Investing principles to provide you comfort during exuberant markets.
Your biggest question: How do you keep your head during what is an unprecedented time. It might seem the stock market and the economy are not reading the same news.
There’s an effective medium, though, between doing nothing and panicky trading. These guidelines can keep you level-headed even while the markets twist and turn and record new highs.
Revisit your ISP (Investment Policy Statement) and if you don't have one, now is the time to put one together. An IPS is a written planning document that describes your investment objectives and risk tolerance over a relevant time horizon, along with the constraints that apply to your portfolio. An IPS serves as your guardrail so you don’t veer all over, chasing investments or changing your strategy as markets ebb and flow.
This document should be designed, built, and discussed prior to constructing and implementing your investment portfolio. The IPS creates a link between your unique considerations and your strategic asset allocation. The IPS is also an operating manual, listing key ongoing management responsibilities. You and your financial advisor should review the IPS regularly and update it whenever changes occur either if your circumstances change or the capital markets environment changes.
Your ISP should include the following:
A well-constructed IPS has several powerful advantages.
One advantage is that the IPS encourages investment discipline and reinforces your commitment to follow the strategy. This advantage is particularly important during adverse market conditions, like we've just experienced recently.
A second advantage is that the IPS focuses on long-term goals rather than short-term performance.
Third, the IPS provides evidence of a professional, client-focused well thought-out investment management process, with the fulfillment of fiduciary responsibilities.
By having an IPS you’ll know what to do and exactly when to do it – not just when your emotions want to move you.
Exxon Mobile has been a part of the part of the Dow Jones Industrial Average in one form or another since 1928. It's one of the largest oil companies in the world and for 92 years was considered a stalwart. In 1994 Exxon was valued at over $446 billion dollars and was the most valuable company in the United States.
At one point, even Warren Buffett owned the stock.
From 1994 - 2013 Exxon generated an annualized return of 12.65%, a whopping total return of 985% return during this 20-year period. Exxon's performance completely dwarfed the overall stock markets total return of 471%.
What could go wrong?
Well, as most of us have come to learn, nothing is guaranteed in this world, and this definitely holds true on Wall Street.
The challenge for Exxon and one reason why the company is being removed from the Dow Jones Industrial Average today, actually began back in 2014. From Exxon's high in 2014, it's seen it's stock drop by -46%. Several years ago, the energy sector made up 16% of the S&P 500, today it makes up less than 3%. What does this mean? This means that the Energy sector and Exxon is not as an important part of the market as it used to be. The once mighty and most valuable company in the United States, Exxon is now worth just 8.5% of Apple or about 10% of Amazon.
Why did Exxon's mobile stock price drop by -46% over a period the time when the stock market is up 111% and so many technology company's stock prices have been soaring?
As I've written before, a company's stock price is a reflection of it's earnings and it's future growth prospects. The market cares little about the past.
And on this front, Exxon falls flat. Both it's earnings (see below) and it's future growth prospects do not look promising. Since 2014 Exxon's earnings per share are down a staggering -77%. And digging into the company's financial statements, the numbers do not look good, whether looking at their revenue, earnings, or the the company's balance sheet.
While I'm not predicting Exxon's emanant demise or that it will not survive, I think Exxon will do just fine. However, its future doesn't look as bright as its storied past.
What can we take from this?
Well, several ideas can be drawn from Exxon being dropped from the Dow Jones Industrial Average.
As we get closer to the US Presidential election, the chatter begins to build about who may or may not occupy the White House, which in turn leads investors to worry about how this might impact the stock market. I’d like to provide some information and historical perspective.
For years now, politics and investing have been spoken about in the same breath. Market pundits and even presidents themselves have linked the performance of the stock market as a sort of “barometer” of their administration’s policies. What's interesting, the data doesn’t support this connection.
Over the past 100+ years, the long-term performance of the market has shown almost no correlation with government policies.
Informed investors realize that the key drivers of stock market performance have been, and will continue to be, earnings and economic growth.
Much of our collective memory about the performance of the economy under various past presidents’ stems from incorrect historical narratives, not hard data.
Presidential Stock Market Returns vs. Economic Growth (1957 - present)
While we want to believe that this election season will be different than so many previous elections, it won't be. There will be vitriol on both sides. It will be a knock-down drag out fight, and it will not be pretty. But…the good news is, in spite of this, history has shown that investors have prospered even during the most difficult political times. In fact they done extremely well during all sorts of challenging times. There has never been a time when there was not something to be concerned about, whether it be, up-coming elections, trade-wars, inflation, social unrest, military wars, or anything else that grabs the medias' attention.
Several years ago, Invesco, a provider of financial products, coined a phrase that bears repeating: “Hating the government is not an investment strategy.” We agree.
While nobody can say with absolute certainty who will win in November 2020, we can say for most people staying the course has made the most sense for long-term investment success.
Here are some certainties during this uncertain election season.
6 Ideas to Keep in Mind No Matter Who Wins:
Many people attempt to use historical narratives to inform ourselves about the future, but do we get the history right?
The charts below show a metric for each president, in dark blue, compared with the long-term average growth rate for that metric since the end of World War II. Clearly, history is often remembered differently than the actual data. And you thought calculus was hard.
How about only investing when your particular party controls the Presidency?
“Partisan” portfolios – which would invest only when a Democrat or a Republican was in office – significantly underperformed the “bipartisan” portfolio that stayed invested regardless of who was in power.
The difference is a result of the fact that the US stock market rose fairly consistently over the past 120 years, even while enduring two world wars, many smaller wars, two major financial crises, several recessions, and now, not one, but two pandemics. The best-performing portfolio over the past 120 years was one that stayed fully invested through both Democratic and Republican administrations.
The more time in market, and not trying to time the market, the better investors have done. See below.
So what does all this mean?
It means if you have a well-designed investment portfolio, you can stop worrying about who's going to win the Presidential election and focus on what you can control and what I would argue is most important. Things like, the relationship with your family & friends, your health, the people you can positively impact, and your long-term goals.
Charts and data from Invesco.
by Carlo M. Cipolla (professor of Economics 1922-2000)
The First Law of Human Stupidity
The first basic law of human stupidity asserts without ambiguity that:
At first, the statement sounds trivial, vague and horribly ungenerous. Closer scrutiny will however reveal its realistic veracity. No matter how high are one's estimates of human stupidity, one is repeatedly and recurrently startled by the fact that:
a) people whom one had once judged rational and intelligent turn out to be unashamedly stupid.
b) day after day, with unceasing monotony, one is harassed in one's activities by stupid individuals who appear suddenly and unexpectedly in the most inconvenient places and at the most improbable moments.
The First Basic Law prevents me from attributing a specific numerical value to the fraction of stupid people within the total population: any numerical estimate would turn out to be an underestimate. Thus in the following pages I will denote the fraction of stupid people within a population by the symbol σ.
The Second Basic Law
This fact is scientifically expressed by the Second Basic Law which states that:
Cultural trends now fashionable in the West favor an egalitarian approach to life. People like to think of human beings as the output of a perfectly engineered mass production machine. Geneticists and sociologists especially go out of their way to prove, with an impressive apparatus of scientific data and formulations that all men are naturally equal and if some are more equal than others, this is attributable to nurture and not to nature. I take an exception to this general view. It is my firm conviction, supported by years of observation and experimentation, that men are not equal, that some are stupid and others are not, and that the difference is determined by nature and not by cultural forces or factors. One is stupid in the same way one is red-haired; one belongs to the stupid set as one belongs to a blood group. A stupid man is born a stupid man by an act of Providence. Although convinced that fraction of human beings are stupid and that they are so because of genetic traits, I am not a reactionary trying to reintroduce surreptitiously class or race discrimination. I firmly believe that stupidity is an indiscriminate privilege of all human groups and is uniformly distributed according to a constant proportion.
In this regard, Nature seems indeed to have outdone herself. It is well known that Nature manages, rather mysteriously, to keep constant the relative frequency of certain natural phenomena. For instance, whether men proliferate at the Northern Pole or at the Equator, whether the matching couples are developed or underdeveloped, whether they are black, red, white or yellow the female to male ratio among the newly born is a constant, with a very slight prevalence of males. We do not know how Nature achieves this remarkable result but we know that in order to achieve it Nature must operate with large numbers. The most remarkable fact about the frequency of stupidity is that Nature succeeds in making this frequency equal to the probability quite independently from the size of the group.
Thus one finds the same percentage of stupid people whether one is considering very large groups or one is dealing with very small ones. No other set of observable phenomena offers such striking proof of the powers of Nature.
The evidence that education has nothing to do with the probability was provided by experiments carried on in a large number of universities all over the world. One may distinguish the composite population which constitutes a university in five major groups, namely the blue-collar workers, the white-collar employees, the students, the administrators and the professors.
Whenever I analyzed the blue-collar workers I found that the fraction σ of them were stupid. As σ's value was higher than I expected (First Law), paying my tribute to fashion I thought at first that segregation, poverty, lack of education were to be blamed. But moving up the social ladder I found that the same ratio was prevalent among the white-collar employees and among the students. More impressive still were the results among the professors. Whether I considered a large university or a small college, a famous institution or an obscure one, I found that the same fraction σ of the professors are stupid. So bewildered was I by the results, that I made a special point to extend my research to a specially selected group, to a real elite, the Nobel laureates. The result confirmed Nature's supreme powers: σ fraction of the Nobel laureates are stupid.
This idea was hard to accept and digest but too many experimental results proved its fundamental veracity. The Second Basic Law is an iron law, and it does not admit exceptions. The Women's Liberation Movement will support the Second Basic Law as it shows that stupid individuals are proportionately as numerous among men as among women. The underdeveloped of the Third World will probably take solace at the Second Basic Law as they can find in it the proof that after all the developed are not so developed. Whether the Second Basic Law is liked or not, however, its implications are frightening: the Law implies that whether you move in distinguished circles or you take refuge among the head-hunters of Polynesia, whether you lock yourself into a monastery or decide to spend the rest of your life in the company of beautiful and lascivious women, you always have to face the same percentage of stupid people - which percentage (in accordance with the First Law) will always surpass your expectations.
The Third (and Golden) Basic Law
As the Third Basic Law explicitly clarifies:
The Third Basic Law assumes, although it does not state it explicitly, that human beings fall into four basic categories: the helpless, the intelligent, the bandit and the stupid. It will be easily recognized by the perspicacious reader that these four categories correspond to the four areas I, H, S, B, of the basic graph (see below).
If Tom takes an action and suffers a loss while producing a gain to Dick, Tom's mark will fall in field H: Tom acted helplessly. If Tom takes an action by which he makes a gain while yielding a gain also to Dick, Tom's mark will fall in area I: Tom acted intelligently. If Tom takes an action by which he makes a gain causing Dick a loss, Tom's mark will fall in area B: Tom acted as a bandit. Stupidity is related to area S and to all positions on axis Y below point O.
When confronted for the first time with the Third Basic Law, rational people instinctively react with feelings of skepticism and incredulity. The fact is that reasonable people have difficulty in conceiving and understanding unreasonable behavior. But let us abandon the lofty plane of theory and let us look pragmatically at our daily life. We all recollect occasions in which a fellow took an action which resulted in his gain and our loss: we had to deal with a bandit. We also recollect cases in which a fellow took an action which resulted in his loss and our gain: we had to deal with a helpless person. We can recollect cases in which a fellow took an action by which both parties gained: he was intelligent. Such cases do indeed occur. But upon thoughtful reflection you must admit that these are not the events which punctuate most frequently our daily life. Our daily life is mostly, made of cases in which we lose money and/or time and/or energy and/or appetite, cheerfulness and good health because of the improbable action of some preposterous creature who has nothing to gain and indeed gains nothing from causing us embarrassment, difficulties or harm. Nobody knows, understands or can possibly explain why that preposterous creature does what he does. In fact there is no explanation - or better there is only one explanation: the person in question is stupid.
Most people do not act consistently. Under certain circumstances a given person acts intelligently and under different circumstances the same person will act helplessly. The only important exception to the rule is represented by the stupid people who normally show a strong proclivity toward perfect consistency in all fields of human endeavors.
From all that proceeds, it does not follow, that we can chart on the basic graph only stupid individuals. We can calculate for each person his weighted average position in the plane of figure 1 quite independently from his degree of inconsistency. A helpless person may occasionally behave intelligently and on occasion he may perform a bandit's action. But since the person in question is fundamentally helpless most of his action will have the characteristics of helplessness. Thus the overall weighted average position of all the actions of such a person will place him in the H quadrant of the basic graph.
The fact that it is possible to place on the graph individuals instead of their actions allows some digression about the frequency of the bandit and stupid types.
The perfect bandit is one who, with his actions, causes to other individuals losses equal to his gains. The crudest type of banditry is theft. A person who robs you of 100 pounds without causing you an extra loss or harm is a perfect bandit: you lose 100 pounds, he gains 100 pounds.
The frequency distribution of the stupid people is totally different from that of the bandit. While bandits are mostly scattered over an area stupid people are heavily concentrated. The reason for this is that by far the majority of stupid people are basically and unwaveringly stupid - in other words they perseveringly insist in causing harm and losses to other people without deriving any gain, whether positive or negative.
There are however people who by their improbable actions not only cause damages to other people but in addition hurt themselves. They are a sort of super-stupid.
The Power of Stupidity
It is not difficult to understand how social, political and institutional power enhances the damaging potential of a stupid person. But one still has to explain and understand what essentially it is that makes a stupid person dangerous to other people - in other words what constitutes the power of stupidity.
Essentially stupid people are dangerous and damaging because reasonable people find it difficult to imagine and understand unreasonable behavior. An intelligent person may understand the logic of a bandit. The bandit's actions follow a pattern of rationality: nasty rationality, if you like, but still rationality. The bandit wants a plus on his account. Since he is not intelligent enough to devise ways of obtaining the plus as well as providing you with a plus, he will produce his plus by causing a minus to appear on your account. All this is bad, but it is rational and if you are rational you can predict it. You can foresee a bandit's actions, his nasty maneuvers and ugly aspirations and often can build up your defenses.
With a stupid person all this is absolutely impossible as explained by the Third Basic Law. A stupid creature will harass you for no reason, for no advantage, without any plan or scheme and at the most improbable times and places. You have no rational way of telling if and when and how and why the stupid creature attacks. When confronted with a stupid individual you are completely at his mercy.
Because the stupid person's actions do not conform to the rules of rationality, it follows that:
a) one is generally caught by surprise by the attack; b) even when one becomes aware of the attack, one cannot organize a rational defense, because the attack itself lacks any rational structure.
The fact that the activity and movements of a stupid creature are absolutely erratic and irrational not only makes defense problematic but it also makes any counter-attack extremely difficult - like trying to shoot at an object which is capable of the most improbable and unimaginable movements.
The Fourth Basic Law
This is clearly summarized in the Fourth Basic Law which states that:
That helpless people, namely those who in our accounting system fall into the H area, do not normally recognize how dangerous stupid people are, is not at all surprising. Their failure is just another expression of their helplessness. The truly amazing fact, however, is that also intelligent people and bandits often fail to recognize the power to damage inherent in stupidity. It is extremely difficult to explain why this should happen and one can only remark that when confronted with stupid individuals often intelligent men as well as bandits make the mistake of indulging in feelings of self-complacency and contemptuousness instead of immediately secreting adequate quantities of adrenaline and building up defenses.
One is tempted to believe that a stupid man will only do harm to himself but this is confusing stupidity with helplessness. On occasion one is tempted to associate oneself with a stupid individual in order to use him for one's own schemes. Such a maneuver cannot but have disastrous effects because:
a) it is based on a complete misunderstanding of the essential nature of stupidity and
b) it gives the stupid person added scope for the exercise of his gifts.
One may hope to outmaneuver the stupid and, up to a point, one may actually do so. But because of the erratic behavior of the stupid, one cannot foresee all the stupid's actions and reactions and before long one will be pulverized by the unpredictable moves of the stupid partner.
Through centuries and millennia, in public as in private life, countless individuals have failed to take account of the Fourth Basic Law and the failure has caused mankind incalculable losses.
The Fifth Basic Law
The Fifth Basic Law states that:
Instead of considering the welfare of the individual let us consider the welfare of the society, regarded in this context as the algebraic sum of the individual conditions. A full understanding of the Fifth Basic Law is essential to the analysis. It may be parenthetically added here that of the Five Basic Laws, the Fifth is certainly the best known and its corollary is quoted very frequently.
The corollary of the Law is that: A stupid person is more dangerous than a bandit.
The result of the action of a bandit is purely and simply a transfer of wealth and/or welfare. After the action of a bandit, the bandit has a plus on his account which plus is exactly equivalent to the minus he has caused to another person. The society as a whole is neither better nor worse off. If all members of a society were perfect bandits the society would remain stagnant but there would be no major disaster. The whole business would amount to massive transfers of wealth and welfare in favor of those who would take action. If all members of the society would take action in regular turns, not only the society as a whole but also individuals would find themselves in a perfectly steady state of no change.
When stupid people are at work, the story is totally different. Stupid people cause losses to other people with no counterpart of gains on their own account. Thus the society as a whole is impoverished. The system of accounting which finds expression in the basic graphs shows that while all actions of individuals add to the welfare of a society; although in different degrees.
In other words the helpless with overtones of intelligence, the bandits with overtones of intelligence and above all the intelligent all contribute, though in different degrees, to accrue to the welfare of a society. On the other hand the bandits with overtones of stupidity and the helpless with overtones of stupidity manage to add losses to those caused by stupid people thus enhancing the nefarious destructive power of the latter group.
All this suggests some reflection on the performance of societies. According to the Second Basic Law, the fraction of stupid people is a constant σ which is not affected by time, space, race, class or any other sociocultural or historical variable. It would be a profound mistake to believe the number of stupid people in a declining society is greater than in a developing society. Both such societies are plagued by the same percentage of stupid people. The difference between the two societies is that in the society which performs poorly:
a) the stupid members of the society are allowed by the other members to become more active and take more actions;
b) there is a change in the composition of the non-stupid section with a relative decline of populations.
This theoretical presumption is abundantly confirmed by an exhaustive analysis of historical cases. In fact the historical analysis allows us to reformulate the theoretical conclusions in a more factual way and with more realistic detail.
Whether one considers classical, or medieval, or modern or contemporary times one is impressed by the fact that any country moving uphill has its unavoidable σ fraction of stupid people. However the country moving uphill also has an unusually high fraction of intelligent people who manage to keep the σ fraction at bay and at the same time produce enough gains for themselves and the other members of the community to make progress a certainty.
In a country which is moving downhill, the fraction of stupid people is still equal to σ; however in the remaining population one notices among those in power an alarming proliferation of the bandits with overtones of stupidity and among those not in power an equally alarming growth in the number of helpless individuals. Such change in the composition of the non-stupid population inevitably strengthens the destructive power of the σ fraction and makes decline a certainty. And the country goes to Hell.
Me and my youngest son on the beach in Carmel
Many people would like to leave a legacy to the children or grandchildren but aren't quite sure how to do it, they don't know the best way to go about doing it, or might not have a substantial amount of money set aside to be able to feel like they can make an impact.
There is a novel solution we've come up with that provides several key benefits:
So what is this strategy?
Custodial Roth IRA Account
Let's break down what this account actually is. "Custodial" means it's an account for a minor. So when the minor turns 18 (or the age of consent in your state), the account automatically becomes theirs and they have complete control of the account. Up until that point, the person who set up the account controls it.
And now the last part of the name, the "Roth IRA" is just like a regular Roth IRA which allows up to $6,000 to be contributed into the account on a yearly basis (as of 2020). The money goes into the account after tax, grows tax deferred, and comes out tax free. A Win/Win.
So why is this such a great strategy?
Let's use an example to show case some of the many benefits and power of using this type of account for a minor.
Let's say your 13 year daughter or son has a part-time job and has what the IRS calls "Earned Income," with Earned Income, they or you can contribute up to 100% of their Earned Income that year into a Custodial Roth IRA Account. The part-time job could be from baby-sitting, mowing lawns, painting, office work, etc. The contribution into the Custodial Roth IRA Account must be equal or less than your child's Earned Income in that year and if your child earned less than $12,000 no tax return is required to be filed. That's always a Win.
So back to our example: let's say your 13 year old child makes $2,000 per year from age 13 through age 17 (5 years) for a total of $10,000. You as a parent, or even a grandparent, can contribute that same amount into a Custodial Roth IRA Account you set up for them each year ($2,000 per year for 5 years) for a total of $10,000.
And so here's where it gets exciting. Because you/they are starting to save and invest at such a young age the power of compounding becomes unbelievably powerful. Assuming they have $10,000 in their account at age 18 and invest the money for long-term growth, it's not completely unreasonable that the account could grow at an annualized rate of 10% (the stock market historical average). If they didn't touch this money until they retired at age 65 (which is what this was intended for), the $10,000 would grow to $1,078,266. And not only this but there will be no taxes due ever. So when your child/grandchild retires, the money they pull out will not be taxed! This is a triple Win/Win/Win.
Now imagine what the account value might become if your child/grandchild started contributing to this same account when they started working. With a modest savings of just $200 a month, the account could be worth several million dollars ($3M+) by the time they retire. Imagine the piece of mind you and your child/grandchild will feel knowing their financial future is secure - all by the age of 18.
This is also a great way to teach and have fun conversations about saving, investing, analyzing companies, the economy, etc., over the course of a lifetime with your family. Engaging your children/grandchildren in the process will pay huge dividends on so many levels.
Now go open up a Custodial Roth IRA. Do it now. If you need help, send an email or drop us a line and we can discuss this and other strategies to help you and your family build wealth.