February 6, 2018
The Investment View from Prescott, Arizona
Virtu, one of the firms that executes our ETF trades, recently had an interesting article about the increasing numbers of high priced stocks these days.
It used to be that stocks would split when they got expensive, with the rationale that $30-50 shares sell faster than $100 or $200 shares. This is because investors like to buy in round lots and it is easier for most of us to write a $5,000 check than a $20,000 check. Publicly traded companies would try to build more interest in their stock with lower prices, so when a stock got to $60 it might be split into two $30 shares. That is still $60 of value, but sounds more like a bargain.
Warren Buffett’s Berkshire Hathaway (Symbol: BRK-A) has bucked this age old tradition by never splitting their stock. It recently reached a price of $325,915 per share on January 26, 2018. Yes, a six-figure price! Recently a number of companies have foregone stock splits with 187 S&P 500** stocks priced over $100 as of January 31st, and four priced over $1000 (BRK-A is not in the S&P 500**).
The Virtu article compared the performance of the 20 highest priced stocks in the S&P 500** vs. the 20 lowest priced stocks.
Going back to 2010, the highest priced stocks were pretty average performance-wise, tracking the index pretty closely. However, the lowest priced stocks outperformed the Index by almost double.
This seems to be a pretty good argument to not blindly follow the trendiness of high priced stocks in favor of lower priced ones.
I have long admired Elon Musk’s ability to promote Tesla’s various enterprises while keeping afloat a company that has lost money for 8 years now, and is increasingly having trouble raising more. Every month or so another far out project is announced, but he really hasn’t produced much. Just a few nice looking cars that have only a fair reliability record according to Consumer Reports.
Early in my career I learned that the vast majority of business failures were newer companies that just couldn’t make the leap from ideas to cash flow, and I fear Tesla is in that category. That is why I have never bought their stock.
Musk’s new pay package was recently announced, and is full of incentives to grow the company. Clearly, Musk is motivated to get Tesla to grow, but many of the benchmarks he must clear seem as far out as his project pipeline. I had a vision of a really good cheerleader when I read the article.
Then last week I read that Silicon Valley icon and Apple co-founder Steve Wozniak no longer believes the hype. “But I still love the car,” Wozniak added at a recent talk at Stockholm’s Nordic Business Forum, according to a report by Business Insider.
It’s nice to be in good company, and not owning Tesla stock.
What We Were Saying Back Then - Three Incorrect Assumptions That All Robo-advisors Make About Their Clients
A recent InvestmentNews article reported on a talk by Joe Duran, United Capital CEO, which mentioned the three incorrect assumptions that all robo-advisors make about their clients. I thought Duran’s insights were worth recounting here.
Mr. Duran compared relying on an outdated investment plan to a driver blindly following Google Maps, and said the results can be disastrous. "[Adviser’s] value is not in building the plan, it's in adjusting the plan along the way," he said.
Score one for the proactive management that I provide.
This is especially important in an era of low-cost digital advice where the temptation to go for the lowest fees blinds investors to what really counts, flexibility.
But Duran said robo-advisers are operating under faulty assumptions — that advice is all about money, that all investors are average and that human advisers are too expensive. At Hepburn Capital, we understand that you don't want to be just a number on a spreadsheet, but to be treated as unique.
He wrapped up his talk with this comment: "The future is bionic. The winning combination will be mostly human, but powered by technology in everything they do."
In my work for you, I blend cutting edge technology with old-school market savvy to keep more of your money invested in assets that are going up and less in those that are going down, but the technology is just a tool. I am like the mechanic who knows when to correct an imbalance with the proper tool turned in the correct way at just the right time.
Unprecedented events cannot be neatly programmed into a computer. The human ability to recognize something that may have never happened before for what it is, and then take action on your behalf, is the major difference between my work and a computerized robot advisory service.
According to a wire service, the market has gone 18 months without a 5% pullback, the longest period in history. At some point, the market will pull back as profit-taking takes over, and that point may be upon us.
After a strong beginning to 2018, the last week has not been fun for stock investors, with the S&P 500 Index** dropping 3.85% from its peak on January 26th. Not quite to the 5% mark mentioned in the article, but scary none the less.
It is important then for the active investors like us to avoid becoming complacent. While I believe the market is not totally out of gas based upon a number of my indicators, I am starting to see signs of liquidity shortages, specifically in the weakening performance of high yield (junk) bonds which tend to be a good barometer of market health.
I thought it was funny that during Friday’s sharp selloff in the market one of the causes that many of the pundits blamed was inflation. Nothing could be further from the truth. Treasury Inflation Protected Securities (Symbol: TIP) had very poor performance along with most bond sectors. If inflation was really the problem TIPS would be going through the roof. So chalk this one up to Wall Street misinformation.
When I see Wall Street misinformation being promoted by the media, I begin to look the other way. In this case it suggests that a bond rally is close at hand.
One of the nice things about following market data is that I don’t have to make decisions on funky news stories. Instead, I can focus on what is actually happening and make decisions based on data, rather than gossip, politics, or pundits. Technical analysis allows us to have a plan of action, no matter what happens.
A frequent question I get is “when is this trend going to end?” My normal response is “I can’t say for sure, but I’m pretty sure I’ll recognize it when it turns.”
The stock markets made a lot of headlines in January with their strong performance. I’m pleased to say that HCM account holders did even a little better than the markets, so if the stock market had a good month, we had a great one.
Accounts modeled after our Shock Absorber Growth* strategy outperformed the S&P 500 Index** in both calendar month January and during the sell off that began last week.
I usually compare our performance to the S&P** because it represents about 80% of all dollars invested in US stocks. By contrast, the Dow Jones Industrial Average** might get all of the headlines, but it only represents about 25% of all US stock investment.
The Shock Absorber Growth* model portfolio holds 23 stocks as of this writing on February 5th, divided fairly evenly among go-go growth stocks in my Future Tech strategy* and larger, more well-established companies in my Targeted Growth strategy*.
We also hold about 10% of growth moneys in my gold strategy which moves back and forth between gold ETFs and inverse gold ETFS, ones that go up when gold goes down, allowing us to make money in both up and down gold markets.
Gold had a decent year last year, but the HCM gold model account outperformed gold by a 3:1 margin. If anyone tells you that you can’t time a market, they just don’t know how it is done. Call the office for an appointment if you’d like to see more about how this great strategy works. The number is 928.778.4000.
Even during the sharp price drops in the major indexes from late January through this writing on February 5th, the HCM growth strategies still outperformed the major indexes. This is due to your portfolio’s ability to Adapt to Changing Markets® allowing it to move from fully invested on January 26th to having only 39% exposure to the stock market as of this writing on Feb 5th. This proactive agility is what distinguishes my true money management from that of ordinary, more passive portfolio managers.
When you can perform well in both up markets and down markets that is the sign of a superior investment. Tell your friends, please!
Your Flexible Income* accounts posted a respectable gain in January even though the Vanguard Total Market Bond Fund, which follows the most widely used bond index, lost over 1% in January. The changes I made a few months ago to help us weather the headwind of rising interest rates seems to be working well.
Flex Income* remains invested in a blend of high yield (junk) bond funds, emerging market bond funds, international real estate and high yielding stocks with the portfolio averaging 4.08% dividend rate as of this writing on February 1, 2018. This means that if the holdings do not move up or down during the year, the portfolio should gain 4.08% just off of the dividend reinvestment. I think that you will find that a return like that compares very favorably to bank rates. And if the holdings rise in price, we get a double bonus.
- Shock Absorber Growth is our 100% growth portfolio.
- Flexible Income is our 100% income portfolio.
- Adaptive Growth Portfolios are currently allocated with 80% Shock Absorber Growth and 20% Flexible Income.
- Adaptive Balance is 50/50 between growth and income.
If you haven’t had a review of your account for a while, please call the office to arrange a time to talk in person or on the phone. The number is 928-778-4000.
There is still time to enroll in Fundamentals of Investing for Retirees which begins tomorrow, February 7th and runs for 3 Wednesdays through February 21st, from 2:00-4:00 pm. Call the college at 717-7755 to register for class #WS18-137. Cost is $45
This is the fun class that I have taught at Yavapai since 1990. Please tell your friends that this is a great low-pressure way to get exposed to my work.
With our Future Tech Strategy we strive to provide a high rate of capital appreciation using primarily equity investments in emerging technologies.
We invest primarily in stocks, mutual funds or ETFs, and a money market fund. The proprietary HCM Safety Net suite of indicators is used to warn of potential stock market declines in which case exposure may be quickly reduced or hedged using inverse funds.
Click here to read more about Future Tech.
After several years of searching for a really good, dependable handyman, Sheri, from my office, mentioned Mike Boeckner of Countryside repairs, and what a find Mike has been!
Mike can do decks, remodels, painting, fencing or landscaping, and even repaved a pothole in my driveway. Whether your repair needs are large or small, I would recommend Mike to you. He has all his own tools, cleans up after his work and can provide free estimates.
You can call Mike Boeckner at 928-910-2168 or email him at AZCountryside@gmail.com
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor's account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client's state of residence.
Copyright (C) 2018 William T. Hepburn. All rights reserved.