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

    John Maynard Keynes

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Iron Capital Insights

Our insights, reflections and musings on the most timely topics relevant to managing your investments.
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  • Iron Capital Insights
  • November 25, 2020
  • Chuck Osborne

Everything in Moderation

This advice is repeated so often probably because we are so bad at following it. Today’s motto is closer to “everything in hyperbole,” and perhaps that explains the election and aftermath. We have been living with extremes for so long that we just need some good old-fashioned moderation.


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  • Iron Capital Insights
  • November 05, 2020
  • Chuck Osborne

The Art and Science of Risk Control

Risk is a funny thing. Many people will look at the fact that the market has rallied and that everything has thus far been peaceful as proof that these events were certain. That is not true; there was a probability that things could have been much different. Understanding the different probabilities is what investment risk control is all about.


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  • Iron Capital Insights
  • September 25, 2020
  • Chuck Osborne

Searching for Direction

At this moment we remain in a trading range, which is shop talk for, “We are not going anywhere.” When this happens, it is a sign that the market is searching for its next move. Should the bull run continue, or should the bear raise its ugly head? It depends on what the market decides is important.


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  • Iron Capital Insights
  • September 11, 2020
  • Chuck Osborne

Back to Reality

We went too far too fast, especially with the technology stocks, and they are simply coming back down to earth. This much, frankly, is not all that insightful; it is obvious. What may be less obvious is what is happening underneath the surface.


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  • Iron Capital Insights
  • September 3, 2020
  • Chuck Osborne

Cash Flow is King

Cash flow is the most important thing we look for when investing in a company, but it is also the most important element of financial planning. Many people refer to it as budgeting, but I do not like that term. Budgeting will get a person in financial trouble quickly.

  • “Everything in moderation, including moderation.”  ~ Oscar Wilde

    We have heard the advice so often: everything in moderation. This advice is repeated so often probably because we are so bad at following it. Today’s motto is closer to “everything in hyperbole,” and perhaps that explains the election and aftermath. We have been living with extremes so long that we just need some good old-fashioned moderation.

    President Trump represented extreme behavior, and the country rejected it. The Democratic Party adopted an extreme platform and the nation rejected it, with Democrats losing seats in the House and making little ground in the Senate, despite winning the White House. The market has mostly celebrated that outcome, which we had predicted.

    The market has also begun the process of moderating. We have spoken often about the outsized returns of technology companies and the fact that many parts of the market have not kept up. Over the last month we have witnessed those ignored areas making up ground, while the technology firms have seen their stocks go nowhere. It is a short time period, and it may or may not be lasting, but it seems to go along with the prevailing mood.

    This year we have experienced a global pandemic and an extreme reaction to that pandemic. We have seen extreme social unrest in our cities. We have heard extreme ideas put forth by what are supposed to be serious people. Even in sports, the NBA evidently got together and had a championship that no one watched. College football is on-again-off-again every week, and even the Masters was played in November. Azaleas do not bloom in November for anyone, not even the powerful membership of Augusta National.

    We long for normalcy, for moderation. We don’t often think of moderation during this time of year, because it is Thanksgiving after all. However, even in a year when all we want is some normalcy, there is still much for which to be thankful. In keeping with our tradition, here is my list:

    ~ I am thankful for the perspective of 2020, for it is in the challenging times that we are reminded of what is important.

    ~ Having said that, I am thankful 2020 is coming to an end.

    ~ I am thankful for positive vaccine news, which assures us that there is a light at the end of this tunnel.

    ~ I am thankful for my wife, who has always been a loving mother but who has also become teacher and tech support.

    ~ I am thankful for my children who are growing and learning every day, even if they are wearing pajama pants to their zoom school classes.

    ~ I am thankful for my family, immediate and extended.

    ~ I am thankful for all of my friends.

    ~ Of course, I’m always thankful for Mama’s pumpkin cheesecake and for my loose-fitting pants, which make enjoyment of said cheesecake possible.

    ~ 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

    ~Everything in Moderation

  • Prudent investing is risk-averse. You have all heard me say that at least a thousand times. Coming into this election, the market had been on a big run since bottoming in March. Valuations were getting a bit high and we now have political uncertainty.

    We said there was a good chance that we would not know who the next President would be on election night. That was not exactly a brave prediction, but as expected, this is indeed the case. We did not know how people would react, and given the summer of incredibly violent “peaceful protests,” we hoped for the best and planned for the worst.

    Thankfully the post-election time has thus far been peaceful (knock on wood). The market has surged after dropping dramatically last week. We took protective measures heading into the election and as a result, lost less than the market last week and have gained less this week. We still lost value last week and have still had big gains this week, we have just moved less than the market in both directions. That is risk control.

    Risk is a funny thing. Many people will look at the fact that the market has rallied and that everything has thus far been peaceful as proof that these events were certain. That is not true; there was a probability that things could have been much different. Understanding the different probabilities is what investment risk control is all about.

    One of the biggest differences between the lay investor and the professional is that lay investors tend to think in all-or-nothing terms. Should I be invested? Should I buy XYZ stock? To lay investors, these are yes-and-no questions. Professionals think in terms of degrees: How invested should I be? How much of this stock should I own? What percentage of my portfolio should it be? These are the questions professionals ask, and they are seldom yes-or-no answers.

    Had the lay investor gone to all cash in advance of the election he would have been happy last week and crying this week. The professional doesn’t go to all cash; she trims back her exposure to ride out the possible storms, but almost never shuts down. The problem with that all-or-nothing attitude is knowing when to reverse course. That becomes the guessing game of trying to time the market.

    Prudent investors do not try to time the market; they make decisions from the bottom-up. They think in terms of absolute returns, not worrying about missing out on some magic, and that allows them to be risk-averse. Risk control is what allows investors to keep moving forward towards their goals.

    We still don’t know who the President will be for the next four years. However, we do know that the checks and balances of our system are still in place. The sun came up on Wednesday, the earth is still spinning, and that is all good news for Wall Street. We avoided the storm, but were prepared if we hadn’t. We will prepare the same way for the next potential storm, and the next. Risk control: that is really the job. As they say in football, “defense wins championships.”

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~The Art and Science of Risk Control

  • “Smooth seas never made a skilled sailor.”  ~  Franklin D. Roosevelt

    It is getting a little choppy out here. After the market rally, which went too far, the technology stocks that led that rally came back to earth a bit. Now the market is searching for direction. Volatility has increased a bit, but as of this moment we remain in a trading range, which is shop talk for, “We are not going anywhere.”

    When this happens, it is a sign that the market is searching for its next move. Should the bull run continue, or should the bear raise its ugly head? It depends on what the market decides is important.

    The bull case is pretty simple:  the economy is far better than feared, and we are recovering from the lockdown-induced stop. While there are certainly industries that have been hurt by the reaction to the pandemic, there have also been many companies that were helped. The latter are largely technology firms whose stocks have flown high, but they have also come back a bit.

    There is a third category:  the companies that have weathered the storm. Banks, for example, have not really been helped, but their businesses are doing fine. They still have not participated in the market rally, and they are priced at ridiculously low valuations. Analysts are beginning to pay attention to this fact, and upgrades are coming. Will stock prices follow? They certainly could.

    The bear case is more mood and politics. Wall Street has seemingly just clued into the fact that it is an election year, and a highly charged one at that. There is a significant probability that with so many people mailing in their ballots, we may not know who the President is on November 3. That is not going to be good in the short haul.

    More important to the market may be the fate of the Senate. If Biden wins and there is a Democratic sweep, the short term may be smooth as this would avoid civil unrest, but then, what matters is – what do they actually do? The party platform does not represent what I believe to be the actual core of the Democratic party, let alone America as a whole. The question is, who would actually be in charge – the Joe Biden we knew from the Senate, or AOC and her socialist “squad”? If the latter, protecting principal will be the best we can hope for, and perhaps the least of our worries.

    If Trump wins, the long term is more certain, but in the short term we will see riots. There is a significant segment of the population that believes their side losing means Democracy is broken. The truth is, of course, the exact opposite; but facts don’t seem to matter to this group. The market will not like that.

    If Biden wins but the Senate remains under Republican control, this could be the best outcome from the market perspective. I’m not saying it is best for our country – that is a political judgment and not my place, but it will mean peace in the short term and moderation in the long term, and Wall Street likes that.

    In the meantime, prudence is necessary. In sailing, when the wind picks up and the waves get a little higher, a sailor reefs the sails, which means she reduces the size of the sail to slow the boat and get it under control. The saying goes, “The time to reef is when it first crosses your mind.” We are entering a time where it may pay to be defensive.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Searching for Direction

  • The market over the last several days has me thinking about Soul II Soul, and their 1989 hit, “Back to Life.”  For those who don’t remember, or who wisely blocked it out, I apologize in advance because it is one of those songs that gets into your head and you want to get it out, but can’t. It goes, “Back to life, back to reality…” I’m pretty sure those were the only lyrics but you can fact check me on that. (Again, sorry.)

    Anyway, this is exactly what is happening in the market today. We went too far too fast, especially with the technology stocks, and they are simply coming back down to earth. This much, frankly, is not all that insightful; it is obvious. What may be less obvious is what is happening underneath the surface.

    We have written about this before, but it bears repeating:  This market rally has not been a tide that has lifted all ships; it has been decidedly unbalanced in favor of the technology firms that have benefitted from the Covid-19 world of virtual work, school, and social life. To put it in perspective, one can look at the Morningstar style boxes.

    As a reminder, Morningstar breaks the world up into a grid consisting of large companies, small companies, and those in between. They also break the universe up into stock of companies that would be attractive to the average-growth investor, value investor, and in-between or blend investor. The index for the large-company growth box is the Russell 1000 Growth index, and it returned a positive 23.2 percent over the 12 months that ended June 30, 2020. Over that same period, the small-company value box represented by the Russell 2000 Value index returned a negative 17.4 percent. Yes, you read that correctly – there is a 40 percent difference over the last year between one category of stocks and another. No, that is not normal.

    Not only is it not normal, it is historic. It is also completely unsustainable. The last time anything came close to this in the market was the dot-com bubble. The similarities between now and then are striking. Then, large-growth (aka technology) stocks had dominated the returns in the market for a decade. Today, large-growth (aka technology) stocks have dominated the returns for a decade. Twenty years ago that dominance accelerated toward the crash. Today, the dominance has certainly accelerated.

    Here the stories differ a little bit. Twenty years ago there were many tech companies, lots of whom did not have a sensible business plan let alone things like revenue, and almost none of them had any profits. Today, that is not the case. These firms represent the core of our economy. They are the big blue chip companies. Coming back to reality twenty years ago meant industry consolidation and years of building actual businesses. Amazon was an online bookstore when the dot-com bubble burst. Today it is everywhere.

    I’m not sure whether Mark Twain actually said it, however, “history does not repeat itself, but it often rhymes.” There is no force in investing stronger than what we call the reversion to the mean. That is a fancy way of saying stocks seem to find a way to do what they have always done on average. There should not be a 40 percent gap between one segment of the market and another, and that gap will disappear. It appears to have begun that process a few days ago, as technology stocks have been the biggest losers in this short selloff.

    This doesn’t mean we have to go through a bear market as we did when the tech bubble burst twenty years ago. It does mean that there are many areas of the market that have been neglected over the last decade, and they will catch up. Diversification is likely to be much more important in the decade ahead of us then it has been.

    One last thought. Nineteen years ago, terrorists from the other side of the world flew planes into the World Trade Center and the Pentagon. Heroes on another plane fought back against a fourth attempt, crashing into a field in western Pennsylvania. That day is burned into my memory like few other days. However, what I want to focus on right now is the days that followed. For a brief time, we came together as a nation, and it was the most beautiful thing. The goal of the terrorists was to split us apart, but the opposite happened.

    Unfortunately that unity did not last long, but those of us who lived it can still remember that togetherness is possible. Hopefully my children will get to experience such a time, and hopefully it won’t take an enormous tragedy to make it happen.

    Too many people died on that day. Don’t ever forget that with all of our flaws and how far we fall short from the scale of perfection, when graded on the curve of human history, the United States is the shining city on the hill. We are the light in the darkness. That is why we were a target then, and it is why we remain a target today for those who, at their core, are the enemies of freedom.

    The markets get carried away as does society at large sometimes, but ultimately we have to come “back to life, back to reality.” (Sorry, I know it is a horrible song.)

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

     

    ~Back to Reality

  • When I was a young analyst at Invesco I worked with a lot of other young singles. Like most generations of young professionals, we often socialized with one another. One of those friends introduced me to my wife. She also offered to set up another colleague with a date, and asked him what he was looking for in a potential mate. I’ll never forget what he said, “The most attractive quality in any potential partner would be positive net cash flow.”

    Not exactly romantic, even if it was extremely practical. His argument was sound. He was not looking for someone to financially support him, and he did not care how much money she made. This was not about marrying for money. He was looking for someone who had the discipline to live within her means; and reasoned that if she could do that, then they would be able to live comfortably within their means. Positive net cash flow.

    Cash flow is the most important thing we look for when investing in a company, but it is also the most important element of financial planning. Many people refer to it as budgeting, but I do not like that term. Budgeting will get a person in financial trouble quickly. Here is the problem with budgeting.

    An individual sits down at the beginning of the new year – this was a resolution after all – and puts together a budget. He budgets among everything else, $5,000 for home maintenance, and $5,000 for a vacation. In May, his HVAC goes caput and he has to replace the entire system. It costs $10,000. He is $5,000 over budget on home maintenance.

    In June it is time for his vacation. He knows he just spent $5,000 more than he meant to on home maintenance, but his vacation budget has not even been touched. He goes on his vacation. He also continues to spend on all his other budgeted items. After all, only the home maintenance budget was affected by the unbudgeted item so why would that impact anything else? That is how budgets work in the business world.

    Budgeting leads to siloing of expenses – this item comes from this bucket and that item comes out of that bucket. That leads to overspending, which is an obvious problem; however, it is not the only problem.

    Here is an interesting fact:  most small businesses that go out of business actually show a profit on their last set of financials. How could that be? They spend relative to a budget versus spending relative to cash flow. In other words, the timing of expenses and revenue matter. Using our example again, let’s say our friend budgets $5,000 for vacation, but he doesn’t actually have the money in the bank yet. He based the $5,000 on his expected annual income. He then takes that vacation in February before he has actually made the money. No problem, he thinks; he has credit cards.

    Now he has debt and then the HVAC goes. The hole gets bigger, but he is only overbudget on home maintenance, right?

    This is how people get in debt. Budgeting is a bad word. What is needed is cash flow management. One way to do this, and the way most credit counseling services will recommend for anyone who is over their head in debt, is to use only cash. In our world today that would mean debit cards. The first thing to do in order to get out of credit card debt is to tear up the credit cards. That is good advice for a lot of people.

    However, for those who do not carry credit card debt, focusing on cash flow is still just as crucial in the planning process. The proper use of credit cards can be very helpful. It can make it far easier to see where one’s money is going and to allow one to hold onto her cash a little longer. That is not as much of a benefit today with our extraordinarily low interest rates, but it is still a useful habit. To do that, the rule still needs to be that she does not buy anything with a credit card unless the cash is already in the bank to pay for it.

    The appropriate way to plan for that vacation is to set the money aside before the event. That can be done by a process we refer to as cash flow management. While in our working years we should strive to live within our means. It is helpful to know what our major expenses are and to plan for what we need, so that we know what we can afford to save. My first boss referred to this as “paying yourself first.” Put that money in savings before you spend a dime.

    My wife and I have tried to start this process early with our children. They each get an allowance, and with every allowance, they must set aside 10 percent to give and 10 percent to save. The giving comes from our family’s faith, but I would think it is a good exercise for anyone. The saving is for the unforeseen or bigger purchases. This is what my colleague was looking for: positive net cash flow. If every young person would start their career with this practice, they would end up in a good place.

    Cash flow is not just for those of us still working. In retirement, cash flow is just as important. One of our primary roles as an advisor is to help our clients understand where their cash is going and how much they really need. This may seem odd, but the more successful the client in their working years, the more likely they need help with cash flow management in retirement. While it is certainly possible to outspend any level of income, higher incomes do make cash flow management easier. As a result, many hyper-focused businesspeople really do not know where their cash is going and how much they really need from their investments.

    We spend most of our time at Iron Capital talking about the act of investing. We do this because if one does not invest properly, then it does not matter how well he plans. However, planning is an important part of the investment process. We invest for a reason, and those reasons are significantly deeper than just making money. The cornerstone of planning is learning to manage one’s cash flow. It will help your financial future, and if you are single and looking, it may even help you get a date.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Cash Flow is King