As we move further into 2021 and see the policies of the new administration unfold, it will be good for investors to keep a close eye on the intended, and perhaps more importantly, the unintended consequences of the various actions.
One of the Biden administration’s stated policy goals is to revoke the Trump tax cuts and raise the corporate tax rate. The almost unlimited ability to tax is one of the greatest powers of government and is regularly used to alter consumer behavior. An example are the tax credits for buying electric cars, which increase demand for those vehicles. Government can also reduce demand for products by raising taxes on them. In Europe very high gasoline taxes reduces driving as well as demand for large vehicles. Cigarette taxes are used to reduce their consumption. Ronald Reagan summed this up when he taught that if you tax something you get less of it and if you reduce taxes on something you will have more of it. By using this simple principle, a new administration with different policy goals can get people and businesses to redirect their financial resources by altering the tax code. Investors who pay attention to these changes might find clues as to where money flow might increase. They might ask themselves, what will the new tax code lead to “more of?”
Consider the following story: A man named Jeremy drove an ice cream truck as his family business. He parked it near the community playground on warm days where there were lots of children. One day a lady was at the park handing out dollar bills to all the kids, who immediately ran to buy ice cream. This resulted in a lot of happy people. The children were happy with their free ice cream. Jeremy was happy with his dramatic increase in business. And the lady was happy because both Jeremy and the kids loved her for “stimulating” the playground’s ice cream economy.
But there was a problem with the scenario that went unnoticed. While Jeremy was not paying attention, the lady was actually taking some dollars out of his cash drawer and giving them to the children. The increase in his sales was from his own money coming back to him. In this story think of the lady as the federal government taking tax dollars from Jeremy and handing them out to the kids so they could buy ice cream. Though this action benefits the kids, and even the lady who became the most popular person on the playground, it doesn’t help Jeremy’s profits at all. But it does help someone. Who would that be? A wise investor would look to the company that was supplying the ice cream to Jeremy’s truck.
As the year proceeds, I will be watching for changes to tax policy that will have the effect of redirecting money flow and see if that opens up investment opportunities that we can get in front of.
It has been said that boats are safe in the harbor, but boats weren’t made for the harbor. I love sailing and I recently read a book by Jessica Watson, the 16-year-old Australian who sailed her 34-foot yacht nonstop and single-handedly around the world. Her story is one of amazing preparation and courage. Though I sail a larger 41-foot boat I prefer to sail safely within sight of land and in good weather. Jessica fought 40-foot seas and gale force winds in the dangerous southern oceans, often in the dark of night. On several occasions her little boat was knocked down and at one point, was completely upside down. When asked how she faced such frightening situations she responded with “I learned at sea that there are very, very few situations that can’t be turned around and made more positive and less threatening by just looking at things in a different way… there was no point in wasting a single minute of my time feeling miserable.”
I have heard many complaints about 2020 but as I look at my own life and those around me, much good was accomplished during that year. For many investors, the year brought amazing opportunities and much growth. As we head into 2021 half of America is happy and half is discouraged over the election. And yet all of America has much to be thankful for. We have survived yet another year and come out better than we started. I believe 2021 will be the same. If we can learn to look at those crashing waves and fierce winds of change in a different way, we may find they aren’t so bad after all. Rather than viewing our regular election cycles as moments of winning and losing, let’s try instead to see them as opportunities and not spend “one minute feeling miserable” about it.
Jessica Watson experienced many dangerous storms, but she also tells of beautiful seas and unimaginable sunsets that few have experienced. She spent 210 days alone at sea, the majority of which were in lovely weather. Her story reminded me that there is danger in all areas of life, but those who are guided by fear are never able to enjoy the beautiful opportunities. Half of America complains when the political pendulum swings, forgetting that unchanging political environments are the things oppressive dictatorships are made of. Investors also complain about change, forgetting that stable and unchanging investments (like bank CD’s) are what historically low rates of return are made of. I much prefer the opportunities the changing seas of investing offer. It just requires us to look at things a little differently.
If you let the political winds govern your happiness or your optimism for the future, then you will miss out on many beautiful sunsets. You will overlook the amazing opportunities that lie in the political plans of the incoming administration. Investors should take a lesson from a 16-year-old sailor and prepare well, then invest with courage. Do not waste a minute of this opportunity.
My Dad had a traditional activity at family reunions he called a “scrambles.” He first gathered all the children in a semi-circle in front of him. In his arms was a huge box filled with candy which he would toss into the screaming crowd while yelling, “Scrambles.” This wild event was always very popular with the young kids in the family. As we grew up, we would introduce the grandkids to the tradition, who loved it as much as we did. After all, who doesn’t love free stuff? The downside was that by the end of the day, many felt the effects of overindulging on all that candy.
In his closing argument to the people of Georgia before the senate runoff elections, president-elect Biden said that if Georgia voted blue, $2000 stimulus checks would “go out the door immediately.” Apparently, the message was well-received. Even as adults, who doesn’t get excited about someone tossing out free stuff? As I have mentioned in past columns, the various rounds of “stimulus” packages have also been popular with Wall Street as they know who eventually winds up with much of that money. With the election officially behind us, and the promise of even larger stimulus packages on the horizon, I am beginning to feel like we have become like a bunch of excited children running about chasing the free candy. The government keeps yelling “Scrambles” and the people seem to be responding with glee.
We had a great time during those “Scrambles” at our reunions but eventually my dad would turn the box upside down and say, “All gone,” much to the sorrow of the kids. My dad was a generous guy, but his candy supply couldn’t last forever.
In 2021, Wall Street continues to hit new highs as trillions of dollars are tossed out with promises that the free stuff will continue. I suppose it can go on for a while, perhaps even much of the year, but eventually the government candy box will run dry. Math always wins and the math of printing excessive amounts of money eventually turns against you.
I have said publicly that I do not generally approve of the ongoing stimulus packages. There are better ways to get money flowing again, which largely involve getting people back to work. But so long as government is keen to continue tossing out free money, and devaluing existing money in the process, investors should be looking for investments that are most likely to benefit from that policy.
I expect stocks in general to continue rising for much of the year. Bonds will struggle with low interest rates, but those same low rates should help stocks as well as continue to bolster real estate markets. Investors might also find opportunities in green energy but be aware of a tendency for markets to often overvalue politically trendy companies. And most importantly, in a “Scrambles” year, be prepared to make quick changes when the candy box runs dry.
Ronald Reagan warned us to fear the words, “I’m from the government and I’m here to help.” With congress obsessed over trillion-dollar stimulus packages to “help” struggling Americans, let me share an analogy from college football. Imagine for a moment that the Rose Bowl game will be played this year with 100,000 fans in attendance. Before kickoff, it is announced that $10 in cash for snacks will be given to every fan. As the money is passed around the crowds rush to the various snack shack locations to snatch up hotdogs, sodas and treats.
Who really benefits from this giveaway? The fans would be happy with their free snacks, but the small amount has very little lasting value to any of them. So, who really benefits? Though only $10 per person, the total giveaway amounts to $1,000,000, almost all of which will find its way into the pockets of the snack shack owners.
Now consider a national stimulus bill that hands out a couple thousand dollars to most households. Those who receive it can buy food, some luxuries or pay a few payments, but would it really make a lasting difference? For most people the answer would be no. So, who would really benefit? Though a couple thousand dollars won’t change the lives of most families, as a collective trillion dollars works its way into the pockets of relatively few national businesses, you can begin to see one reason why Wall Street keeps hitting record highs during a period of economic weakness. They are the snack shack.
The downside of stimulus is that printing and distributing money does not add wealth to our economy. It merely transfers it. By printing additional dollars, it devalues the dollars already in existence. By giving people money to spend that wasn’t earned doing productive work, it tips the economic scales in favor of the “demand” side. That means there is more money but fewer things to buy because we are producing less, which pushes prices up. Both of these economic events, devaluing dollars and increasing inflation, tend to hurt the most vulnerable in the long term. Those are the same people the stimulus is supposed to be helping.
If I were cynical about government efforts to “help,” (I usually am), I would encourage people to take their stimulus checks and buy stock in the large companies that may eventually wind up with most of the stimulus money. This is essentially what Wall Street is doing because they know deficit spending mostly hurts those on fixed incomes and who keep their money in cash type savings accounts. Large businesses have the luxury of protecting themselves from inflation by raising their prices, as they are already doing.
With a trillion-dollar stimulus package the government may actually be here to help. But, pay attention to who it is they are helping the most. My advice to investors is, as long as government continues down this foolish path of out-of-control deficit spending, try to position yourself as the one who owns the snack shack.
In 1897 the New York Sun responded to young Virginia O’Hanlon’s simple question about Santa Claus. She had heard conflicting opinions on the issue of Santa Claus but her Papa had assured her that she could find the truth by asking the paper because, 'If you see it in The Sun, it's so.'
The response to Virginia’s question has become a matter of Christmas folklore, and causes some longing for the better days of the past. But within the response from Francis Church, the editor, we find surprising similarities to our day. The nation at the time was just emerging from a serious multi-year economic depression, and many feared that the great America they had come to love had been lost. Mr. Church used his response to a child’s question about Santa Claus, to address a much larger issue at the time, the issue of hope.
One of my favorite Christmas songs is “I heard the Bells on Christmas Day.” I wonder how many have ever noticed the sorrow in the words. The song began as a poem actually written on Christmas Day in 1864 by Henry Wadsworth Longfellow. At the time, the civil war was still being fought and the lines of the poem, along with the two stanzas that have since been omitted, indicate the level of sorrow felt by the poet over the conditions in the world. The poem, filled with despair, contains his hope for the future. Almost 150 years later we still share with Longfellow his concern about the lack of Peace on Earth, and like him, we too hope that the “wrong shall fail and the right prevail.”
Like us, Virginia and Longfellow both lived at a time when life was tough, faith was failing, and hope was hard to come by. History is valuable because it reminds us that nothing really changes all that much. We think the times we live in are so bad. We look back on the past and long for the “better days,” failing to recognize that the people of the past didn’t usually see their days as being all that great.
If there is one thing to remember this Christmas season, it is that despair and hope have always been part of the human experience. It falls to us then to decide which of those two will determine our own lives. Are we going to spend our lives, and plan for our future, based on our fears? Or will we cling to the hope for a better tomorrow that shines so brightly at Christmas? As Mr. Church wrote in his response to Virginia, “The most real things in the world are those that neither children nor men can see.” It is so easy to see what is wrong with the world, but the message of Christmas reminds us to look for what is right.
The lesson of history teaches us that the future always has, and always will, belong to those who hope. This is true in investing, in our families, and in life. Merry Christmas!
When I renew the company airplane insurance, I have to fill out a questionnaire that lists how many hours I have flown in my lifetime, in the prior year, and during the last 90 days. Pilots love to brag about their total hours, with the commercial guys routinely claiming 30,000 or more. That’s an impressive number, but my agent tells me that the most important number is not the lifetime hours, but how many have been flown in the past 90 days in the plane that is being insured. This is known as “currency,” and lack of currency is the reason one might find a highly trained commercial pilot involved in a small plane accident that they haven’t spent much recent time in. They have lots of hours, but not necessarily the hours that matter most.
I had this discussion with a pilot friend who is the head of surgery at a large hospital and he laughed as he told me that it is well known that if you want a good surgeon, your usual best bet is not to pick the department head. Though he has done thousands of surgeries over his career, he spends much less time performing them in his administrative position. He is very experienced, but not current. He said a better choice is usually to choose a resident who does surgeries all day long.
The concept of currency translates to most areas of life. As a personal example, I am extremely good at business and investment related math. It comes easy to me and I can do most of it in my head because I continue to do it every day in my job. But if you asked me to work through an algebra problem I would struggle, even though I aced algebra in school. My career doesn’t require me to stay current in algebra, so I have lost the ability to do it.
I have read many financial articles about the tendency of investors to overstate their personal investing skills. They believe they are better at it than they actually are. My personal experience with investors is that as with any skill, they may have been very good at one point in their life when they had the desire and ambition to study it every day, but as they age other things in life start to take priority. In pilot terms, they may have 30,000 lifetime investing hours, but have those skills been kept current?
Managing investments is not a passive activity. If you have been successful at it, be aware of the tendency to fall behind in your currency as you move into and through retirement. The world is increasingly more complex and if you are unable or unwilling to maintain the same level of study and research you once did, think seriously about getting someone to guide you. You don’t want to be that retired commercial pilot who makes a fatal, amateur mistake in a plane you are not current in.
As a young boy living in beautiful Yorba Linda, California, I felt like I had it all. A treehouse, swimming pool, horses and miles of open land surrounding our property on which to carry out endless childhood adventures. One such adventure was a lemonade stand my brother and I setup one day on the road outside our home. Though a busy four lane highway today, it was just a country lane when I lived there. We dutifully set up our table with plenty of paper cups and a big jug of lemonade. We had every element necessary for success, at least so we thought. For what seemed like hours, we sat talking and joking and throwing stones at the trees across the road while waiting for a car, any car, to pass by. Finally, we saw one approach and as it slowly passed by us its’ brake lights went on. It stopped and then backed up as our little entrepreneurial hearts leapt with excitement. As the man exited, he called out and asked, “Do you boys know where I can find a gas station near here?”
Disheartened, we packed up our supplies as my brother wisely opined, “I think we need a better location.” The deserted conditions that made Rose Drive perfect for playing tag and riding bikes, also made it a terrible place to run a retail business.
My family has long since left California, but I thought of this experience as I read in the investment news about yet another major technology company that has announced they are leaving California and moving their headquarters to Texas. The reasons stated for the move included California’s anti-job policies, high taxes, an aggressive regulatory environment and undependable energy sources, to mention a few. This was just one in a long list of companies in recent years who have fled states with burdensome regulations and high taxes in favor of a more business friendly environment.
These moves make interesting stories that people read then forget about, but I wonder how many have seriously considered the impact to investors. On the face of it one must consider that such a significant business move would come at a pretty high cost, and a company would only take such drastic measures if it was determined to be in their best long-term interests. In other words, as a former lemonade stand owner myself, you only move the stand if you feel a different location will lead to higher profits.
I would suggest that investors might want to pay closer attention to these types of relocation announcements, which are becoming increasingly more common. If in fact a company can move to a new state and end up with lower operating costs and a more favorable regulatory environment, one could expect that increased profits, and higher stock prices, may follow. As my lemonade selling days taught me, location is everything.
It all started with a 12’ tree. We were preparing a special Christmas celebration with our entire family at our Duck Creek cabin. No detail was overlooked as Launa and I stacked our truck with games, presents and a mountain of food. Our meticulous planning left us confident this would be our family’s most memorable Christmas ever. We drove up weeks early to decorate the cabin and set up that beautiful tree so that everything would be perfect.
Finally, the time arrived when we were all to leave from our various locations and join up at the cabin. Then it happened. The worst storm in anyone’s memory hit Cedar Mountain, Utah, knocking out all power and shutting down every road. In less than 24 hours, more than nine feet of heavy snow had fallen. There was no way anyone was getting in or out of Duck Creek for quite a while so other options would have to be considered. Our beautiful tree in the cabin living room would have to celebrate Christmas on the mountain without us. We called our kids and instructed them to come instead to our home. Of course, they were disappointed.
Life does not always go as planned. Investors are certainly well aware of this. Wars, natural disasters, elections, recessions and now viruses require us to constantly adjust our strategy. The key is to realize that, like a family reunion, change does not mean we cannot obtain our goals. It just means we may need to adjust our plans a little.
Too often investors get fixated on wanting to do things in a certain way and are resistant to make necessary changes that a changing world requires. They mistake the road to their goals, for the goals themselves. The year 2020 will go down in history as one that required maximum flexibility in many areas of life. Those who are able to adjust to the changes will be in a position to enjoy what life offers them and even be better off due to opportunities that always arise.
Change is often unwelcomed, but it brings the potential for growth in areas we may not have previously considered. It can open investing opportunities that might have never been possible. Some of the greatest companies in the world were born during a crisis.
When we put up our 12’ tree in our cabin that year we were expecting a memorable Christmas. Had we let the storm get us discouraged it would have ruined our reunion. As it turned out, we decided to make the best of it and had a wonderful time, creating many lifelong memories. It was different than planned, but no less memorable. I believe 2020 will likewise be remembered as a very special year and those who maintained a good attitude combined with a willingness to be flexible, will look back and find much about it to be thankful for.
I just returned from my annual recurrent training required to maintain my ability to fly. Flying is important to me because it allows me to travel long distances to visit with clients who for many reasons are not able to see me in my office. But more important than visiting my clients is being safe while doing so. Safety is my number one concern related to flying, and without hesitation I will cancel a trip if conditions are not within my prescribed limits.
Flight training not only sharpens technical skills, but perhaps more importantly it improves decision making. Each pilot and plane has different capabilities, so flight decisions are very personal. Powerful commercial airliners with two professional pilots on board routinely land at my airport in weather I would not, and should not fly in. I know a pro pilot who once cancelled a flight with 180 people on board because he had a family crisis and suddenly was not in a good state of mind for flying. Many passengers complained, but they should have thanked him.
Pilots are trained to do a personal evaluation before each flight by asking the following questions. Am I physically healthy? Is my mind alert, and free from undue distractions? Is the weather acceptable? Is the plane airworthy? Am I current in my training for this type of flight? Are there unusual external pressures pushing me to make this flight? Should I consider seeking advice about this flight from another pilot or instructor? Pilots who answer these questions honestly and are not afraid to cancel a flight when an answer is not a good one are far more likely to live to fly another day. And I might add, the passengers should never complain about the decision.
My flight training led me to wonder how these critical questions might also help investors when faced with major investment or financial decisions. They would sound something like this. Are my finances currently healthy enough to support this decision, even if it doesn’t turn out as planned? Am I in a good state of mind, having all the critical information I need to make this decision? Are the current conditions in the relevant financial markets acceptable, such that they are likely to lead to a good outcome for me? Have I carefully inspected the financial vehicles I am considering using and found them to be sound and suitable for my needs? Am I current in my financial knowledge so that I am able to make a good decision? Are there any outside pressures pushing me to make a decision in haste, or without considering other options? Should I consider calling another professional for advice before proceeding?
I think it would be very valuable if investors created a similar checklist, and followed it, before making any major investment or financial decision. Like a pilot, it may lead to them missing the occasional opportunity, but on the bright side they would be much more likely, financially, to live to enjoy many more days.
My wife’s grandfather was a brilliant investor. Though limited to a high school education, he taught himself to analyze a stock like few I have known. Whenever we visited, he would call me into his den to discuss the financial markets. Our discussions always involved a fat resource book that he received in the mail every month. It contained an amazing amount of raw financial data about most of the major companies on Wall Street. The hundreds of pages were filled with highlights and notes Grandpa had made, which book he would pass to me when the new one arrived. He also watched market news on T.V. but felt most commentators were more entertainer than financial expert.
I thought of Grandpa recently when I turned on the news to see a random analyst talking under the headline, “Wall Street surges as investors welcome likelihood of (candidates name) victory.” Presumptive headlines like this are common and leave me wondering where this “expert” got their information. I had placed several trades that day and no one checked in to see what my reasons were. I didn’t see any surveys or read any real data to suggest why investors were making their decisions that day. What it likely came down to is the stock market just happened to be up, for any number of reasons, but this analyst took it upon himself to play the expert who could discern the thoughts of the millions of investors in the world. As I listened to his ramblings, my Dad’s common phrase, “hogwash” came to mind.
There are plenty of media “experts” willing to tell us how to think, or how we are already thinking. Political pollsters have done this all year. Their embarrassing, and recurring failures should be evidence of the value of their opinions. But on the other hand, maybe there are too many who are willing to turn over their thinking to media experts, who they don’t personally know, and whose qualifications and motivations may be suspect. I was listening to a younger person speak about where he got his information and he said, “I’m very busy so I just get everything from Instagram.” “Oh wonderful,” I thought, “I feel so much better about our nation’s future now.”
I mention this because as the media noise gets louder, and more intrusive in our lives, we have an even greater need to slow down, and do some good learning on our own. Investing is serious business, and a very personal one. Try reading a good book. I’m sure they still make them. Taking advice from someone you don’t know, or whose goals may not align with yours, can be risky. Media personality comments about what other investors are thinking, with the implication that you should be thinking the same way, should carry little weight in your decisions. That commentator doesn’t really know what investors are thinking, and even if they did, it may have nothing to do with what is best for 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
This communication is strictly intended for individuals residing in the states of AZ,CA,CO,DC,FL,ID,IL,KS,KY,MA,MI,MN,MO,MT,NE,NM,NV,OH,OR,PA,SD,TN,TX,UT,VA,WA,WY. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.