tag:blogger.com,1999:blog-231832682024-03-13T00:18:02.274-04:00It's more than moneyjonathan smithhttp://www.blogger.com/profile/14166247212090652699noreply@blogger.comBlogger91125tag:blogger.com,1999:blog-23183268.post-32917240846694038222010-08-18T15:58:00.000-04:002010-08-18T15:58:02.072-04:00Opportunity Arriving Daily<div><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="http://1.bp.blogspot.com/_zwTVhW1Eroo/TGQw7FO_I3I/AAAAAAAAA-E/B0oPL0ZarSM/s1600/Jonathan,+John+Templeton,+and+Bill+Barnhard+August+1987.jpg" imageanchor="1" style="clear: right; cssfloat: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="218" ox="true" src="http://1.bp.blogspot.com/_zwTVhW1Eroo/TGQw7FO_I3I/AAAAAAAAA-E/B0oPL0ZarSM/s400/Jonathan,+John+Templeton,+and+Bill+Barnhard+August+1987.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Sir John Templeton, Jonathan Smith, and William H. Barnhardt<br />
Douglas Airport, Charlotte, NC sometime in August 1987<br />
Photographer: J. David Barnhardt</td></tr>
</tbody></table><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">During the 1980’s, I had the unalloyed privilege of managing some money for the late <a href="http://www.sirjohntempleton.org/">Sir John Templeton</a>. Every now and again, I pause to consider that one of the world’s wisest investors mentored me, with his money and on his dime, and I am profoundly grateful. <br />
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His wisdom was vast, his insights were unconventional, and his generosity knew no bounds. Sir John was always a learner and never a knower. Learners keep flexible and open-minded; knowers are brittle. When naysayers challenged his view that life continually offered wonderful opportunities, he countered that opportunities were not all gone, what was missing was preparation. Wisdom like this takes years to sink in. Some do not ever get it. <br />
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This summer, a Chattanooga friend who knows Lauren Templeton, the founder of the investment firm bearing her name, told her that years ago I managed some money for Sir John. Lauren is the wife of Scott Phillips, a principal and portfolio manager at <a href="http://www.maximumpessimism.com/">Lauren Templeton Capital Management, LLC</a> and the great-niece of Sir John Templeton. We three connected and talked for over an hour, a joy that reminded me of many conversations with John Templeton himself. This week, I shared my recollection of Sir John’s views on opportunity and preparation with Scott. He reminded me that Sir John once said that the very reason <em>he went to the trouble to save half of his income</em> was so he would have the necessary funds ready to take advantage of future opportunities, since opportunities often appear when least expected. This Scott knows, as is evidenced throughout his latest book, <a href="http://www.amazon.com/gp/product/B003M5IHEG/ref=pd_lpo_k2_dp_sr_1?pf_rd_p=486539851&pf_rd_s=lpo-top-stripe-1&pf_rd_t=201&pf_rd_i=0137038496&pf_rd_m=ATVPDKIKX0DER&pf_rd_r=1WKF8X03QJ5GTXX5BJVN">Buying at the Point of Maximum Pessimism, Six Value Trends From China to Oil to Agriculture</a>. <br />
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At Jonathan Smith & Co., Investment Counsel, we recognize volatility in financial markets is high and is likely to remain high. Our experience is that volatility can be unbearably unsettling to investors, leading them to sell good companies for wrong reasons. Volatility can also paralyze investors, preventing them from taking steps that historically, over the long haul, have been in their best interests: buying quality investments whose margins of safety are high. Investors are not the only ones who must manage volatility successfully if they want to survive; read how hard pilots have it when their outlooks are horribly pessimistic:<br />
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"There's an exercise that some pilots go through late in their flight training. The student pilot gets the plane airborne, at cruising altitude. Then the instructor places a loose-fitting, thick-woven sack over the student's head, so the student can see nothing. The instructor takes the controls and starts stunt-piloting. He loops the loop. He pushes the plane, Turkish-headache-style, skyward, then flips belly-up and swoops earthward. He rollicks and spirals, careens and nosedives, tailspins and wing-tilts. He gets the student utter discombobulated. Then he puts the plane in a suicide dive, plucks the bag off the student's head, and hands him the controls. His job: to get the plane back under control." (Mark Buchanan, <u><a href="http://www.amazon.com/Rest-God-Restoring-Your-Sabbath/dp/0849918707/ref=sr_1_1?s=books&ie=UTF8&qid=1282160081&sr=1-1">The Rest of God, Restoring your Soul by Restoring Sabbath</a></u>, page 37)<br />
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Getting investors’ “financial planes” back under control is the <a href="http://www.jonathansmith.com/jscoway.cfm">JSCO Way</a>, yet so many investors are still utterly discombobulated, their planes in suicide dives. If the instructor has plucked the bag off your head, handed you the controls, and if it feels like you are approaching earth at 17,333 feet per second, give us a call, we can put your nosedive on hold for as long as it takes to have a conversation about getting your financial plane back under control. And if you do not want to, we will hand you back the controls while our parachutes still have time to open. </div></div>jonathan smithhttp://www.blogger.com/profile/14166247212090652699noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-89238115926117566902010-07-23T16:45:00.003-04:002010-07-23T17:00:22.232-04:00Looking at Investing Through the Eyes of a LandlordIt seemed like a really great idea at first. And it actually was, but somewhere along the way, it turned bad, really bad. I’m not quite sure when, but it was either before or after a tenant started breeding Pit Bulls in the back bedroom . . . well, now that I say that, it was probably before. The story starts a good six years before the Pit Bulls. I was just finishing my freshman year in college. Four friends and I were looking for an apartment that would rent to five college kids, but no one would go above four (that should have been my first hint). So I hatched an idea and floated it past Jonathan (side note: I quit referring to him as “Dad” after my first day of work here). I proposed that we use my first-time homebuyer status to get a cheap loan, then buy a four bedroom <a href="http://wikimapia.org/#lat=35.762746&lon=-78.7016344&z=17&l=0&m=b&search=lake%20park">condo</a>, cover our mortgage with the rent from my four roommates, and on graduation day we’d easily sell it and voila, three years of rent free living. I was, as we say, <em>very bullish.</em> <br />
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It worked well for the first three years. In addition to the rent working out as planned, I happened to meet my wife, Millie, who was living in the building next door (I later learned she had made the same proposal to her Mom and they owned her condo also – the serendipity!) Three years later, my roommates became my groomsmen when Millie and I married a month after graduation and, even though we couldn’t sell the condo right away, we found some decent tenants to tide us over for “just a few months.” <br />
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That first batch of tenants sent their checks in on time and didn’t scuff up the walls too badly. But as we continued to rent it out while looking for a buyer, we discovered each group of tenants brought new troubles. Our costs went up: carpets had to be cleaned after each tenant, washers broke, and rooms were painted black. And our emotional expense went up as well: lost sleep over dealing with missed rents and worry over our exit price. All the while our potential liabilities piled up: the smoke detectors went unattended, the 3rd floor porch railing was removed for an impromptu golf driving range, and of course the aforementioned Pit Bull husbandry. Thankfully, the world is full of enterprising young men with four friends who want to live together – we were lucky enough to sell our place to one such “investor” well before the housing market collapsed. <br />
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<strong>The Tenants or “You’re Going to Let Who Stay in Our Hotel?!?”</strong><br />
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<tr><td style="text-align: center;"><a href="http://2.bp.blogspot.com/_zwTVhW1Eroo/TEmygyoOYjI/AAAAAAAAA94/8If7UQCsIV0/s1600/text-arabic-numbers0-9.jpg" imageanchor="1" style="clear: right; cssfloat: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="131" hw="true" src="http://2.bp.blogspot.com/_zwTVhW1Eroo/TEmygyoOYjI/AAAAAAAAA94/8If7UQCsIV0/s400/text-arabic-numbers0-9.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: x-small;">Arabic Numbers: Where the 4’s look like backwards 3’s</span></td></tr>
</tbody></table>We have a good friend who refers to monthly statements and the flashing data on CNBC as “Arabic Numbers” because they have no real significance without someone willing to interpret and apply them to a specific investor’s situation. One of the “interpretation” tools we use is to view our investment portfolio through the eyes of a Landlord. <br />
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As far as we’re concerned, every investor, from the parents saving for college to Warren Buffett himself, is the Owner and de facto Landlord of a 100 room hotel. Each room represents 1% of their portfolio and each Landlord has the choice to rent out each room to a variety of tenants with various quirks. We’d like to introduce the tenants and shed light on how this framework helps us see and navigate the current environment.<br />
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<strong>Bonds:</strong> We have a wide spectrum, but let’s start with our average Bond. We’ll call him James Bond and he agrees to pay us a stated rent and even shows us his estimated payment schedule. In addition, if we let him stay and don’t evict him before the term of his lease is up (if we don’t sell our Bond before maturity), then James promises to leave the room in the same condition he found it. At one end of the spectrum, we have our safest Bond, a US Treasury, who we’ll call T. Bill Bond. Bill has never missed a payment in over 200 years and is pretty well regarded globally. He won’t pay us as much rent as James, but we usually sleep well at night with him in our rooms. At the other end is the riskier High Yield Bonds, we’ll call Barry Bond. Barry has high hopes and offers big promises. He owes a lot of money to his lenders and doesn’t have the best track record of paying his rent. The only reason we let him set foot in one of our rooms is because he promises to give us a large rent check . . . and, like all Bonds, we have a legal contract we can enforce in case he backs out.<br />
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<strong>Stocks:</strong> We have a very curious relationship with our Stock tenants. It really couldn’t look more different from Bonds. In most cases, we allow Stocks to stay with no promise or expectation of a monthly rent. Why? Well, our proposal to Stocks goes like this: we let them stay rent free with no lease agreement in hopes that when we kick them out (sell them), they’ll pay us all their “back rent” in one lump sum payment. It sounds pretty preposterous, but history shows that over long stretches of time, Stocks pay a pretty decent rent. It’s like they are so thankful for a place to “live” while they sell their iThings, Microthings, and Googlethings that they are happy to share in the profits when they move out.<br />
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Of course, there are plenty of times when Stocks don’t pay rent when they move out. The best outcome in that situation is that they leave the hotel room the way they found it and we can just rent it out again to whoever we choose (we have no loss on our position). The worst outcome is when we rent a room (or worse, multiple rooms) to someone like those Lehman Brothers or someone who will go unnamed but whose initials are AIG. They not only stiffed their Landlords, but they stole bathrobes, set the drapes on fire, and got the hotel room permanently condemned.<br />
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<strong>Dividend Stocks:</strong> A subset of the Stock tenants is the Dividend Paying Stocks. These Dividenders say they’ll pay a monthly rent, but they give no legal promise. In fact, all that the Landlord has to go on is the Dividender’s history, their word, and their deeds. This can leave the unsuspecting Landlord open for much disappointment. We’ve seen it plenty of times (and even been tricked ourselves); some Dividenders say they’ll pay rent but end up over-promising and under-delivering. Inevitably they don’t pay the advertised rent, or even a fraction of it. When the Landlord gets fed up with their broken promises and kicks them out, they find a hotel room that looks like it was inhabited by an ‘80’s Rock Band. This is why our “screening” process for these Dividenders goes far beyond looking at last month’s rent check. As we’ve mentioned in prior commentaries, we look at their rental history, “job security”, other financial obligations, and, most importantly, their ability and willingness to increase their rent payments. <br />
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<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/_zwTVhW1Eroo/TEmy8myRDUI/AAAAAAAAA98/pJ7x76mG0y4/s1600/driving-range_japan_small.jpg" imageanchor="1" style="clear: left; cssfloat: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="179" hw="true" src="http://3.bp.blogspot.com/_zwTVhW1Eroo/TEmy8myRDUI/AAAAAAAAA98/pJ7x76mG0y4/s320/driving-range_japan_small.jpg" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: x-small;">Third floor Driving Range</span><br />
<span style="font-size: x-small;"><em><strong>Note:</strong> </em>Do Not Try This At Home</span></td></tr>
</tbody></table><strong>Gold:</strong> Just when it seems that we couldn’t get much different than the above mentioned cast of characters, we meet the most unusual fellow of all: Gold. On the surface, he seems like the last person we’d want to rent to: he has no job, no real prospects for employment, he promises no monthly rent and his only redeeming attribute is that he’s a snazzy dresser . . . and, or course, he’s always been a hit with the ladies. The only way that I, as a Landlord, can make a profit by renting to Gold is by pawning him off on the next Landlord who pays me a premium. Today, Landlords are clamoring for Gold – they’re paying close to historical highs to prior Landlords just for the opportunity to let him in their rooms. This isn’t to say he’s a bad guy. He has a long history of being the go-to tenant in times of uncertainty and fear – it’s just important to know what we’re getting into. Warren Buffett agrees when he says about Gold, “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” </div><br />
<strong>Cash:</strong> After all these instances of skipping rent and trashing rooms (it feels like I’m watching Tom Hanks in The Money Pit ), one doesn’t have to explain the appeal of Cash. In effect, owning Cash is the equivalent of putting a “No Vacancy” sign on any number of doors. While we won’t collect any rent, we’re guaranteed to have our room in the condition we left it – chocolates still on the pillows and the toilet-paper roll still folded into a point. Of course, an empty room provides little comfort when costs inflate. <br />
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<strong>The Landscape or “Where’s the Rent Coming From This Month?”</strong><br />
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That’s a lot of words spent on setting the stage, so we’ll get right to the point, which is what we see happening in the markets. Recession, Inflation, Deflation, and Interest Rates seem to be on everyone’s mind, so we’ll spend the rest of our time there. <br />
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<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/_zwTVhW1Eroo/TEmzQ05VL1I/AAAAAAAAA-A/HH1p4S79tWg/s1600/tom-hanks-money-pit-762942.jpg" imageanchor="1" style="clear: right; cssfloat: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="320" hw="true" src="http://3.bp.blogspot.com/_zwTVhW1Eroo/TEmzQ05VL1I/AAAAAAAAA-A/HH1p4S79tWg/s320/tom-hanks-money-pit-762942.jpg" width="233" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: x-small;">The Money Pit tagline is eerily appropriate: </span><br />
<span style="font-size: x-small;">“For everyone who's ever been deeply in </span><br />
<span style="font-size: x-small;">Love or deeply in Debt”</span><br />
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</td></tr>
</tbody></table>Recession impacts our Stock tenants just like it would any real-life tenant. If Joe Stock’s income is squeezed, he has less money to spend on rent. Same goes for the Dividenders, if they aren’t committed to sending their monthly rent check, they will either reduce or eliminate it all together. We think the probability of another recession (or just continuing the one we may not have ever really exited) is about 50/50. Add in the possibility of large tax increases in 2011 which bring a “negative multiplier” effect (it hurts growth 2-3x more than it helps tax revenues) and a recession gets more certain. The key to renting to Stocks when the shadow of recession is in view, is to only offer rooms to those tenants with secure jobs and predictable salaries, and to have realistically low expectations for “exit rent” that would still make it worthwhile to the Landlord. </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">Inflation is the silent killer of the hotel business; most evidently in our Cash and Bond rooms. We see it in our hotel’s rising prices of utility bills, staff health insurance and pool maintenance. While our Stocks have jobs that will likely pay them more in times of inflation (thus passing that along to the Landlord) our Bonds have contracted a set amount of monthly rent and our Cash is paying us nothing. While we think it’s a near certainty that we’ll have some period of rapid inflation in the US, the question is “When?” We, for one, do not want to be holding a massive amount of Bonds when inflation returns, forcing interest rates to shoot up, and we’re stuck with an undesirable tenant.</div></div><br />
Deflation, a decline in prices, is the flipside of inflation. It’s easy enough to see that this has the opposite effects of inflation and, from where we sit, this seems to be a likely short-term scenario. Even though the Fed is printing money and injecting stimulus, if banks and consumers are holding on to funds at an even faster clip, the end result is that money is being taken out of the economy, prices quit going up, and interest rates go lower. In our Portfolio Hotel, deflation will favor Bond holdings (because we’re happy to collect their now relatively high monthly rents) and favor the Quality, Dividend-Paying Stocks over the Non-Paying Stocks (again, due to the rent coming in). If and when we see deflation, we don’t think it will be a long period and we’re not ones to want to stake long-term assets on a short-term event. So, while we have adequate Bond exposure, we’ve stopped short of overweighting this short-term scenario. Rather, we’re choosing to “bet” on deflation by being more certain that our clients have adequate personal reserves and are paying off any expensive debts. In other words, we’re less inclined to rent out rooms that we might want to live in over the next couple years. <br />
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Mr. Buffett reminds us, “Be fearful when others are greedy and be greedy only when others are fearful.” We’d rephrase that for our hotel analogy to say, “Rent out your rooms when other Landlords lock their doors, and light up your ‘No Vacancy’ sign when others swing the doors open wide.” While we expect overall returns going forward to be lower than historical averages, we are by no means disappointed with the tenants we’ve opened our doors to. Rest assured that we, as the Landlords of our clients’ Hotels, have filled our rooms with a mix of renters that we fully expect to help our clients reach their goals regardless of the larger macroeconomic outcome. <br />
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Justin Smith, CFA®, CFP®<br />
Financial Advisorjonathan smithhttp://www.blogger.com/profile/14166247212090652699noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-28108892834788837232010-07-20T09:00:00.004-04:002010-07-20T11:42:49.432-04:00What we learned from the DoctorJustin here. I read a great article in the <span class="blsp-spelling-error" id="SPELLING_ERROR_0">WSJ</span> this morning (<a href="http://online.wsj.com/article/SB10001424052748704720004575377060985974450.html">here</a>) about a movement to get more doctors to give their notes to their patients.<br />
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We have a client couple where the wife has battled through a fight with breast cancer. The husband said one of the best things about their doctor was that he would photocopy his notes after they talked and give them a copy before they left the doctor's office. He said the <span class="blsp-spelling-corrected" id="SPELLING_ERROR_1">transparency</span> meant a lot to him and his wife.<br />
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We've always given some sort of recap after meetings, but it usually only involves the action points coming out ("Jim and Jane need to revisit wills.") but we didn't always send our clients the full meeting notes ("Jim and Jane need to revisit will because Jane is nervous about Jim providing too much money to his grown kids from his previous <span class="blsp-spelling-corrected" id="SPELLING_ERROR_2">marriage</span>.")<br />
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So, after our <span class="blsp-spelling-corrected" id="SPELLING_ERROR_3">client</span> told us how important it was to them in their cancer fight, we started being more intentional. While we don't copy our handwritten notes (they wouldn't be much help) we've started sending clients full recaps of the meetings. Sure, it takes some time, but we find that it adds some accountability (for us and the clients) and, like with our clients and their doctor, improves <span class="blsp-spelling-corrected" id="SPELLING_ERROR_4">transparency</span>. We see it as standard operating procedure.justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-15802151383998637392010-07-02T11:02:00.003-04:002010-07-02T15:53:16.972-04:00Unintended Consequences in Aid to Haitian WomanIn February, NPR played a story about woman in Haiti, Yvrose Jean Baptiste, who basically loses her business in the earthquake. She desn’t know how she’ll go on, owes the bank $100 while selling chicken necks at the market for pennies. Then in a genuine act of kindness and humanity, NPR listeners flood her bank account with money . . . $3,860 (more than a few years’ wages).<br />
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Today, they followed up with her. She withdrew the money, put her four kids in school, bought a stand at the market and inventory. It dramatically changes her life for the better - you nearly expect Hollywood to start buying the movie rights . . . until her husband leaves her. He doesn’t know how to handle the shift in power in the marriage. Today she says she's happy but she doesn’t sleep well at night (still under a tent) fearing she will be robbed because she doesn’t have a husband to protect her.<br />
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Three lessons:<br />
<ul><li>We all have the ability to radically change someone's life through mere generosity, but</li>
<li>Bailouts rarely work like we expect them to and</li>
<li>Money rarely solves problems we’ve yet to encounter. </li>
</ul><p>Full story here: <a href="http://www.npr.org/blogs/money/2010/07/01/128245622/yvrose">http://www.npr.org/blogs/money/2010/07/01/128245622/yvrose</a> </p>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-63159941580797777232010-06-10T18:56:00.001-04:002010-06-11T13:15:56.296-04:00Today's headlines are rarely the same as what history's judgement is going to be<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; margin-left: 1em; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="http://2.bp.blogspot.com/_zwTVhW1Eroo/TBFoBZkIW7I/AAAAAAAAA9s/FkTJlVHIBic/s1600/stameys.bmp" imageanchor="1" style="clear: right; cssfloat: right; cssfloat: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="150" qu="true" src="http://2.bp.blogspot.com/_zwTVhW1Eroo/TBFoBZkIW7I/AAAAAAAAA9s/FkTJlVHIBic/s200/stameys.bmp" width="200" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Photo courtesy FaceBook</td></tr>
</tbody></table>Jonathan here: Went to <a href="http://bit.ly/cJCvPW">Stamey's</a> for a late lunch, all by myself. I was really looking forward to three four things: a world class hot dog all the way (that's mustard, chili, onions, and Cole slaw for you northerners), an honest-to-goodness chopped BBQ sandwich, and a tall glass of sweet iced tea (otherwise known as the wine of the South). <br />
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<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">To tell the truth, I was looking forward to spending some unhurried alone time with my brand new 2010 US Andex chart.</div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/_zwTVhW1Eroo/TBFonzkJ45I/AAAAAAAAA9w/Q8D86P8UsF0/s1600/2009_US_Wall-Chart.gif" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="422" qu="true" src="http://3.bp.blogspot.com/_zwTVhW1Eroo/TBFonzkJ45I/AAAAAAAAA9w/Q8D86P8UsF0/s640/2009_US_Wall-Chart.gif" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Image copyright Andex/Morningstar</td></tr>
</tbody></table><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><a href="http://1.bp.blogspot.com/_zwTVhW1Eroo/TBFpUV8kShI/AAAAAAAAA90/dzxMikToNpw/s1600/the+art+of+racing+in+the+rain.jpg" imageanchor="1" style="clear: right; cssfloat: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="200" qu="true" src="http://1.bp.blogspot.com/_zwTVhW1Eroo/TBFpUV8kShI/AAAAAAAAA90/dzxMikToNpw/s200/the+art+of+racing+in+the+rain.jpg" width="200" /></a>I love charts. I can spend an hour with a good chart and come away with having had as much enjoyment (and learning as much) as reading a well-written book (for my current new <a href="http://amzn.to/9wy8c8">favorite</a>, shown right). </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">The Andex chart shows what would have happened to $1, had it been invested way back in 1926, in a bunch of different indexes representative of tangible investments (US Small Stocks, S&P500 Total Return Index, Balanced Portfolio, World Stock Markets ex US Total Return Index, Long-Term Government Bonds, 5-Year Fixed-Term Investments, 30-Day Treasury Bills, and that darned old dog, Inflation, sorry Enzo). </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">As if that wasn't enough, the chart also shows: median PE ratio, minimum wage, the price of a first class stamp, gold, the price of oil, prime interest rate, and inflation. That's not all: dotting the nearly 85 years of time were hundreds of events, panics, assassinations, wars, crises, bombings, collapses, deficits, unemployment, Watergate burglars, hostages, bailouts, bankruptcies, market closings. It shows the day the first international mutual fund was introduced in the US and the day John Glenn orbited the earth. </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">All of the above is not the half of it, you need to get a copy of the chart for yourself or drop by our office and spend an hour or two with it. In the words of Jack Bauer, I promise you, it will lower your blood pressure and your heartbeat; two numbers that I imagine have been higher than they really ought to be. Why, because it gives you a 30,000 foot view of things and lets you know that today’s headlines are rarely the same as what history’s judgment is going to be. </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">It was after 2:30 when I gathered up my belongings (today's News-Record, my PDA, and my new friend the Andex Chart, when I noticed several waitresses and busboys and one cashier, who apparently had just spend the last half hour or so gawking at some guy in a Seersucker suit, eating a hot-dog and a BBQ sandwich and pouring over a chart with as many squiggly lines (and as big) as a road map. The cashier became their spokesman, she took a step toward me and peered at the chart: "I saw the market was up 175 points this morning, what it is gonna do?" "By when," I said pleasantly and sincerely, hoping to draw her out. "Oh, I don't know, I guess by when I retire," she admitted, seeing I was for real. "We have a 401(k) plan, you know." </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">Judging she had at least 15 more good working years on her side, I said, "Keep your head down, your heart up, and take advantage of buying more shares month in and month out." "Thanks, she said, that's just what I thought I'd do." She added, "And that's just what our guy says to do, too. You know he comes to see us when the market us up and he comes to see us when the market is down, and he always tells us the same thing. I don't know how people without an advisor do it." </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">"I don't either," I replied, "Put an extra scoop of ice-cream on his peach cobbler next time he comes in. And thank him for telling the truth.” </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">If all this volatility has you down, drop us a line, give us a call, or come by and see us. We'll talk about risk and return and how we're guiding investors through this mess, how to turn this crisis to your advantage. It never hurts to have a second set of eyes, especially in this environment. <br />
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And then we can go to Stamey's and enjoy a hot dog and a BBQ sandwich and a sweet iced tea.</div>jonathan smithhttp://www.blogger.com/profile/14166247212090652699noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-60386845536421261282010-06-09T09:21:00.006-04:002010-06-09T09:46:57.800-04:00You Think You're Paying Too Much In Taxes?Justin here. For all its quirks, it's hard to find a better (and cheaper) place to easily track what you spend that at <a href="http://www.mint.com/">www.mint.com</a>. On top of that, the Mint blog does an equally great job at relaying financial concepts in easy to understand methods; today's post doesn't disappoint.<br /><br />Note that the y-axis numbers are misaligned with the chart for some reason, but the meat of the chart is still right (for those of you who don't remember, the "y" axis is the vertical axis, also known as the "<strong>y</strong>o-<strong>y</strong>o" axis because it goes up and down . . . how about that?)<br /><br /><a href="http://www.mint.com/blog/wp-content/uploads/2010/06/MNT-HIGH-TAXES-R2.png"><img class="alignnone size-full wp-image-11865" title="MNT-HIGH-TAXES-R2" alt="" src="http://www.mint.com/blog/wp-content/uploads/2010/06/MNT-HIGH-TAXES-R2.png" width="902" height="1275" /></a><br /><a href="http://www.mint.com/">Personal Finance Sofware</a> Mint.comjustin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com1tag:blogger.com,1999:blog-23183268.post-41727480542728230012010-05-25T08:56:00.003-04:002010-05-25T09:09:28.103-04:00Congress Waivering on Fiduciary Issue<a href="http://3.bp.blogspot.com/_wvL35W_rkPo/S_vL0YYo5CI/AAAAAAAADmQ/hT1T3O-ycsw/s1600/fiduciary.bmp"><img style="MARGIN: 0px 10px 10px 0px; WIDTH: 262px; FLOAT: left; HEIGHT: 262px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5475193872758400034" border="0" alt="" src="http://3.bp.blogspot.com/_wvL35W_rkPo/S_vL0YYo5CI/AAAAAAAADmQ/hT1T3O-ycsw/s320/fiduciary.bmp" /></a>Justin here. An article last week from WSJ's Jason Zweig highlights what fiduciary duty means to Joe Investor. The element of how congressmen play into the reform is interesting. After seeing how Senator Colburn trades his account, it seems a lot like letting my two year-old decide her bedtime . . . or if she has to hold my hand when she crosses the street (depending on how important you think fiduciary duty is.) Full article <a href="http://online.wsj.com/article/SB10001424052748704414504575244621048180014.html#dummy">here</a>.<br /><br /><div><blockquote><em>In a recent interview with the Journal's Brody Mullins, Sen. Tom Coburn (R., Okla.) said that most of his money is managed by a professional adviser. The senator explained that his portfolio is heavy on oil and natural-gas stocks because energy is big business in his home state of Oklahoma.<br /><br />Sen. Coburn added that he has his own account at TDAmeritrade, valued at about $70,000. He said he trades actively based on tips he gleans from Jim Cramer's "Mad Money" show on CNBC.<br /><br />In 2008, Sen. Coburn traded Transocean four times in less than a month on Mr. Cramer's advice. "I lost my shirt," the senator said. He fared better with Tyson Foods, which he bought on Nov. 20, 2008, and sold less than three weeks later. "I bought it and got out because it went up," Sen. Coburn said. He added that he regretted selling Tyson so quickly, because its price kept rising after he sold.</em> </blockquote></div>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-71859021118989377332010-05-11T16:52:00.003-04:002010-05-11T17:14:16.158-04:00Grantham on BubblesJustin here. I'm fairly certain that all the 1000+ hours I spent studying for the CFA and CFP exams might have been better served taking a class on "How to Speak with a British Accent." Jeremy Grantham is brilliant (see his bio <a href="http://en.wikipedia.org/wiki/Jeremy_Grantham">here</a>, and latest commentary <a href="https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIDqLlslDnruR3zwRaw6g6aB5jq0v8Y6sYttu4QGiSm%2fXH5UHyLmeHD2MrrK90s%2fw4NSoDtnKPMJk345pvc7TkLSc0hcAzg4TiY%3d">here</a>) but his accent adds a good 20 points in perceived IQ.<br /><br />The following short (6 minute) video discusses bubbles, how to spot them, what purpose the serve, and how "bloody mad" you have to be to buy into one. Y'all enjoy.<br /><br /><a href="http://link.brightcove.com/services/player/bcpid71778049001?bclid=69928231001&bctid=79128759001">http://link.brightcove.com/services/player/bcpid71778049001?bclid=69928231001&bctid=79128759001</a>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com1tag:blogger.com,1999:blog-23183268.post-46251955385705985592010-04-23T16:44:00.000-04:002010-04-23T16:44:26.539-04:00When Emotions Get the "Worst" of UsDan Ariely is the James B. Duke Professor of Behavioral Economics at Duke University and author of the New York Times bestseller <a href="http://www.amazon.com/Predictably-Irrational-Revised-Expanded-Decisions/dp/0061854549/ref=ntt_at_ep_dpi_1">Predictably Irrational</a>. And to my delight, one fortunate night last year, he was a friend who just happened to stop by my house for dinner. We sat around the dining room table with my wife, our son Justin, his wife and their one-year old daughter. We talked about, among other things, the irrationality of stock prices, the packaging of laundry detergent, and the sleep schedules of toddlers. Take solace that Ariely, a highly intelligent professor and author with doctorates in marketing and psychology, could figure out complex problems involving emotions and economics, but was still trying to get a toddler to sleep through the night. <br />
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<a href="http://www.fuqua.duke.edu/faculty_research/faculty_directory/ariely/">Ariely</a> and I met at a lecture two years ago. I was intrigued by the focus of his studies: how people behave in the marketplace compared with how they would behave if they were completely rational. His interests span a range of ordinary behaviors: buying, saving, ordering food in restaurants, pain management, procrastination, dishonesty – all under different emotional states. <br />
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<div class="separator" style="clear: both; text-align: center;"></div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><a href="http://1.bp.blogspot.com/_zwTVhW1Eroo/S9H_r90WsEI/AAAAAAAAA8w/iSDU-ozBBEc/s1600/PI.JPG" imageanchor="1" style="clear: left; cssfloat: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="http://1.bp.blogspot.com/_zwTVhW1Eroo/S9H_r90WsEI/AAAAAAAAA8w/iSDU-ozBBEc/s200/PI.JPG" tt="true" width="130" /></a>In a recent <a href="http://hbr.org/2010/01/column-the-long-term-effects-of-short-term-emotions/ar/1">Harvard Business Review</a>, Ariely explained how he and research partner <a href="http://www.haas.berkeley.edu/news/20090127_andrade.html">Eduardo Andrade</a> set out to prove how one’s past emotional decisions can negatively influence future decisions. Participants were divided into two groups: Group A saw a five minute segment from the movie Life as a House, a clip known to irritate and annoy its viewers. Group B watched a five minute segment of the popular TV show, Friends, known to evoke happy feelings. After that, they played the <a href="http://en.wikipedia.org/wiki/Ultimatum_game">Ultimatum Game </a>in which the “sender” (Ariely) has $20, and offers the “receiver” (the movie watcher) a portion of that money. Sometimes the offer was fair (you get half and I’ll get half) and other times it wasn’t (you get $5 and I’ll get $15). If the receiver rejected the offer, both sides got absolutely nothing. To make a long story short, the agitated group rejected more offers than the happy group. Even though it was highly irrational behavior, the agitated participants preferred to lose free money in order to punish Ariely for making an “unfair” offer. </div><br />
Now the really interesting part: after Ariely and Andrade gave the receivers time for their emotions to settle down, they played the game again. The previously annoyed group, now no longer irritated, still rejected far more offers than the happy group, who was now no longer glowing from watching Friends. Why? Because the members of each group had tapped the “memory” of decisions they made earlier, without any regard to whether they were under the influence of being annoyed. <br />
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All too often, we see aggravated emotions creep into markets like a fog, turning seemingly easy decisions into difficult ones. If that weren’t enough, we see that the lasting effects continue to obscure the judgments of many, even when the aggravation is long gone. A few years ago, investment banks became frustrated by the low returns offered in the market. So they invented financial products and increased their leverage, sometimes loaning out their capital 30 times over. In effect, these banks were fearfully wrapped up in the potential for lost future profits and made the irrational choice. Sadly, this “experiment” didn’t carry the warning “Don’t Try This At Home!” Homeowners became increasingly irritated by their neighbors, brothers-in-law, and people from TV shows like “Flip That House” making loads of money. That aggravation propelled them to put on the blinders, assume home prices would rise forever, lie about their income, borrow more than they could ever afford, and put themselves squarely in harm’s way.<br />
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Likewise, at the end of 2008, Joe and Jane Investor were staggering under the weight of their irritated and annoyed emotions. Every time they opened their statements or turned on the TV, they saw a smaller “number” than the day before. It was hard to see the rational point of view: that the world wasn’t going to end, that P/E multiples were historically low, that stocks were extremely underpriced and that US Treasuries were fairly overpriced. Just like in Ariely’s experiment, investors seemed to be offered $5, free and clear, but turned it down because of emotions rather than rationality. <br />
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The irrational behavior continued into 2009 and by all measures appears to still be present today. The Vanguard Group reported that January 2010 was the first month since January 2009 that more money flowed into their stock funds than their bond funds. And according to the <a href="file:///X:/Company%20Documents/Qtrly%20Mailings/2010/Q1/www.ici.org">Investment Company Institute</a>, it seems that most of the rally was the result of mutual fund managers putting their large cash reserves to work, rather than new investors entering the market. Meaning, when stocks were cheap, investors plowed money into bonds, but once stocks got more expensive, investors decide to buy again. It’s not surprising that Joe and Jane are once again aggravated. They have missed most of the rally and seem willing to buy any stocks, regardless of the business quality or dividend yield.<br />
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So, how do Joe and Jane avoid making irrational decisions? Let’s go back to Ariely’s study. Imagine if the aggravated subjects were allowed to consult their most trusted advisor and even let that person make the decision for them. It doesn’t matter if the advisor was their pastor, hairdresser or bartender, <em>as long as they were very rational</em> (i.e. they weren’t affected by the aggravating movie clip), highly qualified (i.e. they knew that $5 was better than $0) and held to a fiduciary responsibility (i.e. they were solely devoted to making sure the subject made the right choice). I can almost guarantee than the instances of irrational behavior would plummet, hopefully to zero. In essence, that’s our job. Our mandate is to think and act as that most trusted advisor for our clients – giving rational, qualified, fiduciary advice and direction. <br />
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<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><a href="http://1.bp.blogspot.com/_zwTVhW1Eroo/S9IBOG_MNOI/AAAAAAAAA84/ROMm3sQ2Y0Y/s1600/friends+milkshake.jpg" imageanchor="1" style="clear: right; cssfloat: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="220" src="http://1.bp.blogspot.com/_zwTVhW1Eroo/S9IBOG_MNOI/AAAAAAAAA84/ROMm3sQ2Y0Y/s320/friends+milkshake.jpg" tt="true" width="320" /></a>Then how is Jonathan Smith & Company making rational decisions in this market? As we’ve mentioned in recent commentaries, investing rationally today involves: buying high-quality stocks with correspondingly high-quality dividend focuses, owning corporate and high-yield bonds with less inflation risk than treasuries, and aligning our clients’ overall expected risk and return with their respective stomachs and wallets. Perhaps the most meaningful way we’re making rational decisions is by knowing our clients well and helping them navigate their financial lives in a personalized way. We ask everything from “what will you regret on your deathbed?” to “what’s your credit card debt and interest rate?” We inquire about their history of investing and the things that keep them up at night. And we try to impart our experience and knowledge by addressing issues from “how commodities act as a diversifier” to “how to pass on financial wisdom to your kids.”</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">And if that doesn’t work, we always have a DVD queued to a clip of Friends. For some reason, that usually seems to put everyone in a good mood.</div>jonathan smithhttp://www.blogger.com/profile/14166247212090652699noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-5243493008452186432010-04-22T09:21:00.003-04:002010-05-03T15:29:27.977-04:00Asset Allocations, Starting Points, and DiversificationJustin here. I ran across this great (short) video from Roger Ibbotson (the unofficial father of market research) about asset allocation, starting points, and diversification. At JSCO, we talk a lot with clients about how much an investor's return depends on valuations when they start. Investing last year when all valuations were low was a no-brainer. Investing today, when valuations are inflated, takes a bit more precision (throwing darts at the WSJ won't do.) Ibbotson brings up a good point when he mentions bonds' relative historical starting point.<br /><br />See it here: <a href="http://www.morningstar.com/cover/videocenter.aspx?id=328583&sr=wt0110">http://www.morningstar.com/cover/videocenter.aspx?id=328583&sr=wt0110</a>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-46459106604550741092010-03-18T10:25:00.004-04:002010-03-18T10:37:02.710-04:00Why Financial Plans Are WorthlessCarl Richards is a CFP Professional who blogs about financial matters at his own site, <a href="http://www.behaviorgap.com/">Behavior Gap</a>, and on the <a href="http://bucks.blogs.nytimes.com/author/carl-richards/">Bucks</a> portion of the NY Times online. He really understands what's important with plans, planning, and the whole process. And for those of us who think in <a href="http://en.wikipedia.org/wiki/Venn_diagram">Venn diagrams</a> (can I see a show of hands? One, two, . . . ok, so all two of us) he usually has a treat like the one below.<br /><div></div><br /><div>His newest post <a href="http://bucks.blogs.nytimes.com/2010/03/15/why-financial-plans-are-worthless/">"Why Financial Plans are Worthless"</a> is especially good.</div><div><a href="http://2.bp.blogspot.com/_wvL35W_rkPo/S6I5Kuzn3rI/AAAAAAAADjA/GUvWN23nO9g/s1600-h/15bucks-napkin-ready-blogSpan.jpg"><img style="MARGIN: 0px 10px 10px 0px; WIDTH: 400px; FLOAT: left; HEIGHT: 282px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5449981355597749938" border="0" alt="" src="http://2.bp.blogspot.com/_wvL35W_rkPo/S6I5Kuzn3rI/AAAAAAAADjA/GUvWN23nO9g/s400/15bucks-napkin-ready-blogSpan.jpg" /></a></div><div> </div><div> </div>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-53826315090367754402010-02-17T21:38:00.001-05:002010-02-17T21:39:45.616-05:00Warren Buffett on Gold<span style="font-family:lucida grande;">“It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” </span>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-75057686034884861412010-02-02T15:57:00.004-05:002010-02-02T16:17:35.816-05:00Top 10 Investment Tips from the Ancient Texts of Classic Rock ‘n’ Roll<span style="font-family:georgia;">Justin here. I found this absolute gem of a article on the CFA Institute's website. Written by Thomas Collimore, CFA, (Director, Investor Education for CFA Institute) it has some great tips and might even make you hum some classic rock. Here's a sample:<br /><br /></span><span style="font-family:arial;"><strong>8. “Lady Madonna,” The Beatles (1968)</strong> </span><br /><span style="font-family:georgia;"><br /><em><span style="font-family:arial;">“Lady Madonna, children at your feet,<br />Wonder how you manage to make ends meet.<br />Who finds the money when you pay the rent?<br />Did you think that money was heaven sent?” </span></em><br /><em><br /></em><span style="font-family:arial;"><strong>Plan, plan, and then plan again.</strong> Committing yourself to a realistic investment plan requires understanding your resources and obligations as well as the essential attributes of your future desired lifestyle. As you plan your investment strategy, leave room for investment underperformance. Committing your plan to writing may force you to address issues that you might otherwise glide over.</span></span><br /><span style="font-family:georgia;"></span><br /><span style="font-family:georgia;">Go <a href="http://www.cfainstitute.org/aboutus/investors/pdf/rocknroll_investment_tips.pdf">here</a> for the full list of tips inspired by hits from bands like The Eagles, Led Zeppelin, Rolling Stones, and Aerosmith touching on topics such as Expenses, Longevity Risk, Taxes, and Professional Designations. It's rare to find something worth reading that's this easy to read. Good work Mr. Collimore.<br /><br /></span><span style="font-family:georgia;"></span>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-54855212857057115872009-12-07T08:57:00.005-05:002009-12-07T09:09:04.944-05:00The 'Are You Unemployed' Game ShowJustin here. The folks at Mint.com have done it <a href="http://itsmorethanmoney.blogspot.com/2009/11/who-is-paying-taxes.html">again</a>. Here's a great video explaining <em>real</em> unemployment. Kinda makes you think that the "great" <a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/12/04/AR2009120400572.html?nav=rss_business">news</a> last week wasn't all it was cracked up to be.<br /><br /><object height="344" width="425"><param name="movie" value="http://www.youtube.com/v/Ulu3SCAmeBA&color1=0xb1b1b1&color2=0xcfcfcf&hl=en_US&feature=player_embedded&fs=1"><param name="allowFullScreen" value="true"><param name="allowScriptAccess" value="always"><embed src="http://www.youtube.com/v/Ulu3SCAmeBA&color1=0xb1b1b1&color2=0xcfcfcf&hl=en_US&feature=player_embedded&fs=1" type="application/x-shockwave-flash" allowfullscreen="true" allowscriptaccess="always" width="425" height="344"></embed></object>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-13509556801293295232009-11-26T12:30:00.005-05:002009-11-26T12:30:00.162-05:00Everything I Needed to Know . . .<div>Justin here. Everything I needed to know about fighting a recession, I learned from <a href="http://www.tatestreetcoffee.com/">Tate Street Coffee House</a>. I took this picture the other day while drinking my regular coffee (w/ half and half, spenda, and a packet of raw sugar); it says it all: </div><div></div><br /><div><strong>Innovate</strong> - See the bar there? TSCH is offering wine and beer now. Not just Keystone Light either, but an organic brew made from hops grown by owners Matt and Anne. Brilliant. </div><div></div><br /><div><strong>Do it Yourself</strong> - See that guy painting the ceiling during business hours? That's Matt, the owner. He does a bit here, a bit there. Never closes down business, never pays painters. And it gives the customers something to talk about and check in on. Two Birds/One Stone.</div><div></div><br /><div><strong>Know Your Customers</strong> - Again with Matt . . . he, Anne, and the other employees seem to know everyone by name and they ask about their interests and genuinely want to <em>know</em> their customers. I've rarely seen it done better.</div><br /><div></div><a href="http://2.bp.blogspot.com/_wvL35W_rkPo/Swxe73QkBeI/AAAAAAAADZo/m1QMZib98dU/s1600/tate+street+coffee"><img id="BLOGGER_PHOTO_ID_5407801635103835618" style="FLOAT: left; MARGIN: 0px 10px 10px 0px; WIDTH: 605px; CURSOR: hand; HEIGHT: 348px" alt="" src="http://2.bp.blogspot.com/_wvL35W_rkPo/Swxe73QkBeI/AAAAAAAADZo/m1QMZib98dU/s320/tate+street+coffee" border="0" /></a><br /><div></div>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-67361345622507781322009-11-24T10:51:00.007-05:002009-11-24T19:06:54.254-05:00Who Is Paying Taxes?Justin here. We're getting near year-end and so taxes are on the brain. I ran across this graphic from Mint.com. They do some really great visual explanations (they recently did one on <a href="http://www.mint.com/blog/goals/the-essential-reverse-mortgage-factsheet/?display=wide">reverse mortgages</a>) but, seeing as though my second language is "Charts and Graphs", they could probably make a diagram about paint drying and I'd be fascinated. Enjoy.<br />
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<a href="http://www.mint.com/blog/wp-content/uploads/2009/11/MINT-TAXES-R3.png"><img alt="MINT-TAXES-R3" class="alignnone size-full wp-image-7087" height="640" src="http://www.mint.com/blog/wp-content/uploads/2009/11/MINT-TAXES-R3.png" title="MINT-TAXES-R3" width="523" /></a><br />
<a href="http://www.mint.com/">Personal Finance</a>Software – Mint.comjustin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-13202746816535412902009-11-04T11:20:00.007-05:002009-11-04T13:13:42.615-05:00Paul Krugman Thoughts<a href="http://2.bp.blogspot.com/_wvL35W_rkPo/SvGyLYrtnHI/AAAAAAAADZg/otbPS8aOCXU/s1600-h/krugman_post.png"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5400293336868035698" src="http://2.bp.blogspot.com/_wvL35W_rkPo/SvGyLYrtnHI/AAAAAAAADZg/otbPS8aOCXU/s320/krugman_post.png" style="cursor: hand; float: left; height: 57px; margin: 0px 10px 10px 0px; width: 323px;" /></a> Justin here. I went with a friend last night to see <a href="http://krugman.blogs.nytimes.com/">Paul Krugman</a> speak at the <a href="http://blogs.guilford.edu/bryanseries/">Guilford College Bryan Series</a>. I've got a number of things on my plate today so my review/thoughts will be brief.<br />
<div></div><br />
<div>Best Quote: "We can no longer make money by selling each other houses that we bought with money we borrowed from the Chinese."<br />
</div><div></div><br />
<div>Second Best Quote: In talking about the similarity between the US and Japan he said something to the effect of "With the exception of our raw fish consumption, we're pretty similar. Both democracies, both have hard working intelligent citizens, both have politicians who aren't the best but aren't idiots."<br />
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<div>Comment That Provoked a Slight Gasp from the Woman Beside Me: when answering a question about the N.C. furniture industry, Krugman said he couldn't imagine an industry that is so labor intensive lasting so long in a high wage country like the US. And he followed that up with something to the effect of "before you get too worked up about that, remember that it's only here because the high wage North East US forced the jobs south to cheaper labor." As if to say, this is only a pit stop on the way further south. <br />
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<div></div><div>Cold Sweat Inducing Statistic: 55% of commercial loans that are to reset in 2014 are underwater. And that's considering that they started with an extremely low Loan/Value ratio that would certainly need to go up if they get rolled forward. Makes me think of a number of friends in the commercial real estate business as well and the impacts that has on other industries.<br />
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<div></div><div>My Question That I Didn't Get To Ask: what do you do with your excess income (i.e. how do you invest)?<br />
</div><div></div><br />
<div>Overall message: <br />
</div><ul><li>He talked about how we got into this mess ('shadow banking', poor regulation, leverage),</li>
<li>How this was/is a global crisis (Spain, UK, even countries without bubbles felt it because they were connected.) </li>
<li>What we did right (cut interest rates, stimulus, flexible fed),</li>
<li>How we get out this crisis quickly (no silver bullet that will save us like railroads, world wars, and IT did for recessions past . . . only remote quick fix could be green technology, but even that has a lot of barriers and lag time, and 10% unemployment is a HUGE number will take a lot of GDP growth to get over),</li>
<li>How, more likely, to get out of it slowly (possibly unions (which, to my surprise got a round of applause), possible further stimulus, cut interest rates if we could go any lower)</li>
<li>Final point was that Keynes said "the shortage of capital through use, decay and obsolescence causes a sufficiently obvious scarcity to increase the marginal efficiency" meaning that our ipods will break, our computers will become slow, and our tires will wear out. Although slow, this process will create demand and innovation.</li>
</ul>Politics aside, it was a good talk. It reinforced our slow growth thesis and our propensity to seek quality dividend paying companies as well as opportunities outside the US and in fixed income.justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-66352387237581743352009-10-31T12:35:00.019-04:002009-10-31T13:04:21.560-04:00"If not for Veteran, I have no place to come to"Some events are so enormous that history’s judgment erects a permanent monument; something that remains long after all the eye witnesses are gone. Last Saturday, I boarded US Airways Flight 9092 to Washington, DC as part of the Triad’s Flight of Honor to take 101 World War II Veterans to see such a monument, their monument: the <a href="http://en.wikipedia.org/wiki/World_war_ii_memorial">World War II Memorial</a>.<br />
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</div>I was chosen to be one of thirty-six guardians, each of us assigned to accompany three of the Veterans (pictured, myself in red). Before the flight, knowing that seniors prize familiarity, I made an effort to both call and meet my 83, 86, and 91 year-old companions at the ‘<a href="http://triadflightofhonor.com/">pre-flight’ meeting</a>. When the eldest couldn’t make the meeting because he was under the weather, I drove out to his home. I learned how much the last ten years have demanded of him, but I got to hear a lot of happy memories too, and I could see that the more we talked, the better he felt. The only problem, I learned, was that the t-shirt he’d been given for the trip was an XXL but he needed an L at most. Before I could reel back in my words, I told him I’d take care of it. <br />
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After finding out there were no more shirts available, I called the seamstress who has repaired my dress shirts over the years. “Could you take a size XXL and make it into a size large?” I asked. “Sure,” she said, in broken English, “You bring large t-shirt too when you come, ok? When you come?” <br />
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<div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/_zwTVhW1Eroo/SuxqIDbxsdI/AAAAAAAAAzE/nMki-0ognh8/s1600-h/XXL+Tee+Shirt.gif" imageanchor="1" style="clear: left; cssfloat: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/_zwTVhW1Eroo/SuxqIDbxsdI/AAAAAAAAAzE/nMki-0ognh8/s320/XXL+Tee+Shirt.gif" vr="true" /></a><br />
</div>Ten minutes later, the owner of <a href="http://maps.google.com/places/us/greensboro/battleground-ave/2506/-alteration-studio">Alternation Studio</a>, a petite Vietnamese woman and I were comparing a size L to the size XXL. The shirt had the Flight of Honor logo, which she asked about. “Honor Flight,” she said, “what this?” I offered the short answer. “This you wear?” she asked. “No, no, my 91 year-old Veteran friend will wear it when we go to see the World War II Memorial in Washington,” I answered. “Veteran,” she said, her mind working, “I do for him, yes,” and with a bigger smile, said this powerful truth, “If not for Veteran I have no place to come to.” <br />
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Two days later, as promised, she produced the transformed size L t-shirt. Knowing how no one likes to wait for something, I delivered the shirt on my way home. At first I had a little trouble explaining how a t-shirt labeled XXL was really a size L, but when he understood that it had been remade just for him, you would have thought he just made a hole-in-one. <br />
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Other than t-shirt alterations, the job description of guardian was to accompany the <a href="http://va.gov/">Veterans</a> through airport security, help them board and disembark, sit, walk and talk with them, point out access ramps and restrooms, tote cameras and pill bottles, provide an arm to lean on, circle up chairs under a big tent, and secure our box lunches. But much more importantly, we were there to listen, offer strength, and stand by them as they, the heroes, gazed into the Memorial, reflected on their own thoughts, and opened up the history books of their lives to us on that magnificent day not one of us will ever forget. <br />
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I haven’t been able to get that day out of my mind. It was such a privilege and honor to be with those men on such a gift of a day. But I’ve also been thinking about how much my job that day mirrors <a href="http://www.jonathansmith.com/whatwedo.cfm">our job here</a>, as Financial Guardians. We listen and plan, we direct and monitor, we share highs and lows, and offer our support and strength through all the stages of life’s journey. <br />
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This year has been a journey indeed, and our job as guardians has never been harder or more needed. Seven short months ago, a media-dominated, worried nation wondered if this time the headlines might be right. Investors whose parents lost everything during the <a href="http://en.wikipedia.org/wiki/Great_depression">Great Depression</a> told us so. Fear spiraled. Sellers sold, buyers backed away. Stocks skidded, hitting low levels not seen in many years. As advisors, we bore down to figure out what our investments were really worth and what was really driving the market. The answer: bad news begat fear begat selling begat more fear and so on. We remembered <a href="http://www.sirjohntempleton.org/">John Templeton</a> saying, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” We clung to that, hung on to our positions, owning more stocks than we normally would, while strategically moving up the quality chain and diversifying away some risk. We waited for rationality to return, figuring it could be many quarters or years away. <br />
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Then out of nowhere, here we are today (written 10/6/2009): the S&P500 is up nearly 20% for the year (and up nearly 60% off the March lows), corporate bonds are up nearly 15% and 10 year treasuries are down 6% year to date. Again, we have to ask where we are, how we’ve gotten here, and most importantly what it means to be a guardian. Our short answer: the market has gone far past “fair value,” mostly on the backs of low-quality stocks, and caution is the order of the day. <br />
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<strong>A Low-Quality, Speculative Rally.</strong> Like a tightly coiled spring, the assets that were most depressed in 2008 and early 2009 let loose when the world did not, in fact, come to an end. Any way you slice it, this six-month rally has been driven by the lowest-quality assets (in both stocks and bonds). Small stocks have outperformed large stocks, Newspapers and Financials have outperformed Regulated Utilities, and, most telling, No Moat stocks have outperformed Wide Moat stocks (for more about moats, see our Q1 2009 commentary “<a href="http://www.jonathansmith.com/commentaries/2009/Q1_2009.pdf">What’s Really Important: Price, Moat and Uncertainty</a>). <br />
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<strong>Instability in the Background.</strong> Throughout this rally, we’ve seen large improvements in the real economy, but we’re nowhere close to out of the woods. After shooting up to record levels, the personal savings rate has slowly drifted from 5% in June, to 4% in July, 3% in August and although September data is not yet available (written October 6, 2009), our best guess is that the trend continues. Unemployment has crept up to 9.8% (and even that number doesn’t capture the underemployed and discouraged who are no longer looking for work.) The government has promised a $1 trillion per year deficit for the next ten years. Housing and Consumer sales have been temporarily bolstered by government programs that are all but over. <br />
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<div class="separator" style="clear: both; text-align: center;"><a href="http://2.bp.blogspot.com/_zwTVhW1Eroo/SuxqeIRXA-I/AAAAAAAAAzM/VqjWil0wi60/s1600-h/market+valuation+graph+10062009.gif" imageanchor="1" style="clear: right; cssfloat: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="http://2.bp.blogspot.com/_zwTVhW1Eroo/SuxqeIRXA-I/AAAAAAAAAzM/VqjWil0wi60/s400/market+valuation+graph+10062009.gif" vr="true" /></a><br />
</div><strong>Caution is the Order of the Day.</strong> The need for caution doesn’t just come from the gloomy statistics mentioned above, but it also seems that caution could provide very satisfactory absolute (not just in raw numbers, we see the market as a whole selling for approximately what it’s worth (102% of fair value, see above.) However, the businesses with Wide Moats are selling for 88% of fair value (a 12% discount!) in contrast to the No Moat businesses that are currently overvalued (109% of fair value). Using the same yardstick, the US stocks in our separately managed portfolios are selling for 74% of fair value, with a 3.4% dividend yield on top of that. We structure these investments along with foreign stocks, domestic and foreign bonds, commodities, and real estate to provide our clients with a diversified portfolio that delivers a large portion of its expected return in the form of interest and dividends (which can then be used for income needs or reinvested in the market.) <br />
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I have a good friend who could probably sleep through a jackhammer pounding in the next room, but if he heard a set of keys rattle in the middle of the night, he’d shoot straight out of bed. Why? He was a prisoner of war for a long, long time. Although he learned quite a lot during those solitary years, he never quite learned to like the sound of a jailer’s keys. As guardians, we’re constantly learning to ignore the sound of the jackhammer, however loud it gets, and listen for the keys that the average investor might miss. Seven short months ago that jackhammer was unmistakable: “sell now, get out, run for cover.” We mostly ignored the rumble of the pavement and thankfully went about our business. Today, the jackhammer is a little more subtle (mostly from uncertainty), encouraging the investor to “seek the highest risk, make up lost ground” without regard for what the investor can stomach financially or emotionally.<br />
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<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">We recently met with a client who, while happy with her portfolio going back up, wondered if she’d ever get back to the high water mark. That’s the sound of the jackhammer. We reminded her that we were accomplishing her goals now: producing a dependable income stream that meets her needs, on the backs of high quality, diversified investments that still have plenty of potential to appreciate. Now, that’s the sound of the keys jiggling that many investors miss. She quickly recognized the difference and wanted to pursue meeting her real-life goals, rather than just a number. <br />
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<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><a href="http://2.bp.blogspot.com/_zwTVhW1Eroo/SuxqvOlTJ5I/AAAAAAAAAzU/5oRa9L5r1QA/s1600-h/Total+return+by+economic+moat_+year+end+2008.gif" imageanchor="1" style="clear: right; cssfloat: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="http://2.bp.blogspot.com/_zwTVhW1Eroo/SuxqvOlTJ5I/AAAAAAAAAzU/5oRa9L5r1QA/s400/Total+return+by+economic+moat_+year+end+2008.gif" vr="true" /></a>And even though we’ve been financial guardians for nearly three decades, we never know what <a href="http://en.wikipedia.org/wiki/Benjamin_Graham">Mr. Market’s</a> next move will be; that’s a fool’s errand anyway. But, we do know that businesses that tend to produce high returns on capital will increase in intrinsic value over time and that those companies will tend to outperform the market. We know that owning investments across a number of different asset classes smoothes out the volatility of returns. We know that we sleep better when a large portion of our expected return is being paid in the form of interest and dividends. And we know that we’ve never felt better positioned for a quickly changing and uncertain world.<br />
</div>jonathan smithhttp://www.blogger.com/profile/14166247212090652699noreply@blogger.com1tag:blogger.com,1999:blog-23183268.post-43211139344381090692009-10-16T10:03:00.001-04:002009-10-16T10:03:02.108-04:00Risk Appetite Hits Highest Level in Over Three YearsWarren Buffett said Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.<br /><br />Seems like the speedometer is going fro "Zero to Greedy" in 7 months.<br /> <br /><a href="http://news.morningstar.com/articlenet/article.aspx?id=311755">Risk Appetite Hits Highest Level in Over Three Years</a><br /><br />Shared via <a href="http://addthis.com">AddThis</a><br />justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-19550216918856640622009-09-02T16:27:00.005-04:002009-09-02T17:11:22.164-04:00Surprise Call From a CongressmanJustin here. <a href="http://coble.house.gov/">Congressman Howard Coble</a> has been in US House about as long as I've been out of preschool. He's on our quarterly mailing list and knows Jonathan fairly well (I don't think it's just because he requests a <a href="http://coble.house.gov/Forms/FlagRequest/">new flag</a> every couple of years, but maybe.)<br /><br />You can imagine my surprise today when he called asking for me. It went roughly like this:<br /><span style="font-style: italic;"></span><blockquote><span style="font-weight: bold;">Congressman Coble:</span> "Well son, I got your <a href="http://jonathansmith.com/white_papers/Justin%20Smith%2008142009%20Linked.pdf">press release</a> with your recent <a href="http://jonathansmith.com/commentaries/2009/Q2_2009.pdf">commentary</a> and was just calling to congratulate you on the CFA."<br /><span style="font-weight: bold;"><br />Me:</span> "Well, thank you sir."<br /><span style="font-weight: bold;"><br />Congressman Coble:</span> "Now that was pretty hard wasn't it? How long did it take?"<br /><span style="font-weight: bold;"><br />Me:</span> "About 3 years and a thousand hours."<br /><span style="font-weight: bold;"><br />Congressman Coble:</span> "Yes, I don't imagine they're just handing those CFA's out in the restroom stalls, now are they?"<br /><span style="font-weight: bold;"><br />Me:</span> "No sir, not in any of the restrooms I've been in."</blockquote>What a surprise joy. Something happens in a phone call, letter, or meeting that just can't happen over facebook, twitter, LinkedIn, or even email. I'll try to remember that.justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com3tag:blogger.com,1999:blog-23183268.post-66507026026734826852009-08-25T17:18:00.002-04:002009-08-25T21:26:54.603-04:00What's important Part II - Dividends, Diversification, and SafetyJonathan here: One of the two best best ideas we've ever had is having an enduring investment process. The other is focusing more energy and resources on <em>process</em> than on <em>outcome</em>. In <em>What’s Important Part II</em>, we explore three ordinary but frequently underestimated components of an enduring investment process. <br />
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Our part of the world gets, on average, 43 inches of rainfall each year. That’s too much to worry about the price of rain barrels going up, but not enough that your average gardener can really trust Mother Nature for all watering needs. It seems the popular and cost-effective solution of choice is Drip Irrigation. My introduction to it was nine years ago, in Sacramento, California. My son-in-law hooked up miniature hoses and nozzles, which sputtered, stuttered, and sprayed a fine water mist for three whole minutes twice a day, onto ferns, banana trees, morning glory, oleander, hibiscus, and bird of paradise. His “backyard” was literally a beautiful pool and a cement pool deck with huge terra cotta pots containing mammoth plants. I was astonished that the plants flourished in these conditions. Seriously convinced, once home I visited Lowes in search of all things drip irrigation. I threaded rubber hose no thicker than a pencil through a maze of rhododendron, yew, azaleas, hydrangeas, moon vines, morning glories, black eyed Susan, cardinal vines and impatiens. I attached, at various intervals, micro sprinklers and nozzles, balanced the water output with Y-splitters, and screwed into the nerve center of this hydroponic contraption, one battery operated Gilmour automatic water timer. <br />
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<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><a href="http://2.bp.blogspot.com/_zwTVhW1Eroo/SpRQGSjOIfI/AAAAAAAAAwY/PelAkQ_nPnI/s1600-h/puresense.gif" imageanchor="1" style="clear: right; cssfloat: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" lk="true" src="http://2.bp.blogspot.com/_zwTVhW1Eroo/SpRQGSjOIfI/AAAAAAAAAwY/PelAkQ_nPnI/s320/puresense.gif" /></a>But not every gardener has it so easy (so to speak). Parts of California, Nevada and New Mexico, for instance, get between 8 and 16 inches of water per year. There’s a saying that farming is just gambling in slow motion – you have to wait nine months to find out if you’ve won. Recently, Morning Edition featured Zach Sheely, a farmer who can’t afford to place a bet on (or wait nine months to find out) whether he waters too much or too little. Sheely uses a system designed by PureSense (pictured right) to help him rebalance the moisture levels on his 10,000 acre, California vegetable farm. “Using probes, sensors, weather instruments and meters, PureSense calculates the moisture and nutrients in the soil; it uses the Internet to send the information to servers, and then uses software to analyze whether or not the crops are getting the right amount of water.” The data is then transmitted wirelessly to Sheely’s iPhone; he can literally make it rain on any section of his crops with the tap of a button. </div><br />
The principles governing agriculture and investing are much the same. Plant the best seeds at the right time in good soil, then water, fertilize, weed, thin out, protect against threats, harvest, enjoy, repeat as often as necessary. Too much or too little of any of these activities can create undue risk. But, hit the right balance and you stack the odds of reaping a harvest in your favor. In our last commentary, we outlined six “prism tweaks” we’ve put in motion. We discussed, in detail, the importance of Price, Moat, and Uncertainty; this quarter, we’ll cover Dividends, Diversification, and Safety.<br />
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<strong>Dividends</strong>. Sometimes it helps us to think about investing in terms of being a gardener who sells vegetables, whole vegetable plants, and potted flowers at the local farmers’ market. On any given Saturday, she can decide to sell her hand picked vegetables (which, in investing, is similar to collecting dividends), or she can sell a whole plant (selling a dividend paying stock), or she can also sell her potted flowers (selling a non-dividend paying stock). The problem the gardener faces with buying and selling too many potted flowers (buying non-dividend paying stocks) is that the only way to make a profit is if her buyers think the flowers are worth more than she paid for them. That’s all well and good if her time horizon is long enough or the market for plants is stable. But what if (like many investors today) her time horizon is shorter and the market for plant buyers isn’t especially stable? Or what if the price of soil skyrockets or news reports circulate that recreational gardening is a health risk? People won’t want to plant in their gardens and prices of these plants will drop. If our gardener is depending on selling her plants (vegetable or flowering) for her income, she would have to sell them at an inopportune time. As advisors, we aim to set up our clients’ gardens (portfolios) in such a way that their vegetables (dividends) provide for the majority of their income needs and they aren’t dependent on the price of their plants (stocks) on the day they need income. There’s much more to dividends than finding the highest yield (for example, determining a company’s ability to keep paying it, management’s commitment to upholding it, and what we can expect in terms of its growth) but that’s for another commentary. <br />
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<strong>Diversification</strong>. Suppose our gardener needs to choose between planting squash, cucumbers, or both. She figures each will produce approximately the same amount of income for her and will need the same amount of sunlight, water, and care. The only difference: squash are susceptible to squash bugs while cucumbers are vulnerable to cucumber beetles. With an equal chance of either insect showing up hungry and harming a crop; it makes sense to plant both squash and cucumbers while still trying to ward off both insects. This is the case not only for stock diversification (owning more than just a handful of stocks), but even more so for asset class diversification (owning more than just a couple asset classes such as US Stocks, Bonds, Foreign Stocks, Commodities or Real Estate.) While it does get more complex meshing multiple asset classes, the outcome is still the same. An investor can take a number of inherently risky assets and combine them in a portfolio that delivers the highest expected return for a given level of volatility (determined by what the investor can stomach both financially and emotionally.) <br />
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<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><a href="http://2.bp.blogspot.com/_zwTVhW1Eroo/SpRQR_O0H1I/AAAAAAAAAwg/ul3je-0AZM4/s1600-h/morningstar+value+graph.gif" imageanchor="1" style="clear: right; cssfloat: right; float: right; margin-bottom: 1em; margin-left: 1em;"><strong><img border="0" lk="true" src="http://2.bp.blogspot.com/_zwTVhW1Eroo/SpRQR_O0H1I/AAAAAAAAAwg/ul3je-0AZM4/s320/morningstar+value+graph.gif" /></strong></a><strong>Safety</strong>. Sometimes, what could seem safe (taking shelter in a storm under a tree or taking money out of stocks last March) can actually be the most dangerous option possible (both “lightning” and “missing a 30% rally” can really knock the wind out of someone). As portfolio managers, we want to make sure we’re always learning from our mistakes . . . but just not learning too much. We’re conscious to look at the important data points, not the prevailing perception that might say seeking sustainable dividends, wide moats, and low uncertainty is being too “safe” to provide any meaningful returns. We might normally agree, however today is far from normal. We’re in a market where companies with the widest moats are selling for the largest discounts (78% of their worth) while the companies without moats, see chart, are trading for no discount (100% of their value).<br />
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Author Annie Dillard says “Danger is the safest thing in the world if you go about it right.” While investing is and will continue to be “dangerous” in terms of uncertainty and volatility, we’re confident that we’re “going about it right.” As we said last quarter, we’re doing that by: concentrating on buying undervalued assets (Price), owning businesses with sustainable competitive advantages (Moat), and investing in areas where we have a narrower range of outcomes (Uncertainty). By adding to those the areas we’ve covered this quarter, we’re able to take calculated risks that line up with our clients’ ability and willingness to take those risks.</div>jonathan smithhttp://www.blogger.com/profile/14166247212090652699noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-88595815805183316272009-08-17T16:13:00.000-04:002009-08-17T16:13:21.314-04:00Justin W. Smith, CFA, Earns Prestigious Chartered Financial Analyst Designation<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><a href="http://1.bp.blogspot.com/_zwTVhW1Eroo/SolmL6maXBI/AAAAAAAAAwE/xkW2jnTVhJ8/s1600-h/Justin+W.+Smith_+CFA.gif" imageanchor="1" style="clear: left; cssfloat: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" sj="true" src="http://1.bp.blogspot.com/_zwTVhW1Eroo/SolmL6maXBI/AAAAAAAAAwE/xkW2jnTVhJ8/s320/Justin+W.+Smith_+CFA.gif" /></a><strong>Greensboro, NC, August 14, 2009</strong> − Justin W. Smith, CFA, a Financial Advisor at Jonathan Smith & Co., Investment Counsel in Greensboro, NC has earned the prestigious Chartered Financial Analyst® (CFA®) designation. <br />
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The CFA charter is a globally recognized credential for investment analysis and management. The CFA Program sets a globally recognized standard for measuring the competence and integrity of financial analysts, portfolio managers, and investment advisers. Currently, more than 82,800 investment professionals in 128 countries and territories hold the CFA charter. </div><br />
Recipients of the CFA charter have successfully completed a graduate-level, self-study curriculum and series of three intensive examinations taken sequentially over at least two years. It is recommended that candidates prepare a minimum of 250 hours per exam, with substantially more recommended for individual circumstances. <br />
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Since the inception of the CFA Program 45 years ago, pass rates at each of the three exam levels have averaged about 50 percent. Because of the rigor of the program, only about one in five candidates who enter the program pass all three exams and successfully complete all the requirements to earn the charter. <br />
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Administered exclusively in English, the international language of business, the three six-hour exams cover ethical and professional standards, securities analysis and valuation, financial statement analysis, quantitative methods, economics, corporate finance, portfolio management, and performance measurement. <br />
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“This isn’t about adding three letters to the end of my name,” Smith pointed out. “At a time in the market where there is so much uncertainty, I’m happy to be able to do something that not only makes me a better advisor, but also gives our clients some added confidence in who they are trusting to get them safely home.” <br />
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“Five months ago, you could have picked a portfolio by throwing darts at the Wall Street Journal and had a great return,” Smith said. “But today, we think we’re looking at just the opposite. That’s an almost inconceivable shift in such a short amount of time. The CFA program has given me the knowledge, insight, and persistence to tackle this ever-changing investment landscape.” <br />
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And if his day job weren’t enough, he’s got a full load on his hands at home. “I’ve got a 115 year-old house, one toddler and another due soon, and a honey-do list that, due to the CFA exams, has been three years in the making,” Smith noted. “All that CFA work is going to seem like a breeze compared with what I have in store for me at home.” <br />
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Robert R. Johnson, Ph.D., CFA, deputy CEO, explained what motivates candidates to make such a significant investment of their time and energy to seek to earn the CFA designation. <br />
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“For more than 40 years, candidates have sought to earn the CFA charter for two chief reasons,” Johnson said, “one, to expand and test their knowledge of current practice across a broad range of investment topics, and two, to demonstrate to clients, employers, and peers their mastery of a demanding body of knowledge." <br />
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<strong>CFA Institute </strong><br />
CFA Institute is the global association for investment professionals. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 96,000 members, who include the world’s 82,800 CFA charterholders, in 133 countries and territories, as well as 136 affiliated professional societies in 57 countries and territories. More information may be found at <a href="http://www.cfainstitute.org/">http://www.cfainstitute.org/</a>.<br />
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<strong>Jonathan Smith & Co., Investment Counsel</strong><br />
Jonathan Smith & Co. is a Registered Investment Advisor providing investment counsel and financial planning for individuals, trusts, estates, corporations, investment trusts, employee benefit trusts, and institutions. Aware that each engagement’s wealth management needs are unique and often complex, they craft individualized solutions and simplify life's financial aspects for their clients. Their mission is to build, protect and manage each client's wealth through every stage of life. More information may be found at <a href="http://www.jonathansmith.com/">http://www.jonathansmith.com/</a>.jonathan smithhttp://www.blogger.com/profile/14166247212090652699noreply@blogger.com1tag:blogger.com,1999:blog-23183268.post-29749579950803066582009-08-03T16:58:00.006-04:002009-08-03T17:09:44.141-04:00I Probably Won't Be Dessert . . .<span style="font-family:arial;">Justin here. Professor Jeremy Seigel recently pointed out the difference between the <strong>fear of unemployment</strong> vs the <strong>reality of unemployment</strong> </span><a title="http://img.en25.com/Web/WisdomTree/Siegel_FP_Commentary_09_Q2_FINAL.pdf" href="http://img.en25.com/Web/WisdomTree/Siegel_FP_Commentary_09_Q2_FINAL.pdf" send="true"><span style="font-family:arial;">here</span></a><span style="font-family:arial;">: </span><br /><br /><span style="font-family:arial;"><span style="font-family:arial;"><span style="font-family:arial;"><span style="font-family:arial;"><em><span style="font-family:arial;"><span style="font-family:arial;"><span style="font-family:arial;"><span style="font-family:arial;"><em>"The June unemployment rate touched 9.5%, and it is quite possible that that rate will eventually exceed the 10.8% rate reached in November 1982. But even if it does, unemployment will rise, at most, 2 percentage points, far less than the reported 30% to 40% of workers who fear they will be laid off. And as the economy mends, the fear of being unemployed will subside, and consumption will rise."</em></span></span></span></span></em></span></span></span></span><br /><br /><span style="font-family:arial;">Professor Seigel has forgotten more than I'll ever know about economics, but I have to (very respectfully) disagree. I think it’s unrealistic to think that Joe Consumer could have 10-20% <em>more</em> friends, family, and co-workers lose their jobs and then somehow he'll then breathe a sign of relief and start spending because some economists think that unemployment is already far above normal. I think Joe is going to pretty scared for a pretty good while.</span><br /><span style="font-family:arial;"></span><br /><span style="font-family:arial;">It’s like being in a pit of lions that, on average, will eat no more than one human in a sitting. I don’t know about you, but if I’m stuck in there and two of my buddies were just eaten (mind you that's 100% above the average), mean reversion and bell curves won’t make me any less likely to need a clean pair of underwear.</span>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com1tag:blogger.com,1999:blog-23183268.post-91843374421563777722009-07-15T16:37:00.000-04:002009-07-15T16:37:50.944-04:00What’s Really Important: Price, Moat, and UncertaintyJonathan here. Been a busy quarter migrating to our new investment platform. Been meaning to post our 1st quarter Market Commentary since April when we wrote it. 2nd quarter Market Commentary in the queue. <br />
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I have a pair of Skyline 16x50 binoculars that belonged to my father-in-law, Conley. They feel great hanging around my neck or in my hands (certainly due more to my fond memories of their former owner than the superior design of their manufacturer.) Even though they are decades old, the magnification and width of field are superb. There’s just this one tiny problem: they create just enough double vision that you have to close one eye when you look through them. I still remember having to use them as a <em>mono</em>cular so I could see Sam Snead lay up close to the pin on the 18th green at Sedgefield Country Club when Conley and I went to the Greater Greensboro Open years ago.<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="http://2.bp.blogspot.com/_zwTVhW1Eroo/Sl47fsS_fkI/AAAAAAAAAvk/D3JDQFxXbzk/s1600-h/binocs.gif" imageanchor="1" style="clear: right; cssfloat: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="http://2.bp.blogspot.com/_zwTVhW1Eroo/Sl47fsS_fkI/AAAAAAAAAvk/D3JDQFxXbzk/s320/binocs.gif" zj="true" /></a></div>A while back I tried fixing my binoculars’ cockeyed view. Perhaps an objective lens or eye piece was cross threaded. Nope, they were screwed in fine. Asking myself “What’s the worst that could happen?” I took them all the way apart. Four tiny screws later, cover plates removed, I saw the problem: there were four prisms, seemingly held tight with little set screws, until one prism jiggled loose. Just one misaligned prism resulted in the distorted view.<br />
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I was reminded of my binoculars after an attorney friend of mine told me about a presentation he’s been giving to area banks. He’s committed to helping them work through this financial crisis and see the future of banking. When he talks, he holds a prism up high. He tells the bankers, “If you look straight ahead, where you’re accustomed to looking, you won’t see what’s straight ahead. If you want to accurately see what’s ahead, you need to turn the prism.” <br />
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Many of the troubles we’re experiencing in our economy are due to our nation’s tendency to look straight ahead and miss it. For example, we saw that Lehman Brothers was leveraged 25 to 1 while many investors and talking heads didn’t blink an eye because that’s how investment banks have always operated. And for years consumers shunned saving, but rather lived on their home equity and credit cards because their home values always went up and cheap credit was always available. And in the last year, we saw that a bank could combine a few BBB issues into a new CDO and the rating agencies would suddenly call it AAA because it was now a new security that was “relatively” safe. On the surface, these examples might look like instances of hindsight being 20/20, but they are really instances of past foresight being more like 20/180. <br />
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I wish we could say that, as advisors, our vision has always been stellar, but we can also be guilty of “looking straight ahead and missing it.” What is more important, though, is that we’re willing to open up the binoculars, adjust the appropriate screws, and go on viewing the golf match. We think the only thing worse that looking through a broken pair of binoculars would be to think either: a) we’ll get lucky and the golf ball might just roll into view or b) the binoculars are going to fix themselves.<br />
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So, what prism tweaks have we set into motion? They can be summed up in six areas: Price, Moat, Uncertainty, Dividends, Diversification and Safety. We’ll give some details of the first three in this commentary and the next three in the following commentary. If you can’t wait until next quarter to read about them, let us know and we’ll send you our thoughts ahead of time, or we can sit down and talk about them face to face.<br />
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<strong>Price</strong>. For years, price was our (and many other value investors’) end-all, be-all. We’ve been intent on buying “dollar bills for 50 cents.” The focus in this approach is more heavily on the stock and less so on the business. The problem is that this approach alone can lead to casualties if the investment’s time horizon and risk tolerance isn’t aligned with the investor’s time horizon and risk tolerance. We are still like a budget conscious grocery shopper: we know that it makes sense to buy cheap produce that has a few bruises on it, but we’re also conscious of some other factors that should get equal weight.<br />
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<strong>Moat</strong>. Moving up our chain of importance is a focus on a business’ economic moat. Warren Buffet said that a moat protects a “valuable and much sought after business castle.” Moats can come in many forms such as a well-known brand name, superior pricing power, or a large portion of market demand. While they come in many forms, all moats contribute to a common result: a company that is more likely to be in control of its own destiny. We recognize that there is plenty of money to be made in businesses without moats (many of us have built our livelihoods working for “no moat” companies). However, in this environment where the rules seem to change daily and confidence is here one day and gone the next, we believe it is wise to limit the number of factors that are outside of a business’ control.<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/_zwTVhW1Eroo/Sl47tEWm0dI/AAAAAAAAAvs/Vx6B1aTmdHg/s1600-h/baseball.gif" imageanchor="1" style="clear: left; cssfloat: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/_zwTVhW1Eroo/Sl47tEWm0dI/AAAAAAAAAvs/Vx6B1aTmdHg/s200/baseball.gif" zj="true" /></a></div><strong>Uncertainty</strong>. Another area garnering more weight in our process, is our level of uncertainty regarding the potential value of an investment. When I took up softball in my early forties, having never played baseball as a kid, my batting philosophy was this: close your eyes and swing, repeat if necessary. In investing, we have more control over the certainty of outcomes than I did in the batter’s box. Before we invest, we can choose to swing for either “homeruns and strike outs” or “singles and doubles”. Granted, sometimes swinging for singles and doubles will end up in a homerun and sometimes it will end up in a strikeout, but most of the time it’ll turn out just as intended: singles and doubles. Since our primary job is to help our clients sleep well at night, we are inclined to invest where we have a lower degree of uncertainty about the potential outcomes.<br />
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The most frequent question we’ve fielded after talking about any tweaks to our investment strategy is “isn’t this like shutting the barn door after the horse is already out?” It’s a great question; one we’ve thought through extensively. Our best answer is this: if someone would ring a bell today and announce with 100% certainty that the stock market can’t go any lower and we’ll have full recovery within months, then we would invest differently. The reality is that we haven’t heard any such bells announcing anything of the sort and, frankly, we could still see more unnerving news on the horizon. <br />
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We still think today is a great time to own U.S. equities, particularly companies with the qualities mentioned above (historically low prices, sizeable moats, and low uncertainty.) The potential returns we could see over the next ten years could be at levels not seen in generations. The problem is that we don’t all have ten year time horizons, and even if we do, the volatility is hard to stomach. This brings us back to the other three “prism tweaks” we’ve already put in place and we’ll cover next quarter: Dividends, Diversification, and Safety. These three allow us to (respectively): get paid to wait, smooth out the bumpy ride, and seek superior risk-adjusted returns. Again, our primary job is to help our clients sleep well at night and now, more than ever, that means investing for the upside and protecting against the downside.jonathan smithhttp://www.blogger.com/profile/14166247212090652699noreply@blogger.com0tag:blogger.com,1999:blog-23183268.post-18631672247401754912009-03-30T16:26:00.006-04:002009-03-30T17:31:48.713-04:00Two Wrongs Don't Make a Right - Pension Insurance<a href="http://www.boston.com/news/nation/washington/articles/2009/03/30/pension_insurer_shifted_to_stocks/?page=full">Pension insurer shifted to stocks - The Boston Globe</a><br />Posted using <a href="http://sharethis.com/">ShareThis</a><br /><br />The article above gives me a pit in my stomach on a number of levels, but one in particular. I think most people would get sick thinking of the money already "lost" . . . <span style="font-style: italic;">I</span> get sick thinking about the money that might not be gained.<br /><br />I'd like to think that the Pension Benefit Guarantee Corp would operate under some pretty standard advice: if you need money in the next 5 years, maybe you shouldn't have it in stocks. I <span style="font-style: italic;">do</span> think they need to be proactive and estimate if they'll have an onslaught of pensions to back and see if that changes their time horizon, <span style="font-style: italic;">but</span> they also need to be able to face reality. With valuations where they are, it might very well make sense to "stay put" and not have Congress reallocate your portfolio.<br /><br />As we say here: "Two wrongs don't make a right." From this observer's point of view, it seems like shift back to the old strategy <span style="font-style: italic;">right now</span> might be wrong #2. <br /><br /><span style="font-size:78%;">Note: The author recognizes that he does not possess the right mix of qualifications, connections, and unconfessed past sins that is required to work for the PBGC, the Government Accountability Office, or the Congressional Budget Office. Therefore, his opinions are merely that and should not be applied to your investment strategy or the government's investment strategy for that matter and frankly he's surprised you're reading this fine print. </span><br /><a href="http://sharethis.com/"></a>justin smithhttp://www.blogger.com/profile/04771867572673212034noreply@blogger.com0