My Burgeoning Philosophy.

People always ask me what my minimum net-worth standards are for clients, and I always respond with; "that depends... The nature and culture of my firm dictates that the ideal client has a minimum of $1M in investible assets (could be household), or has other dynamics like the young professional family with rather large income streams (IE. Great growth potential), or a focus on an entrepreneurial business owner who may not have the largest asset base to begin with, but the bulk of his money is in his business that he will one day sell, triggering a special event in which my services are definitely of added value."

Quite the mouth-full... I hear other advisors speak about their ideal client and they can usually spit it out in 1 quick sentence. The more I look at it, the more I don't want to define my clients by minimum net-worth standards, but by someone with integrity, honesty and respect. Someone who is interested in receiving and willing to act on good advice, and who is willing to sit and share thoughts and insights on family, friends, and anything else of true value to them.

The following is a quote I recently read from a top Canadian advisor publication that I find truly sums up my own thoughts regarding my place in the industry, and how I define myself as a wealth manager:

"When an investment advisor looks at the glass of water, he will tell you that it is half full, and is filling up quickly so you should buy a bigger glass. An insurance agent will warn you that a half-empty glass leaves the future uncertain so you should insure against possible consequences. An accountant will tell you that you paid too much for the glass because it is too big. My goal is to ensure my clients have considered all these issues, focusing on the importance of the water, not the glass." (Courtesy of Mr. Blair Corkum, Corkum & Associates)

No one's cornered the market on the best strategy.

It's interesting that as of late I have been receiving phone calls and emails from clients who are questioning the recent run in the markets. It is the old "sky is falling" reverberation that one sees when markets trend a specific way. We keep hearing that we're in for a lot of short-term volatility so just picking good stocks is no longer enough, and that utilizing a bottom-up method of selecting quality companies will no longer work in this economic environment... I found this article from Tom Bradley at the Globe and Mail really hits the nail on the head when addressing this very question. Enjoy...

Tom Bradley -The Globe and Mail 09/09/2009

I feel like I'm really up to speed right now. With the lousy weather in Ontario and Manitoba cottage country, there's been more time for reading. And while I still can't tell you what “quantitative easing” is, I've firmed up my view on all kinds of other topics.

I'm convinced that to get out of this debt crisis, we have to come up with a strategy that doesn't involve people borrowing more money. China is not the star that everyone says it is – it's easy to look good when the government is spending like a drunken sailor and the credit tap is wide open. And perhaps our first step toward a greener economy should be the better use of all the natural gas we have.

I love thinking about the big-picture stuff as much as the next investment geek, but the problem is, I don't know how I'm going to make money from it. At the end of the day, I'm still a believer that the most reliable way to add value to an indexed portfolio is to work from the bottom up. In other words, build a concentrated portfolio that doesn't look like the index, one security at a time. Each time, attempt to buy something that is worth considerably more than it trades at in the market.

But I read something this week that threw me for a loop. In his latest musing, Ira Gluskin, the soon-to-retire but never retiring president of Gluskin Sheff, was outlining why his firm is putting an increased emphasis on asset mix and had added economist, strategist and industry rock star David Rosenberg to their team. Mr. Gluskin said: “There are the holdouts who claim that they just select the best stocks around the world, regardless of industry [or country]. They are true antiques.”

“ My first reaction to his statement was one of indignation. Hmmph.”

My first reaction to his statement was one of indignation. Hmmph. Mr. Gluskin goes over to the dark side and suddenly all his old philosophical buddies are misguided and out-of-date. Relics we are!

But after I got my fragile ego back in check, I thought I'd better give Mr. Gluskin's view careful consideration, because he is one of the leading thinkers and thought provokers on Bay Street, and was writing great stuff when Mr. Rosenberg was still in school. He is of the view that short-term volatility will be with us for a while and just picking good stocks is not enough. “We wanted better strategic advice on where events are heading.”

Let's take a step back. In reality, investing involves a combination of the “bottom up” and “top down” approaches. Even pure stock pickers have a general awareness of the overall business environment when they're doing their company research and valuation work. And after the macro investors choose their direction, they still have to select securities to execute their strategies (unless they're indexing).

Nevertheless, the approaches are profoundly different. The “high elevation” investors focus on economics and broad market factors, including valuation. Their big-picture conclusions determine which sectors and/or countries they will invest in. The security selection falls out of the macro work.

That's opposed to the managers skulking along the bottom (dare I say dinosaurs), who let their fundamental analysis and valuation work determine when to buy, hold or sell a stock. The country and industry weightings in their portfolios are the result of where they find the most undervalued stocks.

Too often other issues get mixed in with the top-versus-bottom discussion, specifically the merits of “buy and hold” strategies and the importance of asset mix. That's unfortunate. Equating bottom-up to “buy and hold” is just not appropriate. Certainly some stock pickers have low turnover, but others actively trade their portfolios. Top-downers vary greatly on this measure as well.

As for asset mix (stocks versus bonds versus cash), neither side will dispute that getting the strategic or long-term mix right is the most important thing an investor does. Where the big gulf between the enlightened and the prehistoric lies is in how actively that mix is managed, and how far they are willing to stray from the long-term targets to pursue shorter-term tactics. It's in most top-downers' DNA to be more active and make bigger bets, which prompts a number of questions. Is it possible, with the likes of Mr. Rosenberg, Jeff Rubin or Patti Croft at my side, to get it right consistently enough to add value? Does all that work lead to too much tinkering? Will it distract me from finding undervalued securities and prevent me from buying them? And can I use my budget for risk more effectively elsewhere in the portfolio?

I'll keep noodling on the issue since, in my experience, ignoring what Mr. Gluskin says is usually at one's peril. In the meantime, my fellow antiques and I will continue to make sure our clients' strategic asset mix fits with their objectives. We'll devote most of our resources to finding undervalued bonds and stocks. And we'll try to get the big picture by watching long-term term trends and ignoring anything to do with the next three months.

Cheers.

7 Top Ways Millionaires Become Wealthy - Courtesy of Steven Mattos

There are 7 common factors to those who build net fortunes of one million dollars or more. In America, there has never been more personal wealth than there is today; yet most Americans are not wealthy. Amazingly, a mere 3.5% of households own almost one-half of the wealth in the United States! Although we may be hard working, educated, moderate to high-income earners, why are so few of us affluent?

In studying the affluent, I found a pattern that the wealthy follow. It is more often the result of planning, hard work, perseverance, and self-discipline that determines who become wealthy. The factors compiled here are summarized from the research done by Thomas Stanley Ph.D. on over 1100 actual millionaires (many are multi-millionaires) in the U.S. today.

1) Live Well Below Your Means
Don't be fooled. The ‘average' millionaire doesn't look like a millionaire! The key word here is frugal, frugal, and frugal. The typical person is America is a consumptionist. It's in our blood. We work hard, make money, and spend it well. Not the typical millionaire! They play great defense (saving and investing) as well as offense (making money). Just like in football -- great offense is exciting…but great defense wins games. An interesting note: Millionaires on average claimed their spouses were as frugal or more than they were. It's a family affair: Sacrifice high consumption today, for financial freedom tomorrow.

2) Spend Your Time, Energy, and Money in Ways that Build Wealth
Although the road to Millionaire's Ville takes a frugal path, they pay well for training and advice. Do investment planning. Go to seminars. Hire good attorneys, tax accountants, mentors and coaches. Learn to identify and invest in assets that produce income. The wealthy spend money when the investment will protect and grow their assets. Millionaires also know the details: How much is spent each month and on food, clothing, and shelter. The non-wealthy say they don't have time to plan, while the wealthy make time to plan. But here's the shocker: The average millionaire spends 8.5 hours per month planning, while the non-affluent spend 4.5 hours or less planning. How can 4 more hours per week impact your future? Make it happen and the odds are in your favor of joining the truly wealthy!

3) Choose Financial Independence over Displaying High Social Status
The wealthy run highly efficient operations both in business and at home. Most live in average neighborhoods, and drive average cars. They're not interested in keeping up with the Jones' -- because the Jones' aren't financially free. It takes lots of energy to consume big mortgages, change homes every few years, buy the most recent model cars, and wear the latest fashions. The wealthy drive typically American made cars! Japanese cars come in 2nd place; half of these are Toyota Camry's. Yes, significant value per dollar is the key here. The Millionaire's Motto: You aren't what you drive. The status cars -- Lexus, BMW's, Mercedes? At 6.4% or less per each brand.

4) Don't Accept Economic Support from Your Parents once Outside the Home
Sounds painful doesn't it? It's a fact that has taught the wealthy how to earn, keep, and invest money. Parents of the wealthy do not, or cannot, provide "economic outpatient care". The results are clear: The more dollars the adult children receive, the fewer they accumulate. Those who are given less are motivated to accumulate more on their own merits. An amazing fact: 80% of millionaires are first generation millionaires; they have made their money on their own, in their lifetime. Many of these folks have been immigrants to the U.S., starting out with minimal cash on hand. Work hard to learn and generate wealth--it CAN be done, and happens in America every day.

5) Teach your children to be economically self-sufficient to foster a "Wealth Mind-Set"
Provide your children fish and they will eat for a day. Teach them to fish and they will eat for a lifetime. As you might guess, children who grew up to be affluent, who had affluent parents, were taught to be disciplined and intentional with their money. Robert Kyosaki, author of Rich Dad Poor Dad, didn't cave in when his son asked for a car at 16 years old, even when the neighbor kids were being given cars by their parents. He gave his son $3000, and a subscription to the Wall Street Journal, and a few books on investing in the stock market. Now Rich Dad's son watches more CNN than MTV. He has the motivation, and is getting an education that will provide him for a lifetime, well beyond his first car purchase.

6) Become Proficient in Targeting Market Opportunities
Find your niche, like the wealthy do. Follow where the money flows, and look for specialized opportunities. Why not target the wealthy themselves? Yes, they are frugal, especially first generation self-made wealthy. BUT…they spend openly on investing in themselves and their families. Investment advice and services, business training, software, tax advice, legal, medical, dental, health, real estate, and education are top priorities. They pay well for products and services that protect and grow their assets. Remember the majority of the wealthy are self-employed entrepreneurs. Followed by medical professionals and business executives.

7) Choose the Right Occupation
You now have a good idea of what the affluent do. 20% are retirees. Of the remaining 80%, most of these are self-made businessmen and women. Keep in mind that entrepreneurs are 4 times more likely to become millionaires than those who work for others. There is no one business, or group of business more likely to breed millionaire-hood. Some are lecturers, others medical professionals, farmers, small manufacturers, and corner mom and pop stores. The most important predictor is the characteristics of the owner, than the type of business. It's the winning combination of skills and attitude that hits the wealth target.

NOTE: The affluent attribute being honest with all people as the most important characteristic in their businesses, tied with being well disciplined. The vast majority of the wealthy were not stellar students, or born into money. They have made it through following a few simple principles and being consistent.

TEACH YOUR CHILDREN WELL OR ATLAS WILL SHRUG. (Courtesy of The Gartman Letter)

Crosby, Stills and Nash told us that we’ve no choice but to teach our children well, and it is very, very hard to argue with that statement for who wants to teach their children poorly.

But sometimes they learn lessons for themselves, and a friend of ours sent us the following short story about a lesson concerning the US drift into socialism learned on their own by his two sons. Our friend wrote:

On the way home from summer vacation, my two sons (four and eight years old) were talking about staging a lemonade stand when they got home. The four year old who spends every penny he gets suggested that he should keep all the profits because his brother (who saves every penny) has a lot more money. As a lesson in behavioral finance I suggested that it sounded like a good idea. The eight year old then said the four year old can do it himself and he would not participate.

It does not get much simpler than this to see why socialism does not work.

ScottEbeling
CommodityTrader
Chicago, IL

Scott wrote later, after we’d asked if we could reproduce this wonderfully simple yet forceful story for our clients, that “You should have seen my [eight year old son… he was kickin’ and screaming, but eventually our taxes will get to a point where it is not worth the risk to put capital and effort into starting businesses and creating jobs, we will choose just to not participate.”

We are collectively near to the point of this eight year old boy’s anger and dismay over his four year old brother’s illogical demands, for we are being asked to pay huge and rising taxes to support those who chose not to work and we wish not to do so.

We’ve a responsibility to those who cannot work and for those to whom life has dealt a very bad hand. We have obligations to the infirm and the ill-treated, and we take those obligations very, very seriously, for we give graciously and willingly to charities of all kinds and at most times.

However we are not prepared, nor do we intend, to sponsor the “four year olds” who envy what we or others have made and think it is theirs to be taken from us. Obama and the Left are teaching our young an ill advised lesson that those who are wealthy owe money… large sums of money… to those who are not, but even eight year olds know a scam when they see one.

(Dennis Gartman - The Gartman Letter - Aug 05, 09)

El Nino... (Investment Opp?)

Not that I really want to become a weather forecaster, but one of the things that commodity funds keep a close eye on, and I do too, is El Nino/La Nina events and their impact on commodity supply, prices and related equity performance.

Over the past few months there have been signs of a developing El Nino event in the Pacific and this could have important implications for supply and prices for several commodities over the next 12-18 months. The US National Oceanic and Atmospheric Administration expects the current event to last throughout the Northern Hemisphere winter and into 2010.

What is El Nino? It is an abnormal warming of surface ocean waters in the eastern Pacific which causes an oscillation of pressure patterns impacting weather conditions.

What are El Nino impacts?

• Reduction in rainfall in eastern and northern Australia, as well as parts of South East Asia causing drought conditions. A strong El Nino could result in drought in India, Indonesia and Malaysia. Very hot summer weather in northern China, flooding in southern China.

• Warmer winters in the northern part of North America and cooler in the southern parts. Wetter summers in the intermountain regions of the US. Depressed hurricane activity in the Gulf of Mexico.

• Warm and wet summers in western parts of Latin America (Peru and Ecuador) likely causing flooding. Higher winter rainfall in Chile. Dryer and hotter weather in the Amazon, Colombia and Central America with wetter spring and summer conditions in southern Brazil and northern Argentina.

Why is this relevant to commodities?

El Nino/La Nina trends generally impact supply of commodities, be that oil and gas, coal, wheat, soybeans, rice, etc

What are potential commodity impacts?

Oil & gas: El Nino generally results in depressed GoM hurricane activity which could mean limited supply curtailments this hurricane season, keeping gas prices depressed if demand doesn’t pick up.

Wheat: The last two major El-Nino events have resulted in significant increases in wheat prices during and after the event. This has come in no small measure due to impact of drought conditions in Australia on wheat production and yields.

Soybean: The last two major El-Nino events have resulted in significant increases in wheat prices during and after the event. Brazilian and Argentinean production of soybean has been impacted by drought and flooding in previous events.

Rice: The last three major El-Nino events have resulted in increases in rice prices during and after the event. Chinese and Indian rice production may be impacted by an El Nino event.

A Great Answer To A Great Question.

There seems to be something wrong with the way oil is trading these days -- at least wrong if you believe it should trade based on supply and demand. Obviously, the fundamentals aren't changing as fast as the wild price swings. Much of this seems to be because the trading pits are dominated by trades of paper (financial) barrels of oil and not real barrels of oil.

Yet, you seem to be generally opposed to limitations on oil speculation. Why? And is the current method of pricing oil the best one we can come up with? Can't we come up with a better system? When I go to the store to buy other goods, the price doesn't fluctuate so wildly. Why do we have to price oil this way?

Stephen Schork (The Globe & Mail 13/07/09): I certainly agree that oil speculators impact the pricing of oil (and other commodities) in the short-run. Therefore, at times the price path does indeed decouple from the underlying fundamentals. However, in the long-run, markets will regress to the fundamentals. hence the Wall Street adage. markets fall faster than they rise.

I do favor certain new regs on speculative trading in commodities. For instance, there is a tremendous amount of derivative contracts linked to U.S. markets that are traded on the ICE exchange in London that do not come under the purview of U.S. regulators. For price transparency reasons I think that ought to change.

On the other hand, I do not like the idea of limiting oil speculation. Why?

The most important reason is that speculators provide an outlet for producers to sell risk. If you hamper the speculators ability to buy that risk then all you are really doing is forcing this systemic risk back onto the books of the producers.

Therefore, they will in turn become apprehensive when it comes to increasing their risk exposure to the market, i.e. it will retard their ability to increase their plant and equipment or said another way. it will hamper their ability to increase supply when demand warrants.

Thus, in the long-run, limiting speculation might decreased short-run volatility in the market. But it will only serve to increase it for all of us in the long run.

So... Where are we again?

June has come to pass with the swift speed that only Father Time could attain, and here we are still watching as the tumultuous markets work through their innate differences in a most vexing fashion. The famous "sell in May and go away" adage did not apply, and as we look back from our semi-annual perch piecing together the sparse similarities of historical precedence to some how map our way in an effort to gain some long-desired foresight, we need not be afraid. For the markets ALWAYS have this stubbornly magical, yet preordained habit of moving from the lower-left to the upper-right. From morning to noon and into the night... (*This rhyme is best served with a recent Andex chart. Feel free to scroll down to a recent post of mine in which you will find a wonderful reminder of what markets tend to do)

Asset selection is very very important from this point going forward. Easy to say, difficult to apply. There are many different theories on what a portfolio should look like... How to "learn from this one and finally build something that will guarantee principle value retention." It seems to me that all of these sudden preservation and V&L shaped recovery strategies are an explosive way to market a short-term reaction to the problem. Whereas, I am really interested as to what those select few who have stayed to their original investment policy in the face of adversity are up to. As they tend to be the ones skating to where the puck will be, where the rest of those "reactionaries" are busy adjusting course to where the puck is going.

People tend to chase performance by selecting investments that outperformed over the last 1,3, and 5 years. The best thing you can do for your current portfolio is to look at what you own today, and decide if its what you want to own tomorrow. Think about your future…

Moving on to a side-note.

In 2008, for the first time in human history, the majority of the world’s people lived in cities. And cities for the foreseeable future will continue to grow faster than the countrysides surrounding them. Globally, the number of people living in cities of 1 million or more will grow from about half a billion in 1975 to almost 2 billion in 2025. As a result, cities have assumed a central role in the urbanized world of the 21st century. They are wielding more economic power, developing greater political influence and increasingly employing more advanced technological capabilities to enhance their operations... This is an absolute and finite and indisputable reason why Globally competitive markets will continue their march from these lows. The continued urbanization of exisiting economic powerhouses, along with the creation of a middle-class in developing countries, will put a strain on supply and add to the demand for natural resources, services, and pretty much all industries across the board.

So, if the words of financial Armageddon have not pierced your heart and left you frozen in a state of asset-shock, then where do we begin? What story do you believe in? Look into your own portfolio and ask yourself these 2 questions:

- What investments do you want to own in the next 1,3, and 5 years?

- What are you concerned about for the next 1,3, and 5 years?

Alternative Energy? ♦ Municipal Bonds? ♦ Gold? ♦ Social Security going bust? ♦ Inflation running rampant? ♦ Deflation? ♦ Oil? ♦ Taxes going up? ♦ Monthly income? ♦ The dollar?

As the old guy next to me used to say: "A car could look sporty, but if it don't got it under the hood, then all that exterior jazz will just get blown off when the race starts..." So to should a portfolio need to have the best underlying story driving all the other parts, to not only finish the race, but to win the darn thing. It's the least you could do for yourself. Honest.