Monthly Archives: December 2015

What the tortoise knows about financial security.

Remember the race between the tortoise and the hare? The tortoise won because he kept plugging along while the hare took a nap. Everyone would like to get rich quick; it’s the reason that people buy lottery tickets. But the chances of actually striking it rich are astronomical.

The way to get financially well-off is within the reach of almost anyone, even people who start out poor. What it takes is following a few simple rules.

  • Avoid destructive behavior.
  • Get an education and acquire a skill.
  • Spend less than you earn.
  • Start saving early.

The temptation to parlay a small bundle of cash into a fortune is what gets most people into trouble. Consistent saving over time is much more likely to pay off than strategies such as timing the market. Risk-the-farm investing strategies have a high probability of failure, but saving and prudent investing always wins.

Getting rich slowly is the primary way that most people achieve their financial dreams. The advantage of saving 10% or more of your income cannot be overemphasized. Do that and then let compounding go to work for you.

Compounding does a lot of the heavy lifting for investors. But it needs time to work. That means starting the process as early as possible and staying with it as long as possible. Waiting until you’re in your 40s or 50s means that you have given up twenty to thirty years of financial growth that you will never get back.

Want to have a million dollars by the time you’re 65? If you begin when you’re 25 with $25,000, save $3000 a year and invest the money to get a 7% return you’ll have $1 million when you’re 65. Of course as you get older and make more money you’ll be able to increase your savings rate, and end up with more than a million.

Finally, control your emotions or – better yet – hire an investment manager who will help control your emotions for you. Markets don’t go in one direction forever and that’s a good thing to keep in mind when the inevitable correction happens. An investment portfolio that lets you sleep well at night helps to cushion the blow of a decline and avoid the temptation to “bail out” at exactly the wrong time. In fact, investing more when the market’s “on sale” is a way to increase your wealth.

This is New Year‘s Eve; 2016 starts at midnight. It’s a great time to start if you have not done so already.

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Warren Buffett lost money this year.

Even the savviest investor can have a bad year. Buffett’s Berkshire Hathaway is down over 11% in 2015.

The reason for the decline is the declining price of oil and other commodities. Berkshire Hathaway has a big investment in railroads that make much of their money hauling commodities such as oil and coal.

It also has big positions in American Express and IBM which declined 24% and 13% respectively this year.

If you broke even this year you beat the “Wizard of Omaha.”

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Who Loves You?

A troublesome trend that began in earnest over five years ago after the big banks crashed is continuing: the major investment firms – those whose ads you see in the Wall Street Journal and on TV – are all trying to get the multi-millionaire clients. These “Big Box” firms are abandoning the middle class market because they are viewed as “not profitable.” It’s one of the main reasons we left a big Wall Street firm and started our own independent investment firm – we wanted to have the freedom to choose who we worked with, without having to justify it to management.

The big firms are “strongly encouraging” their employees to go after the “whales” and abandon their middle class clients. The Wall Street firms “encourage” their sales force to do this using two methods: pay their brokers more for attracting the rich, and cut the payouts to the brokers on “small accounts.” The results are predictable.

That leaves a big gap for middle-class people who are looking for investment advice and financial planning. Investors with less than $2 million in investable money are just not getting the “love,” or the advice, that they need from the big Wall Street firms.

We do care about our clients, and so we left the big investment firm because we wanted to continue to provide all of our clients with the high quality, personal service that they had come to expect from us.

We bring the strategies used by ultra-high net worth families and institutions to all of our clients, whether they’re the middle class people that the investment firms made us “justify” working with, or whether they’re they multi-million dollar client that the Big Box firm coveted. We offer advice, planning and guidance to people who are working toward a comfortable retirement. We act as the Chief Investment Officer to the busy client who just wants to have his portfolio professionally managed. We also provide assurance to the widow who is not comfortable managing the large investment portfolio that her husband had managed for so long.

In the mid-1970s actor Telly Savalas played Lt. Theo Kojak, a bald New York City detective with a fondness for lollipops whose tagline was “Who loves ya, baby?”

We do.

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How Do I Start Saving and Making My Money Grow?

We contribute to several forums that provide advice to novice investors. One of the most popular questions goes like this:

• I’m 28 and will start a new job soon. I have accumulated $10,000 in a savings account and will be able to save an additional $1000/month when I start my new job. I need advice on how to start an investment plan.

It’s a good question. The person asking it usually has some money in the bank and has enough income to add to his or her savings. But because interest rates are so low the savings are not growing. There are three common reasons for not starting an investment program.

Not knowing where to start. The mechanics of opening an investment account can be complicated.

Fear of making a mistake. People work hard for their money and don’t want to lose if because they made some rookie error.

Not knowing who to trust. Who will provide good, honest advice for you?

Here’s how to begin an investment plan that works for people of all ages.

  • Find a Registered Investment Advisor (RIA) who is a fiduciary: who put their clients’ interests ahead of their own and provide unbiased investment guidance. They will help you through the process.
  • Find someone with experience. You don’t want to deal with someone who’s learning with your money.
  • Find someone who is accredited. A CFP™ (Certified Financial Planner) is trained to give advice on all aspects of financial planning.
  • Find someone who does not charge commissions. It eliminates conflicts of interest.
  • Find someone who has a good reputation in the community.

At Korving & Company, we’ve been helping people just like you make better decisions about their money and their lives for thirty years.

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Greedy Innkeeper or Generous Capitalist?

We are indebted to Brain Wesbury of First Trust who has been sending out this Christmas story since 2009.

The Bible story of the virgin birth is at the center of much of the holiday cheer this time of year. The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken. Mary gave birth after arriving in Bethlehem and placed baby Jesus in a manger because there was “no room for them in the inn.”

Some people believe Mary and Joseph were mistreated by a greedy innkeeper, who only cared about profits and decided the couple was not “worth” his normal accommodations. This version of the story (narrative) has been repeated many times in plays, skits, and sermons. It fits an anti-capitalist mentality that paints business owners as greedy, or even evil.

It persists even though the Bible records no complaints and there was apparently no charge for the stable. It may be the stable was the only place available. Bethlehem was over-crowded with people forced to return to their ancestral home for a census – ordered by the Romans – for the purpose of levying taxes. If there was a problem, it was due to unintended consequences of government policy. In this narrative, the government caused the problem.

The innkeeper was generous to a fault – a hero even. He was over-booked, but he charitably offered his stable, a facility he built with unknowing foresight. The innkeeper was willing and able to offer this facility even as government officials, who ordered and administered the census, slept in their own beds with little care for the well-being of those who had to travel regardless of their difficult life circumstances.

If you must find “evil” in either of these narratives, remember that evil is ultimately perpetrated by individuals, not the institutions in which they operate. And this is why it’s important to favor economic and political systems that limit the use and abuse of power over others. In the story of baby Jesus, a government law that requires innkeepers to always have extra rooms, or to take in anyone who asks, would “fix” the problem.

But these laws would also have unintended consequences. Fewer investors would back hotels because the cost of the regulations would reduce returns on investment. A hotel big enough to handle the rare census would be way too big in normal times. Even a bed and breakfast would face the potential of being sued. There would be fewer hotel rooms, prices would rise, and innkeepers would once again be called greedy. And if history is our guide, government would chastise them for price-gouging and then try to regulate prices.

This does not mean free markets are perfect or create utopia; they aren’t and they don’t. But businesses can’t force you to buy a service or product. You have a choice – even if it’s not exactly what you want. And good business people try to make you happy in creative and industrious ways.

Government doesn’t always care. In fact, if you happen to live in North Korea or Cuba, and are not happy about the way things are going, you can’t leave. And just in case you try, armed guards will help you think things through.

This is why the Framers of the US Constitution made sure there were “checks and balances” in our system of government. These checks and balances don’t always lead to good outcomes; we can think of many times when some wanted to ignore these safeguards. But, over time, the checks and balances help prevent the kinds of despotism we’ve seen develop elsewhere.

Neither free market capitalism, nor the checks and balances of the Constitution are the equivalent of having a true Savior. But they should give us all hope that things won’t be as bad as so many seem to think they will be.



The Dogs of the Dow

The “Dogs” are the ten stocks in the Dow Jones Industrial Average (DJIA) that have the highest dividend yield. They are referred to as Dogs because the stocks with the highest yields are often those that are out of favor with investors and whose prices have declined significantly.

The Dow is made up of 30 stocks that are leaders in their industry.  They are generally though of as “Blue Chips.”  All of the stocks in the DJIA pay a dividend. Their yield is determined by dividing their annual dividend by the stock price. For example, as of December 31, 2014, AT&T was one of the 30 stocks in the DJIA. At that time it had an annual dividend of $1.84 and was priced at $33.59. Dividing $1.88 by $33.59 gives us a dividend yield of 5.48%, making it the highest yielding stock in the DJIA.

One of the reasons for the high yield is that AT&T declined in price by about 4.5% in 2014 while keeping its dividend level.  70%  of the other Dogs of 2015 also declined in price while keeping dividends level. In fact, seven out of the ten actually raised their dividends even as their prices declined.

This price drop coincided with an over-all market increase of over 10%.  For the smart investor this provides an opportunity for bargain hunting.

The market moves in cycles. Some companies run into company specific problems that cause their stocks to decline. Still others lose favor because of the industry they are in. Whatever the reason, it becomes a top management priority to fix the problem and get the stock moving back up. Their bonus depends on it.

The Dow Dogs of 2015 were AT&T, Verizon, Chevron, McDonald’s, Pfizer, General Electric, Merck, Caterpillar, ExxonMobil and Coca Cola.

Keeping in mind the old maxim that the way to make money in the stock market is to buy low and sell high.  Buying the Dogs provides an opportunity for investors who are looking for a simple way of buying high quality stocks when they go “on sale.”  While there is no guarantee that these stocks will turn around and go back up, the chances are fairly good that some will and that will lead to a positive over-all return.

As an added advantage, investors who buy the Dogs get an above-average income from a steady stream of dividends that these stocks produce. There is even a tax bonus since dividends from these stocks are considered “qualified dividends” for tax purposes and are taxed at a lower rate than ordinary income.

The investor who follows the Dogs strategy strictly will review his portfolio annually and sell those stocks that are no longer the highest yielding. They will be replaced by the new Dogs. By doing this the investor if forced to sell his biggest winners and replace them with the new, lower priced, Dogs.  While selling our winners and buying stocks that are out of favor goes against human nature, it is a time tested strategy that has worked well over long periods of time for the disciplined investor.

The person most responsible for popularizing the Dogs of the Dow Strategy was Michael O’Higgins who wrote a book “Beating the Dow” in 1991. The strategy worked well for a number of years but fell out of favor at the end of the decade when the boom became the new rage. It’s making a come-back now.

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The Fed Raises Rates, the Market Throws a Party

Back in September we wrote two short articles on the long anticipated rate hikes.  Dear Fed: Just Do It! Followed by Oh No They Didn’t!

Our thesis was that the Fed’s zero interest rate policy  (ZIRP) wasn’t doing anything for the economy and that a rate hike would actually be viewed as a vote of confidence in the current slow growth economy.

Main Street may not be enjoying a boom, but Wall Street is doing just fine. Thanks to corporate actions to improve profitability, the continued emergence of new products and technology, and a drop in oil prices caused by huge supplies of new energy, companies are reporting record earnings.

Yes, there are pockets of weakness caused in part by an inevitable slowdown in Chinese growth and its insatiable appetite for raw materials, but here in the U.S. the low interest rates are hurting savers more than they’re helping the economy.

Today the Fed announced a much anticipated 0.25% hike in rates.  Despite predictions in some corners of a market sell-off, the DJIA rose by 1.28%, the S&P 500 rose by 1.45% and the NASDAQ by 1.52%.

Thank you Fed.  It’s long overdue.

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Technology, Magic and the Economy

If you have read the “Lord of the Rings,” you know that wizards were able to talk and see things going on in distant places by peering into a crystal globe called a “Pilantir.” When J.R.R. Tolkien wrote his trilogy during the mid-20th century this was magic, imaginary things only available to people with special powers. Today, it doesn’t take a wizard with special powers to see and talk with people far away. The devices that everyone uses today are called “smart phones” and they do things that make a Pilantir look old-fashioned.

British science fiction writer Arthur C. Clarke gave us “Three laws of Prediction”

  • When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong.
  • The only way of discovering the limits of the possible is to venture a little way past them into the impossible.
  • Any sufficiently advanced technology is indistinguishable from magic.

We had an opportunity to attend a meeting recently at a new medical facility near our office and had an opportunity to speak with the facility’s  President. He spoke of advances in medical technology and the amazing improvements that have been made in imaging systems. Scanners that allow physicians take three-dimensional pictures of our internal organ in a few minutes.  What once was magic is now useful technology.

Those of you who are of a certain age may recall a cartoon character by the name of Dick Tracy. He was a detective who wore a wrist watch that was also a two-way radio.  That was technologically impossible in those days.  Today, the entire industrialized world is built around wireless communication devices. Our basic industries would come to a halt without them. Cars, trains and planes would stop without them. Modern factories would shut down; banking and investing would stop. To anyone born in the 19th century today’s reliance on wireless electronic communication would look like magic.

Many people worry that the engines of growth seem to be grinding to a halt; that the future is going to be bleaker than the past. But that is to deny what’s going on. Just a few examples: the old adage that you can’t get blood from a stone is still true, but we can get oil from rock, it’s called “fracking” and has made oil and gas more abundant than ever. Facebook has revolutionized the way we keep in touch with friends. Twitter has changed the way we communicate ideas. Apple has made so many changes in our lives that it’s hard to list them all. Entire new industries worth many billions of dollars have been created in the last few years, and changes keep happening. Companies we think of as Internet entities are planning moves that will transform brick-and-mortar industries. Google is developing and self-driving cars and Amazon will deliver your order using remote-controlled drones.

The technology 25 years from now will look like magic to the people living today. All these things represent an opportunity for investors who share a vision of the future; the kinds of things we once relegated to the realm of magic. That magic will make us all richer.

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