There is nothing more frustrating in our automated world than dealing with a computer system issue. You are working away then all of a sudden, nothing. You reboot because you know that is what the IT people will tell you. Then you get the blue screen of death and call IT. “Have you tried rebooting?” Yes. “Are you sure it is plugged in?” Yes. “Okay I’ll be right there.” He comes, he reboots and it works again. “I swear I did that,” you say. “Sure you did,” he says as he walks away.

It is so frustrating, but it is part of our lives today. At some point we just have to understand that it is largely out of our control. In his book “The 7 Habits of Highly Successful People,” Stephen Covey states habit one as being proactive. Part of living a proactive life is understanding what is in your control and what is not. He referred to items that one can control as one’s circle of influence.

Covey is not alone. In “Golf is not a Game of Perfect,” sports psychologist Bob Rotella implores golfers to focus on process, because once the ball leaves the club face, everything that happens is out of their control. John Wooden, the legendary basketball coach, spoke about this in his books, too. Wooden focused on teaching and on his players’ execution of what they were taught, not on winning and losing, because he understood that the outcome is often impacted by luck, good or bad, and is therefore out of his control. The interesting thing is that Bob Rotella’s clients have won a lot of golf tournaments, and John Wooden’s teams won a lot of championships. That is what happens when one focuses on the things that are within his control.

In the investment world we often refer to the rate of return on an investment as performance. I once had a senior portfolio manager tell me that we should ban such talk. Performance is something that happens on a stage, he would say. We deliver investment results. When I first heard this I didn’t think much about it; I thought it was just an old man splitting hairs. Now, I’m a lot older and have begun to understand what a difference hair splitting can make.

First, it puts one in the correct mindset for making investment decisions. We can discuss yesterday’s performance, but it seems silly to discuss yesterday’s investment results. The word investment itself connotes a longer, more meaningful time period, while the word results connotes some sense of finality. The investment result cannot truly be known until it has fully run its course. The day we sell a stock is the first day that we truly know the end result. This puts us in a much better mindset for making prudent decisions.

Secondly, day-to-day performance of an investment is not something one can control. We cannot control, or even know in advance, that the New York Stock Exchange (NYSE) will suffer a technical glitch that will halt trading. We cannot control what happens in Greece. We cannot control the short-term volatility of China’s equity markets. The list of things that have short-term influence on performance which we cannot control could go on forever.

So let’s focus on what we can control. We can control what custodians we recommend for use to our clients. We are not short-term traders, so rare temporary technical issues that halt trading are not really of concern. What is of concern is making sure that good records are kept of what our clients’ actually own. We also keep our own redundant system. Prices change, and pricing errors can be fixed – this is the NYSE’s role. Having proper documentation of what one owns is of most importance, and that is the role of the custodian.

We can control what we own. We can know the balance sheet, the income statement. We can have an understanding of the products they make. We can judge the quality of their management. We can have reasonable certainty that cash will be there for dividend payments, and that the company has intrinsic value. We can diversify knowing that we won’t always be right. In other words, we can do the fundamental things that prudent investors do, which we know bring long-term success. That is what we can do, and what we will continue to do every day for our clients.

Warm Regards,
Chuck Osborne, CFA
Managing Director

~Control

“Nip it in the bud!” That is what Grandma would have said. If one wishes to put an end to certain behavior, then she had better make that clear as soon as possible. If one allows small transgressions, then slowly over time the transgressions will grow and grow until all authority to stop any transgression is depleted.

This timeless wisdom – the phrase dates back to the 16th century – is easy to understand, but hard to actually implement. Short-term ramifications always get in the way: the fear of being seen as over-reacting; the rationalization that this current transgression is really not that big of a deal; the fear of potentially negative consequences to making an early stand. Doing what is right is always so hard. Every parent understands this.

Now the EU understands it as well. In childrearing we call it spoiling the child; in economic terms it is known as moral hazard. Once one starts forgiving debts it becomes very difficult to convince a debtor that he really does need to live within his means. The ongoing saga of Greece’s indebtedness has finally come to a head. After kicking the can down the road for the last five years the EU has come to the same conclusion of many parents before them: We have let this go as long as we are going to and it is now time to get serious.

Polls in Greece indicate that the people there are reacting much like a child unaccustomed to discipline. They blame the creditors. How dare they expect us to actually pay what we owe? That is somewhat understandable, after all it was the Greek government not the Greek people that got the country into this mess. Many citizens whose taxes must be raised and pensions cut are rightfully upset as the politicians who got them into this mess are in much better condition than the people they claimed to care about. Of course that is often the downside to democracy; people vote for those who promise the most and then don’t really pay attention. That happens in lots of places. Everywhere one looks today one sees governments awash with debt. Are we all on the road to being the next Greece?

Those who profit from others’ fear will likely pronounce such. However, I’m an optimist. In the long run this tough stance by the EU is a good thing. Governments must take their debts seriously, and every now and then it is healthy to have that reminder, especially within the EU. If the folks in Brussels really want Italy, Ireland, Portugal and yes, even France, to get serious about being fiscally sound, then they need to show them that there are ramifications for not doing so. In other words, nip it in the bud. End this while it is still just Greece, which is so far gone.

On our side of the pond Puerto Rico is suddenly in the news as they are about to default. Of course we have seen it happen to cities in California, and the state of Illinois is the leading candidate for our own internal debt crisis. Maybe the U.S. will finally get serious about fiscal responsibility.

In the meantime, how do we invest with all of this happening? We addressed that in our last Insight, and nothing has happened over the last two weeks to alter our comments. We don’t see Greece having a significant impact. Of course there is always the knee-jerk reaction that leads to a couple of down days, but year-to-date – and even last week – international stocks have been the best place to be, so the markets don’t seem too concerned about Greece. But, even if we are wrong about that, we know what we own and we still like it for the long term. We have our risk controls in place for portfolio security and if need be we will take action.

There is no great cause for concern for your portfolio. The concern should be for the people of Greece, and over the hope that the political leaders in other countries are watching this and beginning to understand that fiscal irresponsibility needs to be nipped in the bud.

Chuck Osborne, CFA
Managing Director

~“Nip It in the Bud!”

The only constant in life is change. Then again, the more things change, the more they stay the same. But wait, sometimes what is old is new again? These cliché’s can be so confusing.

If you don’t believe me then consider the NBA championship series between Golden State and Cleveland. It could be called the new versus the old. Cleveland represents the old NBA – rough and tough defense sometimes boarding on dirty play, and offense best described as “give the ball to LeBron James.” (In fairness, Cleveland has been forced to play this way due to injuries.) Golden State represents the new-style NBA – they do this crazy new thing called passing the ball. All five players seem to move at once and while Steph Curry is certainly their star, they all seem to have permission to score when open. The millennial-aged writers at places like ESPN are beside themselves with this new type of game they are calling “motion offense.” To them it is something completely new. Of course those basketball fans who are a little older can remember when motion offense was the norm, not some new thing. To us it is basketball and it is about time they have started playing it again at the professional level.

Real life is no different. I recall a conversation I overheard in the spring of 2009 as I was walking to lunch and overheard two men behind me discussing what came to be known as the Great Recession. One said, “I hope I never have to live through another recession.” I looked back – I couldn’t help myself – and the man appeared to be in his late thirties. I did not know him so I did not say anything, but my thought was, “He must not have a long life expectancy, I hope I see a lots of recessions.” Not that I enjoy them but I know that recessions happen to occur approximately every five years; it is what we call the business cycle. I hope to see lots of them before I’m done.

This brings me to today. I have been looking for something to write about as the market seems stuck and the oil story has gotten old, and then someone asked me what is going to happen if Greece actually does default. As I was pondering that question I looked at this week’s Economist magazine. On the cover they make a bold statement, “The world is not ready for the next recession.”

Before I go further let me reassure you that we do not see any signs of recession at the moment, but the headline does make one think. After all it has been seven years since that dreadful summer and fall of 2008. While this is the first year since then that the IMF is estimating that every economy in the developed world will indeed grow, the U.S. has been growing since 2009. That growth has been painfully slow, but it has been growth none the less. We have also been in a bull market for stocks since the bottom in the spring of 2009. That is a long time, and eventually a recession will happen.

During the financial crisis I began writing these newsletters in an effort to calm nerves. The theme of almost every one of them was, “this too shall pass.” Now we have been at or around new market highs for almost two years and the economy has kept moving forward. I hate to say it, but eventually this too shall pass.

Will Greece be the trigger that kills our tranquility and takes us back into a downturn? I doubt it, I really do. Greece is a lot smaller, and with all due respect to the salad and the gyro (both of which are delicious), less important than Lehman Brothers. This also has been coming for five years now, not a shock over a weekend. Having said that, the truth is that I don’t know, and by the way neither does anyone else.

This is why prudent investing is always done from the bottom-up. Will Europe go back into crisis and U.S. into recession? I don’t know, but I know you can follow it on your iPhone. Apple will likely survive, as will every other company in which our clients are invested. Might stock prices drop a bit? If so, there are lots of companies we would like to invest in at better prices. Will interest rates spike? I don’t know, but it is unlikely to hurt our fixed income portfolio.

Will it be another 2008? That I can comfortably say is extremely unlikely. Life is a cycle. Summer leads to fall, which leads to winter, which brings us spring. But no two years are exactly the same. Today’s NBA motion offense is not an exact copy of the motion offenses of the 1970’s. The next recession will not look like the last one. The cycle will continue and this too shall pass, but prudence never goes out of style. The more things change the more they stay the same, and we will continue to invest from the bottom-up for absolute returns in all environments while always being risk-averse.

Chuck Osborne, CFA
Managing Director

~Change

As markets continue to take three steps forward and two steps back there has not been much to talk about. Of course all the financial television channels are still in operation, as are the web sites, tabloids, newspapers, etc. Today it seems they are really in the noise business, not the news business – I don’t mean that disparagingly, it’s just reality. Most days there is not enough actual news to fill the 24/7 news cycle, so they must share all the extraneous noise to fill air time.

Last week one such piece of noise was what Federal Reserve Chair Janet Yellen thinks about the stock market. She said, “I would highlight that equity market valuations at this point generally are quite high.” Her comments caused some short-term traders to hit the sell button and we have seen a few days of volatility.

Her comments reminded me of a conversation I once had with the CEO of what was then INVESCO Retirement Services. He had spent a lengthy, storied career in finance and related industries. Among other positions he had been a banker; he headed up the Office of the Comptroller of the Currency during the Carter administration; and he was formerly the CFO of INVESCO before moving to their retirement division. He asked me to design an investment education program for the non-investment professional employees because, in his words, “Everyone thinks they are an expert in investing, but they really know very little.”

He went on to explain how only after working with real investment professionals had he realized how little he knew about investing. The outside world thinks that anything financially related is investing-related. Allow me to let you in on a secret:  Your CPA has no more training in investing than your plumber, and your friend at the bank knows no more about it than your friend at the florist. (And, by the way, I am neither a banker nor an accountant.)

In areas like law and medicine people seem to realize that their podiatrist is not the right person to ask about a heart condition. They don’t call their corporate lawyer on a criminal matter. They understand that we live in a specialized world and being knowledgeable in one field does not give one expertise in another. This is partly because there is a recognition of the education level required for those professions. The practitioners themselves are highly educated, and to paraphrase Albert Einstein, the more they know, the more they realize what they don’t know.

Investing is another story. Many people know a little about investing, and a little knowledge is a very dangerous thing. Many of the investment industry’s wounds are self-inflicted – we have allowed the sales clerk to be elevated to “financial adviser,” which leads many among the general public to think (often correctly) that they know just as much about investing as the average financial adviser. Dangerous indeed.

Back to Yellen. Ms. Yellen is undoubtedly a very bright economist, but there is nothing in her background that would suggest one should follow her investment advice. However, that does not answer the most important question:  Is she correct about equity market valuations? Well, it depends. Are you invested in the stock of Chinese Internet company Alibaba, which is selling at a price which is 47.43 times greater than its earnings, or are you invested in offshore drilling company Atwood, which is selling at a price which is 6.09 times its earnings?

Prudent investors invest from the bottom-up. Knowing if the stock market as a whole is correctly valued is a nearly impossible task. Knowing if a specific company is correctly valued is much easier. There are plenty of good opportunities in the market today. One just has to look, and perhaps have more than just a little knowledge.

Warm Regards,
Chuck Osborne, CFA

~Everyone Is an Expert

This is a great time of year for sports fans. The NCAA Basketball Tournament, better known as March Madness, is one of those events that transcends sports as a cultural phenomenon. People who have not watched a basketball game since last March will sign up to enter their office pools and fill out brackets. The tournament always produces great drama and wonderful background stories.

Of course, as most of our readers know, I like watching basketball all the time. I have coached youth basketball for the last few years, and just this past season I was explaining to a bright young woman with a feisty competitive demeanor that if she wanted to try and steal the ball away from the player she was guarding, she needed to reach straight out, and not slap down. I explained that the referee would call a foul if she slapped down, but likely would not if she reached straight out. She then asked a question which showed her youth and innocence, “Why would the referee call a foul if I don’t actually touch the other player?” I tried to explain how referees are just human, etc., but as her eyes glazed over I resorted to the same answer my coaches had given me so many years ago. “There is no why, it just is what it is.”

I have been reminded of that this past week in my day job as well. Oil has revisited its lows and everyone is on edge over the Federal Reserve (Fed) and the potential raising of interest rates.

Let’s tackle the Fed issue first. Every Fed meeting in recent years has been covered by the financial media as if it were some big event on the scale of March Madness. The pundits line up to talk about when they will raise rates. They all seem to think it is going to happen very soon. I heard one commentator this past week suggest the Fed would raise rates at every meeting this year. Then the Fed does not raise rates and tells everyone very clearly that it will not raise rates until inflation is higher than the Fed’s two percent target.  Inflation is nowhere near that level at the moment, but the financial channels are full of people pontificating on why the Fed’s measures for inflation are wrong or why the Fed’s policy in general has been wrong. They may be or may not correct, but the Fed isn’t going to change either way. It is just like that young man you will likely see on TV this weekend pleading his innocence as he is sent to the bench with his fifth foul. He may very well be innocent. In super slow motion we may be able to see that no foul actually occurred, but if he slapped at the ball, the foul will likely be called.

The Fed has told us clearly what they will do. All one has to do is look at that same information they have and one will understand that no meaningful interest rate hike is on the horizon. If they do anything this year at all it will likely be a token move to test the market reaction.

The other interesting story in my world has been that oil has revisited its lows – and has once again bounced, but that isn’t as interesting so it won’t be discussed. As with the Fed and interest rates, the fascinating part of this story is the reason given. Wall Street is determined to make this about actual supply and demand for oil. They are now focusing on the amount of oil being stored. More people are storing oil today because futures markets indicate that the price will be much higher in a few months than they are now, but somehow in TV land this means that prices will be down. While this negative story is being fleshed out and everyday there is another negative oil story, the price of oil has already bounced back approximately 12 percent.

Oil revisited its low because oil is a commodity, and commodities have no fundamentals, no earnings and no intrinsic value. Securities are traded in the market based on two theories. One is fundamental analysis – what is a company actually worth; the other is technical analysis, which is the study of price movements. Technical analysis is not highly regarded outside of Wall Street because it has no intellectual underpinning. Prices don’t actually move in patterns, but humans are hard wired to see patterns even when no pattern exists. Technical analysis should not work, but it sometimes does because of the laws of self-fulfilling prophesy. Enough people think technical analysis works to make it work for short periods. There are many technical rules which have this attribute, but the one in question here is that lows must be “tested”. The stocks of companies have real fundamentals which often override technical mumbo jumbo, but technical analysis is all commodity traders have, so the lows are bound to be tested. There is no other reason why oil prices revisited their previous lows and are now seemingly on their way back up.

Sometimes it is good to not over-think things. Sometimes “it is what it is” is a valid answer. Interest rates are not going anywhere anytime soon, oil prices are going to go back up, and over the next two weekends we will see some mystery fouls called because a defender made that dreaded slapping move. It is what it is.

Chuck Osborne, CFA
Managing Director

~It Is What It Is.