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JUDGMENT UNDER UNCERTAINTY
Behavioral Economics Takes Center Stage in Q3

I will be very impressed if the title of this latest edition of Portfolio Matters sounds familiar to anyone. It’s actually the title of the research paper by Daniel Kahneman and Amos Tversky back in September of 1974 that brought the field of behavioral economics into the mainstream mindset we know today. (We credit writer Jason Zweig for bringing this anniversary into spotlight.)

What this research paper really did was to question our understanding of how we think, or at least, how we think we think. The paper shed light on powerful thought patterns that likely affect us all. And when it comes to investing, these thought patterns and resulting behaviors play a far greater role in the markets than most folks realize…read more

In 2017 thus far, the only thing more dominant than the L.A. Dodgers may be large cap growth investing.

Through July, large cap growth is up over 17%, beating the S&P 500’s impressive 12% return. At the other end of the spectrum, small cap value investors have seen a minuscule 1% return, as seen in the chart below. But there’s something eerily familiar about these year-to-date results …

A SMOOTH RIDE IN Q2
But Don’t Fall Asleep At The Wheel

On May 16th, there was a Wall Street Journal column by Jason Zweig that may have gone unnoticed, if not, underappreciated. The article discusses Amazon’s 20th birthday as a publicly traded company. Since its IPO in 1997, Amazon generated a total return of nearly 49,000%, or over 36% annually for its shareholders. No doubt that a performance number of 49,000% will make anyone stop dead in their tracks, either in amazement, disbelief, or both. But the rest of the article had some far more important points that may not have sunk in for most readers.

We’ll return to this story later, but suffice is to say that the Amazon story was likely lost among the many negative stories that embodied the most recent quarter. In this issue of Portfolio Matters we’ll discuss what all these moving parts mean for investor returns and, more importantly, the future for our clients and friends…read more

Ready for the next market correction? Today’s drop rekindles questions of whether this bull market is finally over. To be sure, stocks are up over 7% in the first 4 months, extending the 8-year run from the 2009 low.

But the bull market run has resulted in some expensive prices. Regardless of whether one uses multiples relative to sales, book value, trailing earnings, or normalized earnings, stocks aren’t cheap. The Shiller P/E ratio, which compares stock prices to normalized earnings over a 10-year cycle, is at its third highest dating back to 1887. The top two instances were 1929 (before the Great Depression) and 1997 (during the Tech Bubble).

Thumbnail PM 041217Is The Market Getting Ahead of Itself?

I recently attended an event at which General George W. Casey spoke to a crowd of emerging business, civic, and non-profit leaders. General Casey served as U.S. Army Chief of Staff and was Commanding General of the Multi-National Force in Iraq from 2004 through 2007. He described his experiences in the Middle East, and his words offered some key truths for us all.

In his remarks, he referenced the “vuca” world in which we live: volatile, uncertain, complex, and ambiguous. He then stated how important relationships are to the success of any objective in such a world, in his case, peace in Iraq.

Joseph-mediumThe financial markets are now closed for the year and with all of the theatrics the verdict is in. Those investors with the following five characteristics prevail over those who fall victim to a host of mistakes and unsuccessful approaches:

  1. Investing from a superior position of financial strength.
  2. Being well prepared for a range of possible outcomes.
  3. Having an investment philosophy and approach you can confidently stick with and win with through thick and thin.
  4. Tuning out the noise, taming the emotion and focusing on what you can control.
  5. Investing for long-term success and, in the process, avoiding anxiety-toxic predictions, moves, comparisons, concentrations and traps.

Blue Chip StocksToo much of a good thing can be wonderful, at least, if actress Mae West was right. But when it comes to your investments, we’d argue too much of a good thing can be downright
dangerous.

Consider what’s going on among blue chip stocks in today’s low yield environment. Anyone seeking income from bonds knows that yields are at historic lows. As such, many investors have sought blue chips stocks and their healthy dividends as an equivalent to traditional bonds. We don’t believe this to be a terrible idea, but it definitely comes with its tradeoffs and we question whether those risks and rewards are getting the attention they deserve today.

footballThe last 18 months have been a volatile time in the market with fears of a Chinese recession causing a temporary market pullback in August 2015, Eurozone concerns causing a dip in February 2016, and Brexit triggering a quick decline at the end of June this year. Through all of that, the S&P 500 is actually up 3.67% over the last 12 months and 6.17% year-to-date. Because the S&P 500 is up 6%, your portfolio should have returned around 6% this year, right? Not necessarily, and if you’re in a diversified portfolio, likely not.

The problem with comparing a diversified portfolio to “the market” is that the S&P 500 only measures companies that make up a portion of a well-diversified portfolio. Football is top of mind as it is nearly football season again (HALLELUJAH!) so allow me to draw an analogy. Lineman, the largest players in football, make up only a portion of NFL football players. Comparing the S&P 500 to a diversified portfolio is like comparing the average size of an NFL lineman to the average size of an NFL football player. While players of the same sport are being compared, the comparison is apples to oranges because there are a large variety of statures in the NFL. The same goes for investing where there are countless asset classes available.

On Tuesday, Donald Trump won the Republican nomination for President. This news likely caused much elation, disgust, and nothing in between.

But among those who call themselves Republicans, this marks quite a shift in their thinking from last year. In an April 2015 poll of registered Republican voters, Jeb Bush led Marco Rubio while Donald Trump … wasn’t even on the list!

No-Clear-Leader-in-the-GOP-Field Blog 07.20

“What goes best with a cup of coffee? Another cup.”

-Henry Rollins

Coffee beans 07.14Thus far, 2016 has been an interesting year for money managers. We have seen the recent market rally mask some of the greatest market volatility experienced in five years. If you think back to the beginning of the year, you’ll remember the worst start to the calendar year ever for the S&P 500. As recession fears subsided, stocks rebounded and we closed at a new record high on the S&P 500 yesterday. We have also seen a reversal in commodity prices.

From a total return standpoint, the S&P GSCI, the commodity index, sits atop of its equity counterparts. The increase in commodity prices have helped subdue the concerns of a global recession, but also comes with drawbacks. The clear drawback is the price to fill your car. We have seen prices at the pump increase over the year as oil prices have risen and now hover around $50 per barrel. Another downside, one not as publicized as other commodity prices, is the price of coffee.


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