To know what clients want, you need to first know what they really value in life. You need to know about their life objectives and their tolerance for various types of investment risk. Then you build a financial plan to give them the highest probability of reaching those objectives while remaining true to their values. I call this enhancing their wealth.
Here's one definition of wealth from Webster's Dictionary: "the things that are most important to you." So when I find out what wealth means for a client, I want to help them create an abundance of whatever that is. Will it be a specific amount of money? No, in fact, I have never had a client who ranked money as number one. What's most important to people are things like their families, friends, health, career, or even spirituality.
When a client engages me as their primary financial advisor, my mandate is clear: Design a plan to take the client from where they are today to where they would like to be. The plan needs to give them the highest probability of reaching their objectives. The plan must also give them more time to focus on what matters most to them.
In addition, as an advisory team, each year we will:
1. Recommend saving strategies. We go over how much they should save (or when retired how much they can spend). If things are tight, we will help find money in their budget to save what they need to. They know that we prefer never to suggest to someone that they need to reduce their lifestyle, unless they really must.
2. Control money management expenses. Performance we can't control, but expenses we can control. We'll never rebalance needlessly to trigger taxes, and that we may rebalance to soak up losses.
3. Reduce taxes. First we will look for deductions or credits. Next we'll look to incur minimal tax on the portfolio by adjusting type of income, as appropriate. Then we will look for any deferral opportunities, and lastly, look for any ways to have income taxed in the hands of the family member with the lowest possible income. It's amazing the many situations in which we can reduce taxes by thousands.
4. Anticipate cash flow requirements. We will make certain they have adequate liquidity to avoid liquidation at the wrong time.
5. Protect net worth. We will be certain that they are protected from an interruption of income as a result of disability or critical illness. It's important to make sure there are adequate funds to protect erosion of what they have accumulated.
6. Keep estate affairs organized. We will suggest any changes that need to be made as the life evolves.
It's quite easy to fall into the performance game... To be measured by ones ability to beat the uncertainties of the market at all times. Investment performance is obviously part of the financial planning equation, but it's the part that we least control. That isn't to say that this mitigates the need for us to use well-defined investment principles and processes, but lack of control of the markets is a constant... I ask myself: What is my value as an advisor worth? (Because I know clients will be asking the same question)
Monday, December 22, 2008
Thursday, December 18, 2008
Thoughts on Future Inflation... (M.C.)
We are in the camp that, although what the Fed is doing is inflationary, it will not cause higher inflation for a while (perhaps at least a year or more). That is because commodity prices, earnings, jobs, consumer confidence and economic activity are all in the dumps with not much expectation of a dramatic improvement in the foreseeable future.
However, Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve put it cogently:
“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating. Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”
It's nothing to bet on yet but, if history is any proxy, the unprecedented stimulus efforts will at some point cause same unintended effects. A world inflation bubble might just be that unwanted love child.
However, Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve put it cogently:
“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating. Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”
It's nothing to bet on yet but, if history is any proxy, the unprecedented stimulus efforts will at some point cause same unintended effects. A world inflation bubble might just be that unwanted love child.
Tuesday, December 16, 2008
Refreshing Idea's...
The market's going to be tough over the next number of quarters. But there are some incredible deals out there in both the Materials and Energy sectors. You're getting companies at single P/E multiples. I believe in Peak Oil, and when you can buy companies trading at half price sales, you want to buy them!
The small-cap cycles are typically 5 years in duration, and this is the 5Th year that small-caps have underperformed, which isn't surprising given the current credit crisis. In this environment, to succeed, you have to not follow the Index, cut your losers, and keep your winners.
Over all, what's happening now is both Deflation in paper assets and Inflation in real assets. To use Eric Sprott's example: "The price of a house is going down, because you can't borrow the money to buy the damn house! Because nobody wants to issue that piece of paper, because paper's not worth what it used to be..." (Our lovely "dual _flationary" environment)
Remember to stick to your convictions. There are periods where the market doesn't embrace your ideas... Unfortunately you have to wait for the market. You can't change the market. Nor shall we chase the market...
The small-cap cycles are typically 5 years in duration, and this is the 5Th year that small-caps have underperformed, which isn't surprising given the current credit crisis. In this environment, to succeed, you have to not follow the Index, cut your losers, and keep your winners.
Over all, what's happening now is both Deflation in paper assets and Inflation in real assets. To use Eric Sprott's example: "The price of a house is going down, because you can't borrow the money to buy the damn house! Because nobody wants to issue that piece of paper, because paper's not worth what it used to be..." (Our lovely "dual _flationary" environment)
Remember to stick to your convictions. There are periods where the market doesn't embrace your ideas... Unfortunately you have to wait for the market. You can't change the market. Nor shall we chase the market...
Thursday, December 11, 2008
Ballooning Bond Yields... (Velocity of the USD)
Below is a recent ex script from Hong Kong's "GaveKal Daily" regarding the most repeated questions being asked by their global clients today. (An interesting piece I found most appropriate as we approach the end of 2008):
“I just don’t get it! The Fed is out there printing US$ as if paper and ink were about to run out, and yet the US$ surges, oil plummets, gold sucks wind and gold mining shares collapse and yields on long dated US government bonds reach levels that I had never thought I would see in my lifetime! How does this all add up? It makes no sense!” As we see it, there are three potential explanations to the above dilemma:
Option #1: As much as the Fed is printing, the velocity of money is collapsing even faster than the money supply is increasing. As such, the total amount of liquidity in the system is still shrinking, thereby bringing down prices (explaining the low bond yields and the low gold) and activity (low oil). Of course, this situation will not last forever and, once the banks get back on their feet (which admittedly may take some time), velocity will bounce back. At that point, the risk is that the excess liquidity provided by the Fed and other central banks will be multiplied aggressively and that we will move from a deflationary bust to an inflationary boom scenario very rapidly; it will then be very important for the world’s central banks to aggressively withdraw the liquidity that they provided or inflation will become a real economic problem.
Option #2: Looking to markets for any kind of confirmation of deep macro-economic trends today makes little sense as markets are still under heavy duress from forced selling in the riskier assets (i.e., oil, gold…) and forced buying of others (US$, US government bonds…). Indeed, how else could we explain that 3-month bond yields were actually negative earlier this week? If this is not a sign of a bond bubble, then what is? And as we all know, the late stage of a bubble is always characterized by “forced buying”; investors know that valuations make no sense but they are forced, either because of regulations, or simply to keep their jobs, to pile into an asset class. In early 2000, all the indexers and closet indexers had little choice but to buy Nokia, Cisco and JDSU. In the first half of this year, oil and commodities were driven higher by Chinese forced buying ahead of the Olympics (see our book A Roadmap for Troubling Times). And now, government bonds are being bought by banks, insurance companies and pension funds in an obvious attempt to “window dress” the books before the year-end. Thus, in the new year, once the need to “window dress” is behind us, we should expect capital to flow out of bonds and into riskier assets.
Option #3: Contrary to popular belief, the Fed actually has not been printing nearly as aggressively as everyone believes. Indeed, as we tried to show in our latest Quarterly Strategy Chart Book, borrowings from the Fed now exceed the total amount of bank reserves, and thus the reserve component of the monetary base is now entirely borrowed money. The monetary base itself is now a levered figure. Thus, non-borrowed reserves growth has been negative; Bernanke, the pre-eminent scholar of the Great Depression, who knew that the contraction of the monetary base was possibly the most significant policy blunder of the 1930s, sat back and let the unlevered monetary collapse by a third. Fortunately, however, that trend has recently been reversed with the Treasury injecting more than $150bn into commercial banks and taking equity stakes.
As we see it, these are the three possible explanations to the dilemma above. Now the interesting thing is that, whichever option you decide to go with, it will tell you that getting out of government bonds today is not only necessary, but could be urgent.
Something to ponder as you follow your path of due diligence...
“I just don’t get it! The Fed is out there printing US$ as if paper and ink were about to run out, and yet the US$ surges, oil plummets, gold sucks wind and gold mining shares collapse and yields on long dated US government bonds reach levels that I had never thought I would see in my lifetime! How does this all add up? It makes no sense!” As we see it, there are three potential explanations to the above dilemma:
Option #1: As much as the Fed is printing, the velocity of money is collapsing even faster than the money supply is increasing. As such, the total amount of liquidity in the system is still shrinking, thereby bringing down prices (explaining the low bond yields and the low gold) and activity (low oil). Of course, this situation will not last forever and, once the banks get back on their feet (which admittedly may take some time), velocity will bounce back. At that point, the risk is that the excess liquidity provided by the Fed and other central banks will be multiplied aggressively and that we will move from a deflationary bust to an inflationary boom scenario very rapidly; it will then be very important for the world’s central banks to aggressively withdraw the liquidity that they provided or inflation will become a real economic problem.
Option #2: Looking to markets for any kind of confirmation of deep macro-economic trends today makes little sense as markets are still under heavy duress from forced selling in the riskier assets (i.e., oil, gold…) and forced buying of others (US$, US government bonds…). Indeed, how else could we explain that 3-month bond yields were actually negative earlier this week? If this is not a sign of a bond bubble, then what is? And as we all know, the late stage of a bubble is always characterized by “forced buying”; investors know that valuations make no sense but they are forced, either because of regulations, or simply to keep their jobs, to pile into an asset class. In early 2000, all the indexers and closet indexers had little choice but to buy Nokia, Cisco and JDSU. In the first half of this year, oil and commodities were driven higher by Chinese forced buying ahead of the Olympics (see our book A Roadmap for Troubling Times). And now, government bonds are being bought by banks, insurance companies and pension funds in an obvious attempt to “window dress” the books before the year-end. Thus, in the new year, once the need to “window dress” is behind us, we should expect capital to flow out of bonds and into riskier assets.
Option #3: Contrary to popular belief, the Fed actually has not been printing nearly as aggressively as everyone believes. Indeed, as we tried to show in our latest Quarterly Strategy Chart Book, borrowings from the Fed now exceed the total amount of bank reserves, and thus the reserve component of the monetary base is now entirely borrowed money. The monetary base itself is now a levered figure. Thus, non-borrowed reserves growth has been negative; Bernanke, the pre-eminent scholar of the Great Depression, who knew that the contraction of the monetary base was possibly the most significant policy blunder of the 1930s, sat back and let the unlevered monetary collapse by a third. Fortunately, however, that trend has recently been reversed with the Treasury injecting more than $150bn into commercial banks and taking equity stakes.
As we see it, these are the three possible explanations to the dilemma above. Now the interesting thing is that, whichever option you decide to go with, it will tell you that getting out of government bonds today is not only necessary, but could be urgent.
Something to ponder as you follow your path of due diligence...
Tuesday, December 2, 2008
Using Discipline in an Undisciplined Environment.
Courage is at the core of every great investor and genuine courage is rare.
Every market climate tests our investment conviction, today's environment is especially intimidating.
For an investor, challenging popular thought is never easy, but the fact is a number of solid companies with good fundamentals lie in the market wreckage.
Greed blinds us to danger while fear blinds us to new opportunities.
This occurs when logic loses out to emotion.
It is one of the principle reasons why it is so hard for investors to buy low and sell high.
Often, even when individuals plan strategically, they deviate from their plan when the market is too challenging or too tempting.
The elements of Investment Discipline:
- Don't chase performance - it can be hazardous to your wealth!
- Act Strategically, not emotionally. Build an investment plan
- Rebalance your portfolio regularly
- Stick to your plan even when your emotions tell you to do the opposite
- Seek experts when you do not have the tools, the time, or the experience to do it yourself.
Every market climate tests our investment conviction, today's environment is especially intimidating.
For an investor, challenging popular thought is never easy, but the fact is a number of solid companies with good fundamentals lie in the market wreckage.
Greed blinds us to danger while fear blinds us to new opportunities.
This occurs when logic loses out to emotion.
It is one of the principle reasons why it is so hard for investors to buy low and sell high.
Often, even when individuals plan strategically, they deviate from their plan when the market is too challenging or too tempting.
The elements of Investment Discipline:
- Don't chase performance - it can be hazardous to your wealth!
- Act Strategically, not emotionally. Build an investment plan
- Rebalance your portfolio regularly
- Stick to your plan even when your emotions tell you to do the opposite
- Seek experts when you do not have the tools, the time, or the experience to do it yourself.
Monday, December 1, 2008
December 1st, 2008... Here we go.
The levels of market volatility continue to be an incredible force to contend with. It’s almost like viewing a Richter Scale during a large seismic event… Imagine you’ve lived through an earthquake… You rebuild and life goes on. But from that day forward, anytime you hear or feel the slightest tremor, you expect the utmost worst to happen. This “fear” becomes a permanent “Pavlovian” response in your mind. But does that stop you from living your life? Does it drive you to escape? If that were the truth, then places like California and Japan would be uninhabited ghost-towns. People pick up the pieces and rebuild.
Some rebuild better than others, improving on their foundations to protect against future rumbling’s.
Some rebuild quicker than others, utilizing the skill and expertise of industry tradesmen to recover what they once lost.
Right now it’s time to focus on Things That Are Really Important:
Last week was the first week up on many indices like the TSX. What makes this very interesting to me is that the TSX has not enjoyed 2 consecutive weeks up since the index was 13771 back in late August. So if the market is going to come off a bit, it should probably do it very early in the week and then by this Friday, I would think that it stands a very good chance to close higher than the 9270 close on Nov.28th. I would think that if we get 2 consecutive up weeks on all the major indices, that would be very positive given we are going into a very bullish seasonal time and the prospect of automakers getting their bridge loans when they reconvene in Washington this week and with the inauguration set for Jan 20th, the table does seem to be set for an opportunity finally for all of us to make quite a bit of money from the long side for a change. The rally is only 6 days old and that is why I think if they come off for 2 or 3, you have to be all over that.
Subscribe to:
Posts (Atom)