January 2, 2020
The Cannabis Bust of 2019
What We Were Saying Back Then
In 2018, Cannabis investing was a hot topic. Canada had just legalized pot, as well as a growing number of states and many investors were expecting a gold rush into the market for pot. But cannabis investments, typified by Exchanged Traded Funds, MJ and Yolo, have been some of the worst performing specialty funds of 2019.
MJ, the largest cannabis ETF is down 57% in the last 16 months, sending a lot of money up in smoke.
Expectations were high in late 2018 when Canada legalized marijuana, but the industry is fragmented dominated by small businesses that institutional investors avoid, stifled by bureaucracy that limits the number of outlets and taxation that makes legal pot more expensive than black market pot.
The great Canadian experiment has shown us that folks will buy their pot where it is convenient and cheap regardless of whether it is legal or not.
In the US, federal laws prohibit banks and other interstate commerce companies from participating in the cannabis industry. Potential federal intervention is a huge negative for investors.
Someday cannabis investments might be viable, but not today.
What the Markets Are Doing
This is the time of year when pundits and other financial types like to predict what the coming year will bring. Predictions are dangerous for hands-on money managers, because the maker tends to get “anchored” to their target, and if reality gets in the way the maker will have a harder time recognizing and adjusting to the current reality.
What I will tell you is that the stock markets, both here and in many places abroad are advancing nicely. Since stock markets, with millions of people making decisions about what to expect, tend to be one of the best predictors of future economic activity, I’m going to say that our strong economy will continue for a while.
High energy prices suck the life out of an economy. If it costs an extra $20 a week to keep gas in your car, over a year, that adds up to $1,000 that can’t be spent on other things. High interest rates can do the same thing. These two factors are the things that in the past have sent us into economic recessions. Neither are happening right now, nor do they look ready to happen. This is a good thing.
Jobs are plentiful and wages are beginning to rise. That money will circulate in our economy, too.
A Peek into the Future
This article from The Hustle newsletter (firstname.lastname@example.org) gives me hope that we may find relief from intrusive use of our personal data.
It’s a new year, and tech companies have to play by new rules (in California, at least)
The California Consumer Privacy Act (CCPA) officially went into effect yesterday, giving Californians more control over the destiny of their data.
Here’s how the law works:
Companies with customers in California will be required to provide consumers with an option to opt out of data collection.
The law gives California internet users the power to request that any data collected from them is deleted — and mandates that companies continue to provide free services to customers who opt out of data collection (although it does allow companies to offer more limited service to data dodgers).
The law applies to any company with California customers that:
- Makes $25m in annual revenue
- Holds information about at least 50k people
- Earns at least ½ its money selling CA consumers’ info
So, why is this such a big deal?
Although concerns about corporate data collection have been growing for years, the CCPA is one of the first major consumer data protection policies to go into effect in America.
And because many large companies like Facebook and Google will be required to build out new transparency tools to comply with the law, the CCPA’s impact will extend beyond the Golden State.
Some companies — like Microsoft — have already announced they will make data available not just to Californians, but to all of their customers.
And since California is often a leader in passing new regulations, it is likely that other states will follow its lead.
But rollout of the law will be a bumpy process…
California’s attorney general will be responsible for taking non-compliers to task. But the attorney general’s office will be able to handle only a limited number of cases per year.
The AG has set a date of July 1 to finalize the specific requirements for companies.
The law is expected to cost some businesses as much as $100m.
What’s Happening in Your Portfolio
All HCM models performed strongly in the 4th quarter giving us satisfying gains for the year.
Our Flexible Income* model had a good year in 2019 outperforming the bond index (ticker AGG) for a number of months since we added high dividend stocks to the mix. The stocks sport an average dividend rate of 3.1% and provide balance for our mutual funds holding preferred stocks, high yield bonds, municipal bonds and mortgaged back bonds.
I am avoiding bond funds in general, as I believe the price to be too high (the yield too low).
Shock Absorber Growth* has five different investment models. These models are different buy/sell systems, giving you a diversification not found with ordinary money managers.
The models include Future Technologies*, stocks showing earnings that positively surprise analysts (which Wall Street loved), trend following growth, seasonally strong holdings, and a long/short index model.
Our Municipal Income* model continues to make good money, slowly, which many investors just love.
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.
When Managing Risk is More Important than Beating the Market
When we have a year like last year, managing risk becomes a bigger priority than beating the market. The market was coming off a 20% decline at the end of 2018, and trade issues, impeachment and economic recession potentials dominated the news. Any of these issues has the potential to knock another 20% off the returns of the stock markets, so “caution” was the watchword in 2019.
There may have been investors who caught every bit of the stock market’s healthy gains last year, but to do so those same folks likely had to ride through the 20% loss at the end of 2018 to get there.
The math of gains and losses tells us that someone who loses 20% and then gains 28% on what is left has an overall gain of 2.76%. Not much for all the risk one takes in the stock market.
Benchmarking, or comparing returns to an index only becomes meaningful when looking at a complete market cycle, an up and down market, rather than any calendar time frame. Benchmarking using calendar years, quarters or other set periods can be very misleading. When comparing 2019 to 2019 plus quarter 4 of 2018, you will see a very different outcome.
Big Tax Savings
2017 Tax reform put a dent in philanthropy by giving us all larger standard deductions. Fewer taxpayers itemize deductions, meaning charitable deductions can’t be written off.
If you have an IRA and are over the age of 70½, then you can make a charitable donation with untaxed IRA dollars rather than after-tax dollars. If you are charitably inclined, this tax angle is for you!
Using Qualified Charitable Distributions (QCDs) from IRAs is a planning maneuver that has become more valuable under the new tax law and is seeing a surge in use.
QCDs allow a taxpayer over the age of 70½ to give money directly to charities using money from a traditional IRA, effectively making donations with already deducted dollars, the same as if you itemized. These distributions are now the only way for many donors to receive a meaningful income tax benefit from charitable contributions. Please note that total annual QCDs can’t exceed $100,000 for an individual.
QCDs offer two large benefits: distributions count toward satisfying an individual’s annual Required Minimum Distribution or RMD if done before the RMD, and are excluded from the taxpayer’s income. If you don’t really need income from your IRA and want to avoid being taxed on the RMD, this technique is something you should consider.
The key is to plan and make your QCDs before the RMD, and in doing so, satisfy the RMD requirement in a non-taxable way.
- Why do “tug” boats push their barges?
- Why do we sing “Take me out to the ball game” when we are already there?
- Why are they called “stands” when they are made for sitting?
- Why is it called “after dark” when it really is “after light”?
- Doesn’t “expecting the unexpected” make the unexpected expected?
Our Spotlight Strategy – Adaptive Growth
With our Shock Absorber Growth Strategy we strive to provide an acceptable rate of capital appreciation while experiencing one half of the risk of the S&P 500 Stock Index*, using primarily equity investments.
Your money will be invested primarily in stocks and commodities mutual funds and ETFs, both foreign and domestic, inverse and leveraged, and a money market fund. The proprietary HCM Safety Net indicator is designed to warn of potentially sudden declines in which case stock market exposure may be quickly reduced.
Click here to read more about Shock Absorber Growth.
College Classes Coming
Mark your calendar for these 2020 Yavapai College Classes.
“Tax Tips for Arizona Newcomers,” a class I do with CPAs Gidget Schutte and Adam Rutherford, is coming up on February 6th.
“Fun-damentals of Investing for Retirees” is scheduled to begin on February 20th.
I’ll post details in my next newsletter.
A Slice of Life
Being a positive thinker, I avoid what we call “organ recitals,” when people our age talk endlessly about all their doctoring, aches and remedies. However, I have had a most remarkable time since having some work done on my back at Thanksgiving.
The work involved cleaning up stenosis by taking 3 vertebrae apart, cleaning out the arthritic tissue from the spinal canal, and fusing it all with a wire cage, screws and rods to stabilize the whole area. You would think with all that breaking of bones that I would have huge discomfort, but no. As soon as 2 days after surgery there were periods when I had no pain whatsoever on nothing more than Tylenol. I never needed a narcotic, which is just fine with me.
Within 24 hours of the surgery I was trading and I’m now back in the office on a regular basis.
I’ve even had a month off from housework, too. Life is good! ?
I ought to be a big hit at the next TSA screening.
* 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 Hepburn Capital 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 Hepburn Capital Management, LLC, an Arizona 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.