• 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.
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  • Iron Capital Insights
  • November 22, 2017
  • Chuck Osborne

Thankful 2017

This rally just will not end. It has changed character several times, with different segments of the market taking the lead. It has had slight pauses that might signal an oncoming market correction, but through it all this market just keeps climbing. The recent leadership has come from China. Emerging markets have been the best…


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  • Iron Capital Insights
  • October 4, 2017
  • Chuck Osborne

A Taxing Debate

The fact that the market has been positive thus far this week suggests to me what we already know: The computers are in charge of the short-term movement today. Investors have always been characterized as being heartless, but the machines actually are. The machines and the humans who program them are focused on tax reform. Will it get done?


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  • 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.


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  • 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.


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  • 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…

  • This rally just will not end. It has changed character several times, with different segments of the market taking the lead. It has had slight pauses that might signal an oncoming market correction, but through it all this market just keeps climbing.

    The recent leadership has come from China. Emerging markets have been the best place to be this year and Chinese technology companies have led the way. Can it last?

    Yes, it can. Of course, there are never any guarantees in the financial markets and something can always go wrong, but this rally is mostly based on better company results, which means a better economy and ultimately a better consumer. We see it in the economic data and we also see it in real life.

    This past Sunday was my son Charlie’s tenth birthday. For his birthday we gave him a trip, wherever he wanted to go – within reason and budget of course. He chose Disney World. Our flight to Orlando was packed; our hotel was completely full. The parks were wall-to-wall people, a large portion of whom were wearing matching t-shirts, and one brave man who won my affection by wearing a shirt which simply stated that no one was ever getting him into a matching t-shirt. Everyone must stand for something.

    Perhaps the greatest signal of economic strength was found in the fact that on my son’s birthday some people – not the Osbornes – were willing to wait for 170+ minutes to ride the Seven Dwarfs Mine Train, the newest roller coaster in the Magic Kingdom.

    Disney World is an interesting place. Some people absolutely love it and others absolutely hate it, but there is no doubt that it is an American landmark. I got to meet a sailor in our U.S. Navy who took his four kids to the park using tickets given to him through a military charity. It was a treat before he shipped off in a week’s time. I met a family with five sons, all adopted but no less brothers. I won’t lie, my family witnessed some rude behavior some from children but unfortunately much from parents. However, we witnessed a hundred small kindnesses as well. We witnessed the great diversity of our nation and our shared culture.

    When one takes it all in he realizes that he has much for which to be thankful. In keeping with our tradition here is my list. This year I am thankful for:

    ~ A good year in the financial markets.
    ~ The United States of America, where people from all walks of life can share experiences like Disney World.
    ~ My children, whose enthusiasm for the small things in life reminds me of what is truly important.
    ~ My family, immediate and extended.
    ~ All of my friends.
    ~ As always, Mama’s pumpkin cheesecake and my loose-fitting pants which make enjoyment of said cheesecake possible.
    ~ Finally, 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 2017

  • It is hard to think of work when tragedy strikes like the one in Las Vegas Sunday evening. Our thoughts and prayers are with all those who have lost loved ones and suffered injuries in this truly senseless act.

    Even in tragedy, life goes on and the market keeps on going. The fact that the market has been positive thus far this week suggests to me what we already know: The computers are in charge of the short-term movement today. Investors have always been characterized as being heartless, but the machines actually are.

    The machines and the humans who program them are focused on tax reform. Will it get done? It brings to mind the last time tax policy was really under debate. We dedicated an issue of our Quarterly Report newsletter to the subject in 2010, which can be re-read here. Back then we were talking about raising taxes and now the talk is about lowering them, but the principles of tax policy remain the same.

    The biggest area of concern for the markets is corporate taxes. The United States has the highest corporate tax rates in the developed world. Our outdated system puts us at a disadvantage for global competition. Of course, politics will be played, but this was an agenda item for the last administration as well. We need to reform our system.

    Those against reform will tell you this:  While 35 percent is the stated rate in the U.S., what actually gets paid is a more modest 24 percent. That number comes from the Center on Budget and Policy Priorities. The response to this argument should be to simply say, “Exactly.” You see, this is the problem in our system and it is the problem with high tax regimes in general. Politicians love to get on the stump and rant about those evil greedy capitalists. “They are going to pay their share. We’ll have the highest rates in the world.” Then they quietly say, “But we didn’t mean you, Mr. Donor. Your company will be given a loophole.”

    It is very popular today to claim that the American system has become rigged, but no one then reflects on how would one actually go about rigging a system? One way would be to make tax rates very high and then give out loopholes to favored taxpayers. This may sound like blasphemy, but we might not need a tax cut right now; we are, however, badly in need of tax reform.

    The biggest beneficiaries of real reform would be smaller companies. These are the ones who end up actually paying the higher rates. Of course, because of the high rates and the fact that business income is actually taxed twice if it is paid out to owners, many small businesses have gone to alternative business structures where the business income is “passed through.” This means the owners simply include the business income in their own personal taxes. This works for several types of companies, but the problem for many is that this system provides a disincentive to reinvest in the business.

    If a business owner is going to have to include all the business income in his personal taxes, then why would he not at least get the personal enjoyment of that money? To grow one’s business an owner must reinvest in plants, equipment, training of workers, and ultimately more workers. If she has to pay personal income taxes even if she didn’t spend the money on herself, then why would she reinvest? The data over the last decade-plus would indicate that the answer to that question is that she wouldn’t.

    Our economy cannot grow if businesses do not grow, and businesses cannot grow without investment.  We need a system that encourages investment, and one that does not favor one industry or company over another. Will we get it? Doubtful, but unlike politicians who allow perfection to be the enemy of progress, the market will applaud progress. If we get anything that reasonably could be called reform, it will help the economy and that, in turn, will help your portfolio.

    Warm Regards,

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    Chuck Osborne, CFA
    Managing Director

    ~A Taxing Debate

  • 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,

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    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