firm. We do not take your loyalty for granted.

We are very thankful for the referrals that our clients and friends have made to people they care about, so we can assist them and better their lives.

We are thankful for the clients who have requested our advice on matters in addition to  investing and financial planning, such as helping them with life transitions, estate planning, real estate transactions and the sale of businesses.

We are thankful that our clients understand the importance of focusing on their long-term goals, and not on short-term market swings, as this will provide them better long-term investment results.

We are thankful for our business partners and relationships, which help us to be successful and operate our business efficiently.

We wish all of you a very Happy Thanksgiving, and hope you are able to share it with those who are most important to you.


Note: As next week is Thanksgiving, there will not be a weekly blog post email next Friday. The next email will be December 1st.

This time it’s different….or not?

Is this long term bull market different from those of the past? No.

Are things really different this time around? No.

This phrase comes into play when markets go through periods of major declines and gains. Think of the losses during 2008-09 or the huge tech increases in the late 1990s.

History and academic research teaches us that “it’s not different this time,” even if you may feel that it is.

As in the past, patient and disciplined investors will do best by adhering to their investment plan and a well thought out strategy.

Those who actively trade or try to time the market will most likely do worse than those who focus on the long term.

Investors who focus on low costs and diversification, such as asset class funds like we recommend, will have a greater chance of success. Data shows that lower investment costs are correlated with better performance.

Will this market end up in a bubble? It is possible. But no one can accurately predict exactly when this may occur. Even if they could, would they also be able to predict the bottom to get back in?

A bubble or temporary peak is somewhat normal for stock market activity. So are declines and corrections. The highs are generally too high and the lows are too low. Over time, the world’s stock markets continue to reach new highs and investors reap the rewards, even if they are interrupted by sharp, temporary declines along the way.

Investing may seem easy today, when markets are increasing. When the next major decline occurs, and major declines will occur again and again in the future, remember these words. It will not be different then. Each decline may seem scary and unexpected. How and when the market will recover may seem unclear. Negativity and fear will be everywhere. Most people will think it is actually different this time. But you will know it is not truly different. Just the specific circumstances will be different. That is when this historical perspective will come to your aid. We will provide you with rationality during the uncertainty. We will remind you that optimism is the only realism.

The stock market today has some individual stocks which appear to be quite overvalued. This has been the case for some individual stocks for many years. But individual stocks are not a game we feel is worthwhile to play with your serious money. Investors who buy these hot large cap growth stocks may be successful, but they also are at much greater risk when the next downturn occurs or when one of these companies incurs an earnings miss.

At the same time, there are many asset classes and individual stocks which are more reasonably valued. As no one can accurately predict in advance when an individual stock or asset class will rise or fall, we will continue to recommend that our clients remain invested in a globally diversified portfolio using asset class mutual funds, according to their personal Investment Policy Statement.

This time is not different. There will be a correction at some point. But we have not advised our clients to wait on the sidelines for that to occur. In the words of legendary mutual fund manager Peter Lynch, “far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

Our goal is to provide you with advice which will enable you to secure a real-life outcome superior to that achieved by the vast preponderance of your peers. This is different.

This week’s takeaway: Stock markets increase over time. Corrections and significant declines will occur, but they will be temporary and the markets will recover. The cause and timing of these corrections cannot be predicted. During these times, when the markets are down and many others say “this time it’s different,” it will not really be different.

The financial markets today and going forward

The stock markets in the US and the world continue to be very rewarding for most investors.

If you are broadly diversified, you should be benefiting from solids gains over the past years.

We see the economy as continuing to be strong and the majority of companies continue to report good revenue and earnings growth. Companies which are not growing or are being impacted by innovation and strong competition (many retailers, grocery store chains and energy companies, for example) have seen stock market returns far below the general market averages.

Stock market returns are correlated to current and future earnings expectations of companies. Over time, greater earnings result in higher stock prices. For evidence of this, take a look at GE and IBM over the past decade and Under Armour, which declined over 20% in one day this week after reduced sales expectations.

In the short term, stock market returns can be impacted by politics, but long term returns are not driven by politics. Our best advice is to ignore day to day politics and focus on the long term growth of the great companies of the world.

One of our core principles, grounded in academic financial research, are the following relationships: small stocks outperform large stocks, value stocks outperform growth stocks, International stocks outperform US stocks and Emerging Market stocks outperform US and International stocks. While our recommended portfolios have exposure to many asset classes, we recommend exposure to small, value, International and Emerging Market stocks, as they have greater long-term returns.

While these relationships do not hold true every year, we believe they are valid and will be rewarding for disciplined investors who are patient over the long term.

While valuations of certain individual stocks and some US indices seem quite high, the returns of some major indices have been driven by the performance of a small number of companies. The Dow Jones Industrial Average (DJIA) is comprised of 30 stocks. The WSJ reported yesterday that Boeing alone accounts for most of the DJIA’s gains for this year. For October, 3M, Apple, UnitedHealth, Caterpillar and McDonald’s accounted for over half of the DJIA’s gains. Our globally diversified stock portfolios consist of thousands of stocks, so your returns are broad based and not due to just a handful of companies. This should be reassuring to you.

As markets have risen, many commentators have stated that valuations are excessive and others ask if it is time to get out of the market. Valuations are much more reasonable for the asset classes we focus on, particularly considering that global interest rates are still historically low. The asset classes we recommend greater exposure to, such as small value companies, International and Emerging Markets, are cheaper than many major US stock indices (such as DJIA, S & P 500 and NASDAQ) based on various valuation metrics. Thus, given that these asset classes have provided solid returns and are still cheaper than many US stock indices, we are confident in our portfolio positions.

This does not mean that a market decline or correction cannot occur in the near term. On the contrary, markets are long overdue for a 10% or greater decline, on their longer term path higher. However, we would not recommend changing your stock allocation today just because of the gains of the past years.  Those who have not been invested in the stock market, who are concerned or have been waiting for a pullback for the last year or two, are far behind those who have stayed the course and remained invested according to their written investment plan.

Our investment strategy of monitoring your portfolio to maintain your appropriate allocation to stocks provides you the benefit of discipline and the reward of “selling high.” We are disciplined about rebalancing throughout the year, not just at year end. We do not sell an entire asset class, such as completely getting out of emerging markets because it has outperformed this year. We may take some profits, but still leave exposure to each asset class.

We are positive about the announcement of the new Federal Reserve Chairman, Jerome Powell.  His appointment requires confirmation by the Senate.  He is expected to continue along the same path as Chair Janet Yellen, who has managed the transition of the Fed well during her 4 year term, which ends February 5, 2018. The US stock market had strong gains during her 4 years as Fed Chair. We expect Powell to lead in the same manner in the future, with gradually rising interest rates over the next few years, with some commentators suggesting he may be less restrictive from a regulatory standpoint.

The world is constantly changing. No one can predict the future. We could not have predicted the success of Apple, Amazon or Facebook’s stocks 10-15 years ago. But we also don’t know how these stocks will perform over the next 10-15 years. Past performance does not guarantee future returns.

Similarly, we could not have predicted 10 years ago that Bed Bath & Beyond would be worth much less today, Merck would be worth about the same and Exxon Mobil would be worth less than it was in 2007. These are just a few examples of why we believe in the broad diversification of using asset class mutual funds, which have dramatically increased in value over the past 10 years.

This week’s takeaway:

The asset class funds which we recommend are very broadly diversified and hold thousands of stocks. Their returns have been solid and not concentrated in a few stocks. There are some major indices whose increases are due to a small number of stocks. Also, the valuations of the asset classes which we overweight are more reasonably valued today than major US indices. This should be reassuring for our clients.