I love a good thunderstorm. The power of nature is beautifully inspiring and extremely humbling. Humans can feel a bit arrogant until nature reminds us that we puny little creatures are completely dependent on greater things for our survival. A little humility goes a long way toward achieving a successful outcome here.
There are few times when I feel more in awe of nature, and my nothingness compared to it, than when in an airplane. Flying is an amazing experience that can come to a sudden and tragic end if a pilot fails to give proper respect to the forces of nature.
Last weekend we flew to Dallas. Planning such a trip begins weeks in advance with a careful review of the developing weather patterns. As a very moist system had moved in to much of the southern half of the country, I was paying particular attention to the pattern of thunderstorms that were building each day along my route. When the day for the trip arrived I had determined that the storms would be prevalent, but avoidable, so at first light Saturday morning we departed.
As anticipated, my entire route was covered in a front with cloud tops around 15,000 feet, but since I was flying at 27,000 feet, we were soon on top enjoying the sunny side of the clouds. But thunderstorms can reach up tens of thousands of feet and even the biggest airliners cannot top them. Given their enormous amount of energy, the only safe place to be when there are thunderstorms around is far away. But here is the secret. In my position above the cloud deck I could easily see hundreds of miles in all directions, making the isolated towering storms both easily visible and simple to avoid.
As we flew, we listened to some of the smaller planes talking to traffic control, planes not capable of getting above the cloud deck, and thus unable to see the way ahead. These pilots were at risk of flying into their worst nightmare, an embedded thunderstorm. I marveled with Launa both at how dangerous the storms were, as well as how easy they were to avoid when you had the proper viewpoint.
As investors we are also on a journey fraught with both beauty and danger with survival dependent on our starting with a fair amount of humility. Arrogance in flying or investing rarely ends well. Add to that humility a 27,000-foot view, as it were. In investing as with flying, humility and a good vantage point generally come from experience. An increasing risk to investors is the ever growing distance since the last economic thunderstorm. Too many investors and advisors have either forgotten the danger, or were too young to have experienced it. Flying below the clouds they are essentially unaware or unconcerned about the embedded thunderstorms that may lie ahead.
In future columns I will address some of the economic thunderstorms that may be developing along our flight path.
When I was newly married I immediately bought some life insurance. The monthly premium was small, and the death benefit seemed like a fortune. As I worked to build my business I often joked that I was worth more dead than alive. But it gave me great comfort knowing that for a very small monthly amount, my wife and family would be cared for if something happened to me. Many of my friends struggled with whether to buy insurance, reasoning that they were young and healthy and would likely never need it, the money for premiums then being wasted. I explained to them that not needing to use the insurance was the whole point.
I have an alarm system I hope I never need; I wear seatbelts that have never saved my life and I even buy food storage I have never had to eat. In each case I consider peace of mind to be a great return on the investment.
In my business we require any young families we work with to have life insurance. It is usually just an inexpensive term policy. The reason is simple. I tell the couple that in the unlikely event that something happens to them, it will be I, not them, who is left behind to try and help their surviving family make it through. How will I explain to a grieving spouse with small children and insufficient income, how their trusted financial advisor could have allowed them to get into such a mess? If both parents should die, how could I live with myself knowing the children are left without means of support?
Death is not likely for most people in their child raising years, but it does happen, and as financial advisors we see it more than we would like. Apart from that, I happen to have a unique perspective on this situation. When I married Launa she was 23, had two small children, and was a widow. On a very normal Sunday her husband kissed her goodbye on his way to church, and within minutes rolled his car and was gone. Statistically death may be rare, but in her case those statistics didn’t matter. She was suddenly left with a family, a mortgage, a food bill and no income. Fortunately, her husband, a thoughtful accountant, had a small life insurance policy that wouldn’t make anybody rich, but at least assured the family would be taken care of.
If you are a young married dreaming about the great future that lies before you, start first by taking care of the present and get life insurance. Cover both parents because the death of either can put a severe financial strain on the family. The likelihood of needing it is slim, but this is a risk against which you absolutely must protect your family. Pay that small monthly fee without complaint, and then be thankful if the years pass and your only return on those premiums is peace of mind.
Last week Launa and I stayed at a hotel where the experience fell short of expectations. When we brought it to the attention of the manager the response was a weak apology but no offer to make matters right. I then wrote a letter to corporate headquarters who responded with excuses, but no solution or real concern. It was clear I was only one small customer that didn’t mean much to them.
In analyzing companies for investment purposes, in addition to reading the financial data I also like to take a common sense approach. In this area one thing that carries a lot of weight is how a company treats its customers. If customer service is weak, a company will struggle regardless of the quality of its product.
Every business makes mistakes, but what matters is how they respond to those mistakes. Do they pass blame? Do they make excuses? Do they do what needs to be done to keep even the smallest customer happy? I have found that a company that disrespects an individual customer, will disrespect other customers as well, and that is bad for business. So in my opinion, no matter how big a company may be, how they treat the smallest of their customers tells me a great deal about their potential for long term success.
I met one day with the Senior V.P. of one of the world’s most successful entertainment companies. I asked his secret of success and he responded that despite having millions of customers, they treat every single one as a VIP. He said they have a 100% satisfaction guarantee for every customer. He told me the average family of four spends $32,000 in a lifetime with them, so they were not going to lose that business over an argument about a $30 toy or $20 meal, regardless of who was at fault. That policy gave me high confidence as a potential investor.
Consumers today have many choices. If a company does not treat someone well, they will likely take their business elsewhere and will also share the bad experience with all their friends. In our digital age, customer service has never been more important. As an investor I would not hold an investment in my portfolio with a company that had not treated me well. I would know that company will struggle to compete in a world where bad news spreads rapidly.
As I drive around town I see parking lots full at businesses that are well known for their customer satisfaction policies. You don’t need to know how to read a financial report to know that these companies will have a competitive edge over those who feel some customers are too small to be bothered with.
Take a moment and review your investment holdings and ask how your personal experience has been with those businesses versus their competitors. Remember, how they treat you is how they are treating others, so invest accordingly.
Have you ever been on a commercial flight waiting for it to push back and have the steward go around asking for a couple of volunteers to move to a different seat? Unlike any other transportation device, airplanes are very sensitive not only to weight, but to how that weight is distributed. A small regional jet weighs over 50 tons empty, yet its maximum weight is carefully calculated on each flight, and balanced throughout the plane. So sensitive are these massive planes to weight that a steward will often move a few people around before takeoff to get the balance just right.
Cars and boats also have maximum weights but I doubt many people even know what they are. They tend to do just fine with whatever you can stuff in them, but try to fly an airplane overweight and it may not even get off the ground. Fly it out of balance and the results can be disastrous. If a 50-ton jet is affected by a few hundred pounds, imagine how important it is for those of us who fly small planes to get the weight and balance accurate.
One day I was loading my plane with my son and some of his friends for a trip to California. I had calculated their weights carefully and allotted each one 20 pounds for luggage. One of them brought a 30-pound bag and I told him, either he loses 10 pounds or we mail it. He was surprised I would be so “picky” but I simply said I had to choose between offending him or spinning to our death over the Nevada desert. OK so I exaggerated for effect but he took out 10 pounds and we departed. I take my responsibilities as a pilot seriously. If I don’t take care of the seemingly small things, the big things that really matter will eventually suffer.
Reviewing the investment accounts of so many people I see the large effect of small decisions. A single wise choice or a foolish act can change the course of a person’s financial life. I wrote about this a little last week as I discussed the couple that wanted to put their savings into a poorly advised penny stock. As it turned out, they took my advice and didn’t make the investment, and in the two weeks since, that stock has failed completely. In addition to preserving their savings, that small decision taught them a valuable lesson that I believe will change their lives.
In investing just as with airplanes, it is the small details that can have the biggest effect. Since most of our accounts look more like small planes than regional jets, we have to be very careful with every decision we make. If a steward will move a 200-pound man to balance a 50-ton jet, shouldn’t you pay more attention to the little details in your portfolio to keep it in proper balance for the journey ahead?
Last week I went with two of my brothers to Jackson Hole to do some whitewater rafting. The stretch of river we rode has several miles of class 2 and 3 rapids, which means it is enough to be exciting but not really dangerous if you follow the rules.
As we approached each rapid, the guide would direct the boat to create the maximum effect. We would yell and scream and when we hit the calm area that followed each rapid, we retold the tale as if we had just survived certain death. The reality is, we were never in any significant danger, but the experience created the impression that we were.
Humans enjoy scaring themselves, though I am not sure why, with each person’s comfort level being a bit different. Some might enjoy relatively safe class 3 rapids while others crave the class 5 which are actually fairly dangerous. Still there are those whose only comfort level with whitewater rafting is to drive the car along the highway and pick up the group at the end. I would argue that the car ride may be more dangerous than the one in the raft, so risk can be a matter of perception, which is often incorrect.
I speak often about risk but I would like to address the perception of risk as being just as important as real risk itself, to an investor. It is a matter as worthy of consideration as any other factor in investing.
Most know that our family loves theme parks. I have always been right there with the kids to run to the fastest, highest and scariest ride in the park. I know the rides don’t have real risk, but the perceived risk can give such a thrill. One example is the Supreme Scream at Knotts. This ride takes you high into the air and then drops you suddenly. I have a fear of heights so the ride always frightened me, but for some crazy reason I enjoyed the thrill of that fright. However, I don’t get the same enjoyment out of it anymore. The ride has not changed, but I have changed and I no longer like being scared by it. I now prefer watching my kids scream on the ride while I eat my Dippin’ Dots on the bench below.
Financial advisors often encourage investors to take risks they are not comfortable with. The advisor may be comfortable with a high thrill level, so they push the investor to rely on the advisor’s comfort level. In this I believe the advisors err because an investor who is truly fearful, even if they maybe shouldn’t be, will not enjoy the experience. Life is meant to be enjoyed. Investing properly is designed to help make that possible. How can the investor enjoy life if they lose sleep or live in fear? Thus, even the perception of risk should be considered in any investing plan so that the investor, not just the advisor, might enjoy the experience.
At five years old I gave my first public speech. It was in a church meeting for primary children and I still remember it. It began like this, “Everything in the world works by a law; Birds fly by a law; flowers grow by a law and bees make honey by a law…” I went on to teach that if you want to obtain anything in life, you have to obey the law by which that thing is governed. Those who violate law, will not obtain the thing they want, but something else.
I had the occasion to share the message of that talk with a young couple this week who sought advice on investing. They had dreams to obtain substantial wealth. The process by which they intended to obtain it involved buying very risky penny stocks in the hopes that one of them would hit the jackpot.
I tried to teach them that there are natural laws that govern investing, and to have a likelihood of success, those laws had to be followed. Sure, there are some rare individuals who win the lottery, but gambling should never be considered a legitimate investment plan.
I told them to compare good investing with good health. There are laws that govern health and those who desire to be healthy must be willing to abide by those laws. Unfortunately, the majority of Americans continually try to find a shortcut to good health. They want a magic pill, a crash diet, or some amazing machine to melt away the pounds with little effort.
When I ride my bike in the morning I pass by a gym and am impressed to see so many cars in the lot at 6 am. I am pretty sure very few of those people are excited to jump out of bed when the alarm goes off, but they want the reward and understand they must follow the law of health to obtain it.
Successful investors obtain success by faithfully following the laws of financial health. They know it isn’t always easy and it can take a long time and a lot of patience. I am certain they are often tempted to do other more exciting things with their money. But, like my dedicated friends who are up exercising while much of the world is still asleep, they believe the reward is worth the cost of obeying the laws that produce it.
I hope this young couple heeds my advice, though I honestly don’t think they will. Like many, they seem determined to find a shortcut that will bypass the natural laws that govern investing, which course will likely lead them to disappointment. I guess that’s OK too because sometimes it is only in breaking a law that we learn a painful lesson about why we should start keeping it. Everything in the world works by a law, and so does investment success. Try to bypass the law and you do so at your own peril.
When the recession of 2007 hit, one of the harsh realities that struck many Americans was that they had been living beyond their means, buying houses and luxuries they could only barely afford, and setting aside very little for an emergency. As the economy stalled, businesses cut back and jobs were lost, people were unable to maintain their lifestyle and the economic pain became severe.
Oddly, one of the immediate changes that occurred when people were suffering financially was a spike in the personal savings rate. Prior to 2007 Americans were saving a pathetic 2% of their income but by the end of 2008 that had increased four-fold to over 8%. I marvel that people who could only come up with 2% during the good times could somehow manage to find 8% to set aside during a disaster. A crisis has a way of clarifying our priorities.
As the economy continued to improve there was hope that this great lesson learned would not be forgotten, and by 2012 our savings rate spiked to an astonishing 11%. It appeared that those who had lost jobs, homes, boats, cars and even relationships over the terrible recession had successfully adopted the new motto, “Never Again!”
I am not sure what happened after that point but I suspect human nature finally kicked in. While the economy continued to flourish, rather than take the opportunity to save more, Americans returned again to the old habits of luxurious spending. With more spending there was less left over to save until now, in mid 2018, the personal savings rate in America has fallen back below 3%.
These savings rates are far too low to support a reasonable retirement plan, much less offer any safety against tough times. If we continue on this path, the words of George Santayana will once again ring true that, “Those who fail to learn from the past are doomed to repeat it.”
For those like myself who believe we have entered a prolonged period of economic prosperity in this country, I offer the following warning. In 2013, an Oxford University study projected that by 2033 (a mere 15 years from now) approximately one half of all American jobs will be replaced by automation. Even in those jobs that will not be replaced, there are few if any areas where technology will not reduce our dependence on human employees.
The new normal in economics is that you don’t need a recession to put your family into a personal disaster. In fact, the booming economy is accelerating the rate at which new technologies will be replacing jobs. No one is immune to career risk in a world where robots and artificial intelligence are developing at breakneck speeds.
I am just one small voice but to those who will listen I plead with you to put your mindset back to 2008 and implement a responsible savings plan as if your future economic life depends on it, because for most people, I believe it will.
When my daughter Jaimee came into my office some years back and announced her decision to join the Marines, my first response was, “Why? Why the military? Why the Marines? Why not the Air Force? And why leave such a nice opportunity here at the family business?” But Jaimee had always wanted to do something really special and she especially wanted to serve her country. So she turned the question back on me and said, “Why wouldn’t I?”
One of the most important questions in life can be “Why?” It is the question that challenges tradition and opens discussion on that which has always been accepted. The current commandant of the US Marine Corp, Robert Neller, has spent his career asking the question, “Why?” The Marines have long been the world’s most respected, and feared, fighting force, yet Neller contends that it is necessary to continually ask “Why do we do it this way?” and “Is there a better way?” Neller often bumps up against long standing Marine tradition to which he replies “The expectation is that we will always go undefeated.” And so change, though sometimes “Terrifying” (his words), is necessary.
I often ask my clients to consider making changes with the hope that they too may remain “undefeated” in their goal to retire successfully. I ask them to question “Why?” as they consider their various investments: Why did I do it this way? Why do I keep doing it this way, and should I be changing how I am doing it?
One of the biggest examples was years ago when we had to start moving some funds away from traditional bank savings vehicles. For years, banks paid 5.25% on insured savings accounts, and people had become very comfortable with them. My grandmother had 100% of her savings at the bank and when I questioned her about diversifying she replied that she had no reason to. And she was right. All four of my grandparents passed away from natural causes before the age of 75. With less than 10 years spent in retirement, the amount saved and the rate of return was less significant than it is now.
In addition to living decades longer, the current generations are intent on working less, playing more, travelling more and generally spending more. The retirement dreams of the present generation simply won’t work with the math of the past.
Most of my WW2 clients are gone. As I consider the way they lived, the way they invested and the way they retired, I can see that what was successful for them will not likely be successful for their grandchildren. The world has changed. The numbers have changed. The way of life has changed and the retirement battle has changed. For the next generation to remain “undefeated” in that battle, they must change too. And this begins with looking at every investment and every strategy on a regular basis and asking the question, “Why?” And then being willing, if necessary, to follow the path the answer takes you down.
I stumbled across some old boxes from my investment days dating back to the early 80’s. I found dozens of notebooks on which I had written down my daily market trades. Every page was filled with stock ticker symbols and pricing, as well as the financial results of each transaction. I smiled as I remembered that in those days we traded in 1/8 dollars, as compared to today when stocks are priced in fractions of a penny. A flood of memories returned as I reviewed the symbols of dozens of the biggest companies of the day, many of which have either faded away or are a mere shadow of their former selves.
One such company was Eastman Kodak. Formed in the 1800’s, Kodak was a photographic pioneer whose name was as synonymous with cameras as Kleenex is with tissues. Having filed for bankruptcy years ago, the now privately held Kodak Alaris company that remains, no longer makes cameras. The collapse of the Kodak camera and its replacement with the far better technology of our digital age is known in the economic world as “Creative Destruction.”
Creative Destruction sounds like an oxymoron, but it is a critical element of a free market. In its simplest form, it is the process by which that which is old is torn down and replaced by something newer and better. It can be a painful process with loss of jobs and share value, but like tearing down an old warehouse to replace it with a new high rise, the process brings opportunity and benefit to society.
Looking through my old trading books I realized how hazardous Creative Destruction can be to an investor. Had I just bought and held many of those stocks that made me money decades ago, I would be holding an awful lot of worthless paper today. It is sobering to realize that with the dropping of General Electric just weeks ago, the Dow Jones Industrial Average Index no longer contains any of its original 12 members. The once powerful companies have all fallen victim to Creative Destruction.
The free market system works because it generally only destroys a company when it has something better to replace it with. It doesn’t just tear down the old factory, it seeks to builds a newer, safer, more energy efficient one in its place. Investors who prefer a long term “buy and hold” (and sometimes forget) strategy would do well to consider the history of the markets. As free markets create and destroy companies on a regular basis, investors should be active in monitoring their investments for signs of trouble, and opportunity.
My notebooks reminded me that investing must be a proactive process. It takes constant research and education to stay up with our rapidly changing investing environment. To think otherwise is to find yourself after your family vacation looking for a store to process your roll of 110 film. If you do not know what 110 film is, then I rest my case.
Launa and I went up on the mountain above Cedar City, Utah this week to escape the desert heat. Most of the homes on the mountain are surrounded with an abundance of trees, mostly pine. Each year the forest service removes trees to help with fire protection and we were amazed at how quickly an army of new small trees had begun to take their place.
In some areas cabin owners plant their own trees to cover a clearing or provide more privacy. An interesting thing about pine trees is that they grow in abundance from seeds all over the forest wherever there is enough sunlight, but if you plant one by hand it can be very difficult to get it to grow. Cabin owners must install automatic watering systems to provide a constant flow of water to the newly planted trees. It is an odd phenomenon to see natural young trees growing in abundance all on their own, next to human planted trees with watering systems that struggle to survive. I asked an old timer why the planted trees needed additional water. He explained that natural trees begin life as a seed and the first thing they do is send out roots seeking water. As the root system develops the young sapling adds small branches and leaves as it is able to support them. It does not grow any faster than the roots are able to supply the moisture and nutrition the tree needs.
The human planted trees are grown in pots and fed water manually at the nursery. As a result, the branches and leaves grow more quickly, and the root system is much less developed. When they are planted on the mountain in a harsh environment, the root system is simply not strong enough to support the needs of the beautiful tree above it, so they struggle.
I thought about the many times people come to me in their adult years looking for help with their finances. Many times these individuals are in a situation where their financial needs and wants have grown faster than their ability to support them. Like a hand planted tree, they find themselves struggling in life’s forest against the elements and challenges without a strong root system to provide the needed nourishment.
The tiniest pine sapling can survive the fiercest weather because of the hidden but strong root system that lies below, while strong and beautiful hand planted trees regularly struggle and die because they lack good roots.
When it comes to building a strong financial life, nothing beats starting early to build a support system before the needs of life become overwhelming. Strengthen your financial roots first, then allow the rest of your life to grow as you can afford it. In so doing you will find, like the natural trees of the forest, the ability to enjoy the beautiful sunshine while being prepared to weather the many harsh storms life is sure to throw at you.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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