Archive for Economy and Investing

Fear and Loathing on the Campaign Trail

Economy and Investingon November 3rd, 2016No Comments

Although we’ve borrowed our title from Hunter S. Thompson’s book of essays on the 1972 presidential race, we’re here not to comment on Nixonian high jinks but on the closing days of the present contest.  Fear and loathing seems an appropriate description of the public mood as we enter the final four days before that blessed release from our collective misery. As usual, the financial markets, ever sensitive to the public mood, have begun to vibrate in sympathy with ubiquitous anxiety.  The All Country World Index and the S&P 500 have both slipped about 2 1/2% over the past four weeks, though some suggest that uncertainty about Federal Reserve actions have played a part. And the Fed governors are keeping their cards close to the vest, no doubt because of their own uncertainty about what will come November 8 and beyond. All roads lead to Tuesday.

Which raises the inevitable question: what, if anything, should we do now, on the eve of the election? The first thing we’d recommend is a stiff drink. The second is a good novel or movie (avoid the following: All the President’s Men, The Manchurian Candidate, and Recount). The thing we would absolutely NOT recommend is making any last minute changes to your portfolio for fear of what will happen on November 8.

“Reach for a stiff drink, a good novel, or a sappy movie, but leave the portfolio alone.”

We don’t any of us know for sure what will happen on Tuesday and we don’t any of us know for sure what the impact on the economy and the markets will be. The one thing we can be sure of, however, is that whatever happens the impact will be less than the speculative extremes now being floated. We’re all wired by evolution to overweight the possibility of bad outcomes, which made sense when not doing so increased the probability of being a saber-toothed tiger’s dinner. But it can work against us when we choose to violate the plans and policies that have been put in place for our investments. The whole point of having investment policies is to make it easier to know what to do when it’s hard to know what to do. Like now.

Another and even more important factor is the resilience already built into your portfolio. It is globally-diversified and spread across every single industry and economic sector. It is also spread across thousands of stocks, large and small, foreign and domestic. It contains a significant allocation to a stable reserve composed of cash and high-quality, short-term bonds. If you’re retired, that stable reserve is large enough to bridge you across a seven year span of whatever the outside world might serve up. In other words, it’s specifically designed to be resilient, so that you don’t have to turn to that ever-murky crystal ball. And, anyway, presidents have far less power where the economy and the markets are concerned than is popularly believed.

So, be of good cheer, remember to breathe, vote on Tuesday, and, in the meanwhile, enjoy two of our all-time favorite videos:

Short take: do the markets fear Trump?

Economy and Investingon October 5th, 2016No Comments

stock-market-quotesA few days after the first presidential debate, University of Michigan economist Justin Wolfers published a piece in the New York Times titled, Debate Night Message: The Markets are Afraid of Donald Trump. In it, he predicted that stock markets would fall 10% – 12% if Donald Trump is elected. He based this on an analysis of movements in the futures markets during the first presidential debate, during which stock market futures rose, seemingly in response to “prediction markets” lowering Trump’s probability of being elected.  Nate Silver’s FiveThirtyEight website was giving Hillary Clinton a 55% chance of winning against a 45% chance for Donald Trump on the day of the debate, odds that have since shifted to 76%/24% in favor of Clinton.  Nonetheless, trepidation is running high and we’ve received a lot of calls and emails from clients asking, “what if . . .”

Attempts to predict what impact a presidential election will have on the markets has a long history . . . and little value.  For starters, there have only been 29 such elections since the beginning of the 20th century, a sample most statisticians would consider too small for robust inferences.  Secondly, what little data exists is noisy, with only weak correlations to go by.  Having said that, as a thought experiment, let’s take it as a given that a Trump victory would have an impact on the market, if for no other reason than it would be such a big surprise given current predictions.  We know markets don’t like surprises.  What recent parallels might we look to for guidance?

Brexit, of course.

In the weeks leading up to the June 23 Brexit vote in the UK, prediction markets and pollsters were giving the “stay” vote a narrow margin of victory.  And since most economists and investors had concluded that a vote to stay would be good for the UK, the EU, and the world at large, markets around the world rose in the days leading up to that fateful vote.  Then came the Friday morning hangover as the British voted to part ways with the European Union.

Between Thursday and Monday, world markets fell by more than 7%, while the British stock market fell by nearly 6%.  However, as apocalyptic as the initial headlines may have been, investors quickly shrugged it off, as can easily be seen in the charts below, and the British market regained its pre-Brexit highs within a single week.  The rest of the world took three weeks to do the same thing, by which time the British market was nearly 6% higher than its pre-Brexit highs.  Both the British and world markets are even higher today.

brexit-chart2

british-stock-market-brexit

The final thing we’d like to note is this: human beings and the economies and markets they build are resilient things.  If you look at the past century of U.S. history you will see that the economy tended toward growth and the markets tended to rise during Republican and Democratic administrations alike, good and bad, competent and incompetent.  The wealth chart below shows how $1 invested in various assets at the end of 1926 has fared over the intervening nine decades.

If Professor Wolfers’ “event analysis” is correct, markets aren’t going to like it if
Donald Trump is elected president.  But they’ll get over it.

wealth-index-2016Click to enlarge image

Investing Lessons from Fantasy Football

Economy and Investing, Yeske Buie Millennial, Yusuf Abugideirion August 25th, 2016No Comments

Written By: Yusuf Abugideiri, CFP®

Game Day PlanIt is estimated that nearly 75 million Americans will play fantasy football this season. If you aren’t planning to play in a fantasy football league this year (and the odds are if you play in one, you will probably play in multiple leagues), then you almost certainly know someone who is playing. Fantasy football has been around since 1963 when Wilfred Winkenbach, a limited partner in the Oakland Raiders, founded the Greater Oakland Professional Pigskin Prognosticators League. The game really took off, however, in the late 1990s; all major sports media websites began offering competing versions of the game by the start of the 21st century.

A typical fantasy football roster has 16 slots, and leagues range in size from 8 to 12 teams. Each team’s manager names 9 players as starters each week and competes against their opponent’s starting lineup; each team’s respective players’ statistics are compiled to determine the team’s aggregate weekly score. The remaining 7 players on each roster sit on the bench, and their stats do not count toward the team’s score. It is the manager’s job to determine who should start or sit each week. Standard fantasy league rules stipulate that starting lineups are configured as follows:

  • 1 Quarterback
  • 2 Running Backs
  • 2 Wide Receivers
  • 1 Tight End
  • 1 Defense/Special Teams
  • 1 Kicker
  • 1 Flex Player (can be a Running Back, Wide Receiver, or Tight End, depending on league rules)

Yeske Buie has had a fantasy football league for the past four years. The league has become increasingly competitive over the last few seasons, especially with the addition of a trophy for the winner and a different kind of “prize” for the loser. Past winners include current team members Cristin Etheredge, Dorothy Navales, and Yusuf Abugideiri (Yeske Buie’s most ardent sports fan). In light of the upcoming season, Yusuf put together his thoughts about investing lessons that can be learned by playing fantasy football:

  • Don’t Overvalue Glamour: Just as a diversified portfolio may include some glamour stocks (i.e. stocks trading at valuations higher than the average) as a part of a broad market index, a functional fantasy football team must have a quarterback. Quarterback is the most highly paid position in the NFL, but that doesn’t directly correspond to their priority regarding fantasy draft status; just because something is expensive doesn’t mean it’s commensurately valuable.
  • Don’t Undervalue Low-Cost Investments: Research shows that, over the long run, value stocks (i.e. stocks trading at valuations lower than average) tend to outperform glamour stocks, and Yeske Buie’s portfolios are designed to capitalize on that. Similarly, a good fantasy football manager looks to add undervalued players (rookies or players new to their roles) to his/her roster with the aim of “buying low and selling high”.
  • External Factors Matter: Just as the markets can be influenced by geo-political considerations, non-football factors must be taken into account when configuring one’s starting lineup. A good manager must consider the weather in which the player will be competing, as well as nuances like distance traveled (ex. players from West Coast teams are notorious for performing poorly in early afternoon games on the East Coast, as their body clocks are still adjusting to the time difference). Of course, in the end, no matter how much one may try to manage these external factors, the results are driven more by random chance than anything else.

Yusuf’s approach to managing his fantasy football team is similar to that of an active investment manager trying to pick “hot stocks” (an approach that has consistently failed to beat the market over time) constantly churning his roster and looking to capitalize on a hot tip. While Yusuf believes that doing so in a fantasy environment can be justified because, as he puts it, “the potential benefits outweigh the costs because there are no costs,” we must nonetheless observe that, while he finished first in 2014, Yusuf came in dead last in 2013. An example, we think, of the relative importance of skill versus random chance. And, of course, when it comes to real-life investing, costs matter and trying to beat the market is an expensive enterprise. The best approach to investing accounts for the aforementioned “lessons,” and is one with which Yeske Buie’s Clients have grown familiar: diversify amongst and across asset classes, control costs, and rebalance in a disciplined fashion.

Random chance or skill? You be the judge!

Chicken

Yusuf’s prize in 2013.

Fantasy Football Trophy

Yusuf’s prize in 2014.

“Captain’s Log, supplemental”

Economy and Investingon July 14th, 2016No Comments

“Captain’s Log, supplemental.” Some of you will recognize these as the words spoken by Captain James T. Kirk after each commercial break, to be followed by a recap of what happened in the prior segment and a preview of the action to come.  Those words come to mind today as we contemplate stock market developments of the recent past and our desire to share a brief update.

Specifically, we recognize that the significant positive shift in global stock markets over the past four months can be somewhat obscured within our normal reporting format. So we thought we’d take this opportunity to illustrate what has been going on in your portfolio since February. Admittedly, four months does not a trend make, but it’s nonetheless a welcome relief from what had been a rough start to the year.

It is also notable that our average client portfolio is now more than 1% higher than it was immediately prior to the Brexit vote in the U.K., showing that, whatever the long-run consequences for the United Kingdom, investors worldwide have, at least for the moment, shrugged it off and moved on.

markets since Feb 29

The Brexit Bust

Economy and Investingon June 30th, 2016No Comments

When we wrote last Friday morning in the immediate aftermath of Thursday’s Brexit, global markets were in freefall and anxiety was rising.  We acknowledged the potential negative impact on the UK economy and the probability of heightened volatility in the near term.  We then noted:

Europe, the U.K., the U.S. and the rest of the world will adapt to the new reality.  As for the markets, they discount the future and will absorb and reflect the implications of Brexit relatively quickly. So best not to extrapolate what happens today or next week very far into the future.

What a difference a week makes!  As we write this note a mere week later, the US market has recovered to pre-Brexit levels and the UK markets are actually higher than they were prior to the vote.  Emerging markets and global real estate securities have also fully recovered.  Germany and France, meanwhile, have undone more than half of the declines of Friday and Monday, their markets rising during each of the last four trading sessions.

It’s interesting to note how quickly the world has digested the news and, seemingly, moved on.  And many of those in the UK who spoke most ardently in favor of the Leave campaign seem to be walking back some of their prior (extravagant) claims and new paths seem to be opening up for possibly unmaking the decision.

Whatever happens, we’ll continue to watch with interest.

brexit-chart2

Brexiting Brits

Economy and Investingon June 24th, 20161 Comment

Brexit Direction SignThey did it.  The Brits voted yesterday to leave the European Union, driven, if the polls got it right, by fears of an immigrant invasion.  Hadrian built his wall, Trump wants his, and the Brits decided to Brexit.

Global stock markets have fallen on the news and there’s surely more volatility to come.  The past three months have actually seen a nice double-digit rise in markets worldwide but expect to give some of that back in the short run on fears of a negative impact on the U.K., on U.S. interests in Europe, and on the durability of the EU itself. Is it true that this development has negative ramifications? Yes. Will the more apocalyptic predictions now spilling forth come true? Almost assuredly not.

Europe, the U.K., the U.S. and the rest of the world will adapt to the new reality.  As for the markets, they discount the future and will absorb and reflect the implications of Brexit relatively quickly. So best not to extrapolate what happens today or next week very far into the future.

In the end, broad diversification coupled with adequate cash and bond reserves will carry us through any short term dislocation we may observe as a result of Brexiting Brits.

The 2016 Trends in Investing Survey

Economy and Investing, Yeske Buie in the Mediaon June 14th, 2016No Comments

Written By: Lauren Mireles, FPQPTM

Asset AllocationEarlier this month, the Financial Planning Association®, Journal of Financial Planning, and FPA Research and Practice InstituteTM released a report on the 2016 Trends in Investing. Most notably, the report shares that Exchange Traded Funds or ETFs are the preferred investment vehicle among advisers for the second year in a row. As Practitioner Editor of the Journal of Financial Planning and having over 30 years of experience in the profession, Dave Yeske spoke with Michelle Zhou, contributor for FinancialPlanning.com, about the results: “‘Index funds including ETFs have really become dominant in the industry,’ says Dave Yeske. Yeske added that in addition to those reasons and the general shift toward passive management, the dramatic growth in the variety of ETFs is also a chief contributor to their enduring popularity. ‘ETFs track every kind of index now… which leads to greater exposure and a rising propensity for advisers to be more creative in their management approach.'” So what can we expect in the future? As Zhou writes, “Yeske believes ETFs will not be easily outdone by other products. He says that most other investment vehicles introduced in the past that reached the same level of popularity as today’s ETFs were mere fads. ‘Other things will come along, but they won’t surpass ETFs,'”

Simple Rules

Economy and Investingon February 12th, 2016No Comments

Bull and Bear Market SimpleStock markets around the world continue to be roiled by investor anxiety over the state of the U.S. and world economy, corporate earnings, the price of oil, and the intentions of the Federal Reserve and other central banks.

This is not new stuff, of course, investors are always looking for something to worry about and they can usually find it.

So how do we navigate this inevitable reality? We believe it requires us to embrace four fundamental truths and three simple rules.

The fundamental truths are derived from the worldview that we described a few weeks ago and consist of the following:

  • Human beings are fundamentally growth-seeking and resilient, as a consequence of which
  • The U.S. and world economy are ultimately resilient and biased toward growth, thus
  • The stock market, which represents ownership of the productive assets of the economy, is biased toward growth over the long run.
  • Finally, the workings of the economy and markets are too complex and chaotic for short-term prediction.

If those four fundamental propositions are true, then there are three simple rules that allow us to harness them:

  • Invest for the long-run in a broadly diversified, global portfolio.
  • Make sure you have enough reserves to weather a downturn.
  • Ignore the headlines.

The first two bullets are exactly how we invest, including the provision of a six to seven year “stable reserve” in each portfolio that allows clients to bridge a market downturn without having to lock in any losses. And we think the third rule is good advice under all circumstances, not just when investing.

Some will suggest that this is too simplistic but there’s power in simplicity. Those who believe you have to react to every fresh bit of news and every new round of volatility are like those who think you can control the weather with a rain dance (see, “Chaotic Systems, or how the market is a lot like the weather”).

In the end, it’s better to be resilient than nimble,

and there’s power in simplicity.

Worldview

Economy and Investingon January 20th, 2016No Comments

We’re not quite three weeks into the new year and it’s feeling to many people like the world is coming to an end.  So, before I say anything more, let me cut to the chase:

It isn’t.

There, I said it.  We can all breathe now.  I have about six things I want to say about the panic that seems to have seized stock markets, newspapers, and cable television shows these past few weeks, but the first one is that the sun will rise tomorrow morning, the cable cars will still roll past my apartment building, and your morning newspaper will still be waiting outside your door. Filled with more of those overwrought headlines, of course.

Next, and as a practical matter, let me share what Yeske Buie is doing before I move on to a larger discussion of what’s going on in the world. To begin with, we have already initiated the system we have in place for our “spending” clients in which we do not spend from stock funds, only from the stable bond reserve that each portfolio possesses.  This reserve is designed to carry clients through six or more years of a downturn without ever having to sell stock shares at a depressed price.  Not that we think anyone will need a six year reserve and not that we’re predicting this three-week rough patch is going to be more than that.  You may recall that even in the Great Recession, the worst downturn in nearly a century, our portfolios all recovered in a little more than three years.

For clients who are not yet retired and spending from their portfolios, we have a somewhat smaller bond reserve that makes it possible to buy stocks at bargain prices.  In short, a dip in world markets, even a steep one, is not a threat to spending clients and is, if anything, an opportunity for non-spending clients.

Of course, the notion that one can dip into that stable reserve to bridge through a downturn, or to buy stocks cheap, all depends on a belief that a downturn in the markets is a temporary phenomenon, right?  And this brings me to my next and most important point: things will get better, they always do, and for a reason.  This is where we come to the realm of “worldview” or what the German philosophers called Weltanschauung.

Worldview refers to those beliefs that are so fundamental, so foundational, that they color everything else you do or think.  Here’s our worldview:

Humans the world over are growth-seeking beings who seek always to make their lives and the lives of their families better.  All the decisions that you and everyone you know and everyone you don’t know make each day about earning, saving, spending, and investing, all aggregate up to this thing we call “The Economy.” That’s why economies in every place where people have any freedom of action tend to be resilient, tend toward growth over the long run.  It’s because human beings are resilient, and adaptable, and growth-seeking.  Both in their daily lives and in their activities within companies.  As we’ve discussed before, one of the things we like about being “value” investors, buying the shares of companies that have been beaten down, is that it’s a bet on human ingenuity.  Such companies tend, on average, to recover, and then some.  Because the human beings who are working in them tend to be resilient, ingenious, problem-solvers.

So the real questions aren’t the ones you see in headlines: Will China’s economy continue to slow?  Will Eurozone economies continue their recovery? What’s going to happen to the U.S. recovery? Does the Fed have any policy tools left? What if the days of $100 a barrel oil are over?

The long-run answers are that China’s economy will continue its current transition to a more mature, consumer driven norm.  The Eurozone will, ultimately, continue its recovery. Oil prices will settle wherever technology and demand push them and the world will adapt.

The alternative to this worldview is a belief in perpetual decline and a descent into some kind of a Mad Max dystopian disaster.  We think it would be a mistake to bet on that future. Especially based on the evidence of three rough weeks in the stock market and a bunch of overwrought headlines.

So, returning to the practical reality: anyone who’s retired has a six to seven year “bridge” to draw from before ever having to sell a single stock share.  Anyone who isn’t retired is buying shares cheap.  And in the end, the world will find its way to a new equilibrium.

And if you can spare five minutes, you might want to revisit The Most Beautiful Flash Mob Ever for a spirit-lifting spectacle.

The China Syndrome

Economy and Investingon January 7th, 2016No Comments

3D Market Going UpAs we enter the fourth trading day of 2016, world stock markets seem to have a bad case of nerves.  As you know, we don’t believe that what happens in the markets on a day-to-day or month-to-month basis carries any real information, dominated as it is by the “noise” of the daily news cycle (see Weekend Chart Challenge for a graphical demonstration).  Nonetheless, the predictably dramatic headlines prompt us to share a few thoughts.

Much of the market turmoil of these first few days of the new year is being attributed to new doubts about sustained growth in the Chinese economy, which has come to represent a sizable share of global economic activity.  From the raw materials it buys from Brazil, to the manufacturing equipment imported from Germany and the U.S., Chinese demand is viewed as a bellwether for global economic growth. And all signs point to a slowdown.  Of course, “slowdown” is a relative concept, with China’s economy predicted to grow by 6.9% in the coming year, a rate that is the envy of more mature economies in the U.S., Europe, and Japan.  The real issue, from our perspective, is the question of how much China can manipulate or control economic growth in general and the stock market, in particular. So, two observations and a conclusion:

1.) In recent years, China tried to stimulate growth by over-investing in infrastructure, with high-speed trains to nowhere and block after block of empty office and apartment buildings.  When a country over-invests in infrastructure, they add less and less to future economic growth (the U.S., by comparison, is grossly under-invested in infrastructure and, for us, these would be high-return investments).  We’ve been writing about this for the past five years and believe that it will ultimately be a healthy development when China’s economy is driven more by the legitimate demand of its citizens and trade partners.  However, transitions can sometimes be a little unsettling in the short run.

2.) We are also seeing a test of whether the Chinese government can control its stock market.  It attempted to do so last August, during another period of falling prices.  Back then, the government encouraged Chinese companies to increase their share purchases in order to drive up demand and, thus, prices.  Such manipulations are at odds with the real purpose of markets, which are big information processing mechanisms that should be setting prices based on emerging trends in the economy, not artificially created demand.  If markets are big enough, they’ll foil such attempts at short-term manipulation and this was the case in China, last August and now.

All of which points to the potential for the Chinese economy and stock market to emerge from this period of volatility looking more “normal” and mature and less like something that can be manipulated at will by the government. However, like many such transitions, this one will create uncertainty and a lot more “noise” for world markets to digest.  We believe that the transition will ultimately be healthy for both China and the world economy and that the present bad case of nerves rippling through global stock markets will, inevitably, pass.

Happy New Year!


“Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, Who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be? Your playing small does not serve the world. There is nothing enlightened about shrinking so that others won't feel insecure around you. We are all meant to shine. And as we let our own light shine, we unconsciously give others permission to do the same. As we are liberated from our own fear, our presence automatically liberates others.” ~Marianne Williamson