TopTurn Blog

What's in the News with TopTurn

  • Extremism – in media, sports, and investments Oct 24, 2017
    ikˈstrēˌmizəm/ noun The quality or state of being extreme (Merriam Webster dictionary) The fact of someone having beliefs that most people think are unreasonable and unacceptable (Cambridge dictionary) Extremism, in layman’s terms, describes any kind of exaggerated view. Whether it’s the obvious examples of political and religious extremism, or my more mundane obsession with baseball, more




    1. The quality or state of being extreme (Merriam Webster dictionary)
    2. The fact of someone having beliefs that most people think are unreasonable and unacceptable (Cambridge dictionary)

    Extremism, in layman’s terms, describes any kind of exaggerated view. Whether it’s the obvious examples of political and religious extremism, or my more mundane obsession with baseball, the key factor in extremism is that it can result in views that are detached from reality.

    In media, communications, politics, sports, and, yes, even the world of investment, extremism has become increasingly commonplace. Why has this narrative become so prevalent? What is the driving force?

    A quick trip through Google’s lists of most reported news in 2016 turned up a focus on terrorism, the Zika virus, Brexit, the Panama Papers, and the presidential election. Surprisingly however, the 2016 Rio Olympics held a top spot in the list, perhaps a more positive, less extremist bit of news (assuming our swim team was left out of the reporting).

    However, if you looked up the top searches in 2016, the absolute number one spot was held by the largest ever Powerball lottery: $1.5 billion spread across three winning tickets. After that, the passing of musician Prince held the second spot, followed by Hurricane Matthew, Pokemon Go, Donald Trump and Hillary Clinton. What is interesting about both lists is that extremism is not only played out in the media, but also directed by individual people and their interests. Increasingly polarized and extremist positions are dominating social conversations, media, and information sources.

    What “sells” in media today is any extreme point of view – no matter what subject is being discussed or what side is being taken. Dollars are earned each time a link is clicked, and that link is clicked more frequently when the perspective provided taps into an individual’s existing beliefs.

    The Roots of Extremism

    Extremism, despite its increasing notoriety, is not new. The gladiators of ancient Rome were far more extreme than today’s mixed martial arts fighters. When pax romana began, a period of long-term peace, the inner core of the Roman empire – an empire founded on war – was virtually insulated from violence. In memory of their traditions, artificial battlefields were set up for various forms of public amusement including; organized fights to the death between hundreds of gladiators, the mass execution of unarmed criminals, and the slaughter of both wild and domestic animals. The size of the amphitheaters they left behind – the Colosseum in Rome as a primary example – speaks to how enormously popular these displays of violence were.

    People often gravitate towards a higher level of stimulus and excitement, and extremism in its many forms captures our interest. Confirmation bias, our tendency to ignore information that contradicts our beliefs, while focusing our attention on information which confirms and enforces it, can lead us to seek media outlets that share just one side of any given story.

    Convergence, our tendency to become more like members of a group we identify with, can cause us to unconsciously become increasingly zealous. Divergence – the opposite tendency – can cause us to unconsciously deny information from a group in order to differentiate ourselves, coming up with more and more “out there” concepts which reinforce our differences. Groupthink can lead to the dehumanization of members of an opposing group, making them seem less like real people, as we are able to empathize more with people who are “like us”.

    Once we become fanatical about a subject, we may start to experience an extreme emotional response when discussing our point of view, or engaging in this activity. Emotional payoff now becomes the reinforcing factor, allowing us to associate positive emotions with the extreme perspective, creating a somewhat addictive cycle.

    The destructive results of emotional decision making

    Consider the 2008/2009 financial crisis. How did it come about? Was there emotion involved in the decisions people made? Of course! Many people believed at the time that flipping homes was an easy way to make a quick buck, that if they didn’t buy a house today – even if they couldn’t afford it – they would never be able to, since prices were going up so fast. You could borrow money at basically nothing on an adjustable-rate loan… and if interest stayed at 1%, everything would be fine. The entire system was built on a foundation of emotion.

    The more fearful, depressed, oppressed, discounted, or hopeless we feel, whether as individuals or communities, the more susceptible we are to endorsing or expressing extreme views. The shallower our level of understanding, the more confident we are in our opinions. That combination of low levels of knowledge and fear of missing out led to a national economic disaster.

    One of the things we know for certain is that short-term emotion makes for a very unreliable advisor. When we share stories of the worst decisions we’ve made in life, we often recall choices that were made while in the grip of visceral emotion – anger, lust, anxiety or greed. How different would our lives have been if we each had about a dozen undo buttons in the aftermath of these choices?

    More importantly, how do we stop ourselves before we make extreme, emotional decisions? The more we can step back and distance ourselves, the better we are able to have deeper perspective, and make more rational decisions.

    A great example of the importance of distancing is provided in the book Decisive by Chip and Dan Heath. In this example, your friend meets a girl in his psychology class, and is thinking of giving her a call. However, he has only talked to her once in the past, so he is trying to determine whether to (a) talk to her more in class before calling, or (b) call her immediately. Most people surveyed would counsel their friend to call right now. Interestingly, if it was a choice they were making for themselves, most people would choose to talk to the girl in class more before calling. Why? Because when we think about ourselves, we let emotions make our decision for us.

    The power of perspective

    Warren Buffett was recently in the news again regarding a million dollar bet he’d made against Ted Seides, former co-manager of Protege Partners, an asset management firm. The bet, made in 2007, was that active investment management by professionals would underperform passive investment. The original bet was made just before the financial crisis, and the preceding years have been a time when it’s been relatively easy to make a great return – it looks like Buffett will be winning that bet. The implied message is that index investing is better, but in reality, how many people stayed invested during that time?

    That’s where great managers and advisors can add a lot of value to a portfolio. While it might be “easy” in theory to just throw your money into an index fund and let it ride for 20 years, the reality is that most people won’t be able to stay invested when the market drops significantly, because emotions intrude.

    If short term emotion is an unreliable advisor, then conversely a great advisor is someone who can navigate through the complexity of our emotions and help us see past the anxiety, stress, and euphoria, to focus on facts, data, and quantitative analysis.

    Whether it’s the housing market, tech stocks, or the next big thing, if you ever feel like you “can’t lose”, it’s important to step back and check your own biases.

    Are you considering buying into something that speaks to your own existing set of beliefs? Do you believe in it because those around you, people you admire, also believe? Does thinking about it give you a bit of excitement?

    Is this choice… extreme?

    ~ Greg Stewart, CIO


  • Is this a Bubble I see Before me? (Not MacBeth) Sep 12, 2017
    Before beginning this post, I would be remiss if I did not first remember the many in various parts of the nation, and even the world, that are currently affected by natural disaster. Please know that our thoughts and prayers are with you. Recently, Alan Greenspan gave an interview with a dire warning: “By any more


    Before beginning this post, I would be remiss if I did not first remember the many in various parts of the nation, and even the world, that are currently affected by natural disaster. Please know that our thoughts and prayers are with you.

    Recently, Alan Greenspan gave an interview with a dire warning:

    “By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices, but in bond prices. This is not discounted in the marketplace.”

    Understandably, we received a few inquiries regarding this interview, and we decided that, even though it’s been a few weeks since Greenspan’s comments, it was still worth re-visiting.

    Let’s start with clarity…

    A bond “bubble” (not a term we particularly care for) is considerably different than a bubble in the stock or housing markets, because these types of investments are considerably different.

    Bonds are debt. Stocks and real estate are equity. Unlike stocks and real estate, the value of a bond at maturity is already determined; it is the face value.

    As interest rates adjust throughout the years, demand for those bonds that have already been issued adjusts the prices on those bonds so that the net return (principal and interest) to the bond holder remains in equilibrium with the current interest rate environment.

    When Alan Greenspan used the word “bubble” what he was really saying was that interest rates are artificially low, and as rates rise, it will happen faster than people are expecting. In the short run, this will be particularly painful for those investors who have bonds with long maturity dates. This is what is known as “interest rate risk” or “duration risk.”

    An Example:

    An investor invests $10,000 in a new 30-year treasury bond today. The interest rate is 2.84%. In one year, the bond has 29 years left until maturity, and let’s say interest rates have increased by 1% . Hypothetically, if the government tried to issue a 29 year bond, it would have to offer an interest rate at 3.84% to attract investors.

    With interest rates now 1% higher than that one year old bond, our original investor will sell the old bond to buy a new bond that pays a higher interest rate.

    The only way a new investor would be willing to buy that old bond would be if the price was discounted, so that their eventual return at maturity would be equal to – or perhaps better than – what they would receive from a new bond.

    How much would the price need to drop? A little more than 17%.

    Therefore, the bond that was issued one year ago at $10,000 would now have a price of $8,260. Ouch.

    Keep in mind that if the original investor held the bond until maturity, that investor would, generally speaking get their $10,000 back. He or she will just be receiving below-market interest rates throughout that period.

    This is much different than an equity investment that does not guarantee a return of principal.

    How do investors mitigate interest rate or duration risk?

    The easy answer: They hire a team of specialists to manage that risk.

    The bond investment manager typically manages the risk of a bond portfolio in two ways:

    1. Change the holdings of the portfolio to decrease (or increase, in opposite conditions) the average length of maturity in the portfolio’s holdings. Bonds that are closer to their maturity date are less sensitive to interest rate changes than bonds that have a longer duration.

    2. Buy bonds that have coupons which adjust to changes in interest rates (floating rates). This helps to insulate the portfolio in a rising interest rate environment.

    The investment manager, who manages a portfolio of stocks, bonds, and other investments will typically manage this risk in two ways:

    1. Adjust allocations to reduce exposure to a particular asset class, thereby reducing overall participation in that class or sector.

    2. Increase exposure to strategies or asset classes which provide non-correlated returns with that class they are reducing.

    These actions work to hedge the risk of one asset class – having one class zig while the other zags – which should generally lower the overall risk in the portfolio.

    Going back to Mr. Greenspan…

    One thing to remember is Alan Greenspan’s disclaimer during his interview: “I have no time frame to forecast.”

    This means he can be wrong for an extended period of time, and still maintain his forecast of the future. There’s a long history of interest rates both rising and falling – just like stocks and real estate – which means that eventually, his forecast will be correct.

    Interestingly, the current trajectory has been opposite to Alan Greenspan’s remarks. Over the 6 months previous to his comments, the treasury curve has actually been flattening. This means that long-term rates have been going down, while short term rates have been going up.

    Most predictions and forecasts will play out if you give them enough time. If you don’t, then most of them will be wrong.

    Greg Stewart – Chief Investment Officer

  • How Advisors and Investors Can Avoid The Next Recipe For Disaster Jul 25, 2017
    Twice per year, Greg Stewart takes a look from the shoreline to give us an idea of what to expect in the months ahead. We call it his Surf Advisory. As the Trades Turn: So Far in 2017 2017 has brought us a great deal of rotational trading. Initially, sectors like energy, materials, and industrials more


    Twice per year, Greg Stewart takes a look from the shoreline to give us an idea of what to expect in the months ahead. We call it his Surf Advisory.

    As the Trades Turn: So Far in 2017

    2017 has brought us a great deal of rotational trading. Initially, sectors like energy, materials, and industrials – value oriented arenas – were heavily supported by the implication that we were going to start rebuilding America in a very tangible way. Bridges, highways, and all kinds of infrastructure were going to be created and renovated. Stretching back to post-election 2016,  those companies that benefit when building becomes a focus rallied aggressively, while some of the more growth-oriented sectors, like technology, underperformed.

    The infrastructure rally didn’t last very long, as trades rotated out of value sectors and into growth sectors. A lot of the trades that had worked after the election unwound pretty rapidly; we saw some areas such as energy and financials sell off, and small caps didn’t participate at all. Growth sectors ended up doing very well, yet some of those areas that you would expect to follow, and correlate with growth, acted quite out of character, and didn’t follow the trend.

    Some of the major averages were up decently around the end of June and beginning of July, including the DOW and NASDAQ. Gold did well, and even Europe was doing okay. Commodities, energy, and the U.S. dollar however, didn’t join in the fun.

    The Next Six Months: Guessing Gets You Nowhere

    The use of quantitative models, based on solid data and analytics, can provide the insight we need to make quick decisions, when appropriate. Instinct, while incredibly reliable in certain types of crises, is not particularly useful here.

    Despite our distaste for forecasting, here are a few thoughts:

    The markets have been gyrating somewhat sideways for the past few months. In early March, the S&P 500 was sitting at around 2390. At the beginning of July, it was at 2400. It was essentially four months of sell, recover, new high, sell off again. The rotation between sectors, each taking turns at leading the pack and falling behind, continued and may very well continue for some time. It’s probable that there will be another round of selling off, followed by prices pushing higher, with the result being limited upside – unless you are tactically active about your investment management.

    Risks and traps abound this year, from the potential for military conflict in a new arena, to possibly raising the debt ceiling, to federal policy that has yet to be clarified. These are all external factors that we cannot control.

    What can you control? Your own behavior

    As we mentioned recently, over the past few years there has been high correlation between asset classes, which has significantly reduced our ability to benefit from diversification.

    Even when stocks are outperforming bonds, or vice versa, but they’re still on the same path and moving in the same direction, it’s easy for us to look at these, spot that year-to-date returns are fairly similar, and question the validity of diversification.

    Why have investments in different areas?

    Why not just buy the index and call it a day?

    When we look at results over short time frames – quarterly, annually, as opposed to decades – and don’t really dig deep into how we got the return that we received, these are obvious and easy questions to ask. When you purchase an investment and see that it’s not even matching the market, why would you want to keep it?

    The reality is that this investment, which is trailing right now, might just be the investment that turns around and reduces your losses (maybe even provides gains) when other investments that are gaining right now, start to run the other direction.

    We all know this intellectually, but we don’t often behave accordingly.

    If we know that our diversified portfolios will perform over the long haul, why do we make choices that are against our better interests?

    The truth is not that we are blinded by fear, or that we lack smarts. The truth is that we’re actually quite intelligent, and our brain is actively analyzing the data. The problem is that our brain takes a look at this piece of data – perhaps the one that indicates a return that isn’t going in the direction we want – and extrapolates it out, far into the future. Our brain understands that if this return continues, we’re up a creek.

    As investors, we need to learn how to control our reaction to volatility, to stay invested, and navigate potential downward turns while still feeling good. Traditionally, asset classes don’t move in the same direction at the same time. We should therefore choose to invest in multiple asset classes so that when this is going down, that is going up, which reduces the total volatility in our portfolio.

    Yet, when we see this moving down, we say, “Forget this thing. I want more of that.” Which, from a short-term perspective, could be the most logical move. In the long-term, however, we all know it is not.

    Everybody wants upside, without any downside. As investors, we all need to step back and examine whether emotional reaction is the correct place from which to make decisions.

    Shortly after 2008, we met with an individual who was interviewing managers. We reviewed his portfolio and found that he was down almost 70% – when the market, at its worst, had been down 50%. How did this happen? It’s surprisingly easy.

    Investment A was working, so he bought that. It stopped working, so he sold it and bought Investment B, which had been working. Then it stopped working… and the cycle continued, swirling its way down to the bottom. Jumping from investment to investment, trying to stay with the next big thing, is a surefire recipe for disaster, and it’s emotion that has written the cookbook.

    To be successful as investors, we need to actively work against our natural responses, and act in a way that may initially appear, and feel illogical. This should be given careful consideration.

    ~ Greg Stewart, Chief Investment Officer

  • What You Want Isn’t Always What You Need Jun 27, 2017
    Twenty years ago, I started in the investment industry. It was the peak of the Tech Boom, a time when it was rumored that a broker with a newspaper and a handful of darts could put together a portfolio as wildly successful as any experienced investment guru.  A client that was relatively new to us more


    Twenty years ago, I started in the investment industry. It was the peak of the Tech Boom, a time when it was rumored that a broker with a newspaper and a handful of darts could put together a portfolio as wildly successful as any experienced investment guru.

     A client that was relatively new to us came into the office one day for a review. As he walked out the door, he said, “Buy me more tech stocks!”

     On another day, I attended a firm training meeting. The presenter was telling us that while Morningstar has nine “style boxes” – the grid they use to provide a graphical representation of available investment styles – it was time to seriously consider a tenth box: Technology.

     Through our own research, we discovered that many of the mutual fund managers of the day were suddenly heavily weighted in tech stocks. Even if they weren’t focused on large cap growth. Even if technology was not their mandate.

     We know how that ultimately played out. The Tech Boom became the Tech Wreck. Losses in the NASDAQ were massive – so big, in fact, that it took until 2015 for it to return to its March 2000 high.

     Imagine if you had chosen to put your last dollar in at the top of the market, in March 2000. It would have taken you 15 years to break even.

     Following the Tech Wreck, unique products were born that were focused on limiting risk. From principal guarantees and protections to income-guaranteed annuities, people wanted to know they wouldn’t experience loss like that again, and they were willing to pay extra for it.

     Most of these types of products were structured in such a way that if a market was going down, it would raise a level of fixed income to mature at a particular date, thereby ensuring that the company had principal to pay back to its investors.

     The problem with this structure was that if your fund took on a lot of fixed income and then the market rebounded positively, it would never cycle back over because principal protection – not growth – was the focus. Many of these products heavily underperformed when the market started trending upwards, and were shut down or folded into another fund.

     At the time, companies that had designed these were pushing them hard, because people were asking them. They would travel across the country to let us know that, really, these products worked and were easy – we just didn’t understand the math.

     Not only did many of them not work, they bombed horribly. Lehman Brothers, one of the biggest issuers of these types of products, went out of business with many of these on the books, and investors received a fraction of their original capital.

     The industry will always try to give investors what they ask for – but is it really what investors need?

     When the market went crazy for Silicon Valley IPOs, investors wanted them so badly that they stopped asking for earnings or revenues or business plans. People were calling, demanding that all of their money be invested in an up-and-coming IPO… and we would say, “No, that’s not the right choice for you.” After the Tech Wreck, when many companies went belly up, they thanked us.

     It even happened with housing, as it became popular to flip. Banks lowered their lending standards to satisfy clients, and then tried to mitigate their risk by packaging those mortgages in a way that was appetizing for investors. People wanted mortgages they couldn’t afford, and because of the demand, that’s exactly what they got. We all remember how that turned out.

     Today, we see a big debate between passive and active management – index funds versus professional investment management. Since 2008, money has been flowing steadily out of actively managed funds – as much as $320B last year. Where is it going? Well, $253B of it flowed right into passive index ETFS or equity funds.

     As the markets have been climbing, investors want passive management, and the reasoning behind it makes sense. Over the last 8 or 9 years, passive managers have outperformed active managers, on average. Passive investment works really well when the market is coming off the bottom or when there is a severe disruption. Asset prices are cheap, and correlations between asset classes are very high. If most stocks and even bonds are moving in the same direction, how is an active manager going to add value? Over the last several years, many have not.

     But what’s different, today, from 8 or 9 years ago? Correlation has started to reduce; it’s now almost 50% of where it was 4 or 5 years ago. Not all stocks are moving together anymore. Diversification has become important again. Now is the time when active management, which uses techniques and skill to make great decisions, becomes extremely valuable.

     It’s important to remember – in business and investing – that all the things that brought you here aren’t necessarily the things that will bring you there.

     There was a time when investing in tech stocks was a no-brainer. There was a time when flipping houses was insanely easy. There was a time when passive index ETFs and mutual funds were the smart way to increase your portfolio value.

     When the going starts to get really easy, when everyone you know (and possibly, their dog) are taking this route, that’s the time to start asking questions. That’s the time to take a different approach.

    ~Greg Stewart, CIO

  • Knowing What’s Next (When Time Travel Isn’t an Option) Jun 6, 2017
    In the long-running British sci-fi series, Doctor Who, a Time Lord travels throughout time and space in a time traveling ship called the TARDIS. The Doctor is able to travel backwards and forwards, observing and learning, and applying that knowledge to solve problems (or sometimes cause them – it’s television, after all). As much as more


    In the long-running British sci-fi series, Doctor Who, a Time Lord travels throughout time and space in a time traveling ship called the TARDIS. The Doctor is able to travel backwards and forwards, observing and learning, and applying that knowledge to solve problems (or sometimes cause them – it’s television, after all).

    As much as I wish we could somehow leap forward, and gather knowledge to make great investing decisions, such technology isn’t likely to be available anytime soon. Fortunately, however, we don’t need a TARDIS to look backwards, and learn.

    Imagine it is the year 1999, and you’re about to retire. You have an estimated 25 years ahead of you. The market has been going gangbusters for years – you’ve made money, and you’re confident that you’ll be making more while you enjoy your life of retirement leisure. Over the long run, a 10% return seems completely feasible, especially since returns were easily higher than this in 1999. You pull the plug, sell your business, and wait for the money to roll in.

    Except it doesn’t. Instead, from 1999 through 2009, the S&P 500 returned a negative 1%, annualized.

    Your retirement plan – and even the sale price of your business – were all based on a rate of return that never materialized. Your portfolio, thanks to a combination of negative returns and your draws for income, has dwindled significantly.

    What went wrong?

    Since we don’t have the luxury of being Time Lords, we are often reliant on the past to tell us the story of what the future might hold. The decade previous to your imagined 1999 retirement demonstrated strong return, and built trust in the market. Everyone was making money, and very few people were paying attention to how the environment around them was changing. The decade that followed produced the exact opposite result and – as you and I know – many investors lost money.

    Let’s say you stuck it out. You had enough padding in your portfolio, regardless of negative returns, to help you survive to this year, 2017. Over that 17 year period, the annualized returns were 4.438% – not quite so terrible, but still not the 10% you’d hoped for.

    If you were 65 years old in 1999, you’re now pushing 82. The vast majority of your retirement, which was modeled on a double-digit return rate, has produced less than 4.5%. You’ve likely had to change your lifestyle expectations, your travel destinations, and your estate plan.

    What if you retired later? Let’s say that you sold your business in that devastating year of 2008. Instead of following the herd, which fled markets and went to cash, you had the fortitude to invest heavily, even though everyone thought the world was ending.

    You would have returned around 14% annualized between 2008 and 2017. The tide had turned, yet again. Trust has been rebuilt. Investing seems much, much easier, and returns in the double digits, much more attainable.

    This isn’t to say that we’d use our ability to jump backwards to time the market. It is to say that you have to understand your environment, pay attention to the signals, and seek opportunities that others simply don’t see.

    Half the battle, in some situations, is to have the strength to ride the stock market down – in 2008 as much as 50% – and stick with it. The other half of the battle can be removing your foot from the gas pedal right when everyone else is speeding towards the finish line … it takes a powerful will to avoid following the crowd down the rabbit hole, where they tell you that investing is easy, and the returns are great.

    In the late 90s, regular people were day-trading and easily making money. In 2006, your next-door neighbor was a real estate genius. There are always times when it looks like it’s easy, but as any Time Lord knows, that’s when you have to be the most skeptical.

    Investing in any market – whether real estate, securities, or your own business – requires a deep understanding of the environment where you are starting. Moving forward, there are signs that we may not experience the same kinds of returns in the upcoming decade that we have enjoyed in the past decade.

    A strategy that allows you to be tactical, to understand when and how your money should be in stocks, should be in bonds, or neither, will increase your likelihood of success. Know why you own what you own, what would get you out, and what would cause you to buy more. It’s not about market timing – it’s about having an awareness of when to take less risk and when to take more in the assets that you own.

    ~Greg Stewart, CIO


  • Auditioning for The Voice and a Big Cheque May 1, 2017
    A few years ago I accompanied my daughter, then aged 17 to Los Angeles for an audition of the hit TV musical talent show, The Voice. It was an eye opening experience which lasted the better part of a day. The best description I can give would be that of making your way, with thousands more


    A few years ago I accompanied my daughter, then aged 17 to Los Angeles for an audition of the hit TV musical talent show, The Voice. It was an eye opening experience which lasted the better part of a day.

    The best description I can give would be that of making your way, with thousands of people, through a giant sieve or sifting device. Our day began at the crack of dawn in a massive line wrapping around the exterior of a convention center in downtown LA. The day of my daughter’s audition, it was quite cold. I remember a fellow offering to go get us some hot chocolate from a nearby corner market. I gave him a few dollars. He never returned. We stood outside for hours. Eventually things begin to progress, but once we finally made our way through the doors of the arena, we were greeted by yet more lines.

    Through the initial screening process we were surrounded in line by many, many people, all of whom were vying to become the next Alicia Keys, or in the very least, to end up being coached by her. While waiting, many of the auditioners were warming up their vocal chords, singing lines of the song they were sure would get them a spot on the show. Listening to all of the potential contestants was the part of the experience I found most fascinating. Whether these folks actually believed they had talent, or were merely delusional, I do not know, but I can tell you that the vast majority of them couldn’t carry a tune in a basket.

    Perhaps in a similar way, many people dream of becoming entrepreneurs, believing they will build something successful and valuable, and that in very short order, their creation will be purchased by a larger company. The entrepreneur will cash out, and live a life of ease, perhaps becoming an angel investor and replicating that success ad infinitum. They will end up with the business version of a recording contract on The Voice, cash in on a Big Cheque and repeat that success over, and over, and over again.

    Does this dream scenario occur? It does, but far less often than media portrayals would have us believe. The truth is that about 50% of small businesses fail in the first four years, and the number of business ideas that fail to ever even get started far surpass that percentage.

    Where does that leave us? With a lot of ideas that never make it to becoming a business, and a lot of businesses that never make it into their 5th year.

    The few who build successful, long-lasting enterprises are rarely the creators of some novel technology that ends up being purchased by a massive conglomerate. The reality of business and wealth sustainability is a very different story indeed, as most of the “overnight” success stories I have encountered in my work with wealth creators have been 10, 20 or 30 years in the making (10 being the exception).

    Are there common denominators? In my observation, yes. While each effective business owner may create in a different industry, at a different time, and in a different way, there seem to be three things that they generally all – at some point in time – come to grips with:

    The First Thing…


    The eventual winners are careful to protect the enterprise they’ve created. They continually refine their processes and product, and they are very tuned in to their people. When they do use debt, they do so conservatively. They structure their business in a way that allows maximum control – until they are ready to relinquish it.

    They are generally excellent students of their industry, and of teamwork, and they master doing exactly what they do in an extremely profitable way. Mastery of your business is a key fundamental. If you don’t have this first point handled, you don’t get to move on to points two and three.

    The Second Thing…

    Vision & Structure

    Whether the owner’s vision is to eventually exit and get off the treadmill, or to build a machine that continues to run, on their own terms, for as long as they like, it is imperative that they have a structure that allows them to keep as much of what they are generating as possible.

    Successful wealth creators (especially those that live in high-income-tax states) are painfully aware that every dollar earned begins life as a “subsurface” dollar. While you may generate one dollar, you get to keep and earn a return on only a percentage of that. Because of the tax bite, you start the growth process subsurface, and it can take several years of average appreciation just to get that one dollar back to where it started in terms of value.

    The degree to which a business owner can protect their money, by shielding it from excessive taxation, can have everything to do with accelerating him or her towards their own Big Cheque.

    For most this is about strategy and structure. However, one structure does not necessarily fit all business owners. You could have ten different people with ten different businesses in the same room, and there may be a different strategy for each, because their temperament, experience, background, and priorities are all different. What’s important to all of them, however, is making sure that every dollar they generate is as tax-efficient as possible.

    And Finally, the Third…

    Invest Intelligently

    Once above-the-surface dollars are being accumulated it is all-important that investing take place in such a way that you don’t have to go back to square one and start over again. A single, highly speculative investment opportunity, may have massive upside potential, but you can bet that it will be inextricably linked to a downside that could see the investor losing every cent they’ve contributed to the idea.

    While some wealth creators may have enough money to shoulder that risk, most are smart enough to realize that the Midas Touch exhibited in their business may not necessarily translate to their other investments. The enlightened wealth creators are those with a touch of humility, who have said to us, “I don’t ever want to go back to work again.” Those investors want to prevent big losses, and stay on the right side of big moves.

    Staying on the right side of the big moves might involve investing in larger companies that have figured out the First and Second Things, or perhaps seeking returns in unexpected places by investing in assets that no one else has shown interest in. It may also mean taking your foot off the gas pedal when everyone else is frantically trying to speed towards the finish line.

    In all scenarios, creating and protecting wealth is of the utmost importance. To do otherwise might leave you standing in the cold, surrounded by the voiceless masses, waiting for the guy to return with the cocoa.

    For the record, my daughter didn’t quite make it onto the show, but she did get a chance to sing, and she sounded great.

    ~ Dan Darchuck, CEO

  • Trailblazing: The Real Power of the Lone Wolf Mar 21, 2017
    On a cold day in late December 2011, a wild wolf was confirmed in California for the first time in nearly a century. Wildlife officials have indicated that the lone male wolf, dubbed OR-7, made the long, solo journey to the state from northeastern Oregon. We all imagine ourselves as unique individuals. Most of us, more

    On a cold day in late December 2011, a wild wolf was confirmed in California for the first time in nearly a century. Wildlife officials have indicated that the lone male wolf, dubbed OR-7, made the long, solo journey to the state from northeastern Oregon.

    We all imagine ourselves as unique individuals. Most of us, in some way like to think of ourselves as human versions of OR-7, walking our own road, unlike anyone else.

    contrarian investor

    While it’s true that we all have specific characteristics that distinguish us from the crowd, the majority of us comply with some set of rules most of the time. From stopping at traffic lights, to attending school and work, to walking on the sidewalks instead of the grass, choosing to be harmonious with the people around us is important to maintaining the structure of our society.

    We are all motivated to conform, and the reasons we conform are all very similar. We conform to be socially accepted and avoid rejection, to accomplish group goals, establish and maintain our identity, to align ourselves with others we admire, and – most importantly, at least for this discussion – to be correct. We love being right.

    We all aim to be accurate and correct in our judgements and observations, and we frequently rely on social cues to aid us in analyzing the situations we face. In a 1996 study on conformity, researchers sent several tasks to their student volunteers. When given a task of low difficulty, the students relied less on social supports and more on their own knowledge and experience. When given tasks of greater difficulty, the students relied more heavily on those around them for cues on how to arrive at the right answer. The reality is that we all react in the same way.

    Wisdom can be found in crowds, and listening to multiple perspectives while making decisions can also be wise. But sometimes, crowds lead us astray. Nowhere is this more acute than in investment management. This is definitely one place where you will emerge victorious with far more frequency when you make a lone wolf decision, and run in a different direction from the pack.

    Recently, we were reviewing a specific group of Exchange Traded Funds (ETFs). These ETFs were large enough that they had decent trading data over the past 5 years. Out of the 1200 or so of these ETFs we reviewed, only four of them ranked in the “oversold” or “unloved” arena. The balance of the others were performing remarkably well, showing an incredible – albeit potentially unsustainable – rate of growth.

    If you were sitting on the sidelines, with cash in your hands, you might look at the large group of “hot” ETFs and think, “somebody knows something that I don’t”. You might see this as a large group of investors, many with access to research you don’t have, many with access to information the others don’t have, and all of them are throwing their money at this group of ETFs. You might want in.

    If you turned another direction and started looking at those four ETFs that were not doing so well, you might see that they were all overly weighted in a particular type of industry or sector, one that has not really given anyone a decent return for some time, with media reporting that the influential bodies that make decisions over that industry are not indicating significant change anytime soon. This investment type looks to be going nowhere. Investors are finding other places to put their money.

    Our natural, and fairly logical, response is to put our money where the group is putting theirs, in the 1,196 funds that are doing well, despite the potential for continued growth being unsustainable. We are reliant on the belief that the crowd has, across that wide range of people, access to a collection of knowledge that is pointing everyone in the right direction. Those same people are staying away from that other investment type, because it hasn’t made anyone money for years,

    It’s very, very difficult to fight against our instinct and desire to join the herd. It’s hard to be contrarian – it simply doesn’t seem to make great sense.

    The reality, however, is that we make money in the markets when we sell high and buy low. That means someone else has to like what you’re selling well enough to buy it when it’s high, and dislike what you’re buying well enough to sell it for cheap.

    That means you have to sell the investments that other people are buying. The ones that people say you’re crazy to leave, right now, when the party’s just getting started.

    That means that you have to be interested in ideas that others are not. That means that you have to put your money in the places that other people are getting out of – where they’re selling cheap because they don’t agree with you on where it’s going. Environments that present opportunities are those that look less-than-fantastic at first glance. They’re the ones investors might be walking away from, or aren’t even aware of. We know this intellectually, but to take that risk, when everyone else thinks it’s a bad idea, is incredibly difficult.

    When it comes to making good judgement calls and great decisions, investment can be one of the most difficult arenas in which to practice. It requires not only diligence and process, information and analysis, but also the incredible mental strength to go against everything that our nature tells us to do: follow the crowd. Taking advice from multiple sources and then making a decision seems only logical. But doing this is exactly how investors end up with portfolios that simply follow the market through its exciting rises… and harrowing falls.

    The investor who consistently makes decisions away from the crowd, following their own process, and making, what may at times seem like offbeat decisions, is far more likely to win.

    The concept – buy low, sell high – is easy. But the implementation is hard, because it goes against how we’ve learned to behave in nearly every other scenario. Being a lone wolf means that there are times when you can see the rest of the pack, over there, enjoying a feast at which you chose not to attend.

    But it also means there will be times when you are enjoying a much larger feast, and are the only guest at the table.

    ~Greg Stewart, CIO


  • 2017 – Reality or Reaction? Feb 27, 2017
    As I sat with a client recently, we discussed the knee-jerk reactions that occurred in the wake of the presidential election. First, the world markets were down heavily overnight, but on the following day, once the US trading session was done, the markets closed on an upward swing and proceeded to rally. For about 5 more

    As I sat with a client recently, we discussed the knee-jerk reactions that occurred in the wake of the presidential election. First, the world markets were down heavily overnight, but on the following day, once the US trading session was done, the markets closed on an upward swing and proceeded to rally.

    For about 5 weeks after the election, a stock portfolio would have done quite well, and then meandered around from there. Bonds, on the other hand, were slammed.

    Both results were due to emotional, automatic responses to possibility. They weren’t reactions to new or active change. They were reactions to expectations.

    We’ve seen markets react negatively to social media – not actual news or financial reports, but commentary that may or may not be founded on fact. We’ve seen the stock prices of large companies like Boeing or Ford targeted by tweets and the resulting downward turn in their price and yet… after time has passed and the short attention span of social media pundits transfers to another company, we find that the initial response didn’t end up being the right one.

    You can’t base an investment strategy on rhetoric, emotion, and expectations.

    Knee-jerk reactions happen to all of us – in the words of English rock band Level 42, “we’re only human after all’. What can set you apart is whether you choose to follow that initial response and turn it into action.

    For instance, if you have properly constructed a diversified portfolio, at any given time you’re going to have both winners and losers. You’re not going to have all winners – that’s not how a diversified portfolio works. If you are trying to control volatility and establish a steady rate of return that will help you meet your financial goals, then you’re going to see some investment vehicles riding high while others ride low.

    When you review your statement, though, what is the first thing that you consider? Like most people, you will likely question whether or not it makes sense to keep the loser. Should you sell it now? Should you move the funds somewhere else, perhaps to this winner you happen to be holding, the one that has been trending upwards since your last review?

    Some of your investments are going to be up while others are down, and then they are going to change places. Most investors have had an experience of selling something that was dogging their portfolio, only to kick themselves a year later when they watched it soar.

    As we move forward into 2017, will the reality be anything close to the reaction?

    Uncertainty is everywhere right now. For long-term investors, uncertainty can actually be a positive signal. If there is more pessimism than optimism, then this could set the stage for a potential upswing. Taking a contrarian perspective, and moving against the crowd, lends itself to opportunity.

    While this is obvious in theory, it can be very difficult to put into practice.

    The easy trade, the trade that people want to jump on, is the one that just went up 15%. The hardest trade – the one that pays off – is the counterintuitive one. It can be incredibly hard to sell after that 15% leap, and buy an investment that has taken a beating. The harder it is to buy something, the greater the likelihood that it will end up being the right choice.

    What if you decided to invest in the S&P500’s top 10 highest market cap stocks, and hold them indefinitely? How would they perform, versus the index overall?

    The results of this strategy are not what most people would expect. The reality is that the highest market cap stocks, the ones that have been driven into the stratosphere, got there by becoming everyone’s favorite stock at some point. Universally loved. If you happen to invest into it at that point, who is available to drive the price continually higher?

    Over the long term, your real return since 1972 would have been 548%. If, on the other hand, you had invested in the entire index over that same period, the return would have been 7991%.

    Going along for the ride, picking the famous names, the ones everyone is investing in, is often the wrong choice.

    You have to watch out for the emotions that occur at the extremes. Whether markets are moving upwards, or falling back, or if sentiment is uncertain, fearful, or even incredibly positive, you need to stop and ask yourself if the actions you are contemplating are being driven by the correct sets of data.

    What is the value situation? What is the fundamental view? What is the technical view?

    It’s more difficult to put into practice than most people realize. Think gold about five years ago, they were pushing for 2000 and now it’s dropped all the way to 1000. There were people buying gold hand over fist… convinced that it would continue to climb. Now they’re saying they bought it for insurance.


    ~ Greg Stewart, CIO

  • Greg Stewart’s Surf Advisory – A Study of Expectation vs. Reality Jan 25, 2017
    Rarely do things play out as planned.  When we started 2016, people weren’t expecting Brexit, people weren’t expecting Trump, and to some degree, many people weren’t expecting the Fed to raise interest rates. What was expected – a denial of Brexit, President Hillary Clinton, and a continuation of stalled interest rates – was priced into more

    Rarely do things play out as planned.  When we started 2016, people weren’t expecting Brexit, people weren’t expecting Trump, and to some degree, many people weren’t expecting the Fed to raise interest rates.

    What was expected – a denial of Brexit, President Hillary Clinton, and a continuation of stalled interest rates – was priced into the market. Everyone had already positioned themselves to take advantage of these prospects.  When things didn’t go as expected, market shocks occurred.

    What are the current return expectations for the market?  HIGH – as much as 20% for the year, according to some analysts. Typically, analysts are over-optimistic, and they often come down (or get knocked down) from those lofty points. No one ever gets it completely right. Expectations like these can be hard for companies to match.  Even if company earnings are up 10-15%, if they don’t hit the target, share prices, and markets react negatively.

    Why?  Expectations. Investors will have positioned themselves to take advantage of those 20% expected returns. Should companies miss, they are essentially underperforming and the price that investors were willing to pay based on previous expectations will drop, based on reality.

    Boy with Telescope 700 px

    Presidential Changes: Reality, Fundamentals, and more Expectations

    The market expected Hillary Clinton to win the election. It was repeated around the industry, and in the media, that if Donald Trump won, the market would drop 10%. When he did win, equity futures sold off immediately, based on that 10% drop expectation. However, the next morning, when the markets opened, investors started thinking about the realities of this unexpected president.

    Perhaps he will lower taxes, or spend on infrastructure. Perhaps he will reduce regulation. All of these possibilities might be very good for many industries, and of course, good for stock prices. Seemingly, the potential positives outweighed the negatives, and the market rose.

    On the flip-slide, a few weeks ago now-President Donald Trump gave a speech calling out big pharma. Immediately, a number of related stocks went down heavily – NASDAQ biotech was absolutely hammered. Similar things have happened in response to his tweets about certain companies.

    It’s fascinating, because we know that there isn’t a live person who walks over to their trading desk and hits “SELL” on a given set of stocks simply because of one small sentence in a speech or 140 characters on social media. That just doesn’t happen.

    What does likely happen is that an algorithm gets programmed to take action if Donald Trump mentions a specific set of words in a negative way. At the end of the day, knee-jerk responses – even if those knees are being jerked by computers – have probably occurred. Reactions like these are rarely profitable in the long term, as they only take into account extremely short-term views and behaviors.

    Over the long term, some of the new administration’s proposed changes, such as tax cuts, repatriation holidays, and so forth, could be very helpful to the market.  History suggests that a portion of those potential gains might go towards dividends and buy-backs, which would be good for stocks and the investors who own them.

    Other changes, such as stimulus and infrastructure spending, will probably take a little longer to work their way into the economy. First, the spending must be approved, then the projects must be approved, and more steps will follow before funding is released. Consequently, it’s unlikely we’ll see the full effect of any such proposed changes in 2017.

    Typically, the year after an election tends to be positive on average – and that’s a good thing. It would seem that the optimism with which we started the year could actually continue a while longer. As we move into the second half of the year, a lot of the stimulus spending that had already hit the streets during the 2016 election year will start to go away, which might hurt. However, this year, expectations stemming from new infrastructure proposals may help offset this.

    Fundamentals, Discipline, and the Long View

    Our current research indicates that GDP is growing, likely beating last year’s growth, without a single dollar having been spent on infrastructure, and without one single regulation having been cut or revised. There’s already a lot of action being taken without any input from the new administration. Expectations regarding decisions to be made by the new administration are likely already baked into current valuations, and now (as is always the case) it comes back to fundamentals.

    Valuation remains a key consideration – and valuations still appear to be high. In the short term valuations may very well continue to rise, but over the long term there is a lot of evidence to suggest below average returns are on the horizon.

    One of the key drivers to watch will be supply and demand. There must be an increased supply of funds flowing into the market in order to drive prices upward. Changes indicated by the new administration could free up funds and create the supply required to move this market higher.

    2016 started with doomsday predictions and was punctuated by three significant pullbacks. However, investors with a strong constitution and a long-term plan saw these pullbacks as a fire sale opportunity and bought, and subsequently enjoyed the upward swing of the “Trump Bump”.

    Has this wave already broken?  We’ll have to get back to you on that. Meanwhile, of this we are certain: periods of significant stress and worry are the reason a disciplined approach is important. Having a process to review competing information, and the ability to view the variables from multiple perspectives, with the expectation of being on the right side of the big moves, will remain a key to winning in 2017, and beyond.

    Waves About to Break 700 px

    ~ Greg Stewart, CIO


  • How Billy Ray Valentine Called the Election Dec 6, 2016
    In the 1983 American comedy film, Trading Places, an upper-class commodities broker, Louis Winthorp III  – played by Dan Aykroyd – and a homeless street hustler, Billy Ray Valentine – played by Eddie Murphy – are unknowingly made part of an elaborate bet and social experiment. In short, Valentine is bailed out of jail and more

    Trading Places 700 pxIn the 1983 American comedy film, Trading Places, an upper-class commodities broker, Louis Winthorp III  – played by Dan Aykroyd – and a homeless street hustler, Billy Ray Valentine – played by Eddie Murphy – are unknowingly made part of an elaborate bet and social experiment. In short, Valentine is bailed out of jail and installed in Winthorpe’s former job. He learns the business quickly, using his street smarts to achieve success. In calling his first trade, Valentine refers to the feeling he has that “People are panicking right now because Christmas is around the corner, and no one is going to have enough money to buy their son the G.I. Joe with the Kung Fu Grip!”

    I’ll come back to what Billy Ray has to do with our recent election in a minute.  But, first, just for fun let’s take a look back over the past 40 or so years of presidential election results.  Doing so, we find that in those periods prior to a regime change, the country had generally suffered through some type of negative economic event – usually a recession. Repeatedly, we see a pattern of recession – prevailing party losing power – and a new party taking over.

    Someone once said that a recession is when your neighbor loses his job, and depression is when you lose yours.

    Continuing with that thinking, and Billy Ray’s line of reasoning, let’s dig further into the data during these election time periods.  Looking at median U.S. household incomes on a real adjusted basis – the actual dollars earned by that one person in the United States who lands at exactly the middle of high and low income earners – we find something very interesting.

    Richard Nixon (R) took office in 1973 and served until he was impeached, with the balance of the term carried out by Gerald Ford (R).  What was interesting about this was that the election that brought in Jimmy Carter (D) in 1976 was preceded by a significant drop in real median household income.

    The first few years of Carter’s presidency were good for median household income, but then in 1980, it began to drop – right when Ronald Reagan (R) was elected. The recession continued, and was followed by another in 1981, but then a huge expansion in median household income occurred. This expansion continued to the end of 1988, when George H.W. Bush (R) runs for president and is elected.

    Towards the latter part of Bush Sr.’s presidency, you get another huge drop in median household income, and Bill Clinton (D) is elected president in 1992.

    The pattern continues, but fast forwarding a bit, the 2008 “Great Recession” brought about the election of Barack Obama (D). What’s interesting about median household income during Obama’s two terms is that while it has been creeping upwards, it is still below (on a real basis) what it was in 2000.  That’s 16 years of not returning to the income you once had, if you’re the person we referred to earlier who lands right in the middle.

    This becomes a deeper issue when you take a look at incomes across the country, broken into quintiles.  While the highest earning quintile has experienced a nice upward-sloping, growth in income between 1986 and 2015, the bottom three quintiles have had a continuous decrease over that same period. 60% of households have seen no increase in income whatsoever over nearly 30 years!  In fact, they’ve seen a decrease in real household income over the past 16 years, and for the bottom two quintiles, the problem is even more pronounced.

    We’ve heard time and time again that we’ve recovered from the Great Recession, yet the majority of people are not better off than they were 16 years ago.

    For everything that has been said about social justice, the populist tone in our politics seems to boil down to individual households and how they are doing financially.  Clearly, when people are choosing between a vote for social justice or a vote for their own survival, they will inevitably vote for survival.

    The results of this year’s election were less about racial tension, building walls, and social politics than many people would like to believe.  The correlation between recessions, household income, and regime changes is too significant to ignore.

    James Carville, campaign strategist of Bill Clinton’s successful 1992 presidential campaign coined the phrase, “It’s the economy, stupid”. Billy Ray Valentine may have expressed it differently, but it means the same thing… economics can affect the way people feel, and push them towards accepting – or even promoting – a change.

    Market Reactions

    Usually there is a snap reaction in the markets to big changes, and we’ve seen that happen post-election. The markets have looked at the key economic issues the new presidential regime campaigned on – lower taxes for businesses, less market regulation, etc. – and decided that these changes would be good for company profits and market growth. (It’s important to remember that there’s not a single proposal actually sitting in Congress to make any changes at this time. Conjecture has created those market reactions, not facts).

    So what do we do? Take a deep breath.

    First and foremost, we can’t make longer term decisions based upon short-term hopes and fears.  Secondly, while those immediate knee-jerk reactions could turn out to be correct, we don’t want to buy into these areas after they’ve already experienced a jump.

    Typically, the first couple years of a new president’s term aren’t the greatest.  The current bounce may simply be because some people were holding back due to the election, and are now making investments.

    Either way, rarely do changes such as these turn out either as great or as terrible as we have imagined.  If we were expecting the worst, it’s probably not going to be that bad.  If we were expecting the best, it’s probably not going to be as great as we thought.

    We haven’t changed our perspective: the market remains overvalued, and long-term returns don’t look amazing. We continue to seek opportunities in unexpected places.

    For now… Wishing you and your loved ones the gifts of the season – Peace, Joy, and Hope for a Happy and Prosperous New Year.

    Ornaments on the beach 700 px


    ~ Greg Stewart, CIO

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