September 2, 2014
The Power of Investing in Future Technologies
The Investment View from Prescott, Arizona
In 1990, affluence meant owning a TV, a camera, a stereo, a cell phone, a wristwatch, an alarm clock, a video game console, a CD player, a set of encyclopedias, a video camera, a world atlas and many other items that might easily add up to over $10,000. Today all of these items come standard on a smart phone or can be added to your cell phone for less than a cup of Starbucks’ coffee.
With technology growing exponentially, this example shows how quickly $10,000 worth of expenses can be eliminated . . . thereby creating abundance for us all. No central authority said, “Reduce the costs of these items to zero!” It was entrepreneurs who set out to make better cell phones and spin-offs that resulted in creating this abundance for us all.
I have always been intrigued by future technologies. I assume that you, like me, would like to catch a glimpse of what our future may be like. Curiosity is a powerful motivator.
Emerging industries, such as nanotechnology (building things at the atomic level), robotics, adult stem cell research, The Internet of Things (where things talk to each other without human interaction) and 3D printing, all promise to radically transform our lives. Some of these technologies are already doing so.
I have begun to put my futurist interests to work by systematically researching the investment potential of these industries. Some of these nanotechnology companies have shown incredible investment horsepower, and I am excited to tell you that I have developed a practical way to get the potential of future technologies companies into our Shock Absorber Growth* accounts.
I began by focusing on specific industries and building lists of companies within them that have stock available for purchase. In industry parlance, these lists are called indexes, and I have now built them into three of my analytical software programs. The returns of these indexes have been impressive, and some of the individual stocks even more so. But the risk is higher than we usually incorporate in your accounts due to volatile prices in some of the smaller, emerging companies.
To manage this risk, I have developed a two-fold approach. First, I am suggesting no one put all their money into Future Tech* stocks. However, blended with a conservative approach such as our Shock Absorber Growth* strategy, Future Tech will provide good balance and a stronger growth portfolio.
Second, to control volatility of prices, I apply a hedging strategy which means we would often hold an inverse investment, one that goes up as the market goes down. This would dampen the volatility of the Future Tech part of the portfolio.
I’ll be implementing this strategy over the next couple of months in existing client accounts. If you don’t already have accounts at Hepburn Capital and want to invest in this exciting new arena, please contact the office at 928.778.4000 to arrange a phone conversation or appointment to meet and discuss your specific situation. I’ll enjoy showing you the details.
A Slice of Life
The “bad news” is that Yvette Romero, our Operations Manager since 2005, is getting married next month and moving to Fresno with her new husband, Jared.
The good news is that Yvette will continue to run HCM’s operations from her new remote office in Fresno. Fortunately, with today’s technology, 95 percent of Yvette’s work can be done remotely.
So, expect to see more of Mary O’Neill, Administrative Specialist, and Laurel Taylor, Technology Coordinator in the office on those days that Yvette used to work. Yvette will still be working her magic and making things run smoothly from Fresno.
If you have enjoyed Yvette’s work, please let her know between now and the end of September.
She is terrific!
Please call our Prescott office
to schedule an appointment if you would prefer to
meet with Will in the Scottsdale office.
How Are The Markets Doing?
Messages from the Bond Market
Years ago I often commented on the bond market (interest rates) and the messages it gives us about the economic climate. With the Federal Reserve keeping its thumb on the scale over the past few years, the signals have been difficult to read.
However, with the Fed already having cut ¾ of the economic stimulus and currently saying it will be adding no new money to the economy after next month, pundits everywhere have expected interest rates to creep up. But, nooo! They have actually gone down the past few months.
Since interest rates reflect the cost of money, declining rates are a classic message that our economy is weak. Strong demand for loans is what causes rates to rise as the price of money gets bid up. Lack of demand signals the opposite. Rates have to drift down to encourage borrowers to borrow, which is a sign that there is not a great demand for loans.
A few months back, everyone shrugged off the shrinkage in our GDP as a result of a harsh winter. I’m not so sure that was the only reason.
Another economic indicator is the price of commodities, which also peaked several months ago but has been drifting down ever since. Low demand for commodities is another signal that our economy is weak.
European markets have drifted down for several months, so we can’t expect an economic boost from them. Only emerging markets have shown strength, but the thought of emerging markets leading the world’s economy doesn’t make sense. Emerging markets have to sell their goods to someone, and the U.S. and Europe are the primary buyers.
The stock market indexes were strong last week, but had very low volume. This means rather than a lot of buyers pushing prices up, there were just fewer sellers than normal. The market is not as strong as the indexes would lead one to believe. With the end of summer, we should have a better sense of the market’s true condition as traders return to work this week.
Gold markets held up well enough during the just completed major cycle low to give off one of the few rays of sunshine which gold has shown during its three year bear market.
With September’s track record as a tough month in the market, this is probably not a time to invest aggressively.
What’s Going On In Your Portfolio?
Both our income and growth portfolios performed pretty flatly in August as I had both sides hedged against risk: interest rate risk on the income side and stock market risk on the stock side.
Our income portfolios hold inflation protected bond funds, emerging market bond funds and diversified bond funds, as well as a preferred stock fund and a hedge to reduce the risk of a decline in the value of our bond funds.
The U.S. stock markets surprised me in August as the indexes bounced back from the sharp drop in early August. I kept the hedges in place as August and September have a reputation for sharp declines.
Hedges are inverse investments that go up as a market goes down and are calculated to offset any losses while we hold our stronger investments. Unfortunately, hedges hold us back when the market goes up, as they did in the last half of August. We made gains on our investments, but gave those gains up with the hedges. That is the price of the insurance hedges provide. When the economic horizon clears, I will remove the hedges.
In recent months, I have made two additions to our Shock Absorber Growth* portfolios. In June I began using what I refer to as an “impact” strategy that uses an index fund which is leveraged to add “pop”, but which is used in small quantities (currently about 30 percent of growth portfolios) for short periods of time to control risk.
Stocks of emerging technology companies will also be appearing in growth portfolios this month as I integrate my new Future Tech* strategy into those growth portfolios.
Because this strategy invests in some aggressive growth stocks, the approach requires good diversification to control risk. To be prudent, I consider a $25,000 minimum allocation to this strategy. Unfortunately, this size requirement makes Future Tech* stocks inappropriate for smaller accounts.
Future Tech* stocks will be used in Shock Absorber Growth* portfolios that are large enough to spread out the risk. This means that Adaptive Growth* and Adaptive Balance* portfolios will also see Future Tech* holdings if they are large enough.
What do I mean by large enough? A $75,000 allocation to Shock Absorber Growth* is required for 1/3 of a portfolio to total $25,000 or more. Adaptive Balance* is currently 50% allocated to growth, so Adaptive Balanced* accounts of $150,000 or larger will see Future Tech* holdings. Adaptive Growth* accounts will need to be around $100,000 to utilize Future Tech* stocks.
Future Technology* is one of the more exciting strategies that I have worked on. I think you are going to like it.
When Future Tech* is integrated into all of our accounts, Shock Absorber Growth* portfolios will hold about 1/3 Impact, 1/3 Future Tech* and 1/3 traditional growth investments, with both Future Tech* and traditional growth being hedged.
Did you know that nine out of every 10 living things live in the ocean.
College Classes Coming
Fundamentals of Investing for Retirees
I began teaching Fundamentals of Investing for Retirees 25 years ago at Yavapai College (YC). This course has proven to be one of the most popular investment classes YC has ever offered. The class will be held on Thursdays (September 11, 18 and 25) from 1:00 – 3:00 p.m.
My easy-to-grasp format is designed to help investors become more confident about their financial decisions. Learn the ins-and-outs of stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, controlling the tax impact of IRA withdrawals, avoiding common investment mistakes and simple risk reducing strategies that anyone can use.
Contact Yavapai College at 928.717.7755 to register. The cost is $65 payable to Yavapai College.
Our Spotlight Strategy
With our Flexible Income Strategy we strive to provide high total return consistent with Capital Preservation.
Your money will be invested in bond mutual funds and exchange traded funds (ETFs), including inverse and leveraged funds, currency funds, including precious metals that may be used as currencies and equity-income investments whose price trend is up. If the price cycles down, holdings are replaced with new investments that are going up, repeating as needed. Growth stocks are not used.
* 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) 2014 William T. Hepburn. All rights reserved.