My Dad grew up in an orphanage from age five. It wasn’t a pleasant life by today’s standards but with the depression going on he recognized the blessing of having a warm bed and three meals a day. At the age of 13 he “graduated” from the orphanage and was sent out to make his own way in the world. His life on the streets of Detroit as a teen was totally foreign to me. My teen years were a carefree, wonderful time. His were all about survival.
Because of his life, my dad always had a soft spot in his heart for people in need, even those that many avoid because of their harsh look. He understood them in a way we kids of the roaring 70’s never could. One day my dad came home from work with a homeless man named Woody. This was not an uncommon occurrence in our home. To help Woody out he offered him food, a place to stay for a while, and odd jobs around the house.
One project he hired Woody to do was putting some new molding on our kitchen door. He worked on it for many hours, then proudly called us all in to see the finished project. Immediately, even the youngest of us noticed he had mounted the molding backwards, and I started to blurt out the obvious when my Dad shushed me and said, “It’s beautiful Woody.”
Later that day our dad taught us that Woody’s life was much different than ours, and that he probably didn’t know how to mount a door molding because he never had a home. He decided not to fix the door but left the molding backwards as a daily reminder that others see the world differently than we do because their experience is different. When my parents moved eight years later the molding was still backwards.
The situation in which a person grew up has a great effect on how they invest. Depression era investors often shunned risk, focusing on bonds, CD’s and large cap value companies. Their baby boomer children had easier lives, so they became more ambitious investors, using investing as a tool to become rich as soon as possible.
Millennials have grown up in a digital world. They care more about their online social life than material goods. Thus, they love to invest in new technology and in companies they believe will change the world, not just make money off it. As a result, in increasing numbers they are asking for investments that are environmentally, socially, and politically responsible, known as ESG investing. They want to own businesses that are also good citizens.
For older generations who focused on earnings this may seem like millennials are putting the molding on backwards. But as this growing group is gaining more economic power, it may be wise and profitable to pay more attention to how these new investors see the world. Their parents invested to make money. Millennials invest to make a difference. It’s possible to do both.
In 2013, after a rapid climb to glory, the world of cryptocurrency was rocked by its first major downturn. The internet lit up with chatter from largely millennial investors trying to decide what to do with their newfound, but rapidly shrinking wealth. On December 18th, in the midst of the social media back-and-forth, a poster by the name of GameKyuubi, wrote regarding his crypto positions, "I AM HODLING." He explained that since he was not as smart as professional investors, the only logical course was to not sell into a market that he did not understand. His rambling post was filled with many other spelling errors but the one that immediately became an internet sensation was the misspelled word, HODL.
The expression is common today in online chats and has even made its way into a couple of movies. Posters use it to encourage others to hold a stock “forever” in order to not be out traded by the smarter or more connected elites of Wall Street. When the Gamestop frenzy hit the markets earlier this year, online chat rooms were filled with investors encouraging each other to HODL, “all the way to the moon” if necessary.
It sounds similar to the traditional “Buy and Hold” philosophy but HODL goes further. It has become almost a modern-day battle cry among Wall Streets’ newer investors in their battle against the establishment, as was the case with Gamestop. The strategy is in some ways considered honorable, and a sign of loyalty to fellow investors that one is willing to buy a position and hold it regardless of what happens.
I admire the commitment of millennial investors, and their loyalty to one another. I also respect that sometimes it can be very profitable to buy and hold through the tough times. But I also feel compelled to share a little market history lest they get so carried away in the HODL mentality, that they put their financial future at risk.
The most commonly used measure of market activity is the Dow Jones industrial average. Created nearly 125 years ago, it was designed to contain the largest and most recognized businesses that represented the direction of the country’s stock market. The initial members would have been the strongest of the strong.
Today, none of the original Dow members remain in the index. The final one to drop off was General Electric in 2018. The message is simple. Capitalism provides the opportunity for great ideas to turn into great companies. But it also allows for those businesses to be replaced when even greater ideas come along.
Buy and hold (or HODL) strategies have value, but they also carry risk. This is clear if you look at the great companies of today and realize how young most of them are. Likewise, many of today’s most recognized brands will not exist in future generations. Investors who HODL just for the sake of HODLING may one day find themselves left out when the next great idea comes along.
When asked what the greatest risk to investors is, I usually answer, “Themselves.” Whether it be greed, fear or impatience, humans are very creative at finding ways of sabotaging a good financial plan. Let me begin this discussion in my youth when I decided to join a high school debate team.
My first assignment was to debate in favor of a position that I was personally opposed to. I initially protested but my new coach insisted it would be a great learning opportunity. After a week of diligent preparation, not only was I able to skillfully debate the position, but I gained a greater appreciation for the other side. I also gained respect for the people who I initially disagreed with, recognizing that they had good reasoning on their side as well. It was a basic lesson in life, but one that is sorely lacking in today’s society.
We were once a nation that thrived on the free and open exchange of thought, but in recent years the polarization has become so severe that it’s almost impossible to have a cordial conversation on difficult topics. Viewpoints have become so narrow that decisions are often based on what groups we identify with rather than what makes the most sense. It’s like our lives have become a continual contest of “us” versus “them,” with a dozen different iterations of who us and them are.
I mention this here because this unhealthy attitude has found its way into investing. When people ask me about the economy or current investment options, the questions are often tangled up in the same “us and them” conversation. From the outset their language makes clear that they view the issues through the lens of whatever group they belong to. As a single example, I get many questions about the backlog of cargo ships in California, and the accompanying effect on our supply chains. These questions are usually couched in polarized language which blames politicians, unions, and others for the problem. There seems to be more focus on assigning blame, than on looking for solutions, or in an investors’ case, finding opportunity.
I have done some research on the topic and found, to the surprise of many, that during the recently completed fiscal year the Port of Los Angeles recorded a 112-year record for the amount of cargo unloaded. That sounds much more like an overload than a slowdown and is amazing considering the pandemic. For investors, one might say that is actually good news. The supply problem investors see as a huge political mess (because that’s what they are looking for) is largely because America is on a buying spree. Investors, caught up in polarizing blame games may be missing an opportunity to invest in the companies Americans are so anxiously trying to buy from.
And this is just one example of how polarizing thought is hampering investors. My debate teacher was right. You can learn a lot more (and potentially profit more) if you take the time to understand all sides.
One form of financial fraud that is particularly painful to discuss is advisor fraud. What if the financial advisor you have trusted, turns out to be the one stealing from you?
I regularly track the SARS (Suspicious Activity Report) issued by the banking industry through the Consumer Protection Bureau. A recent report found that 25% of financial crimes against seniors were committed by a family member and a disturbing 7% by a financial advisor. It also revealed that when those two groups are involved, the financial loss is usually greater.
We are all cautious of unsolicited emails, phone calls from foreign countries, and strangers in the parking lot, but when friends or family are involved, we naturally put our guard down. In my career I have seen many cases of financial crimes committed by family, often children against aging parents, as well as by neighbors, friends, and even fellow church members. These are sad events, and the best defense is to be aware that where money is involved, you should always be careful. We should also watch out for each other because when friends and family are the perpetrators, victims are often reluctant to take action even after they discover the crime.
As for financial advisors, sadly, there are bad actors in every profession. There is no guaranteed integrity test and sometimes wolves lurk under the most innocent looking sheep’s clothing. Despite our best efforts, some slip past the protections that are put in place. So, what do you do? In my meetings with potential clients, I don’t just discuss the money we plan to make for them. That’s the fun part. But I also talk about the various things that could go wrong. As part of that discussion, I ask them to consider a very pointed, and necessary question. “If someone in our office, or at our brokerage firm should find a way to steal your money, what protections do we have in place to protect you?”
This usually surprises them but since we cannot know for sure the integrity of all the people around us, I find this question to be of utmost importance. I encourage anyone who deals with others on a financial level to ask a similar question. I encourage anyone with a financial advisor to ask them this question. You may not like the answer some of them give you.
In addition to following stringent best practices for client account security, legitimate investment professionals like ourselves have various insurance policies in place to protect clients from fraud. (Not to be mistaken for normal market losses). Insist on knowing what those policies are, and their limitations. Demand to know, if your money is stolen, will it be replaced and under what terms.*
I am a firm believer in receiving professional financial advice. I also have seen enough trouble to know that you should never trust your money to anyone until you know what steps they have taken to protect you, even potentially from them. Good advisors will welcome these questions.
* For answers on how we protect our clients from fraud please contact our office.
Flight instructors often remind new students that take-offs are optional, but landings are mandatory. This axiom reminds pilots to think carefully before they push that throttle forward to head down the runway.
Once in the air, the most difficult part of flight is usually the landing. At any other time, the plane can be very forgiving of mistakes or inattention. The miles of distance between you and the ground, and other airplanes, allow for a wide margin of error.
On arrival at the destination airport, as you get increasingly closer to the ground, things change quickly and safety margins shrink. During this phase of flight pilots must pay careful attention and fly with precision. This is when pilots have been taught to use very small adjustments to keep the plane on course. The rule is, make small adjustments, give the plane time to respond, then adjust again as needed. Following this rule is a challenge as there is a natural tendency to overreact to the rapidly changing world of a landing airplane.
When I was struggling to learn how to land, an instructor wrote on a sticky note, “Look Up,” and stuck it to my windshield. He wanted me to quit looking at the runway below me and instead focus on the horizon. This was counterintuitive to me since the numbers on that runway were what I was trying to hit. And hit them I did, sometimes with great force. My instructor assured me that if I would focus on the horizon, my small control corrections would become smooth and accurate, and the airplane would land gently on those numbers all by itself. When I was finally able to trust his advice, I found it to be true. For many years I left that sticky note on my windshield.
A landing airplane is going very fast. Trying to control it by chasing the rapidly moving ground below you leads to excessive movements with constant over corrections. Looking to the horizon gives you a better perspective resulting in more accurate control as a pilot.
Investing follows a similar principle. Some people watch the news very closely and react financially to every up and down in the rapidly changing world they see. This results in knee-jerk investing moves that put them in a constant state of overcorrecting. Like a pilot watching the runway directly in front of them, the results can be disastrous. If they could only learn to look up, and focus their attention on the distant horizon, their movements would become smoother, and their course more steady. Like an airplane, their investment portfolio would become more stable and the financial destination more solid.
Investment portfolios do best when we make small corrections, watch to see how things perform, then correct again as needed. This is especially true close to retirement. All this is possible only when we keep our eyes on the horizon. The next time you find yourself stressed over the current days’ political or economic crisis, get out your sticky pad and write yourself a note. Look up!
I’ve never liked the way many analysts refer to market headwinds as if they are always negatives. Let me explain. I had the pleasure this summer of going on a sailing trip with two of my boys. We left Newport Harbor and sailed 27 miles to Catalina Island, where we spent a couple days exploring. The trip across the channel took 6 hours, but we weren’t in a hurry. Sailing is all about enjoying the journey. Along the way we saw some wonderful sights, perhaps the highlight was a pod of Orcas that joined us for part of our voyage.
At one point while circling the island we passed an area where the wind increased to 20 mph, which is a stiff breeze for a sailboat. As the boat heeled to starboard and our speed increased, we all got excited. It was an exhilarating ride and a lot of fun. For my son Jayden it was his first time sailing and he was thrilled to see we were actually gaining speed while sailing largely into the wind. I mentioned that on the way home the next day we would likely have direct 20 mph tailwinds, but that we could expect to be travelling much slower due to a phenomenon known as apparent wind. As a sailboat tacks into the wind, the boat’s own speed increases the speed of the wind hitting the sails, creating more lift and pushing it forward faster. When a boat sails with the wind, the speed of the boat causes less apparent wind to fill the sails and it slows down. On our way back to Newport we did indeed have those same strong winds, yet the experience was totally different. As expected, the ride was calm and our speed much slower.
I was speaking with a real estate appraiser some months ago and, referring to the stock market, he said in a negative tone, “With markets at all-time highs there is nothing good to invest in.” It was not a surprising comment given investing was not his profession, but it did give me cause to ponder. I thought about our sailing trip and how we experienced being able to travel faster against the wind than with it. Sometimes the very opposition that we think will slow us down, actually gives a skilled captain the opportunity to speed things up.
Yes, the market is near all-time highs, higher interest rates are threatening, and inflation continues to rear its ugly head. These may seem like headwinds to some investors. Remember though, as with sailing, it isn’t the direction of the wind but the set of the sails that determines your course, and often heading more into the wind can yield even better results. When someone tells you there is nothing good to invest in, maybe they just don’t know how to set the sail for the current economic winds.
My home office has a program to help protect our company from fraud. They regularly send phony “scam” emails to all advisors, trying to trick them into falling for them. If we do, we joke about having to wear the “cone of shame” for our error. The effort has successfully trained us to question everything that hits our inbox.
A current real scam in my email took a twist that is uniquely dangerous. I received very realistic notice from “Amazon” telling me that the expensive phone I purchased had been delivered to my home in Florida. I did not order a phone, nor do I have a Florida home. It gave a phone number to call if I had any questions. Since it didn’t ask me to click on anything, my initial reaction was to call the number. I thought better of it and went to Amazon directly from my app and confirmed no such order had been placed. Had I called that number I am sure I would have encountered a master scam artist that would outmatch any timeshare salesman.
In another personal incident just this week, I was in a store parking lot when a man pulled up in a very expensive vehicle. He opened the passenger window where a young boy was sitting. The man wore what appeared to be expensive gold jewelry. He said he was a foreigner and had lost his wallet and passport and needed $300 to get a new one. He pulled a big ring off his finger and offered it to me for the cash so he could get home. Before he went on, I responded with a firm “no” and turned away, which led to the man yelling at me for not being willing to help.
It’s difficult to turn down requests from others in need. Criminals take advantage of this so if you want to be charitable, it’s best to do so using legitimate organizations and refer people in need to those as well. On the other hand, if his fake gold ring brings out the greed in you, maybe losing $300 will be a good lesson.
Some of the red flags that should alert to potential scammers are: First, if money is involved. Second, when the calls, emails or requests are unsolicited. Third, if someone or something is using emotions to rush you into a decision.
In all these situations, if you are in doubt, hang up, hit delete or walk away, and then go to the real source to find the truth. Find the website, email address or phone number using your own resources, not the ones you are given.
There is currently a growing wave of scams, and we must be always on our guard. Criminals are clever and they know what we watch for, so they keep changing the approach. If we follow a few simple steps, we can usually avoid being taken. If ever in doubt, our office offers a free fraud service, and we will also alert others to the risk.
In one of my very first economic classes the professor said, “U.S. government bonds are considered risk-free investments because of the governments’ unlimited taxing ability.” Even at my young age I considered that an arrogant statement, and one that if truly believed could lead to all kinds of political mischief.
Congress is currently considering the biggest tax increase since Ronald Reagan. The idea of raising taxes on rich individuals and corporations is gaining momentum. After all, who isn’t a big fan of wonderful government programs that someone else has to pay for? Adding fuel to the fire are leaked IRS documents revealing how very little some super wealthy individuals pay in federal taxes, with one of the richest men on earth actually claiming the child tax credit in a recent year. As this tax debate heats up, let me point out a few things that individuals and investors should keep in mind as a government “by the people and for the people” exercises its “unlimited taxing ability.”
Though Mitt Romney suffered politically for saying so, corporations really are just people. Every dime of corporate profit, or loss, filters down into the pockets of you, me or someone else. If you raise taxes on Exxon, Costco or Apple computer, those taxes reduce earnings to the millions of people who own their stock and increase costs for the hundreds of millions who buy their products. We must not pretend otherwise. The real question is, “when prices go up, who really gets hurt the most?”
“Tax the rich” is a great political slogan but when that translates into higher tax rates for average individuals, politicians are either missing the point, or just lying about their intentions. Billionaires pay relatively little in federal taxes because they have relatively little “taxable” income. Most of their wealth comes from assets like stocks and real estate that are not taxed unless they are sold. When a billionaire generously asks to be taxed more, they are most likely talking about their miniscule “official” salary, not their vast holdings. Apart from that it is estimated that billionaires only hold about 3.5% of Americas wealth. It just isn’t enough money to solve Washington’s spending problems. All politicians know this.
When Willie Sutton was asked why he robbed banks his reply was, “Because that’s where the money is.” The vast amount of our nations’ wealth is held by the middle class so a government that needs more money has no choice but to go after it where it is. My reason for bringing this up is because taxes can hurt people, and if you hurt the middle class, you hurt the economy.
As individuals trying to achieve the American dream, and as average investors hoping to get a reasonable return on our hard-earned dollars, and who depend on those retirement accounts growing, we should be very skeptical of higher taxes that are sold as “making the rich pay their fair share” when ultimately most of the cost will necessarily be borne by the rest of us.
The new autopilot in my airplane is an amazing piece of technology. It can navigate a detailed flight plan with precision no human could replicate. Even when turned off, it quietly monitors the flight and intercedes if the airplane enters an unsafe attitude. If a pilot completely took their hands off the controls, as the plane varied from its safe course the autopilot would wake up and take over.
While being trained on the features of this autopilot my instructor told me my biggest risk would be if I trusted it too much. He said, “Never take this system into any flight conditions you are not qualified to handle without it.” He reminded me an autopilot is only as good as the data it receives, and the responses that are programmed into it. It cannot think creatively. If the data is flawed, or the conditions are outside pre-set parameters, it will give a brief aural warning and then disengage. In aviation we call this the “it’s your plane” moment. This moment almost always happens at the most inconvenient time.
The autopilot does a wonderful job in calm weather. It handles the routine task of flying, allowing the pilot to focus on trip planning, communicating with ATC and resting. It’s also very useful in low visibility conditions because it doesn’t get disoriented. But if the data flowing to it is faulty, or the flight conditions are outside its programmed parameters, for safety reasons it hands the plane back to the pilot. The most common reason would be very rough air.
Investing firms offer their own autopilots. Like the ones in planes, these computers handle many of the routine tasks of investing. They do research, make decisions, and execute trades much faster than a human could. This frees up investor time and resources. But as in an airplane, if you let a computer manage your investing in an environment you are not qualified to be in, you may be setting yourself up for trouble. Computers are great at math and at following their programming, but they cannot think creatively. No computer can see a tragedy in the news and anticipate how it might affect your investments. They tend to react to data rather than anticipate it. They don’t see fires burning, wars being threatened and diseases spreading. They only see the numerical results of those events and react based on their programming. This means that like an autopilot, their best performance is most likely to happen when events transpire in a predictable fashion.
You, or your advisor, may find advantage in utilizing computerized investing systems for routine tasks, but someone who is current in investing knowledge and skills needs to be paying careful attention. If you allow that investing autopilot to take you into conditions you couldn’t handle without it, one day it may suddenly hand the controls over to you at the most inconvenient time. As a pilot who has had that happen in a plane on several occasions, you’d better be ready.
My brother-in-law John was a well-respected car salesman in our community. He was unique in his field as those who went to him knew they would be treated fairly.
I went to him one day to buy a vehicle for our growing family. He asked what I was looking for and I laughed as I replied, “A great deal, of course.” In his straightforward way he responded, “There is no such thing as a great deal.” I was startled by his answer, so he went on to teach me a lesson that truly changed my life.
John said a “great deal,” which everyone wants, implies that a vehicle will be purchased for less than it’s worth. It therefore includes taking advantage of the seller. The motivation for such tends to be more ego than financial since everyone likes to brag about their negotiating skills. “Let me explain the car industry,” he said, “and the principle applies to real estate and just about everything else.”
He said there are widely available resources for valuing every single vehicle based on its conditions and features. Sellers know what price the market will bear, and they have little reason to sell a vehicle for less. If it appears they are doing so, it is usually because there is something about it they aren’t telling the buyer. John told me there are only two deals in the car business, fair deals and bad deals. The greatest risk to a car buyer is being so focused on finding a great deal that they wind up being sucked into a bad deal. He encouraged me to buy a high-quality vehicle and be willing to pay a fair price for it.
Investors could learn a lot from my brother-in-law. They are constantly looking for that great deal. They want higher dividends or growth rates than the markets can bear. They continually seek that golden ticket to an easy future. Inevitably, it is that attitude that often sucks them into the worst deals of all.
As I review my investment holdings over my life, it is clear that my best ones came when I followed John’s advice. Whether it be stocks or real estate, my best results came when I was willing to pay a fair price for a high-quality investment. Other people are smart too, especially in the investing world, and they don’t generally sell things for less than they are currently worth. Of course, there are exceptions, but it has been my experience that people who are obsessed with finding “great deals,” are often the ones taken advantage of by sellers. You rarely overpay for a great investment, but people overpay all the time for bad ones.
My brother-in-law John passed away many years ago, but his sound advice has been a standard for financial decisions in my life. The “best deal” usually comes from buying a quality asset for which you are willing to pay a fair price. Following that advice in my financial life has made all the difference. Thank you, John
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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