When we watch the news, we hear how every day events are "drastically shaping" the market, and on a day-to-day scale, the market seems volatile. How does anyone invest for the long-term? Mike uses several big ideas to shape the way he puts his portfolios together. While not every investment is right for you, Mike thinks that arming yourself with knowledge and perspective can help you make the right choices.
We invite you to take a look at some of our blogs on Mile High Investing for some big ideas, long term investments, and a new perspective on creating a portfolio that is "ahead of the curve."
Many major issues will face the United States, and, the world in general over the next several decades. One issue will be how to manage the rising need for energy with the rising impact on climate. Living on planet earth we are surrounded by greenhouse gases and naturally trapped heat. Imagine the trapped heat in a parked car on a summer day. 10 of the 11 warmest years on record have occurred since the year 2000! Warmer climate isn’t just a rise in temperature but also the fact that warmer air holds more water vapor which leads to heavier snow, wetter rain, heavier rainfall in some areas, and less rainfall in others. The other side of the equation is the demand for energy. As affluence increases, energy use per capita grows. A simple illustration to consider is our increased use of televisions, cars, kitchen appliances, and computers. Coal, oil, and natural gas burned for energy releases carbon dioxide into the atmosphere, adding to global warming. For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.Read More
Last Friday, Joe Hruska, CEO of RescueTime, joined me on the air to discuss how his company found its nitch. Last year, a Jefferson National survey found 75.5 percent of financial advisors believe active portfolio managers can outperform an index over the long term. What we learn from those who have studied the actual returns of mutual fund managers and money managers is that fewer than 20 percent actually outperform over the longer-term 10-year time periods said Charles Ellis, author of Winning the Loser’s Game, and Burton Malkiel, author of A Random Walk Down Wall Street. Dalbar, the nation’s leading financial services market research firm, performs a study every year evaluating the Standard and Poor’s 500 (S&P 500) and the average mutual fund. From 1988 – 2007, the S&P 500 was up 11.8 percent and the average mutual fund was up 4.48 percent. In terms of dollars this means if a person invested $100,000 in the S&P 500 on January 1, 1988 and didn’t touch it, on December 31, 2007 they would have $930,000. If the same person had put their $100,000 in a mutual fund for the same time period they would have finished with $240,000. To beat the market, as so many financial advisors believe they can do, the $100,000 would have had to turn into $1-million or more during those 20 years. And, that just didn’t happen. Beating the market is difficult. It requires a high level of expertise that most financial advisors just don’t have. Josh Brown, author of The Reformed Broker blog and Backstage at Wall Street, explained this well. Allow me to paraphrase: Most brokers are phenomenal, world-class sales people. They’ve learned an iron clad sales wrap that, when used well, often produces a logic defying amount of income. But, a great many of these salesmen don’t have the necessary knowledge to actually accomplish anything for their clients. As I (Josh Brown) have come to learn over the years, selling one’s expertise is easier than actually developing one’s expertise, especially as it pertains to investing. For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.Read More
To repeat from the beginning: Suppose you received a letter from a financial advisor who told you a certain stock was going up over the next several weeks. You watched the stock, and sure enough it went up. A few weeks later that same financial advisor sent another letter to say another stock was going to go down over the following few weeks. Sure enough, as you watched, the stock did go down. Then that same financial advisor sent a third letter to tell you to watch another stock that was going to go up. Sure enough it did. With the next letter the financial advisor told you to watch another stock that was going to go up. And sure enough it did. That same financial advisor sent another six letters each time predicting correctly the direction of every stock he told you to watch – a perfect prediction ten out of ten times. In the eleventh letter he asked for a big investment. What would you say? He had been right ten out of ten times. What the investor does not see is the total picture—the whole story. That financial advisor began sending letters to 10,240 prospects. In 5,120 he predicted the stock would go up; in the other 5,120 he predicted the stock would go down. The 5,120 to whom he sent the letter saying the stock would go down never heard from our financial advisor. Of the 5,120 to whom he said the stock would go up, 2,560 got a second letter predicting that second stock would go up and the other 2,560 got a second letter saying the second stock would go down. The 2,560 who got the letter predicting the wrong direction of the stock those people never heard from our financial advisor again. Of those who got the correct prediction, 1,280 got the third letter predicting a third stock would go up and 1,280 got a letter saying the third stock would go down. You the reader now the full story. Only 10 prospects would get letters with 10 perfect predictions. The other 10, 230 people never heard from the advisor ever again. This is the classic “Baltimore Stockbroker” story1. Why Baltimore? No one knows. As far as I know there never was such a stockbroker. But, I am sad to say it illustrates what happens on Wall Street. One of the most touted marketing programs by Wall Street is diversification and improving portfolio performance through investing in international equities. In 2001 following the Dot.Com bust Goldman Sachs came out with a report predicting the economic growth in four countries would be significantly greater than economic growth in the United States. There is logical reason to believe those countries, Brazil, Russia, India, and China –the BRIC Countries—will outpace economic growth in the United States. The conclusions drawn then and even today are those country’s stock markets are going to out perform the US market. Maybe I am just cynical, but, even at that time I wondered if this study was really about the stock markets or a marketing ploy to get Goldman and other clients who had been burned by the dot.com crash to invest again. Was it a ploy to say this: “You got burned in dot.coms from the US, but you can invest with greater confidence in the BRICs.”? Since that time we have other studies, and, even the data for which the BRIC study, that raise many questions. The data for Brazil was based on only 10 years of data. Credit Suisse analyzed the relationship of economic growth and stock market performance for 83 countries from 1972 to 2009. They ranked the countries by their economic growth on five year periods and looked at how the stock markets performed. Investing in the highest economic growth countries yielded stock market increases of 18.4% over the five year period. But investing in the lowest economic growth countries yielded stock market increases of 25.1%. I do believe that the economic growth in those BRIC countries will be greater than the economic growth of the USA. I have said that before and that is the driving force of the supercycle we are in now—something I have written about before. But that is not the whole story. Just because there is greater economic growth does not mean the stock markets will do better than the US market. I believe it also exposes the investor to greater investment risk. Consider what is happening in Russia now. I want international exposure, but will achieve that by finding US companies that have significant sales overseas. Like the Baltimore Stockbroker, I believe Wall Street is pushing their own agenda and most investors don’t get to see the whole story. The BRIC study is just one of a number of misleading marketing pushes I have seen over the years. Receiving ten letters correctly predicting the movement of ten stocks gives a rational and logical feeling that the Baltimore Stockbroker is really knowledgeable and capable. Getting studies from big brokerage houses and information on CNBC and in newsletters and magazines giving rational and logical concepts and investment themes seem reasonable. But what is the real agenda? What is the whole story? For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts. Footnote 1: How Not To Be Wrong: Power Mathematical Thinking by Jordan EllenbergRead More
If we plan our financial future with invalid assumptions we will end up with an invalid answer – never a good thing. After all, we know what they say about assumptions. Prior to 2008, several financial planners and investors were making decisions based on a “normal curve” of the markets. A normal curve is a bell shaped curve. It allows you to predict the probable outcome of an investment based on the market’s previous performance. Unfortunately, predictions made with a bell curve are done with invalid assumptions. Recently, we saw the severe repercussions when those predictions are wrong. Rather than throwing out the whole curve, the new approach is a “fat tail curve.” This is the same bell shaped curve, only with fatter tails. The fat tails make the probability of extreme events, such as 2008, a lot higher. The problem is, this is still a generalized bell shape curve and predictions are still made with invalid assumptions. To avoid the uncertainty of predictions, several planners and investors have and do use asset allocation. This type of investment diversifies assets across different classes so that when one goes down another goes up. Overall, this reduces risk and improves returns. Unfortunately, in 2008 when an asset went down another didn’t rise. It fell. They all fell. Predictions made with false assumptions, such as normal curves and secure asset allocation, left nearly everyone in a big bind during the Great Recession. By keeping our focus on the long term, rather than the short term, we can plan for economic dips. We can avoid some of the past mistakes. For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.Read More
Robert Gordon of Northwestern University is getting a lot of press for his publications predicting we are entering a new age of slow innovation, slow productivity growth and eventually slow to stagnant GDP growth. To that I disagree. It reminds me of Thomas Robert Malthus. Malthus (1766-1834) was an English scholar who wrote about economics and population growth. He believed that, in his lifetime, improvements in agricultural productivity had reached a pinnacle and improvements would be limited or non-existent. Malthus postulated that wages would sink as demand increased for food but food supplies would be limited. Additionally, that food prices would increase with demand rising faster than supply. In turn, the business owners would reduce wages so they would have enough for food. Malthus felt famines, epidemics, and wars were all good things that reduced the population which in turn reduced demand for food. Malthus argued against the so-called “poor laws” (similar to our unemployment insurance, food stamps, welfare, etc.) He wanted people to die to reduce demand for food. He argued for celibacy and forcing later in life marriages. In 1850 not long after Malthus died the US population stood at 23 million and of those 23 million people, 11 million were employed on the farms– almost 50% of the US population. Today we produce nearly 60 times the amount of food as we did in 1850 and we are doing that with only 1.6 million people employed on the farms. The average worker produces 600 times what the average worker did in 1850! Gordon, in my opinion, is the new Malthus. He claims we have gone through three growth cycles and are at a time when growth will be moderate at best. Gordon designates the first cycle lasting from 1750-1830 and growth was driven by the invention of the steam engine, cotton spinning, and railroads. All three contributed to a significant growth in the world economy. Gordon’s second cycle from 1870-1900 was driven by electricity, the internal combustion engine and running water. Running water was, in his opinion, the most important of the three. The third cycle from the 1960s to the 1990s has been the cycle driven by the computer. Since the 1990s ,according to Gordon, we have significant innovation but little growth in productivity. Gordon extrapolates to say we are entering the time when innovation slows and productivity slows to a crawl. Negativity sells. We have just come through the Great Recession and the memory of seeing portfolio losses and net worth values dramatically drop seems fresh in our memory. So when a Gordon comes along that predicts a slow growth and little gain in productivity he gains a considerable following. But we don’t have to go back as far as Malthus to see others who gained national or international prominence by predicting slow growth. One of the popular books of the 1950s was John Kenneth Galbraith’s book “The Affluent Society”. Galbraith stated the US population had reached a peak in affluence. After all, almost every family had one car and the average size of houses had grown to 1,100 square feet. It was unlikely, according to Galbraith, that there would be much more growth in affluence. That was as good as it would get. Large companies were 2/3 of the output in key sectors and they controlled technology. Small companies did not have the capital to compete. Large companies would innovate but taking few risks. Large companies were not looking to maximize profits, but instead focused on maintaining their organization. Large organizations like the labor unions wanted control over suppliers and political influence. There was just no room for small companies. Galbraith missed seeing a little hamburger place would change American’s eating habits. A year before publishing his book, “The New Industrial State” MacDonald’s came public. Two years before that book was published Watson and Crick published their work on the DNA which was to lead small companies like Genentech and Amgen and a whole new field of biotechnology companies from small to fairly large. Galbraith never foresaw little software companies like Microsoft and Oracle would become huge big companies. It is hard to look into the future and see what the changes will be. We can get an idea from history. I don’t believe history repeats, but it rhymes. Gordon, like Malthus and Galbraith, looked at the present day and sees a leveling out. But if we look back at history, we can see a pattern that is far more optimistic. Until the Industrial Revolution, GDP grew at the same rate as the population grew. But with the Industrial Revolution, GDP grew at 0.3%, and the people began to gain some wealth. In the steam age of the 1800s, production and GDP grew at 1% per year, significantly higher than population growth and wealth accumulation increased. In the age of petroleum GDP growth averaged 2.4% creating an accelerating wealth. In the information age we are living in GDP growth which is likely to be in the 4%+ range. Nobel Prize winner Robert Lucas states it is the: “First time in history the living standards of the masses of ordinary people have begun to undergo sustained growth.” I believe Gordon, like Malthus and Galbraith before him is wrong and instead we are entering a time of sustained growth with businesses and industries that have the possibility of creating wealth for those who are involved and those who invest. For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts. Until Next Time, MikeRead More
The 19th century was the century of chemistry. It was built around oil and steel. The 20th century was dominated by physics with the invention of flight, cars, and electronics. I believe the 21st century is the century of biology. Why is this important? Because it means significant opportunities for you as an investor. Biology, especially in the healthcare industry, is becoming a money making machine. Think beyond the typical drug market. We are seeing huge advances in medical devices. From pacemakers to devices which monitor bodily functions, the way we administer care is rapidly changing. This year I was joined on the air by two different leading professionals in the medical development field. It’s a booming industry. Most recently, Sean MacLeod, President of Stratos Product Development, joined me on About Money. This innovative product development company works primarily in the medical field. Earlier in the year, Sailesh Chutani, CEO and Co-founder of MobiSante, joined me on the air to discuss a mobile ultrasound device MobiSante is developing. What do these two companies have in common? They are led by forward thinkers who challenge the status quo. I’ll say it time and time again: disruptive technology is the key to success. For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.Read More