Our Gambling Culture

The craving for immediate gratification has spread well beyond Wall Street.

April 2015 | by Laurence Fink, chairman and CEO of BlackRock

Retirement gambling CultureWe tend to speak of short-termism as though it’s a problem that only afflicts investors or corporate leaders, but that’s not the case. Short-term thinking pervades our most important institutions, from government to households. We’ve created a gambling culture in which we tune out everything except the most immediate outcomes. If we’re going to meet our commitments to our children and grandchildren, and to society as a whole, we need to open up the lens and start taking a more responsible, longer-term view of the challenges we face.

There’s a host of reasons short-termism has taken hold in our culture, both in the United States and more broadly. Greed and the media’s reliance on daily bombardments of bad news certainly play a part, but more important, we’ve lost sight of our actual goals. It’s in everyone’s interest to provide opportunities for education, a reasonable level of healthcare, and a secure retirement for the most people possible, just as we should all be working to conserve our natural resources to assure that clean air, clean water, and renewable fuel sources are available to our children.

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Is Gold a Gleaming Investment?

by Scott Smith, CIMA®

Is Gold a Gleaming InvestmentA couple blog posts back, I mentioned the historic low interest rates occurring in synchrony around the globe and highlighted a few takeaways for investors. In light of this unusual environment where global central banks are following the same strategy of printing money, buying bonds, lowering interest rates, and devaluing their currency, I think it’s a good time to discuss gold and the role it should play in client portfolios. Is Gold a Gleaming Investment?

Our bias will always be owning reasonably-priced productive assets, like stocks, that have the capacity for earnings, dividends, and cash flow growth over the long-term versus a non-productive asset like gold, whose value is derived partially from jewelry demand where it is worn and partially from investment demand where it is stored. Since gold’s value is predominantly in the eyes of its beholder, there is an embedded amount of speculation that accentuates its price volatility.

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Notes from the Federal Open Market Committee Meeting

by Scott Smith, CIMA®

Based on expectations, the FOMC could raise interest rates twice in 2015 and four times during 2016

C&J Wealth AdvisorsU.S. equity markets have been quite volatile over the last two weeks as investors anticipated and digested the commentary from the recent Federal Open Market Committee (FOMC) meeting held in March. In their press release, the FOMC acknowledged improvement in the unemployment rate and household purchasing power from lower energy prices.  It also affirmed that the current zero to .25 percent target range for the federal funds rate remains appropriate. It’s unlikely that an increase in the target rate will occur at the April FOMC meeting as committee members want to see continued improvement in the labor market before making an initial increase in the federal funds rate.

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The Risk of Missing Temporary Financial Gains Versus the Risk of Permanent Losses

by Scott Smith, CIMA®

Financial GainsTwo weeks ago, I attended the Investment Management Consultants Association’s New York conference and will share some of the insights from that meeting in an upcoming blog post. Today, we will look back on the career of Jean-Marie Eveillard and use his experiences on the risk of missing temporary financial gains versus the risk of permanent losses.

Jean-Marie Eveillard is a distinguished investor who served more than 25 years as portfolio manager at First Eagle Funds. From the fund’s inception in 1986 through March 1997, First Eagle Global notably outperformed the MSCI World Index by nearly 100%.

From 1997 to 2000 as stock market valuations were high and the internet mania kicked into gear, Jean-Marie responded by selling some of his appreciated stocks and raising cash as well as gold instead of joining the internet bandwagon. During these three years, First Eagle performance trailed the market substantially and Jean-Marie went from looking like an astute value investor to an old, stubborn technophobe. He lost nearly half of his clients in the process and almost had to close down the funds. Around that time, Jean-Marie was quoted in saying: “I’d rather lose half of my clients, than lose half my clients’ money.”

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Assessing the Value of Time & Interest Rates

by Scott Smith, CIMA®

Rising & falling interest ratesHave you ever thought about what an interest rate actually means? It’s a rate that compensates a lender or investor for the time value that their principal is invested. The question then becomes how to measure the value of time and the answer is relative to the perceived riskiness of the borrower and inflation expectations during the time period invested. The low interest rate environment that is occurring in unison across the developed world is fascinating. Together, they are telling a story that investors need to pay attention to. Below is a table of 10-year government bond rates & accompanying debt/GDP across several different countries in Europe & Asia.

Interest rate value

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Use Caution When Investing in These Asset Classes

by Scott Smith, CIMA®

Asset ClassesWhat do Real Estate Investment Trusts (REIT’s), Utilities, and long-term bonds all have in common?  They are all income-oriented asset classes that are price sensitive to movements in interest rates.

As interest rates moved lower in 2014, prices on these three asset classes moved up by 30.36%, 26.99%, & 19.72%, respectively, in 2014.  In January 2015 alone, 10-year treasury rates dropped from 2.12% to 1.66%, which again helped REIT’s, utilities, and long-term bonds move higher by 6.85%, 2.18%, & 6.64%, respectively.

It’s easy to be enamored with investment returns, but we caution investors against chasing after these asset classes at this time due to the fact that 10-year & 30-year treasury yields are now approaching their all-time low.  These noteworthy performance gains illustrate how declining interest rates can move interest-sensitive asset prices well beyond their fair value.  If there is upward movement in interest rates as the U.S. economy continues its recovery, these asset classes will be vulnerable to a sizable price correction.  Investors seeking income should look elsewhere.

Football & Investing; Don’t Throw in the Towel Too Soon

Football & InvestingA couple weeks ago, I made the mistake of going to bed with five minutes remaining in the football game between Tennessee & South Carolina. With South Carolina having a two touchdown lead, I thought for sure the game was over. My 6 year old son excitedly awoke me the next morning and told me Tennessee won in overtime. As a Tennessee fan at heart, this is a good lesson not to throw in the towel while there is still time on the clock. It is also a great example of how quickly momentum can shift. These happen to be good lessons that can be applied to football and investing. Many investors pay too much attention to short-term investment returns and throw in the towel too early when their investments begin to underperform the index. Others may under-estimate the market’s ability to reverse its previous course on either on the upside or downside.

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Buffett hoards cash, individuals’ holdings hit 14-year low

C&J Wealth Advisors are big fans of the long-term strategic value that cash offers investors when it is deployed at advantageous prices. As markets continue to make new highs, it’s natural that more individual investors want to participate in these gains and disdain the role that cash plays within their investment portfolio. As this article illustrates, Warren Buffett is doing the opposite and letting cash accumulate to all-time highs. Investors should look beyond the fact that cash is earning nothing today and recognize that it holds future value when it’s invested intelligently. The hardest part in holding cash is maintaining the patience & discipline to wait until an opportunity arises.

Scott Smith
C&J Wealth Advisors
Article Credits: CNBC Business News | James Saft; a Reuters columnist. The opinions expressed are his own.

Buffett hoards cash, individuals’ holdings hit 14-year low

cash in portfoliosIndividual investors have been cutting back on cash in portfolios, the exact reverse of what Warren Buffett has been doing at Berkshire Hathaway.

Who do you think has got it right?

Cash at Berkshire Hathaway stood at just over $55 billion as of June 30, an all-time high and two and a half times the level he’s in the past said he likes to keep on tap to meet extraordinary claims at his insurance businesses. That’s also up more than 50 percent from a year ago.

Buffett’s green pile is in sharp contrast to individual investors, who’ve cut cash in portfolios to 15.8 percent, a 14-year low, according to the July asset allocation survey from the American Association of Individual Investors.

To be sure, businesses and individuals hold cash for different reasons, but Buffett has used Berkshire, in part, as an investment vehicle through which we can interpret his views on markets, or at least the prices of some assets in them.

Berkshire, of course, has some difficulties in putting cash to work not faced by your average dentist or lawyer, in that it tends to make very large investments and as such may need to be more patient than smaller fry. So it is quite possible Berkshire Hathaway is waiting for the right acquisition to come along.

It is also similarly possible that Buffett is not happy with the prices, and is biding his time against a day when prices have been marked down. One thing not influencing Berkshire is tax policy, as all of its cash is generated in the U.S., making it not one of the legion of corporations holding money offshore to avoid a repatriation tax.

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Smart Investors Ignore the News

When describing my job to friends, I tell them that most of my day is spent reading.  To be more specific, it’s deciphering good information from the rest of the headlines that are simply media noise.  Enclosed below is a good blog post from Chuck Jaffe that talks about his observations of the headlines and his advice for investors to avoid knee-jerk reactions to media noise.  With so much information and so many opinions out there today, it’s our goal as an advisor firm to filter out the noise and provide clients with straight talk that conveys facts that are meaningful to our clients.

Scott Smith
C&J Wealth Advisors
Article credit: By Chuck Jaffe | MarketWatch | August 18, 2014

Smart investors ignore the news
You can read the headlines, just don’t trade on them

If the market is making your head swim, you may be able to solve the problem by Flying Colors Slots spins turning off, tuning out and dropping out of the 24-hour news cycle.

That’s an oSmart investors ignore the newsdd suggestion coming from someone who works in the media, but what makes it doubly strange is that it’s prompted in part by the website I trust like no other, MarketWatch.com. Beyond simply being my employer, I trust the site because I know personally the quality people and journalists my fellow staffers are

But, last month, MarketWatch set a site record for the number of unique visitors to its news pages, which set me to wondering what kind of messages we were sending to both new and increasingly active visitors at a time when they were presumably drawn in looking for some measure of market guidance to calm their nerves or keep them on top of the financial news.

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Walgreen May Ditch US for Switzerland

One of the main themes for the markets this year has been the number of companies taking advantage of cheap capital to make mergers & acquisitions.  According to Dealogic, $1.83 trillion was spent on mergers & acquisitions in the first six months of the year, the highest level since the first half of 2007.  Despite the impressive flow of deals, perhaps what is more interesting is the amount of cross-border deals taking place, which was $626.3 billion in the first six months of 2014, up 84% from 2013.  Many US-based companies are using their cash held overseas to buy international companies and then relocating headquarters overseas to lower their tax burden, which is a disturbing trend.  Read the article below to read how an iconic US brand may be moving its headquarters overseas.

Scott Smith
C&J Wealth Advisors
Article credits 7/16/2014 | By MSN Money Partner | Paul Ziobro | The Wall Street Journal

Walgreen May Ditch US for Switzerland
The move, known as an inversion, has never been attempted by a major American retailer.

Walgreen’s (WAG) first pharmacy opened 113 years ago inside a hotel on Chicago’s South Side and this year, the chain will derive nearly all its sales and most of its profits from its 8,700 U.S. locations.

Destination Switzerland

But Walgreen is currently thinking about leaving American shores, as part a plan to buy the rest of Alliance Boots GmbH, which operates a U.K. drugstore chain and is based in Switzerland.

The move could help Walgreen lower its U.S. tax bill saving the company hundreds of millions of dollars a year — money that wouldn’t flow into the U.S. Treasury.

If it goes ahead, it would be an unusual use of the controversial and complex maneuver known as an inversion. While well tested among pharmaceutical and manufacturing companies that earn much of their income overseas or have assets like patents that are held offshore, the move has never been attempted by a major U.S. retailer, according to tax experts.

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