 What does Warren Buffett Say to Hedge Against Inflation? Before we get his answer, he says this about inflation…it hurts almost everybody, it hurts stock, bond, and cash-under-the-mattress investors. Warren Buffett is chairman of Berkshire Hathaway and the most successful investor of all time. How successful has he been? He has built his quasi vestment holding company Berkshire Hathaway into the 7th largest company (measured by market cap) in the United States. Over the years, Buffett has done this by acquiring entire companies and folding them into Berkshire Hathaway, some of these include such names as See’s Candy, GEICO insurance, Burlington Northern Santa Fe railroad, General Re Insurance, and dozens of other companies. In addition to this, Buffett also buys stock in public companies, currently his 10 largest stock holdings are:
In terms of inflation, he’s recently said, “It’s extraordinary how much [inflation] we’ve seen,” as he talked about soaring prices at his Nebraska Furniture Mart and many other Berkshire subsidiaries. “Inflation swindles almost everybody,” Buffett said. Probably one of the most important things that he has recently, the very best defense against inflation is to be great at what you do, producing a great product/service that is in demand and offering a product/service that people will pay for. Specifically, he said: “The best protection against inflation is your own personal earning power…No one can take your talent away from you,” Buffett said. “If you do something valuable and good for society, it doesn’t matter what the U.S. dollar does.” When asked to predict inflation, Buffett said that predicting future inflation is a fool’s game, and that no matter what someone might suggest, the truth is that no one can really know how much inflation there will be over the next 10 years, or for that matter in the coming year. -Paul R. Rossi, CFA
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 You never know what you are going to get. Most of us understand what a 1% chance of a flood happening over a 1-year period means. We recognize it’s highly unlikely to happen. Our understanding can become a bit murkier when we add additional variables and years to the situation. For example: What are the chances of this same flood happening over a 100-year period? The likely hood goes up quite a bit, it’s more likely than not (63.4%) that there will be a flood within the next 100-years, even though the 1-year probability is just 1%. As investors, macro events can have a direct and dramatic impact on our portfolio. We need to understand that “bad” things can and do happen. Let’s start with a very short list of some possible “bad” events:
If we put just a 1% on each of these independent events happening in any given year, over a person’s lifetime, say 80 years, there is a near certain probability (95.9%) of any one of these bad events happening. Now imagine if we add just a few more possible events to this list: global recessions, social unrest, minor wars, assassinations, inflation, etc., you can see where this is going…bad sh*t happens. The future is uncertain and we should assume a lot of “bad” stuff is going to happen, so it’s important to accept this fact. The fact that we are never going to know what we are going to get. I would add, that even with all the “bad” stuff that will happen in the future, more “good” stuff will actually happen, just look at how far we have come from our cave dwelling days. As Warren Buffett has said more than once, “Our best days lie ahead.” Most of us would agree that a carefully constructed investment portfolio can weather a lot of bad economic storms, none can withstand the fatal blow of an investor who panics sells or who invests in things they don’t understand. I like the idea from Morgan Housel, a partner at a VC firm that said, “Save like a pessimist, invest like an optimist.” -Paul R. Rossi, CFA  Cash Flow Questions
Asset and Debt Questions
Tax Planning Questions
Long Term Planning Questions
When outside factors like the economy change, or might change, it’s a good idea to review your financial situation to determine if adjustments might be warranted. -Paul R. Rossi, CFA  Donald Rumsfeld served as the Secretary of Defense under two different Presidents. During his second stint in 2001, he wrote a memo to the President, “I ran across this piece on the difficulty of predicting the future, written by one of the folks here at the Pentagon, Lin Wells. I thought you might find it interesting.”
This was written and sent to the President 5 months prior 9/11/2001. -Paul R. Rossi, CFA  Once upon a time there was a Chinese farmer whose horse ran away. That evening, all of his neighbors came around to commiserate. They said, “We are so sorry to hear that your horse has run away. This is most unfortunate.” The farmer said, “Maybe.” The next day the horse came back bringing seven wild horses with it, and in the evening, everybody came back and said, “Oh, isn’t that great fortune, you now have eight horses! What a great turn of events.” The farmer again said, “Maybe.” The following day, the farmer's son was riding one of new horses to try to break the horse, he was thrown and broke his leg. The neighbors then said, “Oh isn't that horrible?” And the farmer responded, “Maybe.” The next day the conscription officers came around to draft young men into the army, and they rejected his son because he had a broken leg. Again, all the neighbors came around and said, “Isn’t that great!” Again, he said, “Maybe.” "The whole process of nature is an integrated process of immense complexity, and it’s really impossible to tell whether anything that happens in it is good or bad, because you never know what will be the consequence of the misfortune; or, you never know what will be the consequences of seemingly good fortune." - Alan Watts Investing can feel like a roller coaster, with so many ups and downs it can be hard to understand if what is currently happening is actually good or bad. -Paul R. Rossi, CFA  A few pointers to help ensure you don’t endure a double-drubbing this time. Stoicism amid market turmoil is tested hard when a tsunami of grim investment headlines and plunging stock prices hit the market. It is Déjà vu All Over Again? Let’s look at recent history. In 2008, the problem was
This time the causes are different, but the current conditions are very similar, investors worried about
As we've all come to understand, history doesn't necessarily repeat itself, but it often rhymes. The effect remains the same: a double-digit drop in stock prices. Currently the S&P 500 is down over 12% and the technology heavy NASDAQ is down over 20% (official bear market territory). Consider the mistake some investors made exiting markets in 2008-09. Or those exiting markets in March of 2020. Those investors selling locked in steep losses and often were too nervous to get back into markets as prices rebounded. The result: a double-drubbing. Here are some pointers to keep in mind in the current market turmoil. Stocks Outperform Other Asset Classes Even considering periods of steep decline. Investing in stocks means remaining disciplined through both good times and bad – and no formula exists for consistently timing markets to buy at the bottom and sell at the top. Investors who attempt such timing often get sub-par returns because they actually often end up doing the opposite: buying high and selling low. As Warren Buffett has said, “Be greedy when others are fearful, and be fearful with others are greedy.” Higher Historic Returns on Stocks Go Hand in Hand with Higher Volatility Stock investors have been compensated historically for enduring higher volatility. Conversely, we expect a lower return from bonds in exchange for lower volatility. Pursuing higher long-term returns means accepting accompanying risk, period. Your portfolios should be based on your unique financial and personal circumstances. This conceptual purpose doesn’t change if stocks correct 10% or rise 10%. Yes, you should rebalance regularly. But don’t buy or sell in a panic. If fundamentals are little changed, lower prices make stocks more attractive, not less attractive. Diversification Remains Key Proper asset allocation is the one free lunch in the investment world. The magical effects of diversification – which help smooth returns over time – persist. During a massive selloff, stocks, bonds, commodities, real estate and other asset classes may all exhibit weakness, but this is a short-term phenomenon. Once we move beyond the urge to excessively sell in a panic, the benefits of diversification again become obvious. Avoid Emotional Reactions Your core portfolio needs to be sufficiently diversified (multiple assets classes with lower correlations) to give you the highest probability of achieving your goals for the reasons important to you. Stick to your core portfolio and look to rebalance so you remain on track long after you forget the scary headlines. Peter Lynch, one of the most successful investors of all time said, “The key to making money in stocks is not to get scared out of them.” -Paul R. Rossi, CFA  Risk is everywhere. Most of the time we don’t realize it. But it’s there. It’s always present and it’s everywhere. Let’s think about just a few things that seemly come out of nowhere, but probabilistically we should expect several "unexpected" life events to happen to us and the people we love. Here’s a short list of just some of the “risks” we might experience:
But most of us don’t think about all the things we will very likely experience in our lifetime. Some more serious than others, and depending on the nature of the circumstance, it can change our immediate plans or impact our life indefinitely. With the COVID-19 pandemic, people the world over received an awful reminder of how risky life really is. Most of us were affected all at once, the risk of our health, our freedom of movement, our incomes, and in a period of just 4 weeks, the stock market wiped out the previous 4 years of returns. The precipitous drop provided a hard reminder of the nature of risk and uncertainty. During the good times, it’s easy to forget that. What’s the best way to predict the future? The best way to predict the future, is to plan for it. How do we do that? Take a step wise approach to planning. Example: What are the various health issues that you or a family member might experience? What would you do in each case? Who would do what? How would it be paid for? etc. What are the various contingencies if you lose your job? How do you plan for this? What needs to be done today and in the near term to ensure that you can withstand this possibility? Never forget the future is always unknowable. But with some thoughtful planning, you can dramatically reduce the impact of these various risks. You can also reduce your anxiety by having a well-designed process for dealing with these life events. Part of reducing the stress that some of these risks can bring, is understanding that it’s part of living and even with proper planning, somethings are just out of our control. -Paul R. Rossi, CFA  You hear it all the time: You should make sure your retirement savings at least keep pace with inflation. But what is inflation and how does it really affect your retirement savings? Let's explore. In simple terms, inflation is defined as an increase in the general level of prices for goods and services. If inflation is relatively high, say 10%, as it was in the late 1970's and early 1980's, then a loaf of bread that costs $3.00 this year will cost $3.30 the next year, $3.63 in two years, and $4.00 in three years. Historically, inflation in the United States has averaged 3.24% from 1914 through 2021. However, over this more than 100-year period, it has varied quite a bit, it reached an all–time high of 23.70% in June 1920 and a record low of -15.80% in June 1921. In 2021, inflation went up every single month, which you no doubt already know. While moderately high inflation never is enjoyable, it’s still nowhere near what some other countries have experienced. Venezuela averaged 32.47% from 1973 until 2017, reaching an all–time high of 800% in December of 2016. Hyper-Inflation what Venezuela experienced is absolutely crippling.  So how does inflation affect your retirement savings? The answer is simple: Inflation decreases the purchasing power of your money in the future, lowering your standard of living. Consider this: at 3% inflation, $100 today will be worth $67.30 in 20 years, a loss of 1/3 its value. Said another way, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Your $100 will be reduced to just $34.44, which means you are losing almost 2/3 of your purchasing power. How is inflation calculated? Every month, the Bureau of Labor Statistics (BLS) calculates indexes that measure inflation: Consumer Price Index (CPI), a measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. Producer Price Indexes (PPI), a family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPI's measure price change from the perspective of the seller. How the Federal Reserve Attempts to Control Inflation Believe it or not, up until the early part of the 20th century, there was no central control or coordination of banking activity in the United States. In fact, the US was the only major industrial nation without a central bank until Congress established the Federal Reserve System in 1913 with the enactment of the Federal Reserve Act. With the Federal Reserve Act, Congress set three very specific goals for the Fed:
In order to help the Federal Reserve stabilize prices, Congress gave the Fed a very powerful tool: The ability to set monetary policy. And one way the Fed sets monetary policy is by manipulating short–term interest rates in an effort to control inflation. If the Fed believes that prevailing market conditions will increase inflation, it will attempt to slow the economy by raising short–term interest rates, reasoning that increases in the cost of borrowing money are likely to slow down both personal and business spending and therefore bring demand down which eases inflation. On the flip side: If the Fed believes that the economy has slowed too much, it can lower short–term interest rates in an effort to lower the cost of borrowing and stimulate personal and business spending. The most recent example being the pandemic, the Fed stimulated the economy by lower rates to help stave off a major recession. As you might imagine, the Fed walks a very fine line. If it does not slow the economy soon enough by raising rates, it runs the risk of inflation getting out of control. And if the Fed does not help the economy soon enough by lowering rates, it runs the risk of the economy going into recession. More recently the Fed has been targeting an "inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Fed's mandate for price stability and maximum employment." What Investors Need to Remember Understanding the powerful affect that inflation can have on your retirement nest egg, it is imperative that your long-term retirement strategies account for inflation. You should prepare for a decrease in the purchasing power of your dollar over time and should strongly consider assuming that inflation will be at least 3.24%. If you're wrong and you find that the inflation rate for the next 10, 20, or 30 years turns out to be less than 3.24%, then you'll be in even better shape than you had planned. For some things in life, it pays to be conservative. -Paul R. Rossi, CFA 
Your portfolio may be designed to give you the best chance of achieving your financial goals but... Unfortunately, the market doesn’t care about your goals and your risk tolerance. Why? Because the Market Has a Mind of Its Own And a lot of the time, it can feel like the market is out to get you personally. Of course it's not, but it sure can feel that way. A key characteristic of a well-designed financial plan is the consideration of market volatility— and for good reason. It can shake even the most unflappable people. Building wealth over time may seem like a futile effort, but a well-designed financial plan can help you brave the ever-changing ebbs and flows of the markets. A Living, Breathing Plan A financial plan can give you a better idea of how to meet your goals. Any good financial plan is dynamic. People often see their financial plans as fixed in stone. You don’t want to wander too far away from your goals—but goals change. As your goals evolve, your plan must change too. Life changes can affect your financial goals as much as market changes. You may get a new job, enter a new tax bracket, buy a home, inherent money, need to care for an aging family member, have a baby or get a divorce, among the countless other life changes. What you can do is build a plan that accounts for the different scenarios that life could throw at you. What Should You Do? Your best first defense is to be aware of current trends by using the resources you have around you. With a prudent financial plan and the right supporting resources, you decrease the risk of being blindsided by unexpected factors that could negatively impact your financial situation. Focus on what you want to do with your money—not the trends and noise that could pull you off track. Having a clear vision of how you intend to invest and why. This is essential for making decisions that serve your larger financial goals. Knowing your investment philosophy will keep your eye on the big picture instead of market highs and lows. Another thing that can derail your best-laid plans: Y O U R E M O T I O N S Emotions can distract from goals by driving you to deviate from your plan. Instead of letting market gyrations dictate your actions, always look to your plan for guidance. A good plan that’s carefully laid out in partnership with a good financial professional should walk you through various simulations, so you make rational decisions well before emergencies arise. Sleep Better by Having a Financial Plan There’s no way to see into the future, but there’s one thing you can predict: Markets will always be unpredictable. It’s a financial advisor's job to collaborate with you on a thoughtfully designed plan that accounts for any issues that could derail your plan. This allows you to endure the inevitable bad times with confidence. So, if you have a plan, stick with it, and make sure it’s updated as your goals shift. If you don’t have a plan yet and are just focusing on investing advice, you’re missing out on the sense of security that a quality financial plan can provide. The best way to predict the future, is to prepare for it. -Paul R. Rossi  ,
Planning Ahead Can Help You Live Your Life on Purpose. The day before the AFC and NFC Championships were played on Sunday, ESPN broke the news that Tom Brady was retiring from football. Although, by the time Sunday night ended and football fans knew that the Los Angeles Rams and Cincinnati Bengals would play each other in Super Bowl LVI it was reported that Brady told the Tampa Bay Bucs he’s still not sure what he will do next year. He subsequently has confirmed that he is retiring, and many would argue at the top of his game. In his last year playing, he led the league in passing yards, passing touchdowns, and completions. He's won 7 Super Bowl Championships and is considered by many to be the best quarterback of all time. Impressive, and especially impressive for an athlete now in his 40's. When planning for retirement, whether you’re a decorated NFL quarterback or not, believe it or not, similar concerns can arise. Planning ahead can spell the difference between a successful retirement with enough money and being in a healthy mental state, or a stressful retirement with difficult decisions and limited options. As such, in a nod to Tom Brady’s seven Super Bowl rings, here are seven suggestions that anyone contemplating retirement should think about.
You may be close to retiring, but it doesn't mean that your planning stops, in fact it can become more important than ever. Talk to your financial advisor to make sure you are accurately planning for retirement, whatever that looks like for you, so you can sleep better at night. Especially on Sunday nights if there is no football for you. -Paul R. Rossi, CFA We live in tumultuous times—memories of an extraordinary financial crisis are still with us while we experience a once-in-a-century pandemic. Governments around the world are printing money at fabulous rates, including the United States. These circumstances cause us to ask, what causes inflation? In the simplest terms: Inflation is caused when too few goods are being chased by too much money. Understanding this, the chart below clearly shows why we are experiencing higher inflation than we have in decades, it depicts the Money Supply in the United States over the last 20 years. Do you notice anything about the money supply recently?  We should be surprised if we didn't have inflation after seeing this chart and understanding what it means.
-Paul R. Rossi, CFA  Market corrections happen about once every 19 months – and we’re at 19. After the stock market’s fantastic growth in 2021, some believe a pullback (or even a correction) may actually be healthy for the markets. Such a pullback is not horribly painful, by historical standards, and smart investors can cushion such a fall. Why is a market pullback or correction beneficial? You can think of a mild pullback or correction as a type of blow-off value; it allows pressure to be released to help avoid a much larger breakdown, and it can help prevent a large bubble from forming. Bubbles occur when stock prices get clearly out of line with the earnings potential of the underlying companies. We saw the consequence of that in the awful Technology crash of 2000-02 and Financial Crisis of 2008-09, when the markets collapsed, and some people lost half their wealth or more. Many companies didn’t survive. Certainly, market corrections never feel healthy when they occur. People get fearful as the market declines, the media fan the flames by giving investors reason after reason to be afraid. It very well may be, but most modest pullbacks are not the beginning of the next crash. Since 1950, the S&P 500 has experienced an intra-year peak-to-trough pullback of 5% or more in 67 out of 70 years. So roughly 93% of the time, a 5% correction has taken place from 1950- 2021. This could be considered normal market activity. The good news is many investors admit that a 5% pullback is manageably unpleasant, concerns expand when the market decline hits 10% or more. When is the Next Correction Coming? Here is what investors need to remember: the S&P 500 has nearly doubled in value since the market turmoil in March 2020. What has not happened since that time, however, is a selloff of at least 10% - that’s the definition of a market correction. In 29 of the past 50 years or 58% of the time the S&P 500 has experienced a 10% correction. Again, being that this happens more than 50% of the time, so this too should be considered normal. Since 1928, market corrections happen about once every 19 months. How to Prepare for a Correction Are you thinking: “I don’t think I can stomach a loss of 10%? Then that’s where the wisdom of diversification becomes apparent. Remember that the data above represent the historical performance of the S&P 500. A well-designed financial plan and portfolio can help ensure you have the proper asset allocation: a proper mix of Stocks (Small, Medium, Large, International, etc.), Bonds (Gov, Corp, Preferred, etc.), possibly some alternative investments, and Cash. Your portfolio should be designed to represent your tolerance for risk. So having proper diversification can keep you in the “manageably unpleasant” range. If not, you may need to reevaluate your risk tolerance to ensure you are not exposing your nest egg to a larger loss than you can endure. Although the recent market pullback will produce lots of fear, we’ve been here before. If you know what you own and why, then you should rest easy. -Paul R. Rossi, CFA  The CFA Institute through its research foundation recently published a 130+ page brief with insights from 25 years of Vertin Award recipients. These luminaries in the investment field come from a range of backgrounds, from Nobel Prize winners, distinguished professors, billionaire hedge fund managers, editors of prestigious academic journals, and authors of some of the most popular investment books ever published. Although their backgrounds vary widely, they have one thing in common: they have all made significant lifetime contributions in the field of finance. What is the Vertin Award? "The Vertin Award is given to intellectual leaders in the investment industry whose ideas are not only compelling in theory but meaningful in practice. The award winners are indeed exemplars of the CFA Institute mission to set the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. It is fitting that this award is named for Jim Vertin, a dedicated volunteer and professional who recognized the potential to create a multiplier effect on the industry by connecting researchers with practitioners." - CFA Institute "None of us is as smart as all of us,” read the anonymous quote on the wall of James Vertin’s office. With that quote in mind, we can learn a lot from the collective wisdom of these Vertin winners. Below are a few of the recipient's and their notable comments. William Sharpe Noble Prize winner Professor Emeritus Stanford University
Marty Leibowitz CIO, TIAA and author of several seminal books and articles.
Andrew W. Lo Professor MIT
Clifford S. Asness President, AQR Management
Campbell R. Harvey Professor Duke University
Roger Clark President, Ensign Peak Advisors
Elroy Dimson Professor Cambridge & London Business School
Kenneth R. French Professor Dartmouth College
William Berstein Cofounder Efficient Frontier Advisors
William N. Goetzmann Professor Yale School of Management
Aswath Damodaran Professor NYU
In reading the insights from all 25 luminaries, several commonalities are found among them:
-Paul R. Rossi, CFA Download the entire Investment Luminaries and Their Insights below. 
Following a budget is essential to financial health, but it can challenging for many people to create one and stick to it. Learn how to prioritize your spending when creating a budget and how to adapt expert advice to your financial goals. WHY BUDGET? Whether you’re working towards business, fitness, or financial goals, what matters most is creating a well-designed plan to get you from where you are today to where you want to be in the future. When it comes to meeting financial goals, a budget is one of the first building blocks of a sound financial plan. A budget shows how much income you’re bringing in and how much you plan to spend on different expenses. While you might not have much control over the inflow—household income—you can control the cash flowing out. Create a budget by:
Action step: Make adjustments to spending based upon on the 3 steps above. Ultimately, this will help you make financial decisions today that will help you meet tomorrow’s financial goals. WHAT MATTERS MOST When prioritizing spending goals, many families work towards building savings and investing while paying off debt.
A good financial advisor can help you to prioritize these goals based on your current financial situation, age, and other factors to help allocate the right amount to what's most important to you. Wondering where to find the money to build savings and pay off debt? Begin by tracking your spending. FOLLOW THE MONEY Once you are ready to create a budget, begin by determining how much after-tax money flows in and out of your household. This gives you an overview of how well you are meeting your fixed and variable expenses, and how much money you could earmark for your goals (above). While recording your after-tax income from earnings, investments, or other income is simple, recording your cash outflows is many times more complicated. You might have the best intentions to stick to a budget, but where does your money ACTUALLY go? For at least month week, track your spending using either a spending tracker app or old-fashioned paper and pencil. Identify the spending categories for every dollar flowing out of your accounts. This will show you when and where your spending occurs. Are there any surprises? Where could you cut back on expenses? Identify areas where you overspent, as well as opportunities to cut costs. WHAT A WELL-DESIGNED PLAN CAN PROVIDE Building a personalized household budget, prioritizing your spending categories, and crafting an actionable financial plan to help you meet your goals can:
Here's to getting ready for the New Year and a new way of thinking about your budget. It's much more than just numbers. -Paul R. Rossi, CFA  Sometimes I feel the fear of uncertainty stinging clear And I, I can't help but ask myself How much I let the fear take the wheel and steer It's driven me before And it seems to have a vague, haunting mass appeal But lately I'm Beginning to find that I should be the one behind the wheel Whatever tomorrow brings I'll be there With open arms and open eyes, yeah Whatever tomorrow brings I'll be there I'll be there So if I decide to waiver my chance To be one of the hive Will I choose water over wine And hold my own and drive? Oh It's driven me before And it seems to be the way, that everyone else gets around But lately I'm Beginning to find that when I drive myself, my light is found Whatever tomorrow brings I'll be there With open arms and open eyes, yeah Whatever tomorrow brings I'll be there I'll be there Would you choose water over wine? Hold the wheel and drive Whatever tomorrow brings I'll be there With open arms and open eyes, yeah Whatever tomorrow brings I'll be there I'll be there Lyrics and song by: Incubus Lead singer: Brandon Boyd explains, “The lyric is basically about FEAR, about being driven all your life by it and making decisions from fear. It’s about imagining what life would be like if you didn’t live it that way.” Not being ruled by Fear. I get it. It can be easier said than done. Because we are constantly being bombarded.  Market up 68% and GDP up over 3 trillion from when this magazine was issued in 2018  Market up over 265%, GDP up over 8 trillion from 2011.  The fear mongering isn't isolated to just the U.S.   Just to make sure they don't miss any region or country; they'll just name the whole world. We should all be living in a state of constant fear. Brandon Boyd of the band Incubus incapsulated it so well when he said, "It’s about imagining what life would be like if you didn’t live it that way.” Let's not only imagine it, let's live it. -Paul R. Rossi, CFA Click below to listen to the song bit.ly/IncubusDrive My martial arts instructor, Ken, recently passed away at the age of 60, less than 4 months after he was diagnosed with cancer. In his honor, I’d like to highlight some of what I learned from him over the 20+ years I received lessons from him. I received amazing martial arts lessons from Ken over all those years, ironically a lot of what I learned from Ken is applicable to living a more fulfilling life, and it is this aspect that I will shine a light on. First a little background. Back in January 1994 I started training in a Chinese street fighting system, and from the time I signed up, I dove deep into training, consistently working out 4-5 days week. Each of these workouts would last several hours; time was spent learning the hundreds of techniques, hand weapons, blocks, kicks, and sparring drills that were required to be mastered. This time included both group and private lessons from various instructors. In 1997, my head instructor at the time, began getting lessons from a guy named Ken, and my instructor would talk about these amazing lessons he would get from this incredible martial artist. Being that I wasn’t a black belt yet, I wasn’t in a position to ask about getting private lessons from Ken. However, over the course of the next couple of years, Ken would periodically come into our school and give group lessons. Ken was a high-ranking black belt within our system of schools which were located throughout California. However, he ran his own school within the system about an hour and a half away, so it was very infrequent that he taught at our school. Although anytime we learned that Ken was coming into our school, students would make every effort to attend his class, as we all knew we would experience something special. We were never disappointed. After just over 6 years of training, I earned my black belt on April 17th of 1999. It’s a date I’ll never forget. Shortly after I earned my blackbelt, the martial arts school that I was a part of was going through a transition and going in a direction I didn’t agree with. With this is mind and now that I was a blackbelt, I felt somewhat confident that I could reach out to Ken directly and ask him if I might get a lesson or two from him. I found out, he felt the same way about the system and was leaving the school system that he had been a part of since the early 1980’s. At the time, he was the second highest ranking black belt in the entire system and by far the most accomplished. He thought differently, he moved differently, and taught differently. When I approached Ken about getting lesson, I didn’t really know him. Yes, he had given group lessons that I was a part of, but outside of that, I wasn’t sure if he even knew who I was. However, I did know that I wanted to move like him and that no one else had his level of mastery. An analogy that might make this clearer between Ken and all the other instructors would be like seeing a painting by Michelangelo and then seeing a drawing done by a young child. There simply is no comparison. I recognized this vast difference rather quickly and if there was any possible way, I wanted to learn from the best. How could any aspiring artist not want to learn from Michelangelo if he were alive today? What I found interesting was that very few people reached out to Ken, it seemed they would rather stay in their comfort zone. What I came to realize from Ken, is that a lot of people would rather feel good about themselves than to confront their inadequacies. Ken liked placing a figurative and literal mirror in front of his students to expose their deficiencies. He would say, it’s only then that a person can learn and truly grow. They need to know what they are doing wrong, before they can begin to change, and eventually do it right. Ken was incredibly critical. He strove for perfection in himself and his students. Most students couldn’t handle this level of scrutiny, they wanted the easier road. Most just wanted to earn their next belt. I just wanted to get better. Rank wasn’t important to me. I remember one particular private lesson where he was teaching me from a wheelchair, as he had broken both of his feet training (again, another story for another time). He spent almost two hours trying to get me to step the correct way. Without getting into too much detail, I had to step forward with my left foot and then step forward my right foot. Seems straight forward enough. Step, then step. Well it wasn’t, and it still isn’t when trying to execute this particular technique. Two hours of him stopping me, correcting me, and having me repeat my stepping motion. Imagine for a minute, stepping for two hours and getting stopped just after you’ve started stepping, hearing that you’re not doing it right. He would say, do more of this, or do less of that, do it quicker, do it with less gap between the steps, push off the ground more, etc. No detail was too small. What I learned, besides how to step properly, was this is exactly how he got so good, he worked at something until it was perfect, not almost perfect. Perfect. Then he continued to work at it, so he never lost “it.” Once he knew it was right, he made sure he never lost how to execute it ever again. Every lesson I ever received from Ken was similar, his extreme attention to detail and willingness to spend any amount of time to make sure I did it right before we moved on. We’ve all heard the adage, “Practice make perfect.” He said that statement and thinking is incorrect. He would say, “Perfect practice makes perfect.” And it’s obvious once you hear it. If you practice anything incorrectly, you are not going to achieve a high level of competence. In fact, you are drilling in bad habits which then takes even longer to override the wrong motion with the proper motion. To gain perfection, it requires constant diligence and practicing to perfection. I learned good marital artists practice until they get it right, great martial artists practice until they never get it wrong. Perfect motion with lightning-fast reaction is what he taught and what he expected. He expected this level of perfection in everything he did and everything his students did. He believed to a large degree that his students were a reflection of him. So you better not disappoint. And I never wanted to disappoint. Over the hundreds of private lessons I received from Ken over the 20+ years I always walked away amazed and in awe of what he knew, how he could execute a kick, a block, or technique, and his ability to teach at the highest level. Very few people reach the top of their field, very few can teach at the highest level, even fewer can do both. He did both. What was a typical lesson like? We lived about an hour and a half from each other, so I would drive down to his place, and on most days I would find him dripping of sweat already. He was always prepared and expected the same of me. Sometimes he would ask if I had any questions from my previous lesson or anything else I had a question about. If I did have a question, he would explain and show me how to do it. He would explain why he was doing this or doing that and what details were important to remember. He made sure I understood, and then he’d have me do it, to make sure I understood and to impart the proper “feeling” I should have when moving in a particular way. One question typically led to us working on a particular motion or theme for quite some time, many times it took 2-3 hours to make sure I had the proper “feeling” and ensure my question was answered. Other days, he had something he wanted to “show me.” Something he felt I needed to learn, or I might be missing in my proverbial toolbelt. He never held anything back with me, he taught at the highest level, expecting I should be able to do it just as good as he could. He would tell me every time he is giving me a lesson, he is also giving himself a lesson. He was constantly in a feedback loop with himself, always striving for improvement, seeking out slight imperfections that he could correct in himself. It made him better, it made me better. My lessons from Ken were mentally and physically exhausting, as I was always trying to take in a firehose amount of information that came flooding out of him. Then after our workouts we would go to a local restaurant he liked. While the physical part of the lesson might be over, he continued to teach. Our lunches always lasted several hours. In fact, I can remember on more than one occasion we ate our lunch and talked so long that we ended up ordering dinner at the same restaurant. It wasn’t uncommon when walking out to the parking lot to leave, he would end up showing me something else we were discussing inside the restaurant. More than once after we had left the restaurant parking lot, I would get a phone call from Ken on my way home so he could continue his thoughts on what we were discussing. It wasn’t unusual for me to show up at his place in the morning and get home almost 12 hours later. Below is just some of what I learned from Ken.
My instructor Ken was far and away the best martial artist I’ve ever seen and feel extremely fortunate to have gotten private lessons from him for over 20 years. Initially I thought he was head and shoulders above the rest, what I came to realize, he was even better than that. He didn’t teach many people privately…I was one of the lucky ones. Thank you Ken. -Paul R. Rossi, CFA  "Earth Rising" - NASA Apollo program Just seventy years ago no human being had ever seen the entire Earth in one picture; or more accurately, no one had seen the entire "disk" of the Earth in one picture. The space race during the 1960's between the United States and the former Soviet Union helped propel both countries to achieve many prodigious firsts: the first person in space, the first person to orbit the earth, the first person to spacewalk, and the first men to walk on the Moon. These are some of the most impressive scientific achievements humankind has ever accomplished, and all of this was done in a little over a ten year period (1958-1969). During this time, we captured pictures of the entire Earth for the first time. We were able to see our home from a vantage completely unimaginable by our ancestors. What do you think Christopher Columbus, Ferdinand Magellan, Zheng He, and other explorers would have thought if they were alive to witness this? While we have known for hundreds, if not thousands of years that the earth was spherical, we had never actually seen the Earth from a perspective from far enough away to see it in its entirety. Want to change your thoughts? Try changing your perspective. Most would agree that pushing forward and leaning into our lives is a great way to accomplish many of our goals and living our lives on purpose. While I completely agree with this, I would add, that it can be equally beneficial to step back from time to time to gain a different perspective on where you are, where you want to be, and how to get there. In at least one way, successful investing is similar, having the proper perspective can change quite a few things. It can change how you view investing, how you view current events, and even how you view yourself. In the simplest terms, the market takes two step forward and one step back on a regular basis. Although the 2 to 1 ratio varies, sometimes it's 1 step forward and 2 steps back in the short run. But it's the long run where wealth is created. Let's look take a look at a 1-year, 10-year, and 90-year chart. The three charts below are called "Percent Off High" charts, which means it only shows the drawdowns in the market. Every time the graph is at the top of the chart it's making a new high, when it come down it's showing a drop from a recent high. Over the last year (see 1-year chart below), the Dow Jones Industrial Average has been down multiple times.  If we look back over the last 10-years (chart below), it's difficult to count how many times the market has bounced around. Being down from a recent high is quite normal. In fact, most of the time the stock market is in a drawdown.  Stepping back even further, from 1930 to today its hard to even see our current drawdown on the far right hand side of the chart. However, what does stand out is the Great Depression and several other recessions (grey columns).  So what do these three charts reveal to us? They tell us it's very common to have periods where the market is down. In fact, most of the time the market isn't at an all-time high, but rather in some type of drawdown. They also tell us the stock market (and many other markets for that matter) exhibit a fair amount of cyclicality, somewhat analogous to the regularity of the moon's orbit around the Earth. So the next time you are feeling uneasy about the stock market, your retirement portfolio, or just about anything else, take a step back. Take a big step back, and try to see the situation from a different perspective to decide if what you are experiencing is consistent with historical patterns. From this new vantage point you can determine the best course of action. -Paul R. Rossi, CFA  Most people are familiar with the definition of Arachnophobia: the fear of spiders. It’s the most common phobia. Followed by Ophidiophobia: the fear of snakes, Acrophobia: the fear of heights, and Aerophobia: the fear of flying. In fact, if you search for phobias, there are literally hundreds of listed phobias from which people suffer. Below are a few I found that you might not have heard of before.
What exactly is a phobia? A phobia is known as an irrational or extreme fear of something. The something can be caused from a particular situation, a certain place, an object, or an animal. What happens to people who suffer from a phobia? A person can experience a long list of symptoms, some of which include: a rapid heart rate, nausea, sweating, crying, and dizziness. These physical manifestations can even be experienced by just the thought of their phobia. I empathize with people suffering from debilitating heath issues, including those struggling with phobias. And I would hope they would seek out professional medical treatment if possible. For people who do not suffer from a phobia, hearing about someone fearful of gravity or the fear of the figure 8 seems can seem irrational. To the person who suffers from the particular phobia, the sense of fear is real, so real in fact, that they experience a physical response. As a financial professional, I appreciate how even people who do not suffer from a phobia can still be conditioned to be fearful of all sorts of things the financial media anoints as the current 600lbs monster in the room (see the picture above). We have 24-hour news channels filling us with all sorts of anxiety laced financial news; we carry little devices in our pockets that continually provide updates with everything that is going wrong, could go wrong, or in an alternate universe, did go wrong. All of this needlessly feeds our fears. And most of the time our fears are misguided, caused by the incessant outside noise we all experience every day. What can we do to combat this onslaught we endure? While, I won’t ever claim to be a medical expert, there are some basic steps you might try to claim a bit of calmness and balance.
Remember, the media will ALWAYS find something you should be worrying about. Right now, the two big media stories are:
What do you think the media will focus on in 2022, 2023, or even 2030? Why do I ask this? Because the misgiving media will never run out of scary things to push on us. Almost one hundred years ago, FDR said, “The only thing we have to fear, is fear itself.” And he was right. -Paul R. Rossi, CFA  The story is told of a Seeker of Knowledge who sets off in search of the answer to a question that has unsettled him for quite some time. In his extensive travels, the Seeker of Knowledge hears of two wise men who are said by many to be very knowledgeable and experienced in such matters. The first, a famous guru lives in an ivory tower at the top of a serene mountain high above all the hustle and bustle of everyday life. After a strenuous climb, the seeker reaches the top of the mountain, finds the sage inside his tower and poses his burning question, “What is a stock worth?” The guru answers immediately, “The value of a stock is the sum of all the projected future cash flows in perpetuity, discounted back at an appropriate discount rate which factors in the risk premium and interest rates." The guru says, "It is quite easy to prove that the stock value = CF/(1+rp + i)^1 + CF/(1+rp + i)^2 + CFn(1+rp + i)^n …” The Seeker of Knowledge is impressed with this answer, as it seems pretty exact, albeit a bit complicated. The seeker is extremely grateful for this valuable information, warmly thanks the Wiseman, and goes on his way. The second Wiseman lives in the middle of a bustling city surrounded by a constant swirl of activity and noise. The seeker is fortunate to get in front of this second guru and is able to pose the same question he asked of the first guru, “What is a stock worth?” Like the first guru, the answer is immediate, “That depends. Are you buying or selling?” Not knowing quite what to say the seeker starts to respond by repeating the words and equation of the first guru but he is quickly interrupted with, “I don't care about all that stuff, tell him to make me a bid then we can talk about what the stock is really worth.” A bit confused and not at all sure the wise men's answers have brought him any closer to enlightenment the seeker goes away to contemplate further on this question. This parable offers two very different answers to the same basic question. The distinction between them reflects the not often recognized difference between valuation theory and actual stock prices. The Discounted Cash Flow Valuation Model above and others like it, are theories that try to derive the value of a stock so that is it is mathematically consistent with the inputs. These valuation models are forced to make many assumptions. In this case, assumptions such as:
Accurately coming up with these three inputs alone is a herculean feat and shouldn’t be underappreciated. There is quite a lot of value in thinking about stock valuation and pricing as a range of rational possibilities, because the process is a blending of part science and part art. -Paul R. Rossi, CFA You might ask, what does a picture of a blackhole have to do with the article? Absolutely nothing, I just like the picture. :) The parable above has been modified from a 1989 Financial Analysts article Journal written by Professor Stephen Figlewski of NYU. The original article pertained to Option Valuation and Pricing.  In physics, there is a well-known problem that is quite difficult, if not impossible. It’s called the three-body problem and is one of the most complicated in celestial mechanics. It’s the process of exactly solving for the motions of three bodies interacting through the inverse square force (gravity) – think of how the Sun, Earth, and Moon interact with each other. For centuries, physicists and mathematicians knew this problem is not integrable, i.e., we cannot find a precise analytical solution. What might be surprising though, physicists have solved the two-body problem. But by adding just one more body into the mix, the solution becomes impossible. Even though the three-body problem hasn’t been solved, how have we able to calculate the motion of all the planets in our solar system with such accuracy? Physicists reduce the three-body problem to something they can calculate, a more manageable two-body system. For example, although there are more than three bodies in the solar system (the Sun, eight planets, dozens of moons, and millions of asteroids and comets), almost everything behaves, roughly, as though it were a two-body system. Why? This is due to the substantial differences in mass between all the objects in our solar system. As far as each planet is concerned, the Sun is the primary influence due to its the sheer size. The Sun ‘pulls’ on the Earth about 200 times harder than the Moon, and about 20,000 times harder than Jupiter. So, if you want to calculate the orbits of all the planets, a “two-body approximation” will get you more than 99% of the way to the right answer. So what have we learned so far?
Using the idea physicists use to solve the three-body problem and what we have learned so far, I’d like to propose a similar thought about valuing high-growth companies. It’s a difficult process and a precise solution isn’t possible, but we should think of a solution being a range of possible valuations as there are many interactions (bodies) that affect valuation. The formula for a dividend paying company is fairly straight forward and therefore we can think of a dividend-paying company as a two-body problem which we can value much more reliably than non-dividend-paying companies. Unfortunately, many growth companies don’t pay dividends. Having said that, we can still get an “approximate” answer to our growth company problem, we just have to keep in mind that the solution should be a range of valuation possibilities rather than one precise "exact" answer. So let’s do it. To help determine if a company’s stock might be under-priced, fairly-priced, or over-priced, we can use some basic ideas of finance. One of these ideas is comparing a company to the overall market. Let’s use an example to drive home how this works: We want to figure out if AMZN (Amazon) is potentially under-valued, fairly-valued, or over-valued. Using recent financial information, we see that AMZN’s PE ratio is 64. (PE = Price per Share / Earnings per Share). Essentially, how much are investors paying for every $1 dollar of earnings. In this case, new investors are paying $64 for every $1 of AMZN earnings. AMZN’s PE ratio of 64 is substantially higher than the current market PE of 25. It’s a staggering 256% higher. What does this mean? This means that new buyers of AMZN are paying 256% more for every dollar of earnings than the average company within the S&P 500. The next question should be, why is AMZN trading at a price so much higher than the market and is this justified? Let’s find out. Some Assumptions: AMZN PE = 64 Stock Market PE = 25 Growth Rate of AMZN = 20% Growth Rate of Stock Market = 7% Dividend Yield of AMZN = 0% Dividend Yield of Stock Market = 2% T = Time in Years of Required AMZN growth to justify current valuation The formula is below (#1), and (#2 - 7) is the calculation:
So based upon these calculations we find that AMZN would need to grow at 20% a year for the next 9.95 years and then grow at the lower overall market growth rate in perpetuity to justify its current PE ratio of 64. So the question becomes, do you think Amazon can continue to grow at 20% a year for the next 10 years? If so, then its current valuation seems appropriate. If you think Amazon will grow faster than 20% or for longer than 10 years, it could be considered undervalued. Conversely, if growth doesn’t materialize or is substantially shorter than 10 years, then the current valuation isn’t justified. Like the dreaded three-body physics problem, valuing growth companies isn't easy, but it can be done with approximation. -Paul R. Rossi, CFA
 Who is Charlie Munger? By many accounts he is a big reason why Warren Buffett has been so successful. Charlie Munger is Warren Buffett’s partner at Berkshire Hathaway. Ironically, he grew up right down the road from Warren Buffett in Omaha Nebraska, although they didn’t know each other growing up. Charlie graduated from Harvard Law School and started his career as an attorney, however, he realized early on that it wasn’t a profession he wanted to continue with, so he started investing and developing real estate which eventually led him to meeting his future business partner. Together, what Charlie and Warren have built over their extraordinary 60 plus years together could be considered similar to what Mick and Keith or Paul and John where able to do; these extraordinary partnerships were able to capture lightning in a bottle. Howard Buffett, Warren's eldest son, has said that his father is the second smartest man he knows. He says Charles Munger is the first. Like Warren Buffett, Charlie's thoughts on business and life are timeless nuggets of wisdom. Here are some of my favorite Charlie Munger quotes
With Charlie's thoughts above, I hope I've helped you know more. -Paul R. Rossi, CFA 
A downturn could actually be good news for you – if you stay calm, stick to a well-designed plan and possibly take decisive action. It’s not uncommon for people to feel a nervous when they hear news about the stock market being down. This nervousness can be exacerbated when someone in the media forecasts a doomsday type of future for the stock market. It’s happened so many times I honestly cannot remember them all. Don't just don't sell just because others are selling, if you sell your stocks after they drop in value you may end up in worse shape than if you stayed invested. When you look at monthly returns for the stock market it appears to be quite volatile but viewed over a longer period of time the market appears relatively tranquil. Having a long-term perspective may not be exciting but it has historically been an effective strategy...and made quite a few people wealthy. Below is the 1-month price return on the stock market going back to 1979. No doubt about it, the stock market has been quite volatile. I don't see that changing anytime soon.  Rather than trying to time the market, smart investors focus on time IN the market, allowing their investment returns to compound year after year. The greatest investor of all time Warren Buffett as said, “Be greedy when others are fearful.” Back in 2014 during a market downturn, he said, “The more the market goes down the more I like to buy.” Like Warren Buffett, savvy investors take advantage of market volatility by buying quality stocks when there is a sell-off. In 2013, Warren Buffett gave a great example, he said, "It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings—and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his—and those prices varied widely over short periods of time depending on his mental state—how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm." Similar to having a shopping list prepared before you leave your home for your favorite store; have a list of quality companies that you’d like to own when they go on sale. Buying stocks when they attractively priced could help enhance the long-term growth potential of your portfolio. For those investors who not only didn't sell during market volatility but actually purchased, these savvy investors ended up with more than 3x as much money. See the chart below.  So what is the moral of the story? It can pay handsomely to zig when most others are zagging. -Paul R. Rossi, CFA  If you hold mutual funds, you are losing money that you don’t need to be losing due to the way they are structured. If we designated mutual funds with a number similar to what technology companies call their software versions, mutual funds could be considered “Version 1. 0.” The mutual fund structure is almost 100 year old technology. Some wine connoisseurs make the argument that certain wines get better with age, the same cannot be said about the mutual fund structure. Why haven’t you heard of this before? Because there are billions of dollars in management fees, research expenses, and trading costs that Wall Street would rather you not focus on. Structurally, mutual funds are not efficient. Are you aware that your neighbor down the street who you never talk to can directly affect your taxes? Yep. When you neighbor sells their mutual fund position the mutual fund manager must sell the underlying positions in the mutual fund to raise cash to then send to your neighbor. And since the fund sold the underlying positions to raise cash, if there was a gain, this gain can be passed along to you in the form of a taxable gain even though you didn’t sell your position. If this sounds a bit archaic, that’s because it is. You might ask, there has to be a better way? And you’d be right, there is a better way. It’s called an Exchange Traded Fund or ETF. I would call ETF’s the software equivalent of at least version 2.0. They are structurally completely different than mutual funds, but from an investors perspective they are effectively the same. They can hold a basket of securities (US stocks, foreign stocks, corporate bonds, commodities, US treasuries, etc.) just like mutual funds and allow investors to purchase and diversify very easily. A recently released Goldman Sachs paper reported that in 2019:
By using ETF's instead of mutual funds, investors can better control when they pay taxes, or in other words, pay when they sell their shares rather than when their neighbor (i.e., other shareholders) does. Similar to an iPhone software update, it's time to update your investment software. -Paul R. Rossi, CFA  Since the stock market bottomed in 2009 (during the Financial Crisis), the US stock market has enjoyed an unbelievable ride higher with very few major corrections. In fact, from the March 2009 bottom, the market is up over 700%. With such a great, “seat of your pants” type of ride over the last decade, it might make sense to take a step back and assess where we are now. To offer some perspective on the stock market - below are five measures that illustrate where market valuations currently stand: 1. S&P 500 Price to Earnings Ratio (P/E Ratio) The S&P 500 P/E Ratio measures the combined price of all 500 Standard & Poor constituents against their aggregate earnings-per-share. Its latest reading is 25.39, which means investors are paying just over $25 for every dollar of earnings. The P/E ratio has historically been below 20, so this would suggest that the market is currently over-valued. However, when we look at the forecasted P/E, it is currently 21.87 which is more inline with historical averages. In addition to this: Lower interest rates can justify higher valuations, all else being equal - there is an inverse relationship between interest rates and valuations which I will write about in the future. Indicator Conclusion: Mildly Overvalued 2. S&P 500 Cyclically Adjusted P/E Ratio (CAPE Ratio) Similar to the P/E ratio, the CAPE ratio divides the S&P 500’s current price by its 10-year earnings, adjusted for inflation. Why adjust the traditional P/E Ratio? By using a 10-year period, this tends to smooth out year-to-year fluctuations in earnings which can be somewhat volatile over shorter periods of time. The idea is a higher CAPE ratio could reflect lower future returns, whereas a lower figure would indicate higher returns. The CAPE Ratio was developed by Noble prize winner Robert Shiller of Yale back in the 1990’s; however, this idea is not exactly new, Benjamin Graham (the father of value investing) and David Dodd recommended using 7-10 year averages in their seminal 1934 book Security Analysis when using valuation ratios. There is some research that shows over long periods of time this ratio tends to predict future long-term returns fairly well. However, the CAPE ratio isn’t expected to predict what the market might do over short periods of time. Having said that, large spikes in the CAPE ratio have often preceded recessions, and it’s important to realize that the metric is currently approaching its highest level on record. The CAPE ratio currently stands at 38, which is 26% higher than its 5-year average, 40% higher than its 10-year average, and more than double its 100-year average. Indicator Conclusion: Significantly Overvalued 3. The Buffett Indicator In 2001 Warren Buffett said that US Market Capitalization as a percentage of GDP is “probably the best single measure of where valuations stand at any given moment,” The ratio measures the aggregate value of the US stock market relative to the country’s economic output. Where is it now? It is currently at its highest level ever. Investors are paying over $2 for every dollar of US GDP, compared to a long-term average of $0.82. Buffett went on to say, "for me…if the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%–as it did in 1999 and a part of 2000–you are playing with fire" I’m not one to argue with Buffett’s thoughts, so this isn’t a great sign. Indicator Conclusion: Significantly Overvalued 4. S&P 500 Dividend Yield The dividend yield is the aggregate dividend of all the companies in the S&P 500 divided by the price of the S&P 500. Basically, this is how much the 500 largest US companies are paying investors in terms of dividends. All else being equal, a low or falling dividend yield means high or rising share prices. Currently the S&P 500 dividend yield is at a 20-year low. Over the last 10-years it has hovered between 1.75% - 2.25%, it’s currently at 1.26%. And there are only two ways for this number to increase, either dividends increase, or stock prices drop. I know which one I’d prefer. Indicator Conclusion: Overvalued 5. The Yield Curve Long-term treasury rates are almost always higher than those of shorter-term rates. Why? Because investors expect to be compensated for lending money over longer periods of time due to risk and the time value of money. However, when shorter-term rates are higher than longer-term rates - the opposite of what is “normal”, it signals shaky confidence in the economy, and typically leads investors to shift from riskier assets to safer assets, in essence moving from stocks to bonds. This phenomenon, known as an inverted yield curve, has rather consistently foreshadowed recessions and market downturns. A popular yield curve measure used by the market is the spread between the 10-year treasury vs. the 2-year treasury. Just before the last four recessions, the 10-2 spread went negative and the stock market turned negative shortly thereafter. The good news is currently the yield curve is “normal” with the 10-2 spread sitting right around its historical average. Indicator Conclusion: Normal Is a Market Correction Coming? The short answer is yes. Why? Because corrections happen somewhat regularly. Since the Financial Crisis there have been 4 corrections of 15% or greater, with 1 of these 4 corrections being the Covid correction of over 30%. Not only can corrections occur by prices dropping, but corrections can also come from prices staying flat (for years) despite company growth—rising earnings, sales, book value, among others without price increases (think the 1970’s). Either way, the market has always ebbed and flowed over time, oscillating between overvaluation and corrections, but the long-term trend is positive if you have the time. While I don’t advise dancing in and out of the market based upon headline news. I do think it’s prudent to have some understanding of where we might be in terms of the economic cycle and market valuations. Why is this prudent? This gives you a good reason to take some time to thoroughly review what you own, why you own it, and what the future might realistically hold for your portfolio. Having realistic expectations is fundamental to successful investing. With valuations where they are currently, it would be well-advised to use this to temper your future return expectations. If you have a well-thought out, well-designed portfolio coupled with a rock-solid financial plan then you shouldn’t be overly concerned with market fluctuations. Although, that’s a big “if.” -Paul R. Rossi, CFA  I’m a huge proponent of self-improvement and growth. The idea of making small improvements compounds over time and can become extremely meaningful. Let me give you an example: Most people would agree that typically making a 1% improvement isn’t much of an improvement. And I would agree. On the other end of the spectrum, a 100% or 200% or even 1,000% improvement is quite substantial. However, what if you are able to make many 1% improvements over time, this is where things get quite interesting. Assume you are able to make a 1% improvement everyday for just 1 year. How much do you think you would improve? 50% 100% 365% These would all be great improvements, but the actual answer would be a 3,788% improvement. At the end of a year you would be over 37 times better than you were when you started. All from just a 1% improvement every day. The formula is: (1 + 0.01) ^ 365 This is an example of the power of compound growth. Einstein has been attributed to saying, “compound interest (growth) is the 8th wonder of the world.” And even if he didn’t say it, I’m sure he would agree with this idea. Compound growth is incredibly powerful and is quite possibly under appreciated by most people outside of mathematicians and athletes. One such person who I’m confident understands the power of continuous improvement is Wayne Gretzky. It truly is hard to comprehend just how great Wayne Gretzky was on the ice. He made the All-National Hockey League First-Team 8 times, holds the record for most points all-time, most points in a season, most all-time assists, youngest player to score 50 points, most game winning goals in play-offs, and the list goes on and on. He retired in 1999 and STILL holds 60 records in the NHL. And if you can’t remember all his amazing records, you can just call him by his moniker, “The Great One.” He understood the idea of continuous improvement, hard work, and living a fulfilled life. Here are some of his own words on these subjects.
We all can't be Wayne Gretzky, but we can strive to take his ideas and incorporate them in our lives. -Paul R. Rossi, CFA |
AuthorPaul R. Rossi, CFA 
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April 2022
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