September 30, 2020
Artificial Intelligence?
By Guest Columnist, Laura Redfern, CFP®, Shadowridge Asset Management, LLC
A.I., or artificial intelligence, can be found everywhere these days: from marketing (“you might like this…” based on what you bought last time) to traffic (in Austin, the price for some toll roads changes based on traffic flow). A.I. is a powerful technology that can be attractive in many industries. So, it’s not surprising to me when I hear investors and financial advisors wondering: “does it make sense to use an A.I. program in my financial life?”
Good question. When would an investor prefer having a robot, or “Robo Advisor” using a mathematical algorithm, instead of a human behind the wheel? To save costs on fees? Does a Robo give more unbiased advice, or yield better results? Is a Robo simply a personal preference? These are questions that are hotly debated in the financial industry, as you can imagine. And it’s not new. For at least ten years, I’ve seen headlines about the “death of the advisor and the rise of the robots.” But we (financial advisors) are still here. Why?
In a recent discussion with colleagues, I learned about a parallel conversation in the medical industry: years ago, doctors (specifically surgeons) were told that robots would eventually take over their jobs, making the human beings not only obsolete, but also dangerously outdated. After all, who wouldn’t want the relative guarantee of robotic accuracy over the uncertainty of human error? (Especially if you’re dealing with something like heart surgery!) Apparently, this conversation started back in the 1980s! But doctors and surgeons are still here. What does that tell us?
It tells me that the appropriate use of technology can strengthen and improve an industry. But it can never replace a human being. And therein lies the answer.
There are some things that technology can do better than humans. For example, analyzing large quantities of data and identifying patterns. Being data geeks at Shadowridge, we embrace this. We have developed our own A.I. and have written algorithms to help guide our investment decisions. But we still have the human element to confirm the actions that the data suggests. Without this, we lose something essential.
The flexibility and artistry of the human mind are possibly even more powerful than crunching data. Take a look for a moment at the creativity we have seen in response to COVID19. The very fact that many businesses shifted to working remotely is an incredible adaptation. Even school choirs are figuring out how to sing separately yet together. It’s been a challenge, but we are figuring it out.
Compare that to the response of some A.I. systems, and we begin to see the flaw with these programs. An article in Fortune magazine recently reported that:
“once the COVID-19 pandemic hit, A.I. systems had to be overhauled. The software, it turns out, had never been trained with data reflecting a drastic upheaval in consumer behavior caused by the virus and therefore couldn’t adjust to the new reality.”
And that’s not just in retail programs like StitchFix and social media programs like Facebook. We’ve seen in the past how A.I. systems have broken down when stock markets misbehave (for example, in 2018). Sometimes computer algorithms have even contributed to stock market volatility (for example, multiple “flash crashes” over the past 10 years). Even the most robust technology programs have their flaws. They might not be human flaws, but they are problems we need to acknowledge. Software can only do what it has been programmed to do. When life gets messy (which is often the case during medical or financial situations), that’s when human beings need each other.
When you are on an emotional rollercoaster, a computer may fail to recognize this, let alone compassionately change the way it presents information so that you can better receive it in a highly stressed state of mind.
When you are about to make an irrevocable decision, algorithms aren’t going to stop you and ask you how your current actions align with what’s most important to you, to possibly prevent you from hurting valuable relationships.
When you are stuck or overwhelmed, technology probably isn’t going to help you recall a high point in your life that you can connect to during challenging times, so you can keep moving forward.
We do that.
Does it make sense to utilize modern technology, algorithms, robots to aid in investment decisions? Certainly. In a data-driven area like finance, using powerful tools makes sense. Are human beings worse advisors than robots, and will they eventually be replaced? I don’t think so. If anything, human beings, such as compassionate financial advisors, are needed more than ever to help wade through all that data, personalize the decision-making process, and lead those we serve to better, more enlightened outcomes.
And that’s a result I think we can all appreciate (even the robots).
College Classes Coming
“Fun-damentals of Investing for Retirees” Starts Tomorrow
“Go to bed smarter than when you woke up.”
— Charlie Munger
If you want to sit in on the class, Zoom is surprisingly easy to use. All you need is a computer with Internet access. You will be able to see me and the class materials on your computer screen, and if you have a video camera, I and the rest of the class will be able to see you too, if you choose to turn your camera on.
Join us for three 2-hour classes on Thursdays, starting October 1st. And if you have friends who are nervous about the economy or financial markets, invite them to tune in also.
This fun class will help you become more confident making financial decisions. The easy-to-grasp format of this class provides a broad knowledge of investments preferred by investors approaching or already in retirement. Learn about stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, smart IRA strategies, avoiding common investment mistakes, and simple risk-reducing strategies that anyone can use. Bring your questions.
Here is a testimonial about my class that YC uses on its website:
“I learned a lot that about investing from your class that I did not know from years of watching the TV financial gurus. I only wish that I had taken the class years ago, before making the financial mistakes that reduced my retirement income. You offer a wonderful service to the community of Prescott.” ~MG
3 Thursdays: October 1st, 8th and 15th, 1:00-3:00 pm (online class). Tuition is $45.
Register online with the link below or call the college at 928-717-7755 to register for class #FA20-115.
Register for the class online: Fun-damentals of Investing for Retirees
What the Markets Are Doing – September 2020 Market Commentary
By Guest Columnist, Ryan Redfern, Shadowridge Asset Management, LLC
“As we head into October and the coming election, it should be no surprise to see uncertainty rule the market, much like it has done before other elections.”
It has been no surprise to see the stock market struggle in September. Historically, this month has the highest odds of a loss. And so far this month, the S&P 5001 has given back most of the gains it had made in 2020. And as of September 24th, 2020, the S&P 500 index only up 1.99% (FastTrack Data). So much for getting back to normal.
Last month I mentioned how there are several factors (unemployment, yield curve, business failures, etc.) that can still weigh on the market. It seems these issues may finally be catching up with us.
Our Long-Term Trend data recently signaled that it is time to play it safe. So we’ve been slowly backing out of our exposure to the stock market. More on that later.
As we head into October and the coming election, it should be no surprise to see uncertainty rule the market, much like it has done before other elections. The stock market does best when outcomes are generally known. So the fear of the unknown can cause excessive jitters and volatility. We’ll likely see this accelerate over the next few weeks, so again, we’re playing it safe.
For this month’s chart, I want to re-visit the New Highs – New Lows count on the NYSE. On my chart, when the value is net positive, the line is green. And when the value is net negative, it turns magenta. When the color changes, to me, it suggests paying extra attention to other data that can confirm the market is starting to roll over – like VIX volatility spikes, price support levels or moving averages getting broken, etc. In the current situation, this signal appeared after other signals, so this data may be helping to confirm more trouble ahead.
Bonds – the bond market continues, though very slowly, to give back gains made this year. The Aggregate Bond Index AGG is still up just over 6.5% year to date. Other bond segments, like High Yield, are still flat on the year and continue to stagnate.
In last month’s newsletter, I had mentioned that we were starting to reduce our stock market holdings. That was based on our Mid-Term cycle, which has remained negative continually since that time. Now that the Long-Term trend is also signaling trouble, we’re cutting back our stock market exposure much further. If the market starts to drop suddenly, I want to try to make sure our clients feel minimal effects. We’ll see how this plays out, but we should be well-positioned to catch the next rebound when things calm down.
Stay positive and healthy,
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.
What’s Happening in Your Portfolio
There have been lots of portfolio changes this past month as I quickly moved growth accounts (Shock Absorber Growth*, Adaptive Growth* and Adaptive Balance*) to cash and Treasury funds during the first 3 days of a sharp stock market decline between Sept 2nd and Sept 23rd. All major indexes participated in the decline, led by the tech heavy Nasdaq Index, which dropped 12.62%. HCM growth accounts fared better than the indexes, but the swiftness of the decline was a reminiscent of the Covid Crash of February 2020.
So, all growth accounts are 100% in cash or Treasury funds as of Sept 30, 2020.
Income funds are fully invested in a low volatility income funds and Municipal Income accounts are fully invested in Muni funds.
There will be more changes in the near future as Shadowridge Asset Management trading models are introduced into your accounts with me. Shadowridge has run several strategies which together have produced double digit average annual returns over their lives, a few of which are hitting it out of the park, performance-wise, in 2020. And importantly to Hepburn Capital clients, Ryan Redfern, Shadowridge’s Chief Investment Officer, has great skills in sidestepping market declines so risk is well managed in his work. I will enjoy showing Ryan’s strategies to you as we meet.
My Future Technologies* strategy will be integrated with 4 Shadowridge growth strategies in your growth accounts to give effective diversification by investment and buy/sell discipline.
There is great synergy here for you, and we all are going to benefit from Hepburn Capital’s merger with Shadowridge. It is a true win-win situation.
If you are not yet a client of ours but are nervous about the markets and what election jitters could do to your investments, call for an appointment to see these exciting new investment opportunities at Hepburn Capital Management, LLC.
And that is how we are staying in sync with this market.
- Shock Absorber Growth* is our 100% growth portfolio.
- Flexible Income* is our 100% income portfolio.
- Adaptive Growth Portfolios* are currently allocated with 80% Shock Absorber Growth* and 20% Flexible Income*.
- Adaptive Balance* is 50/50 between growth and income.
Mental Floss…
I told my suitcases there would be no vacations this year….
Now I am dealing with emotional baggage.
What We Were Saying Back Then
Cannabis is a hot topic these days with CBD use and legalization of cannabis both on the increase across the US. But investing in the cannabis industry is fraught with problems that have caused major losses for investors.
The price of the largest marijuana Exchange Traded Fund (Symbol: MJ), has dropped by over 70% since early 2019. Losses of that magnitude when an industry seems poised on the edge of great things tells me that there is much that we are not seeing.
A class I recently attended on how government policy affects different investments touched on the marijuana industry and shed some light on this.
Wholesale prices for marijuana have dropped like a rock in states where marijuana has been legalized for recreational use. In Nevada, prices have dropped by 22%, California by 19%, Washington 53% and by 72% in Oregon. (Source 2018 Marijuana business Daily, a division of Anne Holland Ventures, Inc.). On a road trip last year through Oregon, Gina and I noticed price warlike signs between growers. And no, we did not stop.
Apparently, because pot is so easy to grow, markets are getting flooded as soon as legalization occurs. Cannabis is just another commodity with unattractive economics in a field (no pun intended) where barriers to entry are low. Companies trying to operate in that market place are struggling as competition eats into their profit margins.
My recommendation: don’t let your savings go up in smoke. Avoid cannabis investments until the industry shakes out a bit.
Good News You Probably Did Not Hear About
These articles are on Future Crunch and thought you might enjoy some good news today. See more at https://futurecrun.ch/goodnews
- China has lifted over 50 million people out of poverty in the last five years. The country’s requirements are stricter than the World Bank’s; in addition to having sufficient income, China doesn’t consider people to be out of poverty until they have enough food and clothing, guaranteed basic healthcare, access to compulsory education and safe housing. Bloomberg
- Tel Aviv is on track to become the first city in the world to roll out smart roads that can charge electric vehicles while they’re driving. The project involves laying copper coils beneath asphalt, with receivers installed on the floor of moving vehicles to transmit energy directly to the engine and battery. Times of Israel
Slice of Life
I’ve often said that I don’t want to retire, and I have just worked out an arrangement that will allow me to work at a pace that is doable for a long time. Hepburn Capital is merging with a larger independent firm and I’m excited to share the details with you. This merger will allow me to keep my hand in the trading end of the business and also be available to you when needed, while lightening my load on administrative and compliance work. This is going to work out well for both of us.
The company we are merging with is Shadowridge Asset Management, LLC, headquartered in Austin, Texas. Shadowridge is headed by the husband and wife team of Ryan and Laura Redfern, and backed up by industry veteran Phil Lebkuecher and CPA David H. Featherston. I have known and collaborated with the Shadowridge team for five years and our cultures are very similar. Laura is a delightful Certified Financial Planner and Ryan is a tech whiz with proactive investment strategies much like my own, even better in some respects. Our trading skills complement each other well. Ryan’s forte is knowing when to be in the stock markets and when to be out of them, using primarily index funds. Ryan has produced excellent results, as independent tracking service, Theta Research, shows. We feel that by combining Ryan’s talents with my investment research skills, we will make a team that is better than either of us are alone.
The great synergy between myself and the Shadowridge team is something I’m excited about. You can read more about the folks at Shadowridge at: https://Shadowridgeinvest.com/about
We will begin using a team approach to servicing your accounts. Hepburn Capital’s long-time Operations Manager, Yvette Zurita, will come with me to Shadowridge and continue to be your first point of contact. Myself and either Laura or Phil will respond to your calls when needed. This team approach will allow your account to be serviced continuously at a high level, even if I am off vacationing somewhere. Shadowridge likes our HCM motto of “Let the clients feel the love”, so I believe the great client service you have come to expect from Hepburn Capital will continue.
I will become the Vice President of Investment Research at Shadowridge, and act as investment counsel to Ryan Redfern, their Chief Investment Officer. Although you will start to see Shadowridge’s name on paperwork along with Hepburn Capital’s, Yvette and I will continue to operate as you have grown to expect, and Hepburn Capital will continue on, being the local face of Shadowridge in the Prescott area.
There are several advantages for you in this arrangement.
• Ryan and Laura are in their 40s, providing a continuity that will give added stability for your money if something were to happen to me.
• You will now get the benefit of four heads together rather than just one in helping you with your financial questions. The key here is having in-house experts always available to you.
• Becoming a part of a larger firm means that your custodial fees will be lower, and save several hundred dollars per year for our average sized account, as well as eliminating pesky check fees, wire charges, paper statement charges, etc.
• My fees for managing your accounts will now be charged in arrears rather than in advance, meaning that during the next quarter, instead of being billed in the first few days of a quarter you will be billed in the last few days of the quarter. It will feel like you are getting free investment management services for most of the quarter.
Later in October the Shadowridge team will be in town for introductions and an open house. I will look forward to having you meet them. Current clients will get an individual invitation. If you are one of my many hundreds of readers who are not yet a client, but would like to come to the open house, please call the office at 928.778.4000 to get details. If you would rather do a telephone or Zoom video conference before that, I can set that up with you either coming to my office or doing a 3-way conference between Shadowridge, you and myself via Zoom or telephone. Just let Yvette know how you would like to handle the introductions when you speak with her.
This is an exciting time for me and this merger will provide great benefits for all of us. A real win-win opportunity.
As usual, thank you for your business.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Shadowridge Asset Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2020 William T. Hepburn. All rights reserved.
