The Debt Hangover - Midday Money on WLBT

This afternoon, Nancy was on WLBT's Midday segment, and she discussed debt.  Watch the video here:  The Debt Hangover!

blue chips

"Is there still such a thing as a Blue Chip stock anymore?"

It used to be considered a fairly sound investment strategy to just put your money in a couple of "Blue Chip" stocks and call it a day. Stocks have always been rightly viewed as risky, but the term Blue Chip lent comfort to investors. The designation differentiated large, well known, stable companies from smaller, risky companies that had not established themselves in the market. These were large companies with wide moats that could fend off competition and continue profitable growth into the foreseeable future. The term Blue Chip conveyed a sense of safety, a protection against permanent loss.

Picking a few Blue Chip companies is not a strategy that makes sense anymore. Blue Chips do not exist anymore, not because competition is too fierce and risk is too high, but because they are simply not needed.

The arc of human history is towards a growing population with growing wealth. Businesses are levered to this growth. Economic growth is ultimately growth in sales, masking the tumultuous fight for profits at the companies that make up the economy. No matter how steady a company appears, or now large their moat is, with individual companies there is always the risk of permanent loss. If you selected a small list of individual companies right now, you may find that they do not all exist in a one, ten, or forty years. If you happened to have selected the wrong ones, your investment might be worthless. If instead, you just bought everything, there would be some losers, but you would expect the winners to make up for that and still provide growth on your investment. Individual companies may fail, but it is exceedingly unlikely that the entire market fails.

The equivalent today of investing in Blue Chip stocks is being a passive index.

Now you can capture the market return effectively with index funds. There is less need for the stalwart individual stocks when you can capture a similar expected return with lower expected volatility in an index fund. Company management in a reasonably free economy have demonstrated time and time again a fantastic propensity for making money. Ride the wave of human history and just buy everything out there.

Blue Chip companies may be dead, but investing in stocks is still the best way to grow your investments over the long term.

Christmas Cookies!

A friend who is currently in Germany recently asked for christmas cookie recipes. This one is full of memories for me, so I shared it with him, and decided to share it with everyone!

First, story time: When Geraldine Ferraro was the Democratic VP candidate in 1984, she stopped at a blueberry farm in Mississippi on the campaign trail. She asked the farmer if he had any good blueberry muffin recipes. He looked her in the eye and said "ma'am, down here, men don't cook". This inspired my mom and dad to solicit recipes from Mississippi men and make a cookbook, titled "Down Here Men Don't Cook" of course. This recipe for "Southern Sand Tarts" comes from Charles Balch and Gus Liveakos in Tupelo. Dad made these every year around christmas time and my joy was getting to put them in a big bag with powdered sugar and shake them until coated. I probably got clouds of powdered sugar on everything, but I can still smell the sweet buttery cookies now...

Now, recipe:

Southern Sand Tarts. From Down Here Men Don't Cook. Recipe by Charles Balch and Gus Liveakos of Tupelo.

2 c (250g) plain flour

1 lb (450g) confectioners sugar

1.5 c (180g) pecans, chopped

1 TBSP (15mL) vanilla extract

2 sticks (220g) butter

Lay out butter to reach room tempo. Sift 2 cups flour with 7 tablespoons powdered sugar. Blend flour mixture with butter. Add vanilla, mix well. Add chopped pecans. Mix well. Place in covered bowl and refrigerate OVERNIGHT or longer.

Roll chilled dough into neat balls. Place on lightly greased cookie sheet and bake at 325F (162C) for 20-35 minutes until slightly brown (DO NOT OVERCOOK)

Remove from oven. Leave to cook 7-10 minutes. Gently roll all cookies at once into remainder of powdered sugar which has been sifted into a heavy paper bag. Cookies will absorb most all of the surge. Store in a sealed container once completely cool.

Yields 110-118 cookies.

bitcoin supply and demand

A couple of days ago I got quoted in an article about a strange phenomena in the Bitcoin world. An exchange traded trust that was supposed to track the price of bitcoin (all the trust contains is bitcoin) was trading at a very high premium to the underlying bitcoin.

Bitcoin is relatively difficult to buy and sell. It has a niche appeal and the pool of money available to buy and sell it is much much smaller than what is available to trade a publicly traded security like the Bitcoin Trust. This is how the price dislocations can happen so easily. This happens in more popular areas of traded securities as well, such as in close ended funds which can trade away from their Net Asset Value.

The issue is that these do not have a readily available mechanism for bringing their price back to the value of underlying investments. More modern securities like ETFs, however, do have a mechanism to bring their price back to the value and trade very close to NAV.

“Lack of liquidity, accessibility and transparency can all cause significant price dislocations. With the BTC Trust, it is far easier for people to access the trust than the underlying Bitcoin. With the pool of available money going into the trust faster than into Bitcoin, that price rises far off of its underlying value,” he told Finance Magnates.

As to why the premium is maintained even when considering the equally relative ease with which the shares can be sold off, this too is a matter of supply and demand. “The supply of money ready to go into exchange traded investments, like the trust, is just much much greater than the supply of money ready to go into bitcoin, which, for all of the attention it gets, is still a very niche thing,“ he argued.

Bitcoin is a weird place right now, and the slow creep out of the shadows will certainly have some rough patches like this. While I have no strong views on what to do with bitcoin or where it is going, it sure is interesting to watch!

Financial Lessons from 2015!

Susan and I had a lot of fun coming up with financial lessons we learned from events in 2015. I was super excited to see Ashley Redmond of GoBankingRates.com include them all in her article! While the news about rising wages may have the most important impact on your pocket, there were lessons to be drawn from One Direction splitting up, Lamar Odom falling into a coma and even the excitement of getting new, high resolution photos of Pluto!

Here were a few of the lessons I found in recent news:

• There has been some pretty cool news coming from outer space this year. New Horizons has sent us our best images of the surface of Pluto and we have our best evidence yet that there is water on Mars! These are amazing accomplishments that were a very very long time in the making. These are a good reminder that it is important to stay focused on long term goals, even when there is trouble in the short term.

• The shocking and tragic story of Lamar Odom is a harsh reminder that estate planning is not just for the elderly! Estate plans need to be made early, and updated at any major life event. While I do not know the details of his planning, things like a Will and a Medical Directive are super important for people at any level of assets or relationship status. These need to be updated whenever anything changes, such as a marriage, divorce, birth of a child or retirement.

• We were all very shocked, of course, when Zayn Malik left One Direction. When the entire band announced they will go on hiatus in 2016, our inner tween fell into deeper despair. Like a working relationship, it is important to always evaluate our financial relationships. Sometimes it is a budget item that just has to go to make room for another, or maybe an adviser that just isn’t providing appropriate advice anymore. One of the hardest relationships to break off is one with a sentimental stock, maybe an old family gift or a company a retiree has pledged undying loyalty to. These are important to evaluate in the context of the investor’s entire portfolio and sometimes, the stock just does not fit with the investor’s goals anymore. Always evaluate your financial relationships and make sure they are still fully aligned with your own financial goals.

• Exciting for workers everywhere, Target, Wal-Mart and several other very large employers announced that they would be raising wages. While this is a direct boost to those workers paychecks, it will also spread to, and lift the fortunes of all other low-wage workers. These wages aren’t being raised because the employers are kind and loving people, but because they are having a hard time filling positions. Raising the wages effectively puts an above minimum wage floor on what an American worker will be earning going forward. This will likely lead to inflation of basic goods in the coming year, however.

• Tesla made big headlines when their Model S was awarded 103 of 100 in the consumer reports rating system - the highest they ever awarded. This was gold in the hands of their confident promotor and CEO, Elon Musk. On the surface, it is an amazing car, incredibly safe, incredibly fun to drive and quite good looking to boot! Digging deeper into the Consumer Reports article, I noticed one glaring flaw. The car was very new, with little operating history. The section on brand reliability was essentially ignored. Reliability is a major factor when buying a car! Fast forward to a few days ago, some reliability numbers came out and they were “worse than average”. If you had bought a Tesla already, you might not be so happy about your future with it. If you had done a bit of deeper digging at the time, you might have suspected the reliability adjustment was coming (even an article sent to me by a Tesla salesman mentioned having to get a motor replaced). This lesson of doing your research can be applied to a lot of things, but particularly to investing. Far too often I see a mutual fund with a short operating life and a great track record being pitched to me or my clients. Without digging deeper into the sources of return and the risks being taken, you can’t build a realistic outlook for the future of the fund. A long operating history is no guarantee of future success (look at Volkswagen!) but it provides a lot more data for you to understand what you are getting into.