Sep 30, 2015 | Behavioral Finance, Market Commentary, Video Updates
“Every journey in life has a destination.” — Ken Poirot
In today’s video, I share a conversation I had with a friend of mine, who is a surgeon. How does he handle things when the surgery outcome is unknown, and in the middle of the operation if things go awry? How do you stay calm?
What he deals with on a daily basis is the same as investments and your financial plan. How do we keep our eyes on the big picture? What is normal, and how do we stay calm?
One of the benefits I bring to my relationship with clients are the 24 years of experience, and in that time I’ve seen just about everything. The behavior and attitude we bring as investors is probably the most important variable in reaching our financial goals. At least, that’s been my experience.
Click on the video for my thoughts on the Journey
Aug 28, 2015 | China, Market Commentary, Video Updates
“Life is Really Simple–but We Insist on Making it Complicated” – Confucius
Over the next couple of weeks I’m going to talk about the reasons given for the market correction
1. Plunging Oil
2. China
3. Disappointing Profits
4. Trading Milestone (200 Day Moving Average)
5. Rate Jitters
Today I focus on Oil, as it’s declined from approximately $60 in June to $40 today. What is that indicative of, and is that a long term benefit or detriment for the economy?
I say it’s a long term benefit, and make such an argument in my video.
Click below
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive full-service firm right here in Boulder Colorado. I’m recording this on Thursday, August 27. Last video I recorded was last Friday. And Monday and Tuesday of this week very exciting; huge plunge in the unmanaged stock market indexes. Wednesday, yesterday from my point of view and so far today we’ve had a nice rebound. So it’s important to remember that even when there’s big ups in the market taking four steps forward, sometimes we take steps back. Well, the opposite is true. When a market is going down sometimes we have nice rebounds. And so I would anticipate, and it is normal for there to be a seesaw, some downs, some ups, et cetera, and so I wouldn’t read too much into a huge decline or too much into a huge advance at this point. I go back to my first video where I talk about, the video from last week, where I talk about what’s your time horizon, what’s your plan and what’s your conviction. I highly recommend you go back and watch that video.
Today I want to talk about some of the reasons being given for the decline in the market. There are five things, I have written them down here that you’ll read about. The first one is plunging oil and that’s what really today’s video is going to be about. Second one is fears about China. We’ve been talking for months and for years about China and so this should not, if you’ve been watching the videos and reading my newsletter, this should not be a surprise to you. Third thing is disappointing profits. The fourth is trading milestones like the 200 day moving average, there’s certain technical indicators. The fourth thing is rate jitters, which is concern about what the Fed might do in September.
Let’s focus just on plunging oil. What the heck does that mean? Back at the end of June oil a barrel was over $60, today is closer to $40. That’s a pretty huge move in just a couple of months. Now it’s good for us to remember that oil is an input into the equation of expenses for a company and for you as an individual. So would we want – so there’s lots of different variables: employee cost, oil, the cost of manufacturing, all your cost of goods sold. And those costs are passed on to the consumer. So it’s good for us to remember that. I mean if there’s an increase in one of those variables, in order for a company to be viable they have to pass on their expenses to the consumer so ultimately you pay for that consumer. Or, when you go to the gas station would you rather pay $30 for a fill up or $40 for a fill up? Of course $30. Now that allows more income to be diverted towards other things. So if I’m now spending $30 where I used to spend $40 for my gas tank, then that gives me $10 to go into the grocery store, to the movie theater or whatever it might be and help my economy in that way or enrich myself or reinvest that extra $10. From a company point of view, the vast majority of companies are helped by a lower cost of that input than are hurt. There are some that are hurt. I’m not going to lie to you. Some of the oil and energy companies are hurt by it, but let’s just look at the unmanaged stock market index, the S&P 500.
The top five sectors are technology, with about 18 percent of that unmanaged stock market index; healthcare of about 16 percent; financial services 15.5; consumer cyclical about 11; and industrials about 11 percent. You add all those things up and 70 percent of the S&P 500 unmanaged stock market index sector wise is non energy related. And it’s not that the other 30 percent is energy related, it’s these are ones that are going to be helped out, the vast majority, the greater good is with oil being at a lower price.
I’m going to throw up on the screen there real quick just oil production. You can see that the U.S. oil production, I put a red arrow next to it, has significantly increased in the last two and a half years. And so what we have with the price of oil is, and one of the reasons why people have concerns about it, is it can be an indicator of the health of the economy. So when the manufacturing is slowing down you demand less oil. And so therefore when you see less oil then that means that the economy is slowing down. That makes sense. However, that’s not the entire equation on the price of oil, it’s price and demand. So if demand is decreased – in this case we’ve had some demand decrease, which is true, but we’ve also had incredible production. So it’s not just the demand, it’s also the galots [ph], the quantity that’s available is significantly greater and increased and so therefore even with the same demand the price would have gone down. The fact that we’ve got some lesser demand just kind of exacerbates the particular problem.
I’m going to throw another chart up there real quick. You’re going to see the economic drag as JP Morgan has done it. You can see that lower price provides less of a headwind against the particular GDP for our particular country. This is a good thing. And so my whole summary of the video is yes some are hurt by lower oil prices and some of the stocks that are tied to that, energy in the S&P 500 unmanaged stock market index and some of the other unmanaged stock market indexes are hurt, or if it’s a part of a diversified portfolio and things of that nature. However, the greater good over the long-term, the one-year and the five-year of having more money that you can reinvest or to repurchase and put into the community is a good thing overall. So I see this as a good thing, not as a bad thing even, though there might be some short-term impacts and that might be one of the five reasons that have been given.
I’ll talk about China, I’ll talk about rate fear] in subsequent videos, I’ll talk about the trading milestones, some of these other things so that you’re well formed over the next couple of weeks. Mike Brady Generosity Wealth Management. 303-747-6455. You have a great day. See you. Bye bye.
Aug 24, 2015 | Behavioral Finance, China, Emerging Markets, Market Commentary, Video Updates
“I never said it’d be easy-I only said it’d be worth it”–Mae West.
That’s what I think about when I think about investments.
Yes, the unmanaged stock market indexes are making the news, but the whole reason we have a plan, discuss the time horizon, and determine our conviction is because these events happen. Always have, and always will.
History has shown us that those who ignore and then over-react are the ones most hurt. I don’t do that, and I wouldn’t want any of my readers to do that either.
For my full thoughts, click below for the video.
Hi there. Mike Brady with Generosity Well Management, a comprehensive full service financial firm headquartered right here in Boulder Colorado. And I am recording this on Sunday after a pretty interesting week in the unmanaged stock market index; it’s like the Dow Jones and the S&P 500. Perhaps you read something about it or saw it on the news. And so the question is should we freak out or how freaked out should we be? And I’m here to tell you step away from the ledge and why I say that. I was recently at a conference. This was a big conference in Washington DC, I just got back last night with probably 1500/1700 people there, big key note speakers, the whole deal. And I know that not everything went according to plan. I noticed that there were a couple problems with the speakers and some other logistical things that happened. And I know the organizer and she was cool as a cucumber. And so I went up and I talked with her. I’m like, “Wow how can you stay so calm when a couple of things really didn’t go the way it was supposed to?” And she said to me I thought very wisely she’s like, “Mike, that’s why I do all the planning in advance. I’m here to execute the plan. That’s why it’s called a plan. Conference organizers who are running around like a chicken with their head cut off are those that haven’t done planning in advance because when a problem happens it’s too late. You already have to have a plan that you can stick to and you just work through it. You just know that nothing is going to go perfectly; there’s going to be some speed bumps and it’s just part of the deal.”
So with that as a lead in, the people who should be concerned are those with a short time horizon. If your short time horizon is six months, 12 months, maybe even 18 months to two years and you’re undiversified and you don’t have a plan and you’re going to need that amount of money, you shouldn’t be investing in the stock market in my opinion. I’ve said this time and time again in all these videos that if you have a short time horizon, and in my mind I think of that as one year, two year or even less, it’s inappropriate because the unmanaged stock market indexes go through ups and downs and sideways and that is too short of a time horizon for there to be a cycle. If you are undiversified, that’s not very smart because individual stocks can take a very long time in order to bounce back, if they bounce back at all. And you should be concerned if you don’t have a plan that includes stocks and bonds of some diversified nature, even though having a diversified portfolio does not guarantee against loss in a generally declining market, if you do not have a plan like that that’s the reason why you have it. Bonds have a tendency to pull things up when stocks go down and the other way around and you’ve got to find a plan that works for you because investor behavior is what hurts most people. That has been my experience in 24 years is that people ignore and then over react. And I certainly don’t do that and I’m here to tell you if you want to be, in my mind, the smart money, you’re not going to do that either.
People have a tendency to wait too long to get into the market. Let’s think about ’98, ’99, 2000, my gosh you were a fool if you didn’t get into the Internet stocks because everybody made money there and you can’t lose and how could you be so foolish to be diversified, you need to go all into this. Well, that of course was the wrong time to buy. The market goes down and then people say well this obviously isn’t for me right before the market rebounded back all through the 2000’s. I remember in March of 2009 you couldn’t find somebody who wanted to, it felt like, I couldn’t find somebody someone who wanted to invest in equities and in stocks, when really that was the time that made the most sense. So our emotions cause us to do the wrong thing at the wrong time.
So let’s talk for just a little bit about just 100 percent stock market index. I’m going to put up on the chart there, on the screen, something that I do on almost every single video it seems like. And what you’re going to see the bottom number are the red numbers there, it is normal for there to be declines of even double digits throughout the year. And if you go back and watch everyone of my videos for the last three years I’ve been saying that every time it happens people get all concerned, when in fact that is the norm. The thing that has been unusual is that the last two/three years it has been unusually not on the downside. So what we have seen the last week or two that been so alarming because it happened very quickly over a week or so.
In a future video I’m going to talk about some of the reasons and I’m going to dissect them, but if you’ve got a diversified portfolio, which is what you should have, I’m going to throw another chart up there on the screen. You’re going to see at the far left-hand corner one year and then the second grouping of bars is five years, ten years and 20. The big green bar there is over the last 64 years the high for 100 percent stock market index S&P and the low. And so you can see there’s huge highs and huge lows. But then when you look at the second bar in that grouping is bonds. Bonds have a tendency to not have the high highs and not have the low lows. And when you group them together it has a tendency to bring down the highs and bring up the lows.
When we look to the second grouping, which is a five year time horizon, not one year, not two year, historically a combination of 50-50 stocks and bonds has never had a losing five year time horizon going back 64 years, when in fact, of course, it could in the future. I can’t guarantee what’s going to happen in the next five years, but I do know that historically the odds are in our favor, I believe, that if we have a diversified portfolio that is the way to go.
I’m going to put up on the screen talking a little bit about investor behavior. At the top of the screen you’re going to see, starting in October of 2007 all the way through 2008 and all the way to the decline of 2009, and you’re going to see the top two lines did decline, but they very quickly came back because they were diversified. The bonds have a tendency, and the bottom one by the way was 100 percent stock market index, which you shouldn’t be in anyway for most people. I mean if you can have your investments for a long time multiple and you can handle, you just put it in a shelf and say no matter what I’m not going to lose a minute of sleep, then that might be the answer for you. I don’t know. I’m giving very general thoughts here, but that might be the answer. Most people though get concerned. So that’s why we have to know what our investor behavior is. We want to be the smart money and so therefore we usually include some bonds in there, which has a tendency to buffer some of the downs and unfortunately also buffer some of the up as well. When we look at those lines, I’m going to throw it back up on the screen there, you’re going to see that within pretty quick order, and this is even after that horrible 2008, it came back.
So one thing we have to ask ourselves is what is our conviction? If you don’t believe that two, five, ten, 20 years from now the United States, and that’s where the majority of most investor’s money is, if you don’t believe that the United States is the bet that you want to make, why do you have any money in it? But if on the other hand your time horizon is five years, ten years, 20, and if you say wow I believe that in comparison to the rest of the world we’ve got the best ingredients, we’ve got the best workforce, we’ve got the best in comparison to others or the theory of relativity, I’m throwing in some Einstein for you, then this is part of the deal. We’ve got to stay invested and we stay calm and this is a buying – the world can be really scary if you let it be scary or it can be a world of opportunity if you let it be a world of opportunity. Warren Buffett, and I’ve said this many times, Warren Buffett has said that be greedy when others are fearful, fearful when others are greedy. And people are fearful right now. This is a wonderful opportunity if you believe five and ten years down the road and you’ve got a time horizon that is long. And most people have a long time horizon. If you’re within two or three years of retirement, I have to tell you unless you plan on dying the day after you retire, you got another 20/30 years probably to live even after retirement. If you’re in retirement, you know, you’re in your 70’s your probability of you and your spouse one of the two of you is going to live into your 90’s. That’s just the actuarial reality of it. And so what works for us is our time horizon. We have a plan of stocks and bonds, we have a positive conviction, which I personally do, and we don’t ignore and then overreact. Because frankly your unsophisticated investor has a tendency to wait too long to get in and then get out right at the wrong time and that’s why we have a plan. We think about it in advance so that frankly we’re cool as cucumbers when this happens, we’re not scared by Cramer on CNBC and all of the TV. The best thing for this are the news channels and all the newspapers because people, if you want to see negative you’re going to see negative. If you want to see positive you can see positive. Frankly I try to take both of them. I try to be agnostic, although I have to say my conviction is that I see the positive in there and there’s a buying opportunity from my point of view. I have no idea if one or six months from now the market is going to be higher or lower than it is right now. I believe that it’s going to be equal or greater. I’m not going to lie to you. Not one month perhaps but six months from now, but I could be wrong. I could absolutely be wrong. I could be wrong a year from now.
But you know what, if your time horizon is a year you shouldn’t be in it anyway. So it’s an academic discussion that we’re having right now. That’s why you have stocks and bonds meshed together in a diversified portfolio with a time horizon and with a plan that works for you. There is – I said something about a scary place, just in the last couple of years, I just want to throw out some topics here, remember how scary the Flash Crash, this is just what we saw in the last couple of years, the debt ceiling, the S&P downgrade of the U.S. government, Europe almost collapsed, Greece almost collapsed just last month. The emerging markets is not going to take down the world. That’s my opening. That’s my stake in the sand and I’m going to throw out there. But emerging markets should be a minority of your portfolio anyway. Is it going to affect the U.S. portion of your portfolio? Yeah it could. But even Greece, Greece is incredibly small compared to – I mean they’re a $185 billion GDP, we’re 14, 15 trillion. They’re one percent, less than one percent of us. So there’s always things out there that are scary. That’s why we have the plan in advance.
I’m going to continue with videos throughout, you know, assuming that some headlines happen. I’m going to try to explain; I’m not going to do them super long. This one now as I look at my clock looks like a really long one. I’m going to try to keep them shorter so that they are piffy but that you know that I’m on the job over here watching things on your behalf. (303) 747-6455. Mike Brady Generosity Well Management, give me a call if there’s anything I could do for you. Talk to you later. Bye bye.
Jul 13, 2015 | Europe, Interest Rates, Market Commentary, Video Updates
While there have been some exciting one day swings in the unmanaged stock market indexes so far this year, it’s actually been relatively calm, without big 5% and 10% weekly and monthly swings that we see periodically in the markets.
As of the end of the 2nd quarter, most major unmanaged indexes were about break even.
In my video, I talk about the impact Greece and China may have on the markets going forward, and how the potential interest rate hike in September may affect things. I’m not gloom and doom, so if you’re looking for that, than you better watch something else!
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive full service wealth management firm headquartered right here in Boulder Colorado. And I’m actually not in Boulder right now that’s why I’m a little bit more casual than usual. I usually have a library behind me, a blazer on, but for 4th of July weekend I thought I’d come up to our family cabin in Wyoming and with high speed satellite Internet, cell phones and computers and scanners, my entire office is right here as if I was right there in Boulder. Technology is wonderful. I hope you’re enjoying the summer. I’m enjoying, when I’m not working, the mornings and the evenings, the sunrise and sunsets are absolutely beautiful. I hope you’re having a wonderful summer as well.
So this is our second quarter review, sort of a year to date review and a rest of the year preview, kind of a mid year mid report, kind of a halftime check in here. We’re going to talk about Greece, we’re going to talk about China and interest-rate, but first let’s talk about what’s going on so far right now with the big picture. Big picture is so far this year the unmanaged indexes are about break even. They haven’t been really that volatile, although there have been some volatile days. But in general it’s actually in comparison to historical terms a relatively low volatility. I’m going to put up on the screen there the last 18 years of the unmanaged stock market index S&P 500. Why it started in ’97 I have no idea, but the chart starts there. And you’re going to see some big swings up and down and up and down. And since March 2009 you’re going to see that we’ve been on a very nice upward mobility on that particular index.
The stuff that’s happened in the last six months and the last 12 months, and although it’s taking a little bit of a breather, it’s a little bit of a consolidation period. I mean there’s times where the market goes up, it goes down and times when it goes sideways. And right now we’ve been going a little bit on the sideways. I’m going to put another chart up there and you’re going to see this is one of my favorite charts and frankly every video that I seem to do anymore I put this chart up because I like it so much. But this is since 1980, so that’s a good 35 years of the unmanaged stock market index S&P 500. The numbers on the top of that X axis are the end of the year returns. So 27 out of 35 years have actually been positive, some of them are negative, of course, but 27 out of 35 have been positive. But during the year that’s the number at the bottom that kind of that bar chart underneath the X axis and that’s the entry year decline. That means that just hypothetically if the market went up ten percent and then it lost four percent down to six percent and then went up and ended the year at eight percent, rebounded back, that would have and enter year decline of four percent because from the top to the bottom throughout that year there was the maximum four percent decline.
Well, that’s actually what we have so far this year. The S&P 500 is about to break even as of June 30th and it’s really kind of have been going up a couple percent, lose a couple percent, up a couple percent, lose a couple percent. And so that entry year decline is relatively minor and mild when you look at it in comparison to previous years of double digit highs to lows. So that’s been kind of the first six months of this year. One of the more difficult things to do as an investor is sometimes to do nothing. And so my video here today will sound an awful lot like some of my videos in the past over the last three/six/12 months because we’ve actually been on a little bit of a holding period now and it’s my analysis that that holding period is not leading till a big crevice that we’re going to fall into and Armageddon before us, but one that will actually creep higher that it is lower. Our earnings per-share for the market in general are coming in positive and I continue to think this is a good market to invest in, particularly in a well diversified portfolio.
I’m going to throw a chart up there and what you’re going to see here is this is another one of my charts that I used time and time again, but it’s rolling returns. That first grouping is one year, the second grouping is five, the third grouping is ten and the last one is 20. That’s a rolling return going all the way back to 1950. And that third bar in each one of those groupings is a mixture of 50 percent unmanaged stock market index with 50 percent of an unmanaged bond index kind of shoved together. And what you can see is that time is our friend. I mean historically going back 65 years, if you had those two indexes mixed together held like that there’s actually never been a five-year timeframe when you haven’t at least made a little bit on average each year. Some years it might be negative, negative, negative and then you made up for in the fourth year and the fifth year, et cetera, but when you average it out if you hold it for that timeframe there’s actually never been a timeframe, a rolling five-year holding period where you’ve lost money, and the same thing with ten year and 20 year. So we’ve got to be in this for the long-term I think as investors and so volatility in the market is a part of the game, even though we hated every time that it happens. And I think that this is one of those times when the headline is a little bit bigger than what we’re saying right now.
One thing that you’re going to hear an awful lot about in the next three months is interest rates. In September the Federal Reserve is going to get together and it is highly expected that they will start to increase the interest rate. And you’re going to hear all kinds of Armageddon stories about it. And all I can say is that we’ve been anticipating this for a very long time and I believe that it’s priced into the market. When we look at the last three interest rate increases, which was ’94 and ’95, ’99 and 2000 and then 2004 – 2006, initially there might have been a decline, I put that graph up on the screen, there might have been a decline but while the interest rates were increasing the unmanaged stock market index has continued to rise. And so it wasn’t this huge horrible thing that you might have been led to believe in the last two/three years while we’re looking at historical. Now of course, future this time it could be different. Maybe the interest rates increase and the market goes on the downside. I don’t think so. Possible. But the last three rate increases that hasn’t happened, I mean the market has continued to increase over a two-year timeframe even while the interest rates were increasing. So there’s not a perfect correlation that when interest rates increase then the stock market decreases. That’s just not true, even though you might have been led to believe that by some kind of watching something on TV.
Something that’s really big in the news right now is Greece. If I had to explain Greece I feel for all of the Greek people. They’re in a world of hurt and I’m not exactly sure where this is going, but it’s relatively small. They have an economy about the size of Detroit. They have an area, physically geographically the size of Louisiana. They’re really, really small but they are part of the European Monetary Union. And so therefore the question is how is that exit, you know, what’s the moral hazard if they get bailed out? Now I’m recording this on a Tuesday, they’ve already had their vote on Sunday and they’ve rejected by a pretty substantial amount, 61 percent, of negotiating and taking the first deal, well not really the first but the most recent deal that the European Union was giving them. So I feel for the Greek people. I have to tell you that it’s a little bit like having that family member who always has a big story about why they need money but no matter what they do, whether it’s a sibling or a child or a cousin, but they always spend more than what they bring in for whatever reason and their habits don’t change, their behavior doesn’t change so after a certain point you stop loaning them money. You stop giving them money. Everyone everybody in the family knows don’t give uncle Joe this money or don’t give Susie that. And so it’s a little bit like kind of that ugly sibling in the European Union right now, which is Grace. And there’s a few others that are looking to see what happens, Spain and Portugal, et cetera.
And I don’t want to minimize this in anyway because it could be a bigger deal than it is, although I don’t believe it is at this point, but it could. But when we look at history sometimes there are small events that turn out to be big events. I mean when Ferdinand was assassinated in 1914 it led to World War I. Well it wasn’t that small event of the assassination, it was all the alliances. There was a bigger picture than just that one small event. And so this could turn out to be the same thing, although I don’t believe that’s going to be the case at this point right now.
I think a bigger deal is China. I mean you’ve been hearing me for years now talk about China and how I don’t necessarily trust all of their numbers. Well, their stock market, which has just been on an absolute tear this year, just lost 30 percent of its value in the last three weeks. And so I think that those who were invested, that bubble there are also realizing that what is reported is not always the full information and so therefore it might have been priced in inappropriately before and now it’s being corrected. And so if that’s showing a slow down in the Chinese economy, that’s a huge economy, that’s something that could affect all of us. So I think that that’s something that we ought to watch as closely, if not more closely than Greece, even though Greece is a spectacular problem at this point right now.
That’s what I’ve got. I’m still optimistic going forward for the rest of the year and so I’m not making any major changes. We’re kind of in this holding period right now. There’s nothing that I’m seeing that leads me to change my beliefs from the last quarter or frankly the last year/year and a half that having a well balanced portfolio makes sense and that we’re not going to have, I don’t believe that we’re going to have this huge decline. And so I think we ought to just stay with where we are right now without any major panic. So anyway, like Brady Generosity Well Management, 303–747–6455. You have a great day. Give me a call. Give me an email. I’m always here. Thanks. Bye bye.
Apr 22, 2015 | Estate Planning, Financial Planning, Market Commentary, Video Updates
The first quarter was a great reaffirmation that diversification can be your friend. US Large company indexes lagged, but middle and small companies did better. US Bonds did well (in general), as did international stocks.
While diversification does not guarantee a positive return in a generally declining market, my experience is that it does tend to “buffer” some of the returns so you can stay with the plan that works for you.
In my video, I review the past quarter and continue my theme about what I’m watching to come to a “health” conclusion on the markets. Okay, I’m still bullish, but why you may ask? Click on the video for my thoughts and analysis.
Jan 28, 2015 | Bonds, Regulations, Video Updates
I recently did this really awesome educational video for you on Bonds, but unfortunately I described the characteristics of bond mutual funds in layman terms without a bunch of disclosures, and approval from a higher up regulatory agency is required (come to find out).
So that got me thinking about rules and regulations. Should we have more or less, are they a cure-all panacea, and most importantly, what are the unintended consequences?
Click on the video below to hear my crazy thoughts on regulations. All right, they’re not really crazy, but I think the question of more or less is a hard one, and we shouldn’t “knee jerk” one way or another “just because”.
Hi there—Mike Brady with Generosity Wealth Management, a comprehensive, full-service wealth management headquartered right here in Boulder, Colorado.
Today, I want to talk about regulations—are they good, are they bad, should we have more, should we have less, and I’m going to tell you that I’m right in between. The most important thing is that it doesn’t solve everything. First off, before you think I’m some kind of a radical, you’ve got two extremes. This is 100% regulation, this is 0% regulation and I don’t think that anybody of sane mind is saying that we should have 100% regulation, that’s government ownership of everything, or is zero regulations. I don’t know what things were like before the 1929 crash, but I definitely know that, after that fact, there has always been some kind of regulation. It’s not necessarily a panacea. It doesn’t solve all your problems and I think that it’s good for us as investors, not to necessarily advocate for more or less, but just to understand that they have a place, but it just doesn’t solve everything and if you think it’s going to then I think you’re going to have a false sense of security, because something is probably going to happen in the future as well.
Let me tell you why I’m even bringing up today’s topic. I’ve probably done 100, maybe 150 of these particular videos over the last five years and the reason why I started doing the videos is I thought it was a great way, an additional way to communicate with clients and friends, maybe perspective clients. It’s a way for me to try to be as clear and concise as possible to share with you what I’m thinking and how I view things without having to pick up the phone and call every single person. That might be a very inefficient way to do it.
I also want it to be educational for you so if you’ve been watching a lot of my videos, you know that I talk about maybe a current topic, maybe a general topic, etcetera, because the way I view things is just because I do this all day, it’s not because I’m smarter than you, but maybe I’m on page five, maybe I’m on page six and because you don’t do this every day, maybe your education level in investments and financial planning is on a page two and so if I can help bring you up to page three or page four we can have a great conversation and I think you’re better off for it and I think I am as well.
Well, out of all those videos I recently did a video last week that was called All About those Bonds, and actually I don’t know if you ever that song, All About that Bass, all that Bass, well I called it All About those Bonds and I figured a couple people would get the joke, but it turned out to be a 16 to 17 minute video about bonds, so I talked about price, I talked about yield, I talked about what a bond is, how it works, premium, discount and in my opinion, it was a beautiful video. I was very proud of myself because I thought that I could refer back to it in coming months and coming years and say wow, you have a question about bonds. Just look at this particular video. Inside there, I talked about bond funds and I talked about the characteristics of bond funds, and so I was trying to talk, in layman’s terms, about the characteristics of them, whether they could lose money, make money and various situations like that and so for 30 seconds, I actually talked and warned about some things in bond funds, but because of that, I talked about the characteristics of bonds. A compliance department examiner doing absolutely her best job and that’s what she’s supposed to do, said Mike, this is actually you can’t talk about characteristics of bonds without FINRA approval. Now FINRA is one of the regulators. It’s a self-regulatory organization. It’s just one of the big regulators out there for broker-dealers. I’m like okay, how do I get FINRA approval. She’s like well you got to pay a certain amount of money. I think it was like $125 and it’s probably going to take five or six weeks and I’m like really, you got to be kidding me, so I just decided it wasn’t worth the hassle really, to go through all that delay and some of the requirements.
It’s not the $125, it’s actually the transcript, and it’s actually more involved than what I’ve led you to believe. So I basically decided it’s just not worth it for me to do it. Now the unintended consequence of that particular regulation is that what I feel is a great educational opportunity for clients is not going to be out there. A warning of some things that you should beware of as it relates to particular bonds, and I think that bonds have a place in a portfolio. I’m not going to lie to you, I think they’re a good place for most people in their portfolio and, of course, you have to personalize it to your individual situation.
Well, because of this particular regulation, that message isn’t getting out there. Look at prospectuses. Prospectuses—once again, I wasn’t around in the 1930’s and the 1940’s but the prospectus were probably very small. I’ve been doing this for 24 years. I started working with clients in 1991 and, at that point, the prospectuses were pretty fat. Over the years, my perception has been they get fatter and fatter and fatter because more and more either regulation or disclosure gets in there and to a certain degree, unfortunately, most people don’t read the prospectus. I highly encourage you to read the prospectus, okay, and I give out prospectuses to every client prior, or concurrent with an investment. However, the unintended consequence of some regulations has been to a certain point where it has now done, possibly, it just has not achieved its ultimate goal which is to inform the client. They’ve overinformed with so much information that you get nothing okay.
Back in 2008, there was a big discussion about too big to fail, that there were some various banks and institutions that were so big, that we shouldn’t have that. We shouldn’t have—people would say wait a second, we shouldn’t have to bail these things out and you shouldn’t be allowed to be too big to fail. Well, unfortunately, many of the regulations that come out work against the decentralization because every regulation has some kind of a cost associated with it and sometimes it’s hard to say what that actual cost is, but if it’s an extra sheet of paper that’s required, it’s an extra piece of documentation. I mean I have to tell you, I’ve gone through in the last 24 years, you have periodic audits and if I don’t have a folder with a label on it, even though it’s empty, I have to have that label and that folder, but if I don’t they’ll ding me.
So there’s a lot of bureaucratic type of things that add to the cost of doing business and the unintended consequence of some regulations are that it causes smaller operations, smaller businesses to just not be able to survive and be profitable and so they have to merge with larger ones and pretty soon you have, instead of five small ones, you might have two or three or maybe have one because they have to group together for the economy of scale. Now, I’m being very broad here and very general, but the most important thing is that regulations are not a cure-all for everything. Do I think we should have some regulations—absolutely, and I certainly hope you’re not getting from me that we should have no regulations, but I like to think of it as, even the prison system, I mean I think that there are some people who are a danger to society, they just are and it’s for the good of the community that they are put away and shielded from us and from harming us, but it’s very easy to say, well, I’m tough on crime so, therefore, the easy is let’s more people in prison. After decades of saying that, pretty soon we have a lot of people in prison and we have a huge amount of money going towards prison, because the easy answer was well, let’s just put him in prison. That’s the answer for everything.
Every time some kind of a crime happens, we need to be tougher on crime. Well, it’s the same way when something bad happens in the financial world. It’s like, well let’s throw more regulations on there because that’s kind of a kneejerk answer and in my response is, just so that you know where I stand is usually, well, let’s look at what we currently have and do they need to be modified? Are there some regulations that maybe need to be cut, that actually were an unintended consequence that led to that bad action and so it’s really more piling on, piling on, piling on.
That’s my video today. Really, the most important thing I want you to take away from this is that I think regulations are good and I’m glad that we have regulators. I truly believe that, but it is not an answer to everything and one of the unintended consequences at times of some regulations are unforeseen. That’s why they’re unintended, okay, they weren’t intended to begin with, but also sometimes the end investor is actually hurt and, in my case, I think the video that I did was wonderful and beautiful and, unfortunately, you’re never going to see it, but it was a good education I think for all my clients who see this particular video. If you want to know more about bonds, give me a call, because I’ll be able to do that for you in person and I think that over this next year, I’m going to make a commitment to at every meeting, really educating you on what’s the difference between price and yield, why is a 10-year Treasury important. Why has this been in the news all this time and where, in my portfolio speaking as you, where in a client’s portfolio, do bonds have a place? Do they have a big place, a little place, what is for you, so I’m going to now do it for you individually since doing it en masse didn’t work out for me. I’m looking forward to doing another video for you in a couple of weeks. I’m doing this on a Thursday afternoon so, hopefully, you’re getting it Thursday night, maybe Friday morning, because a consideration is oh, Mike, we’ll look at your stuff right away, so you can get your newsletter so anyway, I hope you have a great day. I hope you have a great weekend and you have a wonderful day. Thanks, bye bye.
