Back To Your Future

Consider the past 18 months as your future. If your advisor has guided you through these rough times with little damage, you’re in good hands. However, if your feel your retirement has been jeopardized, your stock portfolio is down over 30%, or your balanced portfolio is off more than 10%, it’s time to seriously consider a change and seek out a few other advisors and their clients to see how they’ve done.

The stock and bond markets today face great opportunities and sizable threats. Your current portfolio should look different than it did a year ago. Much has changed and so should you. Has your advisor properly repositioned your portfolio, or are you still holding the same old stuff hoping it will come back?

The market’s roller-coaster ride has not only continued throughout 2001, but has turned into quite an “E” ticket over the past 6 months. Prior to the tragic events of September 11th, it had already been falling consistently for several weeks due to weakening economic conditions and falling corporate profits. As conditions deteriorated even more due to the tragedy, however, the probability of a sharp rebound in stock prices increased dramatically. While stocks were primed for a near-term rally, it was too early to be certain that a new bull phase was about to begin.

Late in the summer, it looked like companies were beginning to spend again and the leading economic indicator signaled a recovery, but the terrorist attacks changed both. In addition, consumers had the rug pulled out from under them by falling stock prices, layoffs, and a mood of uncertainty. This dramatic deterioration of events demanded action. The Federal Reserve and our Government are now both working overtime to stimulate the economy. No government will match the massive reflation effort now underway in the U.S. While the market will remain turbulent, it is only a matter of time before these actions take hold and our economy rebounds.

The past 20 years have witnessed the birth and death of a great bull market for stocks and bonds. Most advisors and their clients did well through 1999, but only a few have been successful since then. Markets will always be volatile, so your advisor must be willing and able to take action. The period from 1995 to 1999 was an exceptionally low volatility, high return stretch of years that made most advisors look smart. Since then, however, many market indexes have fallen 30% or more, and many advisors have severely damaged their clients’ future. This type of market activity will continue so you need to be able to trust your advisor to guide you through the next 20 years. As of today, you know all you need to know about your advisor. It’s time to fish or cut bait!

Published in Westlake Magazine – December 2001

Pinto or Porsche…What were you sold?

Many people find that working with their investment advisor is as awkward as dealing with an auto mechanic. We’ve all had that uncomfortable feeling that we’re being taken advantage of, but have no ability to prove it. Just because they hand you back a bag of dirty parts doesn’t mean they really fixed anything or if they are really any good. These concerns relate directly to the quality of investment advice most people are receiving. All portfolios, like automobiles, are designed, built and then maintained. Your performance is dictated by the ability of the professionals doing the work.

Engineering: Who designed and built your portfolio? We all know that there is a large difference between a Pinto and a Porsche. Did your portfolio blowup when this bear market rear-ended you? Unfortunately, most investors’ portfolios suffered major damage because their advisor convinced them that they were driving a Porsche, when they really had a Pinto. If the firm that engineered your portfolio was any good, you should have avoided the damage.

Maintenance: Who takes care of your portfolio? Just like a high-performance automobile needs professional care and consistent maintenance, your portfolio requires attention as well. Portfolio maintenance is making adjustments as market conditions warrant. Most advisors lack the background to adequately build and maintain a portfolio. As such, they hang their hats with large firms that provide them marketing support to grow their client base, analysts to help them suggest investments to clients, and then legal support when things go wrong. Portfolio management is the primary skill that you desire them to have, yet it is precisely the area in which they have little or no real education or experience. Fancy certificates from 3-day seminars at Pebble Beach will not make them a portfolio manager.

Sales: It is through this well marketed business model that most investors have found their advisor and suffered steep investment loses in recent years. In reality, most of these advisors are merely “Used Stock Salesmen” acting as the marketing arm of large financial services firms. Though they are experts at describing features and making us feel comfortable with a purchase, none of us would ever consider taking our cars back to the salesman on the car lot for maintenance. Yet, these firms have convinced their clients that the salesman is really a mechanic as well. Just as selling hundreds of cars does not make the salesman a good mechanic or automotive engineer, convincing hundreds of investors to open accounts does not make the salesman a competent advisor.

While this market will eventually improve, it will not go back to the easy money of the 1995-1999 period. As always, investment skill and risk management will be needed. Consider the past 18 months as your future. If your advisor has guided you through these rough times with little or no damage, you are in good hands. If your advisor let your portfolio suffer during this downturn, then it is time to make a change.

Published in Westlake Magazine – October 2001

Mad Dow Disease

Since December 31, 1999, the Dow has declined 7%. For many years, the only technology stock in the Dow was IBM. But, due to the great returns of technology stocks, there was great pressure to add more technology stocks to Dow so it would be more competitive with the S&P 500 index. So, Microsoft and Intel were added. Since then, they have proceeded to drop 40% and 60%, respectively from their highs, causing the Dow to drop further than it would have without them. While we agree that the Dow should have had more technology representation, it is interesting to note that even the “keepers” of market indexes were caught up in the hype.

Once again, the more things change, the more they stay the same. Over ten years ago, our country was obsessed with the growing budget deficit and the banking crisis. The media was busy whipping up the public into a fearful frenzy. It was the end of the financial world and everybody knew it. At the top of the best-seller list was Ravi Batra’s book The Great Depression of 1990. What followed, however, was a great decade of prosperity and economic strength.

During the last few years of the 1990s, the U.S. economy was very strong and wealth creation seemed so easy. Dow 36,000 and The Roaring 2000’s hit the bookshelves and sold like crazy. Again, the general public was all worked up—but this time with greed. You couldn’t attend a social event or turn on the TV without being aware of how quick and easy money was being made in the stock market. Again, what has transpired in the past year was the opposite of what was expected by most investors. While the bull market may be dead and gone, the market in “bull” is still booming. Over the past 10 years, investors would have missed out or lost substantial wealth by following the crowds. In investing, the hype is always wrong.

Going forward, the erosion of stock market wealth will clearly affect spending in the months ahead, perhaps enough to cause a recession. Over the next few months, there will be more bleak earnings news so the stock market is not out of the woods yet. However, the Fed’s rate cutting has reaffirmed its determination to stabilize the economy and has likely put a floor under stock prices. Just as prices started falling last year before earnings dropped, they will begin to rise again before earnings improve. In the past nine bull/bear cycles, the S&P 500 rose 32% on average before earnings began to improve. However, we believe a more modest gain is likely this time.

While it would be great to know exactly which way the market was going to move next, it really doesn’t matter because it is possible to earn a good return on one’s money in most market cycles. Many advisors have failed their clients by having too much money in the wrong sectors of the market at the worst possible time. While these advisors will take credit for the money made during a rising market, they blame it on the market during tough times. As an investor, you need to question your advisor’s advice over the past year. First, did your advisor proactively adjust your portfolio to the changing conditions during 2000. Second, if you’re an aggressive investor you should be down no more than 15% and if you believe your account is conservative, you should actually be up a little. If you did worse than these, it is not the market’s that failed you, but your advisor. Only during tough times does skill, or lack thereof, make itself evident.

Whether you desire to grow your wealth conservatively or aggressively, our success comes from professionally managing your investment portfolio and working to align your financial decisions with your goals. Our goal is to grow what you have and protect what you’ve earned.

Published in Westlake Magazine – June 2001

Stocks: From Lemons to Lemonade

You should not look at the stock market to make you wealthy. You should think of the stock market as a place where your wealth can be protected and grown if managed prudently. Over $1 trillion in value has been lost in Cisco Systems, Microsoft, and Intel. Very few people have actually created their personal wealth solely by investing in the stock market. Most people create their wealth through their personal initiative and hard work. No matter how you create your wealth, it is important to protect, grow, and manage it to meet your goals.

We have a unique mix of financial and estate planning services. Our goal is to identify and understand our client’s goals and assist them in protecting and growing their assets. Our emphasis is on formulating comprehensive family wealth and investment plans to avoid excessive market risks and the burden of taxes.

The following are just a few ideas to consider. Before implementing any strategy, you should check with your advisor.

Stock Losers
If you have substantial losses in any stock in a taxable account, you should consider selling it to “bank” the capital loss and put up to 50% of your loss back in your pocket. You can repurchase it 31 days later or immediately buy something similar to replicate the position.

Capital Gains
In this volatile market, many investors have tried to hold onto stocks for a few more months just to get the long-term capital gain tax rate. In so doing, they have often seen their stock price fall more than the tax savings would have been. Don’t let the “tax” tail wag the “investment” dog.

Re-pricing Stock Options
Many companies are considering re-pricing their stock options so that their employees are not so far out-of-the-money. While this may be great for the employees, it can really hurt the company’s P&L. Instead, consider canceling the options and issuing stock for notes.

Acquisition Bailout
Many key employees of companies with depressed valuations or cashflow concerns are hoping for a quick buyout to pop their stock price up. While this may appear to be a windfall, it often triggers costly “golden parachute” issues for key executives.

Covered Calls
Whether your large holdings are up and you’re worried they might go down, or they’re down and your not sure how quickly they’ll recover, consider writing covered calls on them to take in fat premiums. For example, January 65 2002 calls for Amgen currently at $63 will pay you $12 per share. This 19% current return caps your upside at $77 and protects you down to $51 per share.

Private Wealth Management takes control of your financial situation and creates a strategy to insure that your wealth is not squandered by taking speculative or unnecessary risks. We work with our clients to understand their goals and then create and manage a complete portfolio. We take care of business, which to us is protecting and growing your money. If you’d like to understand the difference that professional wealth management can make, please call 805-495-4405.

Published in Westlake Magazine – April 2001

Knowledge Is The Antidote To Fear - Ralph Waldo Emerson

Most financial advisory businesses grew rapidly during the last decade. This was, however, the greatest bull market in history! For most of the past decade, simple investments in individual stocks, private accounts or even mutual funds have met investor’s expectations. But the 1990’s are over, and with it the realization that it’s not so easy. Financial advisory firms are laying-off thousands and investors are now wondering what to do.

Surveys performed during 1998 and 1999 showed investors expecting annual returns averaging 20% or more. Since the stock market’s return for the 1990s was about twice its average rate of return, any regression to the mean would lead to below average returns for the next 5 to 10 years, most likely in the 5% to 7% range. Since most investors have suffered significant losses over the past two years, they are now forced to rethink their approach to investing. Without much real analysis, many investors have already begun to reshape their portfolios by pulling money out of stocks and moving it into bonds and real estate. However, this is the exact same type of mistake that got them into technology in 1999, bonds in 1994, and real estate in 1989. It’s just not that easy!

In order to look credible after having done so poorly for their clients over the past two years, many financial advisors are finally suggesting that their clients move substantial portions of their portfolios into bonds. The advice appears reasonable because bonds have done well lately and are more conservative than stocks. However, the easy money in bonds has already been made and yields are at historic lows. So, let’s step back for a moment and see how much money you can make on bonds over the next 10 years. Currently a 10-year U.S. Treasury Bond will pay you about 5.2%. Now for the part that will trip-up most investors – interest rates will likely rise over the next few years from these low levels. If interest rates rise just 2%, up to only 7.2% over the next few years, today’s 10-year bonds will drop 12% in value. If you hold the bond until maturity, you will get your 5.2%, but if you need or want to sell it anytime in between, you are more likely to lose money as interest rates are more likely to rise over the next few years.

As has been the case over the past several years, only skilled advisors have been able to advance their clients’ portfolios. With both the stock and bond markets offering below average returns for the next few years, it will take a superior advisor to achieve above average returns. Using the past as prologue, your investing experience over the past two years indicates the competency of advice you will receive going forward. More than any time in the past 20 years, you will need a trusted advisor, with skill and experience, to manage your portfolio in the decade ahead.

Published in Westlake Magazine – February 2001

NASDAQ Math: 85 – 39 = 12.8

In 1999 the NASDAQ went up an astonishing 85%, and then followed that feat with a stunning –39% drop. Most investors would assume that 85% - 39% would leave them with a return of 46% for the two years combined. Would you believe it is only 12.8%, which averages to only 6.2% per year. Let’s see how this works. If we assume you start with $1,000,000 and it grows 85%, you have $1,850,000 after one year. The following year, your $1,850,000 drops -39%, leaving you with $1,128,500. Your money grew by only $128,500 over two years, for a total return of 12.8%.

Even more disturbing is the fact that the typical investor lost more money because they were late to the party and then hung on too long to falling favorites once the party ended. If your financial advisor must call you before making any changes to your portfolio, they will be too slow to react to changing market conditions. If your advisor works for a brokerage firm, bank, or most independent financial planning firms, they are not allowed to manage your portfolio, but can only suggest securities and investment products to you. They must call each and every client, one at a time, in order to make a change. When opportunities or threats present themselves, they are unable to act in a timely manner for all their clients. Worst yet, when you’re ignored and must call your advisor to take action, you still pay them for implementing your idea.

The major brokerage and financial planning firms have seen this problem growing so they have instituted two programs to hide from this threat. First, some of their salesmen have reinvented themselves as “consultants” to sell clients to outside programs or wrap accounts. Second, they have instituted fee programs. Both of these schemes still have the same old flaw, making you pay high fees for low flexibility and marginal service. Because wealthy individuals have become more informed they have insisted on a better way – that way is wealth management.

True wealth management is gaining control of your financial situation and creating a strategy to insure that your wealth is not squandered by taking speculative or unnecessary risks. The key difference between us and “them” is that we manage our clients’ portfolios. We work with our clients to understand their goals and then create and manage a complete portfolio. We take care of business, which to us is protecting and growing your money. If you’d like to understand the difference that professional wealth management can make, please call 805-495-4405 to R.S.V.P for one of our upcoming events.


Portfolio Development Thursday, February 15 at 6pm
How to create, monitor, and maintain an all-weather portfolio

Retirement Planning Tuesday, February 27 at 6pm
Covering pension & 401(k) rollovers, early retirement, and IRAs

Stock Options Seminar Thursday, March 8 at 6pm
Covering ISO and NQSO employee stock options

This article appeared in Westlake Magazine – February 2001.

Client Update – January 10, 2001

Most investors will be glad to say goodbye to the year 2000. The S&P 500 had its worst performance in over 10 years and the NASDAQ suffered its worst loss ever, down 39%. As expected, most Wall Street pundits predict a rising market in 2001 (as they did for 2000). The idea that the market could perform poorly two years in a row seems inconceivable. They will continue to predict the good times until they are wrong several times in a row and then they’ll switch to predicting bad times, but by then we’ll be back into good times.

There are still excesses in the technology sector despite the recent decline in the NASDAQ and tech stocks. Some tech stocks have fallen a lot, but the NASDAQ bubble is not fully deflated. The NASDAQ still sports a P/E ratio of 110, when its long-term average is around 40. That implies that some combination of prices falling over 50% or earnings doubling should take place.

The erosion of stock market wealth will clearly affect spending in the months ahead. Perhaps spending cutbacks will be severe enough to cause a recession instead of a soft landing. However, the Fed will keep lowering rates until it succeeds in stabilizing the economy.

The current shape of the yield curve suggests that the credit markets expect rate cuts of 100 basis points over the next 12 months. The Fed lowered the real fed funds rate to 0% in the early 1990s due to U.S. economic weakness. A similar move today would imply a fed funds rate of 2.5%, much lower than today’s 6.2%. This gives the Fed a rather large net to catch the economy should it fall.

On a more positive note, reasonable values are available in some sectors and many previously neglected stocks are now attracting interest. We will continue to prudently allocate money to those sectors that are the most reasonable and attractive.

While the stock market is no longer extremely overvalued, there are still dark clouds over upcoming earnings announcements. As far as the near term is concerned, we continue to advocate a conservative stance.