​When I was a kid, life hurt. We didn’t have all the safety equipment, rules and regulations to keep us from skinning our knees. When we got hurt doing something dumb our parents would usually say, “Well I hope you learned your lesson.” I rode a bike once with faulty brakes, and I knew it. I still carry scars from the resulting crash, but after that I took care of my bike. Pain is an unwelcome, but effective teacher.
 
During the 1980’s society began to change. A new attitude emerged that children needed to be protected from pain. Youth sporting events no longer had winners, to avoid the pain of losing. Schools stopped issuing “F”s so students wouldn’t feel the pain of failing. I sometimes wonder if younger generations are being denied the opportunity to learn valuable lessons from their own mistakes. Societies’ obsession with preventing hurt means the lessons that pain is meant to teach often go unlearned.
 
Perhaps nowhere is pain a better teacher than in financial matters. I agree with many of the greatest investors of my life that their best lessons were learned from their failures. When people make financial mistakes, the pain is real, and the lessons can be priceless. Yet policymakers seem a bit obsessed lately with trying to remove pain from our financial lives.
 
As an example, the economy currently suffers from a labor shortage, partly due to people not returning to available jobs because their unemployment benefits are so generous. Being unemployed should hurt. The purpose of the pain being to encourage every possible action to find a job.
 
In 2007 a housing market collapse was magnified as people who were given easy access to credit bought homes they could not afford. Borrowing money should hurt. The pain should be enough to encourage careful thought before burdening yourself with debt. As we deal with a runaway real estate market today, much of the situation is caused by extremely low interest rates. People again are often buying more house than they should, because borrowing doesn’t hurt enough.
 
The stock market each day is tossed about by the day trading habits of newer investors. Buying and selling stocks has become too easy, using new free trading platforms (which aren’t really free). Trading should hurt. In my youth, high trading costs made you think carefully before acting, and encouraged you to buy for the long term. Now regulators are looking at finding ways to protect the younger traders from the financial losses many see coming. Why? I ask. If they are to fail, let them. It would be one the best investing lessons they could learn.
 
Everything in life involves risk and sometimes, feeling the pain of taking a bad risk is the best way to avoid more disastrous mistakes in the future. Pain teaches us what not to do. Let’s not regulate so much that younger generations are denied the freedom to learn the painful lessons that led to the success of so many of their parents.

​As a teenager I belonged to a Las Vegas magic club where professional local performers donated their time to teach us the tricks of the trade. One of the guiding principles of magic I learned was that of misdirection. This is the skill used by magicians to make the audience pay attention to one thing, while the real trick is happening somewhere else. This is exemplified by the old phrase “Watch me pull a rabbit out of my hat.” What the magician is really saying is “Don’t pay attention to what my other hand is doing.” Because of my training I have the habit of looking for that rabbit everywhere but where the magician wants me to look.
 
Last week I wrote about the new Meme stocks that are capturing much of the attention on Wall Street. Every day the morning market headlines are filled with stories about these companies. As a result of all this press, a lot of money has been flowing to these often-over-priced companies, and a significant amount more is spent trying to figure out who the next hot meme might be. Watching this behavior, my magician training has kicked in causing me to wonder if a little misdirection might be happening right before our eyes on Wall Street.
 
Investors should understand that there is a certain amount of money available to be invested and as it moves toward one company or sector, it moves away from others. As these hot topic meme stocks take center stage, much of the markets’ attention and money is focused on them. As this drives up their prices to sometimes unbelievable highs, it is also drawing money away from other areas. This is leaving long-time strong businesses with solid products and huge future potential with stagnating stock prices.
 
Now it is certainly possible that some of these meme companies will become profitable, but the math works against most of them at current prices and I suspect that in time those usually impatient dollars will start looking for another place to be. Like a magician focusing the audience in one direction while the real action is happening somewhere else, I feel like the market is telling everyone to “watch carefully as I pull a rabbit out of this hat” (a good analogy for a meme stock) when the real deal is happening somewhere else. In other words, some of the best companies are being overlooked, opening an opportunity for long term investors who are smart enough to not let their attention be mis-directed by a deceptive market.
 
I suggest taking a week to skip any news regarding high-priced meme stocks and look instead for those real bargains that are lurking behind the magicians’ curtain. I believe some of the current excitement is intentionally designed to direct our attention one way, while opening up wonderful opportunities elsewhere if we take the opportunity to look for that hidden rabbit. 

​Meme stocks are all the rage today. For those in the older generation, a meme is a picture used to signify a cultural thought or movement. Memes have always existed, but they have gained popularity with social media that allows a single image to quickly carry a message throughout the world.
 
Meme stocks are companies whose price is based more on a social media phenomenon than on actual value. It seems odd to some of my generation why anyone would invest their money without considering underlying value, but we must remember that we were the ones that bought over 1.5 million pet rocks in 1975. Each generation has its irrational moments.
 
More related to the meme stock craze might be the chain letters that circulated long before the internet. A typical chain letter asked the receiver to send $5 to each of the ten names on a list, add their name to the top of the list while removing the last name, then send the letter out to 10 new people. If everyone did their part, the growing pyramid would return enormous amounts. Like any pyramid scheme, eventually it collapses as it runs out of people at the bottom to feed money to people at the top.
 
Current meme stocks are often companies with weak financials who are singled out by social media users who promote the stock in a viral online fashion. This leads to wild price swings both up and down almost without any regard as to what the company is actually worth.
 
The activity can actually benefit a company as with a current meme stock, AMC theaters,* who issued hundreds of millions of dollars in new shares to take advantage of the rising prices. Strangely, in the offering announcement they included the following: “We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business … we caution you against investing in our class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.” In my career I cannot remember a company issuing new shares, and then discouraging potential investors from buying them.
 
Stocks whose price is based on social promotion rather than real value might turn out like an old chain letter. Eventually you run out of new people to collect money from. Some of these companies may become profitable one day given the easier access to capital that the higher stock prices offer, but for most of them, getting to a level of profitability that has any resemblance to current high valuations is going to be difficult.
 
Hype can push a stock price up, but it takes results to keep it there. Cute memes aside, a company that is selling for hundreds of times more than it is worth is not something I would recommend to most investors. But then again, I always tore up those chain letters.

​News of the Bill and Melinda Gates divorce, and the enormous cost of such an action, are a reminder that whether by death or divorce, all marriages will legally end and the preparation for such should be part of every financial plan.
 
I remember in my youth first hearing the phrase, “Prenuptial Agreement” or Prenup. I always viewed a marriage as an “all-in” proposition and the idea of holding something back, usually money, I found offensive. I was not alone in my thinking and in the early days, a prenup seemed a thing for Hollywood stars who sometimes viewed marriage as a temporary arrangement. For normal people, marriage was ‘till death and any hesitation on being fully committed would be viewed negatively by the other party.
 
My years in this business have taught me to view the once despised prenup as a necessary tool to be implemented in situations where it is warranted. And by that I mean, in a later life marriage. Traditionally people marry when they are young and broke, and everything they have has been built together. But as lifespans have increased, and wealth with it, it is very common to see second and third marriages among people who bring substantial assets with them.
 
When I am involved in the process, I still sometimes see a reluctance to plan the financial aspects of acquiring a new spouse, including trust agreements, expense sharing and even a prenup. The main issue is not about the two people involved because they are in love and usually want to freely share everything, but it’s the heirs they leave behind who often see it much differently. A second marriage almost always means another set of heirs brought into the picture. When that marriage ends through death or divorce, the beneficiaries can find themselves in very difficult, and expensive legal battles. Thus, my advice on later life marriages regarding financial matters is fairly straightforward. Keep most of your assets separate. If you don’t do it for yourself, do it for your heirs who may be left fighting it out with other children they may not even know, and who they certainly didn’t choose.
 
I recently watched the passing of a very kind friend whose children were blindsided to learn that the inheritance their father was excited to leave them, had been lost to their fathers’ second spouse. It wasn’t his plan but out of kindness, he had allowed all his assets to be combined into their joint accounts. On his passing the court gave everything to the new spouse who then willed it to her own children.
 
There is nothing unloving or selfish about preserving for your children an inheritance. There is nothing wrong with adults in a second marriage keeping most of their assets separate so that a smooth and peaceful transition to their own individual heirs can happen. Whatever your desires, plan well so that your assets will go where you want them to go, and not where a court decides to send them.
 

​When I was 15, I went camping with the scouts in Utah’s High Uintah mountains. On arrival a few of us dropped our gear and ran immediately to the lake to fish. That evening we caught something on almost every cast and soon had our limit. Entering camp with tales of our incredible fishing prowess, our scoutmaster said, “Everyone is a master fisherman when the fish are biting.” The very next day on the same lake we caught nothing.
 
One type of investor that has caught my interest over the years is known as a “Day-Trader.” These individuals buy and sell stocks quickly in hopes of a daily profit, usually going back to 100% cash at the end of each day. It is a high-risk activity that evidence shows most eventually lose money at. The risk is increased because traders may overstate their own investment abilities when in reality, temporary market conditions may have more to do with their success.
 
Day-trading became popular in the late 1990’s when computers and the internet provided the technology to make it universally available. I remember stories of fortunes being made by day-traders who felt like they had unlocked the key to rapid wealth. What many traders conveniently overlooked was that from 1995 to 1999, both the Dow and Nasdaq indexes grew at double digit annual rates. It was a time of such robust economic growth that all but the unluckiest of investors were making money. In many cases the success of the day-traders was more a product of the markets than their own personal investing genius. You might say they just happened to have lines in the water when the fish were biting. Using leverage as they often did, magnified the results. When the crash of 2000 came along, the same leverage worked against them and the day traders seemed to go away for a time.
 
Then in about 2005-2006 a new form of day-trader arrived. The real estate market was booming and suddenly it appeared everyone had become a real estate expert and was “flipping” homes for quick profits. The stories of mostly young people becoming wealthy overnight abounded. Then without warning, on a fateful October day in 2007 it all came crashing down. Short-term real estate experts were left bankrupt as their homes were foreclosed on.
 
In about 2017 more marvelous stories of market conquests began to hit the internet from a new generation of successful day-traders. This time around even their proud parents would tell me how their genius child had quit their job and was making a substantial living by day trading. Failing to recognize they are once again a product of a strong upward market, I expect the day to come when the “fish stop biting,” as always happens, and the once great day-traders fade again into obscurity. I discourage day-trading but if you are one of them, at least be smarter than prior generations and tuck away some of those slippery profits while you still have them.

At a nice restaurant I saw the sign, “Patio is closed until further notice due to a labor shortage.” This was not the first time I had seen such a sign, so I reached out to a fast-food restaurant owner. He told me that though he has been busier than ever, he may have to close down because he can’t find employees. I asked why he doesn’t just raise wages to attract new people. His answer was that he is currently offering $20 an hour for entry level employees, and still can’t hire enough help.
 
All of this is quite remarkable given the high unemployment rate that still exists, recognizing the employment numbers are skewed because they only count people who are actively looking for work. One must wonder how “actively” they might be looking if unskilled jobs are paying $20 an hour and going unfilled. Confusing the matter more, this week the labor department announced that filings for unemployment unexpectedly went up. A major outlet ran the headline. “Economists baffled at rising unemployment in light of a recovering economy.” I am not an economist, but like many others, I am certainly not baffled by what is a major cause of the problem.
 
In March congress passed the American Rescue Plan. Among other things the legislation extended unemployment benefits as well as an additional $300 per week bonus to those who remain unemployed, though “actively” looking for work. Generally speaking, that means a person who earns $30,000 per year would get paid more to stay home. Human nature teaches that many will accept that offer resulting, not in a labor shortage, but a laborer shortage.
 
The repercussions of this shortage will extend into the pocketbook, and investment portfolio, of every American. My restaurant owner friend told me he raised prices 30% to cover the added costs. So much for the 4.2% inflation numbers that were just released. Sorry folks, but when the entity that releases the inflation rate also benefits by it being very low (talk to your grandparents about how Social Security payments work) then it’s very difficult to trust the number.
 
When companies struggle to hire good employees, the supply side of the economy gets squeezed. Labor shortages slow production, increase prices and reduce corporate profits. We have already been seeing this for a while. Just ask any contractor about the price and availability of many building supplies.
 
The economy, and the stock market that follows it, are poised for a strong recovery as the country reopens post-pandemic. There is significant pent-up demand for goods and services, travel and leisure, automobiles, restaurants and more. From my perspective the biggest risk to the recovery that investors should watch very closely, is coming out of Washington. Politicians with good intentions, or not so good intentions, are trying so hard to “rescue” America, they may wind up sinking her again. At this point in the cycle the American economy is perfectly capable of rescuing itself.

Low interest rates have fueled our economy and stock markets for quite some time, and the Federal Reserve (Fed) says we will have them for the foreseeable future. Investors are excited about that. After all, who doesn’t love low interest rates? Few people get through life without taking out loans. Houses, automobiles, education, starting a business and other big-ticket items can be difficult to pay for without borrowing.

Companies also love cheap credit. Businesses run daily operations, pay for inventory and plan future growth on borrowed money. Low rates mean they can do more of it. And let’s not forget the federal government with its voracious financial appetite. Even the slightest movement in interest rates can affect the federal budget by tens of billions of dollars. Certainly, politicians love low rates. Is it any wonder that in this environment the federal government spent $3.1 Trillion more in 2020 than it took in, and is on track to dwarf that number in 2021?

Though an abundance of cheap money can seem like a great thing, unusually low interest rates are not all good news. Retired individuals or other savers who are looking to reduce risk in their portfolio have been hurt in recent years with low rates that don’t even keep up with inflation. Large institutions that for legal or practical purposes keep significant funds in interest bearing accounts have also been affected. When I was a younger advisor there were many safe, interest-bearing options that paid good returns but those have largely disappeared.

Low rates discourage saving, weakening many business and family financial positions while also reducing funds available for future needs. Higher interest rates on the other hand encourage saving and discourage excessive borrowing. It’s good to have a healthy balance but it seems we have forgotten about the savers while becoming a nation of spenders and borrowers.

Apart from tempting people (and governments) to borrow more than they should, low interest rates have an inflationary effect by creating higher demand. Take a look at the current housing market with its sky-high prices, driven largely by extremely low mortgage rates.

Though I love low interest rates as much as anyone, it is my belief that they need to go up a bit in order for our economy and our people to be more financially healthy. When they do so, economic growth will temporarily slow down, but at the same time it will help provide a firmer foundation on which to build our personal and national future.

​Investors can ride the wave while rates are extremely low, but when they start moving up, try to see it as a good thing from a long-term perspective. I think it would benefit all of us to borrow a little less and get rewarded for saving a little more. 

In 1990 Michael Jordan set a personal single game record by scoring 69 points against the Cavaliers. After the game, rookie Stacey King, who had scored a single point said, “I will always remember this as the game when Michael Jordan and I combined for 70 points.” That quote came to mind when an investor asked me, “Do you think the stock market has gone too high?”
 
Over the past year the stock market averages regularly hit new records though much of the gains could be attributed to a handful of very large high-tech companies. Those high-flying stock prices often overshadowed the dismal numbers from many other public companies. As their prices went up, so likewise did their price to earnings ratio, or PE.
 
PE is a traditional method for valuing stocks, and historical averages have usually been in the 15 to 20 times earnings range. So, if a company earns a dollar a year for example, you might expect its stock to be selling between $15 and $20. Purely for comparisons sake I looked up the PE ratio for TESLA on the day of this writing and it stood at an astronomical 1162 to 1. Analysts may debate whether TESLA is worth 1162 times its earnings, but one thing is clear. Much like Michael Jordan’s big game, when you average TESLA and other similar high priced tech stocks with the rest of the market, the overall PE average can become quite skewed. This can distort the impression of how the market is doing.
 
So back to whether the market, and the associated PE ratios, have gone too high. I would suggest that the best way to view the current market is on a case-by-case basis. Though King and Jordan averaged 35 points between them, neither one actually scored anywhere near that number. I am seeing the same disconnect in current stock prices. The averages don’t tell the story.
 
In our company investment meeting today my son Jayden, a new intern at our firm, asked how he could begin learning how to select good investment opportunities. I told him an easy place to start is to ask himself what products or services people stopped using last year because of Covid, that they would return to using in the coming year as things open up again. In his response he named many economic sectors and businesses that one might say only scored a point or two last year but in the coming years could do much better.
 
It is true that market averages and PE ratios as an average are very high. But it is also true that the market had a few Michael Jordans’ last year who greatly distorted the averages and hid the fact that many businesses are still yet to recover. Investors might want to pay more attention to finding those companies, the “Stacey Kings” one might say, who still have their best games ahead of them.
 

Hedge funds have been in the news quite a bit lately with the now famous Gamestop short squeeze as well as the over-leveraged collapse of the Achegos fund. Both disasters have led investors to once again question whether such vulturous trading strategies should even be permitted. I felt much the same way until I travelled to Africa two years ago.
 
In Zimbabwe we had the opportunity to visit a vulture preserve. Given how most of us think about vultures, I wondered why anyone would want to preserve them. These ugly creatures circle, then devour other dying and dead animals. They are so disgusting that we refer to predatory humans as vultures. However, we learned during our visit of the critical role vultures play in the African ecosystem. Essentially, with their huge appetites they are natures’ cleanup crew, clearing the land of decaying animals and more importantly, disease. Dead animals carry many terrible diseases including anthrax, rabies and cholera. The acids in a vulture’s stomach make them immune to these diseases making them perfectly suited to their often-unappreciated role in nature.
 
Let’s return now to Wall Street’s version of the vulture, the hedge fund. Last week I wrote about how the markets are wisely designed to move capital to where it can be used most efficiently. It’s a wonderful system and has led to the strongest economy on earth because resources are constantly being moved to companies that produce the best results, and away from those who do not. But the system doesn’t always function properly. Sometimes inefficiencies, or even fraud creeps in causing prices in some stocks or sectors to be much higher or lower than they should be. Enter the hedge fund who may take a short position if a price is too high or buy on leverage if it is too low. In both cases the effect is to drive the price to a more efficient, or appropriate level. There are many, including myself, who have complained plenty about the practice of short selling, but it actually helps to keep markets healthy and properly priced.
 
Admittedly vultures act in their own self-interest as their only focus is satisfying their voracious appetites just as a hedge funds’ focus is on its own profits. But in the process, both play an important role. They provide balance to a system where an imbalance has occurred. Essentially a hedge fund helps clean up Wall Street where it has gotten out of balance.
 
Of course, being a vulture is not always a safe career. Hedge funds may take high risks to bet against the current trend and sometimes, as with the two cases mentioned above, they can pay a heavy price if the market fights back. I don’t recommend hedge funds for most investors given the risk level, but they do have their place in helping to maintain the efficiency of the markets which is so critical for the whole thing to keep working for the rest of us.

​A popular video game is a story-based activity where players build an imaginary life on their own island. One aspect of the game allows players to buy turnips in what’s called a “stalk market” which can then be sold throughout the week at varying and random prices. The selling prices will either result in gains or losses for the players depending on when they sell. It’s a popular feature, with online chat rooms dedicated to finding and sharing the best times to sell the turnips.
 
The real stock market has little to do with the game’s version and thus the mostly younger players are not being taught correctly about investing. Their game more closely resembles a casino, or a game of chance. If people are to become successful investors using the real stock market, they need to understand why it was created, and how it works. Though many investors use the stock market like a casino, to gamble on random events, this is not its true purpose nor its value to society.
 
The stock markets were created to provide a forum for the allocation of capital (money) to those companies who will use it most efficiently. Imagine a baseball park with two food vendors. If one company provides better food with amazing service and at a reasonable price, it will draw in customers and be more profitable. This business will then attract more investing dollars that can be used for expansion. The weaker business will need to improve if they are to stay in business. In this simple example of the free flow of capital, everyone benefits. The fans get better and less expensive food. The valuable employees can command better wages. And the investors are rewarded with growing profits.
 
There are always some areas of the stock market that do not operate efficiently. Government regulatory intervention, manipulation by strong players and even the more recent trend of social media groups banding together to move stocks without regard for specific company value can push capital around in a less efficient manner. These behaviors create false and dangerous areas of the markets than cannot be sustained, but often tempt individuals to invest in a high-risk manner. That type of “game of chance” investing is better suited to a weekend in Vegas or, better yet, a video game that uses pretend money.
 
If your goal is to invest your savings in the hopes of building long term wealth, I encourage you to remember why investment markets exist and use them accordingly. Look for businesses that you believe have a likelihood of being able to use your investment dollars efficiently by building an even bigger and better company. Your future, and our nations’ economic future, depend on a free flow of capital to where it can be most efficiently used. As small investors we can each be a part of, and look for benefit from, that wonderful process.