• The difficulty lies not so much in developing new ideas as in escaping from old ones.

    John Maynard Keynes

Iron Capital Insights

Our insights, reflections and musings on the most timely topics relevant to managing your investments.
  • Iron Capital Insights
  • September 5, 2017
  • Chuck Osborne

Are We There Yet?

Labor Day weekend is the official end of summer. It might be to the beach or to Disney World or to see Grandma, but we have all piled into the family car and gone down the road on a hot summer day. Thirty minutes into our four- or five-hour drive the kids start asking, “Are we there yet?” That is what investors want to know.


  • Iron Capital Insights
  • July 20, 2017
  • Chuck Osborne

Too Good to Be True?

Emotions are the enemy of most investors. Many refer to the emotions of fear and greed as driving the market. While we believe that is over-simplified and many emotions are involved in investing, this framework does provide a helpful message. A year ago we were saying don’t be fearful, while today it is just as important to not be greedy. Stay calm and keep making prudent decisions.


  • Iron Capital Insights
  • March 10, 2017
  • Chuck Osborne

Perspective

Human nature is a funny thing. We tend to forget history quickly and then project the current situation into the future. The only thing that is truly constant in our world is change, yet most of us do not deal well with change. We fail to recognize that it has happened and then we fail […]


  • Iron Capital Insights
  • February 3, 2017
  • Chuck Osborne

Good vs. Evil

After the initial “Trump rally” in the aftermath of the election the markets have really just been chopping along. There has not been much for us to write about. There has been plenty of politics, of course, but as our long-time clients and readers know, I try to stay out of that as much as […]


  • Iron Capital Insights
  • November 23, 2016
  • Chuck Osborne

Thankful

In recent days I have been reminded of 1992. The recession that played a role in President H.W. Bush’s failure to get re-elected was over. It was over before the election even took place, but no one knew that on election night. Practically the next day the economic recovery was made public and President-Elect Clinton […]

  • Labor Day weekend is the official end of summer. When I was a kid, school had either just started or was about to start this week. Our summers were full of unscheduled, unstructured, and most importantly, unsupervised adventures. Today most kids (at least here in Georgia) have been back in school for a month. Everything they did this summer was scheduled, structured, and most importantly, supervised. The only thing that remains similar is the mandatory summer road trip. It might be to the beach or to Disney World or to see Grandma, but we have all piled into the family car and gone down the road on a hot summer day. Thirty minutes into our four- or five-hour drive the kids start asking, “Are we there yet?”

    That is what investors want to know. The long market rally was interrupted by the month of August, which saw the S&P finish basically unchanged while small companies were actually down. The rally had already changed complexion from a broad-based celebration of hope lifting all types of companies to an only-the-strong-can-survive, FANG-driven market. That was a troubling sign. Now we have basically hit pause and many are wondering, are we there yet?

    And where is “there,” one might ask? There is where we turn around and head in the other direction. In this case: down. So, are we there yet? Every time my six-year-old daughter asks that question, I tell her that it adds another hour to the trip. While that is not actually true of a car trip (which my daughter knows, and reminds me every time I say it), it can be true of the market.

    There is an old saying in our business that markets climb a wall of worry. When people are saying, “It is time for a correction,” that is usually a sign that we, in fact, are not there yet. When they start saying things like, “This time it is different,” that is when it is time to worry. Yes this rally has come a long way, but it has been backed up by strong corporate results and better economic growth -v GDP growth was just revised up to 3 percent for the second quarter. It has also been prolonged because it has changed complexion. Old leaders peter out and new ones have come to the fore.

    However, we have come a long way in a short time and it would not be a surprise if we slowed down. Our best guess (others might say forecast, but best guess is more accurate) is that we pause a little longer, then a stimulus comes to push us one way or the other. The most likely thing would be tax reform. If the administration and Congress could actually pull off a package, then the rally is back on. Negative stimuli are always harder to see. (In fact, most of the time no one sees it until after the fact, and then everyone claims that they really did see it. We’ll save that insight for when it happens.)

    Let’s hope for the positive. We need it. This past week there was a story in The Wall Street Journal about an economic study which showed that corporate America has gotten more concentrated. There are fewer but larger companies than in the past. As this has happened, marginal profits have spiked to what the researchers say are historical heights. In a free market that would not happen because the extraordinary profits attract competition. They theorized that the cost of technology is a driver in what has led to this situation. Their data shows that this spike to profits started in 2009, which coincides with a trend for fewer start-up companies.

    This research is interesting and worth pursuing. However, there seems to be another, perhaps more obvious, source of this problem:  high taxes and over-regulation are two of the most effective barriers to entry ever created. The more expensive – and just plain frustrating – it is to build a company, the fewer companies will be built, as we have seen since 2009. Fewer companies means less competition, which means higher profit margins, as we have seen since 2009. Less competition for consumers also means less competition for workers, which means flat wages, as we have seen since 2009.

    Tax reform would signal a true change in direction and could be very helpful to more than just the stock market. Fingers crossed they get their act together is Washington and give us something. If not, then it is more of the same and we will have to ask, “Are we there yet?”

    Our thoughts and prayers remain with our friends and clients in Houston and the surrounding areas.

    Warm regards,

    signature

    Chuck Osborne, CFA
    Managing Director

    ~Are We There Yet?

  • This year’s Insights” remind me of a joke one of my uncles used to love to tell about a three-year-old boy who had never spoken a word. His parents were very concerned and had taken him to multiple specialists to find out what was wrong and how it could be fixed. The doctors were stumped, all the tests came back normal, but still the boy didn’t speak. Then one day his mom was serving him breakfast and accidently burned his toast. The boy suddenly exclaimed, “Woman, you burnt my toast!”

    The mother, ignoring the rude and disrespectful message, was overcome with joy. “You can speak! Why haven’t you spoken before?” The boy explained, “This is the first time anything has gone wrong.”

    I sort of feel like that boy. I keep wanting to find something to share with all of you that is actually worth sharing, and the market just keeps moving right on upward. We keep making new record highs and all is good in the world (at least in the investment world). We have spent the last few days here at Iron Capital going through client statements (which will go in the mail shortly), and the recurring theme is that they all look great. The last twelve months have been one continual market rally. So, everyone is happy.

    What a difference a year makes. This time last year we had gone through a long stretch of time where the market was not cooperating: markets were up on a headline basis, but that was really misleading as the only thing that was doing well were some very large U.S. -based technology companies. Every other area of the investing universe was bad. We had started 2016 with even those tech darlings – the “FANG” stocks of Facebook, Amazon, Netflix, and Google – going down and it looked as if we could go into a bear market. One year ago our messages were much different.

    We were reminding people to be patient. I remember one client meeting in particular in which I was told that the market will never return to an 8 percent return goal. I explained to that client what I always explain: the market does not go up in a straight line. We have to take the good with the bad and understand the long-term average is what counts. I was never completely convinced that my message got through, but that client is still a client. “Patience; this too shall pass” is not an easy message to hear when one’s portfolio has been flat for several years and she is relying on that portfolio to fund retirement. But, that was the message a year ago.

    Sure enough, it did pass. The rally we still enjoy started in the third quarter of 2016. It paused during October and resumed after the election. Once again things have shifted more toward the FANG stocks and away from some of the areas that rebounded so far the second half of last year, but the rally continues. International stocks have participated for the first time in years. Small company stocks have done well. Diversification has worked and our clients have been rewarded.

    So, what really has there been to say? Just this: Patience is in order. Stay the course. This too shall pass. You all know by now that we fundamentally do not believe it is possible to time a market. That is a fool’s errand in our opinion. However, we know this rally will pass, just as we knew the stagnant market that preceded it would pass. We did not know that it would happen in the 3rd quarter of last year, and please make no mistake we are not predicting that this rally will end in the 3rd quarter of this year. For what forecasts are worth – which is not much in our opinion – we are still optimistic. That said, the market still does not go up in a straight line.

    Emotions are the enemy of most investors. Many refer to the emotions of fear and greed as driving the market. While we believe that is over-simplified and many emotions are involved in investing, this framework does provide a helpful message. A year ago we were saying don’t be fearful, while today it is just as important to not be greedy. Stay calm and keep making prudent decisions.

    Warm regards,
    Chuck Osborne, CFA
    Managing Director

    ~Too Good to Be True?

  • Human nature is a funny thing. We tend to forget history quickly and then project the current situation into the future. The only thing that is truly constant in our world is change, yet most of us do not deal well with change. We fail to recognize that it has happened and then we fail to appreciate that it will keep on happening.

    This is true in many aspects of life, but I am thinking about the area I know most about, investing. The “Trump Rally,” which interestingly began in the third quarter of last year when Trump’s opponent was still well ahead in the polls (see what I mean about short memories), seems to be taking a rest. This rally has been strong and it has marked a change of course from the last several years.

    We have been in a market where the only assets that were rising in value were the stocks of large U.S.-based companies. Even among those, it was only a select few. In such an environment, a few things happen. First, active managers who tend to believe in being diversified do not do as well. Secondly, international investments do not do so well. The last time we went through a period like this was in the late 1990’s as what later became known as the tech bubble was being inflated. When that bubble popped, we entered a decade where the only money to be made in investments was overseas. We also entered a period in which active managers thrived.

    It is funny how that history gets forgotten. A few times in the last several weeks I have had someone tell me that international investments have lagged for 30 years. I’m not sure where this came from; it could have been an article that I missed, but multiple people have said the same thing. I have been working for most of that time and this was not my recollection, so I researched it.

    I researched by going to the international funds we use with our various clients. Some of them do not go that far back, but two of them have 29-year track records. I figured that was close enough. The two funds are the American Funds EuroPacific Growth Fund and the Harbor International Fund.

    I first compared the international benchmark, which is the MSCI EAFE index, with the S&P 500. Over the last 29 years the international index has indeed lagged. The S&P 500 has an average annual return of 10.33% while the MSCI EAFE has an average annual return of 5.35%. That is a lot of underperformance. The story changes a little when we look at the funds. EuroPacific has an average annual return of 9.27%, and Harbor’s average annual return is 10.42%.

    There are no tricks here. I did not run any kind of search for the best international funds. I simply looked at the funds that we actually use with our clients which had track records going back that far. Two things happen: First, international investing looks a lot better when using actual international investments. Secondly, this puts into perspective the whole active vs. passive argument. We live in a world today where pundits love to abuse active managers and say crazy things like, “Why would you pay 0.50% more to be in an actively managed fund when active managers ‘never’ beat the index?”

    These two funds beat their index by 3.92% and 5.07% compounded every year for 29 years. Remember that is net of their expenses, as mutual fund returns are always reported net of their expense ratio. If one had chosen an index option in this category the return that investor would have received is 5.35% minus that oh-so-reasonable expense ratio. Does that really sound prudent?

    All manager styles will go in and out of favor over time. Harbor has been struggling as of late. But history tells us that whenever a majority of top-tier active managers underperform their index, it is because there is something wrong in the market. For international investors over the last thirty years there have been many market problems: Japan, pretty much the whole time. The Asian contagion of the late 1990’s. The Russian financial crisis. The war in Serbia. The European financial crisis. The index went through them all. Active managers didn’t, and that equals a 4 to 5 percent excess return annualized.

    Will that happen again over the next thirty years? I don’t know, but my guess is something similar will, because as Mark Twain is reputed to have said, “History doesn’t repeat itself, but it sure does rhyme.” I hope I’m still here and get to see it. In the meantime, we will keep doing what has proven to work over time, even if everyone else has forgotten.

    Warm Regards,

    Chuck Osborne, CFA
    Managing Director

    ~Perspective

  • After the initial “Trump rally” in the aftermath of the election the markets have really just been chopping along. There has not been much for us to write about. There has been plenty of politics, of course, but as our long-time clients and readers know, I try to stay out of that as much as I can.

    The problem with our modern politics is that we are so divided. People no longer see political disagreements for what they are:  two different views on how to solve a problem. They see them as black and white, good vs. evil. They see themselves in a struggle against some evil empire. No matter which side one is on they believe it to be the good side, and the other is the dark side.

    Most of the time, if I do delve into this world of politics it is to remind our clients that this view is over-simplified and that we can’t allow our political views to hurt our long-term investment results. Most of the time.

    But, today is different. We are a nation divided, and sometimes one must make a stand. He must stand up for what is right and against that which is evil. You have probably figured out by now that I speak of something far more important than mere politics. I’m talking about the Super Bowl!

    Let’s face it:  there is no middle ground. You are either a fan of the Evil Empire, aka the New England Patriots, or you have goodness in your soul. You either worship the Emperor (Bill Belichick) and his apprentice Darth Vader (Tom Brady), or you hate them and the evil for which they stand. You either think they are geniuses whose defensive schemes are always a step ahead, and whose passes are so perfectly thrown that the laundry list of re-tread receivers can catch pass after pass after pass due to the rebirth of having Brady, I mean Vader, as their quarterback…

    Or, you understand what it means to steal play calls, and the more plausible explanation for receivers who failed to be able to catch fully inflated balls at their previous stops suddenly being able to grab every super soft pass thrown by the Lord of Darkness. You either believe in the old baseball saying, “If you ain’t cheating you ain’t trying,” or you are a fan of any NFL franchise not named the “Patriots.”  After all, one man’s patriot is another man’s enemy.

    What bearing does all of this have on your investment portfolio? Everything! It is a well-known fact (okay, actually it is more of a myth – but let’s not split hairs about alternative facts) that the stock market goes up when the NFC champion wins, and it goes down when the AFC champion wins. So, in the completely biased opinion of your investment adviser: If you wish for your portfolio to Rise Up in 2017, then we all need to be united. Everyone who is a fan of any NFL team not located in some general multi-state region; everyone who plays by the rules; everyone who believes in the good side of the force; and most importantly for our purposes, everyone who wishes 2017 to be a good year for their investments: Stand together. For as my city’s most famous citizen once said, “We must learn to live together as brothers or perish together as fools.” We must unite and Rise Up for the power of good to overcome evil.

    Go Falcons!! Beat the Patriots!

    Warm Regards,
    Chuck Osborne, CFA
    Managing Director

    ~Good vs. Evil

  • In recent days I have been reminded of 1992. The recession that played a role in President H.W. Bush’s failure to get re-elected was over. It was over before the election even took place, but no one knew that on election night. Practically the next day the economic recovery was made public and President-Elect Clinton received full credit. That is not unusual. When I was in high school, my political science teacher told a story about waiting for the train in Chicago the day after Ronald Reagan defeated Jimmy Carter. The train was late, and the lady next to him looked over and said, “The (insert colorful adjective) Republicans have been in office one day and they have already messed up the trains.”

    Reagan had nothing to do with the train schedule in Chicago even once he was in office. Clinton had nothing to do with the economic recovery before he took office, and likewise this really isn’t a “Trump rally.” What is happening in the market today started in the third quarter. We are seeing the long-awaited rotation out of the so-called FANG stocks (Facebook, Amazon, Netflix and Google parent Alphabet) into the stocks which have been ignored or even beaten up over the last two years. The market stalled in October as investors waited for the outcome of the election to be known; once it was known, we went right back to the bull run. We will never know of course, but I suspect the outcome would not be terribly different had the election gone the other way.

    The stock market may react to political events in the short run, but in the long run it is the results of the companies and the price of their stock that matter. Lost in this election speak is the improving health of corporate America and the low price at which many stocks are currently selling.

    Yes, markets are at record highs as measured by several indexes. However, that fact is skewed by a handful of companies whose stocks are selling at outrageous prices. Those stocks actually have been going down since the election, while the larger number of companies whose stocks are cheap have seen a great rally.

    The question of whether a Trump administration will be good or bad in the long run will depend, as with all administrations, on what he actually does once inaugurated. If his administration promotes good policy, then we will get good results; If not, we won’t. Either way, the United States of America will survive. I have been fortunate enough to live through several administrations – some for which I voted, many that I did not, but all of whom were my president. I didn’t always realize that in my youth, but one day you grow up and understand that this is the beauty of our republic. In the immortal words of Mick Jagger, “You can’t always get what you want. But, if you try sometimes, you just might find, you get what you need.”

    Regardless of politics we still have much for which we are thankful. In keeping with our tradition, here is my own list:

    I am thankful…

    1. That this election season is over and we won’t have another presidential race for four years.
    2. That the United States of America is a place where people are still free to disagree without having to be disagreeable. I’m hopeful more of my Facebook friends will remember that.
    3. For the opportunity to once again coach my son’s basketball team.
    4. That my Wake Forest Demon Deacons are finally looking like they at least belong on Tobacco Road once again under third-year coach Danny Manning.
    5. For my family, immediate and extended.
    6. For the latest addition to the Iron Capital family, Cecelia Elizabeth Smith, who was born on November 2 to proud parents Michael and Sara and big brother Griffin.
    7. Of course, I’m always thankful for Mama’s pumpkin cheesecake and my loose-fitting pants, which make enjoyment of said cheesecake possible and are a little looser than they were last year.
    8. Finally, I am thankful for you, our clients and friends. Your trust in Iron Capital is our greatest asset and we value it every day of the year.

    Happy Thanksgiving!
    Chuck Osborne, CFA
    Managing Director

    ~Thankful