April 3, 2018
To Serve You or Themselves?
The Investment View from Prescott, Arizona
There is a lot of high level wrangling these days in Washington as the regulators consider whether to require all financial advisers to act as fiduciaries toward their clients. Currently, anyone licensed by FINRA through a brokerage firm does not have to act as a fiduciary and can put their interests before yours as long as the investment you are being offered is considered “suitable.” That is a very loose standard and the reason why many clients are offered so many high-commissioned products.
A fiduciary standard would require your interests to come before the adviser’s in all transactions. As you would suspect, the industry, led by national brokerage firms and insurance companies, many whose names you would recognize, are fighting this new regulation tooth and nail.
As a Registered Investment Adviser I have been a fiduciary for you for many years.
Last week, the Certified Financial Planner Board of Standards announced that under a new rule, all CFPs — including FINRA licensed brokers — must act in the best interests of their clients when providing financial advice. The previous rule applied a fiduciary standard to CFPs only when they were involved in financial planning with their clients.
This is a great step in the right direction. Now let’s hope that the lobbyists in Washington don’t ruin things for investors on Main Street.
College Classes Coming
My next classes are in June. Stay tuned for details.
Update on Tesla
What we were saying back then…
I have commented more than once over the past few years on the insane price rise of Tesla stock (symbol: TSLA) which put a valuation on this new company higher than Ford or General Motors despite Tesla’s never having produced a profit.
All major car companies are working on electric vehicles (EV), and many already have them for sale in a store near you: Nissan which has quietly sold more EVs than Tesla, plus BMW, KIA, Volkswagen and Hyundai all have EVs for sale right now, with Mercedes, Honda, Toyota and Ford expected to bring EVs to market this year. Tesla certainly does not have a lock on this market, but their PR would make you think so. I believe that the competition is going to eat Tesla up.
A friend sent me this photo last week of some spiffy new Tesla charging stations near his home which got me thinking about Tesla again.
Sure, these are nice charging stations, but there are no cars. I’ve also noticed a lack of cars at Phoenix charging stations, too. Maybe that lack of sales is why Tesla stock is down 36% in the past 6 months, and down 19% just this past week.
I have started to view Tesla founder Elon Musk as a huckster trying to create a cult following in emotion filled industries such as electric vehicles and solar. He is missing what I believe would be his only chance at success, specifically, getting Tesla cars to market before the competition is ready. Musk’s inability to get production going just underscores his position in my mind as huckster in chief. He talks a good game, but the numbers tell a different story.
Personally, I have never considered owning an EV since I live 100 miles from Phoenix and make regular enough trips down there that I would have to recharge before coming “back up the hill”. The thought of waiting 20-40 minutes for a charge in the middle of the day is a real turn off for me. Since I have never seen anyone actually using a charger like this, it occurs to me that the chargers are serving more as advertising for Tesla than anything else. Good marketing or just more hucksterism? I’m not sure.
And don’t get me started on the idea of launching a Tesla roadster into outer space like Musk did a month ago. That struck me as the act of a desperate man struggling to keep his product in the limelight.
I am not, and would not, be an owner of Tesla stock right now.
What the Markets Are Doing
The first quarter of 2018 saw the most US stock indexes close in negative territory, with the S&P 500** closing 1.21% below where it started at the beginning of the year. Only the tech heavy Nasdaq** index closed in the black, gaining 2.32% YTD through March 29, 2018.
The gain in the Nasdaq** can be misleading as it has seen its gain since January 1st shrink fast in recent weeks, from up as much as 10.6% for the year to having to scramble out of the red to close the quarter with its small gain.
That the trend of the financial markets has changed is obvious. Although we don’t have serious dislocations in the economy like we did with real estate and bank failures in 2007-09, we have already seen the S&P 500** index dip to a 10% loss, a milestone called a “correction” in the stock market. Corrections can be healthy as they reduce excess valuations down to more normal levels, encouraging long term investors to step in and buy. But corrections are still painful for investors who choose to just buy, buy, buy with no plans to ever sell.
I am seeing indicators which suggest that more of the decline is still ahead of us, bringing in the possibility of a full-fledged bear market, meaning a 20% or greater decline in stock markets, before the bear is done.
This is clearly a time for investors to focus on capital preservation rather than growth.
What’s Happening In Your Portfolio
Tech stocks have been a dominant part of our HCM Shock Absorber Growth* portfolios since after the mini-bear market in early 2016. Market leaders like this tend to underperform the broad stock market when corrections inevitably come, and this time is no exception as tech stocks weaken.
The big difference in my work for you and that of ordinary advisers, is that my investments, and my strategies too, are designed to Adapt to Changing Markets®, so only a week or so into the downturn, I began increasing our cash position by cutting back on stock holdings including tech stocks.
As the stock market decline deepened I began adding hedges, investments which go up as a market goes down and serve to dampen the up and down volatility that the market has shown recently.
The results have been positive with our Shock Absorber Growth* portfolios actually producing a small gain for the Quarter ending March 29, 2018, while the stock market, represented by the S&P 500** index, lost 1.22% of its value during the same period.
Importantly, our gain came with only ½ of the volatility of the stock market, too. More return with less risk? That is a great goal, and I achieved it for you this past quarter.
Our growth portfolios are fully hedged right now, so if the decline continues we should do very well. If the decline ends, I will simply reduce the hedge and go back to buying stocks.
We produced a positive win/loss ratio in the Shock Absorber Growth* model portfolio from Jan 1, 2016 to March 29, 2018 with 55% winners and 45% losers, but that is not the big story.
Our losing holdings during this period averaged only an 8% loss a piece, while our gainers averaged 24% each. With winners being both more frequent and 3 times larger than losers it is no wonder I am able to produce satisfying returns for you. This is a result of my simple philosophy of holding winners only as long as they stay strong and cutting losers as soon as declines become evident.
The bond market was another tough story, with the broadest bond index represented by the Vanguard Total Market Bond Fund (symbol: VBMFX) losing 1.71% year-to-date through March 29, 2018, including dividends collected. Interest rates on bonds rose sharply during this period, causing losses in bond values that were greater than the interest rate gains. Flexible Income* portfolios struggled similarly, and I expect this trend to continue on and off over the next few years.
If you have a 100% Flexible Income* portfolio and are uncomfortable with the small losses it has produced recently, perhaps we should talk about adjusting your objective to be more in sync with current market conditions which do not appear to favor bonds over the long run. Call the office at 928.778.4000 for an appointment to talk about this.
Municipal income accounts, while dodging the larger losses of corporate and government bonds, still had a small loss in Q1 2018, although for the trailing one-year, two-year, and three-year periods, muni income accounts have posted gains and outperformed the broader bond 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.
If you haven’t had a review of your account for a while, please call the office to arrange a time to talk in person or on the phone. The number is 928-778-4000.
Mental Floss
The police officer got out of his car as the kid who was stopped for speeding rolled down his window. ‘I’ve been waiting for you all day,’ the officer said.
The kid replied, ‘Yeah, well I got here as fast as I could’.
When the cop finally stopped laughing, he sent the kid on his way without a ticket.
More Headaches for Bitcoin
If a 64% decline in prices since December isn’t enough of a headache for bitcoin and other crypto currency owners, the IRS has recently stated that they expect a tax accounting if Bitcoins are used as a currency to purchase things.
The problem that arises is twofold: First, few people track their spending close enough to be able to turn it into tax accounting. Compounding the problem is that few crypto currency exchanges provide taxable income information to their customers, leaving the burden to fall on the individual to account for losses and gains for each transaction.
Self-employment taxes may also be due on bitcoin payments for services rendered, and sales taxes due for goods sold with payment in crypto currency.
Bitcoin and other crypto currencies are a nightmare for these reasons, as well as their market risk. If you choose to ignore these tax wrinkles and the IRS someday asks the dreaded question: “Have you ever . . .” The best outcome is back taxes and penalties. A worse outcome is a tax evasion charge for not reporting bitcoin transactions at all.
Our Spotlight Strategy – Adaptive Balance
With our Adaptive Balance Strategy we strive to provide high total return from a combination of investments in both the equity and income markets with an emphasis on the income markets..
Our proprietary indicators are used to determine a stock market exposure that adapts to both strength and weakness in the market, directing exposure to the HCM Shock Absorber Growth strategy from 0% to a maximum of 50% of account value. The balance, 50% to 100% of account value, is invested in the Flexible Income Strategy. The HCM Safety Net indicator is designed to warn of sudden potential declines, in which case stock market exposure is quickly reduced.
Click here to read more about Adaptive Balance.
A Slice of Life…
Book sales are taking off!
The timing was perfect! Publishing Why Bad Things Happen to Good Investments just as the stock market rolled into a 10% dive was the ideal time to come to market considering that in the book I show people how to avoid the big losses that indexes have racked up. I am getting some good buzz within the industry right now from advisers who are grateful for the tips and insights in the book.
The book is currently available at Amazon and at the Purple Cat Bookstore at 3180 Willow Creek Rd in Prescott. The Purple Cat is a fun little book shop run by a good friend and great fan, Shari Graham. If you want to avoid shipping costs from Amazon, stop by the store to pick up a copy.
As a subscriber to this newsletter, you have already had a glimpse into my style of proactive investing. If you have already purchased one of my books and you have a friend that you think would appreciate what I have to say, just let us know and we will send you a book that you can give to them – for free. Mentioning my work to your friends is one of the nicest things you can do for both me and them, and this is my way of thanking you for your kind thoughts.
The other thing I would ask, is that if you purchased your book from Amazon, please go to the site and give my book a review. Good reviews mean a lot. Thank you.
* 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) 2018 William T. Hepburn. All rights reserved.
