Author Archives: Edward Brownlee

China’s Financial System a House of Cards

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“China simply does not conform to the conventional wisdom about the factors necessary for sustained high growth: a well-developed financial system, the rule of law, democracy.” ~ PBS

China’s growth model has certainly created enormous risks.

Over the past decade and a half, growth has been driven in large part by massive and inefficient investment and an associated buildup of debt, most noticeably in real estate development, as China’s many uninhabited apartment buildings attest.

A financial system is supposed to allocate a nation’s wealth to its most productive opportunities. But even the most generous interpretation of China’s growth success has to acknowledge the inefficiencies and costs associated with a model that has delivered spectacularly in terms of official GDP, but has led to environmental degradation and a massive waste of resources.

The Chinese economy faces several daunting risks.

The first is a surge of capital flowing out of China — basically, people taking their money out of the country — which could destabilize the financial system as well as the overall economy.

The second is a set of concerns about China’s financial system, including the potential instability of the banking system (too many bad loans), wild swings in the stock market and the size of the shadow banking system (informal banking institutions that are not well regulated).

The third set of risks is related to more fundamental aspects of the Communist Chinese economy, political structure and policymaking. These include the possibility of a dramatic GDP growth slowdown, political instability fed by the government’s desire to further tighten its control domestically, and domestic and foreign policy missteps, specifically related to Taiwan.

References:

  1. https://www.pbs.org/newshour/economy/column-chinas-economy-house-cards

5 investing mistakes you may be making right now

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Fidelity Wealth Management

Key takeaways

  • Risk is an essential part of investing, and investors should have the appropriate amount of risk in their portfolio so they don’t feel compelled to flee the market when volatility arises.
  • Regular rebalancing and tax-management techniques may substantially impact a portfolio’s long-term performance.
  • Investors with neither the time nor inclination to maintain their portfolios actively may consider whether engaging with a professional manager might be worth it.
  • Investing can sometimes seem complex and confusing, and you may often be wondering whether or not you’re doing everything you can to help keep things on track—or whether something you’re doing may be hurting your ability to achieve your goals.

Here are 5 things you may be doing that might be having a detrimental effect on your portfolio, and some thoughts on how you might be able to turn things around.

1. Getting out when the going gets tough. When markets become volatile or experience significant declines, it’s natural to want to try to cut your losses and retreat to what seems like safe territory. But rather than preserving your wealth, you may actually be undermining the long-term growth potential of your portfolio.

In general, market declines have tended to be relatively shallow and short-lived compared to expansionary periods. Over the past 72 years, markets have risen an average of 15% per year during expansions—and even 1% per year during recessions.1 So even when things seem most dire, there’s still a chance for positive returns.

Furthermore, because it’s not possible to predict exactly when the market may shift from negative to positive, there’s a chance that you may end up missing out on a rally or recovery when it occurs if you were to take your money out of the market. Being uninvested for even a short time could have a profound impact: For instance, missing just the 5 best days in the market between 1980 and 2022 could have reduced portfolio returns by as much as 38%.2

2. Taking on too much (or too little) risk. Though the very idea of “risk” can be scary, it’s an essential part of investing. The amount of risk you decide to take on could determine how much growth you may be able to achieve in your portfolio and how much volatility you may need to endure to get there.

While there are no guarantees in investing, the key is to take on just enough risk to give your portfolio a chance of reaching your long-term goals, but not so much that it introduces enough volatility to scare you into withdrawing from the market. And one way to achieve that is by diversifying your portfolio, investing in a mix of different asset classes that may behave differently in different market conditions—that way, when some of your investments are down, others may be up, helping to smooth out the bumpiness in the market that can be so disconcerting.

Important information about performance returns. Performance cited represents past performance. Past performance, before and after taxes, does not guarantee future results and current performance may be lower or higher than the data quoted.

Investment returns and principal will fluctuate with market and economic conditions, and you may have a gain or loss when you sell your assets. Your return may differ significantly from those reported. The underlying investments held in a client’s account may differ from those of the accounts included in the composite. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

The above example (of various asset allocations) is for illustrative purposes only and does not reflect actual PAS data. Asset mix performance figures are based on the weighted average of annual return figures for certain benchmarks for each asset class represented. Historical returns and volatility of the stock, bond, and short-term asset classes are based on the historical performance data of various indexes from 1926 through 12/31/22 data available from Morningstar.

How your assets are allocated across these different asset classes can provide a solid foundation upon which your portfolio may be able to grow over time. It can be a major factor in long-term performance: In fact, up to 90% of the variability of a fund’s return over time can be explained by how its assets are allocated.3

3. Not rebalancing your portfolio regularly. Asset allocation is not a one-and-done exercise or something you can “set and forget.” Over time, the appreciation and depreciation of your investments may result in your portfolio drifting from your initial allocation. As this happens, the amount of risk you’re exposed to could change in ways you may not have expected.

For example, consider a hypothetical portfolio that begins with an asset allocation of 70% stocks and 30% bonds. If over the course of 6 months, stock values were to surge and bond values were to decline, that portfolio might end up closer to something like 80% stocks and 20% bonds—a much riskier allocation—just due to market activity. It can work the other way as well: Were stocks to dip to 60% and bonds to rise to 40%, the portfolio may end up being more conservative than the investor initially intended.

Historical standard deviation in conjunction with historical returns to decide whether an investment’s volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how an investment actually performed, but it does indicate the volatility of its returns over time. Standard deviation is annualized. The returns used for this calculation are not load adjusted.

Unless the investor proactively monitors and reallocates assets, perhaps by adding more funds to the account in the desired asset class or moving assets from one class to another, they could potentially experience more volatility than they are comfortable with or less growth than they need to help achieve their goals.

4. Paying too much in taxes
Taxes are a part of life, but nothing says you need to pay any more than is required of you. And yet, many investors may do just that because they don’t realize that there are techniques they can employ to help invest more efficiently and potentially reduce their overall tax burden.

“Most investors don’t realize how much they’re paying in taxes,” says Bullard. “Capital gains distributions from mutual funds, for example, can surprise investors when the tax bill arrives.”

Cutting your tax bill can have a big impact on your portfolio over the long term, by allowing you to keep more of your money and keep it invested, where it can potentially benefit from compounding growth in the market.

Techniques such as tax-loss harvesting or tax-efficient asset location, which places particular types of investments in the accounts most suitable for their tax treatment, can potentially pay off. In fact, the average client with a Portfolio Advisory Services professionally managed account using tax-smart strategies4 could save $3,900 per year in taxes.5

5. Going it alone. It’s not always easy to stay on top of these tasks and keep everything running smoothly on your own. And even when you know what you should be doing intellectually, it can be hard to stay the course and keep your emotions in check when markets become challenging. That’s why some investors are more comfortable engaging with a professional investment manager who, for a fee, can oversee many of these important investing duties and provide investors with a backstop of support and guidance that may be able to help them weather the difficulties they encounter on their path to their goal.

The truth is, mismanaging your portfolio has a cost. And whether the mismanagement is the result of an honest mistake, an understandable overreaction, or a simple oversight, ultimately the cost is coming out of your pocket.

Life is complicated enough as it is. There’s no need to make it any more complicated than it needs to be. With just a little more attention to these important portfolio practices and reaching out for professional help when you need it, you may be able to help ensure that these potential mistakes don’t keep you from reaching your important investing goals.

Value vs Growth Stocks

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Value investors want to buy stocks for less than they’re worth. If you could buy $100 bills for $80, wouldn’t you do so? ~ Motley Fool

Most public equity stocks are classified as either value stocks or growth stocks. Generally speaking:

  • A value stock trades for a cheaper price than its financial performance and fundamentals suggest it’s worth.
  • A growth stock is a stock in a company expected to deliver above-average returns compared to its industry peers or the overall stock market.

Value stocks generally have the following characteristics:

  • They typically are mature businesses.
  • They have steady (but not spectacular) growth rates.
  • They report relatively stable revenues and earnings.
  • Most value stocks pay dividends, although this isn’t a set-in-stone rule.

Growth stocks generally have the following characteristics:

  • They increase their revenue and earnings at a faster rate than the average business in their industry or the market as a whole.
  • They developed an innovative product or service that is gaining share in existing markets, entering new markets, or even creating entirely new industries.
  • They grow faster than average for long periods tend to be rewarded by the market, delivering handsome returns to shareholders in the process.

Regardless of the category of a stock, economic downturns present an opportunity for a value investor. The goal of value investing is to scoop up shares at a discount, and the best time to do so is when the entire stock market is on sale.

References:

  1. https://www.fool.com/investing/stock-market/types-of-stocks/value-stocks/
  2. https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/

A Majority of American Workers are Living Paycheck to Paycheck

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According to a New CareerBuilder Survey, 78% of Americans live financially paycheck-to-paycheck. That means almost 8 out of 10 people probably can’t afford the home they’re living in and the car they’re driving. They might not even have the cash to cover the next emergency.

Study Highlights:

  • 78 percent of U.S. workers live paycheck to paycheck to make ends meet
  • Nearly one in 10 workers making $100,000+ live paycheck to paycheck
  • More than 1 in 4 workers do not set aside any savings each month
  • Almost 3 in 4 workers say they are in debt today – more than half think they will always be
  • More than half of minimum wage workers say they have to work more than one job to make ends meet

Americans want what they don’t have to impress people they probably don’t even like.

Today, a fancy car and a big house are perceived as the standards of financial success and wealth. But true success is about contentment and being in control of your time. If you’re content with what you have and control your time, you’ll likely not look for the next best thing to bring you “happiness.”

References:

  1. https://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey
  2. https://www.ramseysolutions.com/debt/tired-of-keeping-up-with-the-joneses

Chinese Economy Circling the Drain

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“What I’m trying to remind everyone is you don’t make anything investing in a totalitarian [Communist Chinese] government over a long period of time. ~ Kyle Bass, founder and chief investment officer of Hayman Capital Management

In recent months, a plethora of downbeat economic data and news have come out of Communist China.

Trouble is growing particularly in China’s real estate sector and financial markets. Massive property developers like Evergrande and Country Garden Holdings have teetered on the brink of default. Beijing has in recent months tried to stabilize the property and banking sectors and shore up support for the country’s stock market and renminbi.

Amid the constant flow of negative economic data emanating from China, government officials announced this summer that they would no longer publish certain economic statistic, such as youth employment, which is has soared in recent years.

“In the long run, you’ve got the Chinese economy circling the drain and you have the real estate market falling apart,” said Kyle Bass, founder and chief investment officer of Hayman Capital Management. “Every single private developer is in some stage of bankruptcy today. And you’ve got about $190 billion worth of offshore bonds, dollar bonds, in some sense of default.”

Further, “I just think you don’t want to invest,” he said. “I think you want to invest in markets where there’s a rule of law, and where you have real leadership, and you actually have ways to earn returns that are positive for your portfolio.”

References:

  1. https://markets.businessinsider.com/news/stocks/china-economy-investors-markets-capital-bass-workers-real-estae-property-2023-9

Nitric Oxide Sources

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Nitric oxide is a molecule that is very important to the way the body works, including how the blood flows, how the immune system works, and how the brain works.

Adding nitric oxide to your diet may help your health in a number of ways, such as lowering your blood pressure, improving your blood flow and exercise performance, and reducing inflammation.

Foods that are naturally high in nitric oxide or help the body produce more nitric oxide include:

  • Beets: Beets are a rich source of nitrates, which the body converts into nitric oxide. They also contain antioxidants and other nutrients that can support overall health.
  • Spinach: Spinach is another excellent source of nitrates and contains various other nutrients, including vitamins and minerals.
  • Berries: Many berries, including blueberries, raspberries, and blackberries, contain antioxidants and other compounds that may support nitric oxide production.
  • Pomegranate: Pomegranate is high in antioxidants and has been shown to support nitric oxide production in the body.

The Story of Lawn Chair Larry

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The Darwin Awards are famously given out each year for the most stupid death, rewarding the person’s willingness to “remove themselves from the human gene pool.”

Larry Walters is one of the few to contend for the Darwin Awards and live to tell the tale. “I have fulfilled my 20-year dream,” said Walters, a former truck driver. “I’m staying on the ground. I’ve proved the thing works.”

Larry’s boyhood dream was to fly. But fates conspired to keep him from his dream. He joined the Air Force, but his poor eyesight disqualified him from the job of pilot. After he was discharged from the military, he sat in his backyard watching jets fly overhead.

He hatched his weather balloon scheme while sitting outside in his “extremely comfortable” Sears lawnchair. He purchased 45 weather balloons from an Army-Navy surplus store, tied them to his tethered lawnchair (dubbed the Inspiration I) and filled the four-foot diameter balloons with helium. Then, armed with some sandwiches, Miller Lite, and a pellet gun, he strapped himself into his lawnchair. He figured he would shoot to pop a few of the many balloons when it was time to descend.

Larry planned to sever the anchor and lazily float to a height of about 30 feet above the backyard, where he would enjoy a few hours of flight before coming back down. But things didn’t work out quite as Larry planned.

When his friends cut the cord anchoring the lawnchair to his Jeep, he did not float lazily up to 30 feet. Instead he streaked into the LA sky as if shot from a cannon, pulled by the lift of 45 helium balloons, holding 33 cubic feet of helium each.

He didn’t level off at 100 feet, nor did he level off at 1000 feet. After climbing and climbing, he leveled off at 16,000 feet.

At that height he felt he couldn’t risk shooting any of the balloons, lest he unbalance the load and really find himself in trouble. So he stayed there, drifting cold and frightened with his beer and sandwiches, for more than 14 hours. He crossed the primary approach corridor of LAX, where startled Trans World Airlines and Delta Airlines pilots radioed in reports of the strange sight.

Eventually he gathered the nerve to shoot a few balloons, and slowly descended. The hanging tethers tangled and caught in a power line, blacking out a Long Beach neighborhood for 20 minutes. Larry climbed to safety, where he was arrested by waiting members of the LAPD. As he was led away in handcuffs, a reporter dispatched to cover the daring rescue asked him why he had done it. Larry replied nonchalantly, “A man can’t just sit around.”

The Federal Aviation Administration was not amused. Safety Inspector Neal Savoy said, “We know he broke some part of the Federal Aviation Act, and as soon as we decide which part it is, a charge will be filed.”

DarwinAwards.com

Footnote:  Larry’s efforts won him a $1,500 FAA fine, a prize from the Bonehead Club of Dallas, the altitude record for gas-filled clustered balloons, and a Darwin Awards At-Risk Survivor. He gave his aluminum lawn chair to admiring neighborhood children, abandoned his truck-driving job, and went on the lecture circuit. He enjoyed intermittent demand as a motivational speaker, but said he never made much money from his innovative flight.

Berkshire-Hathaway Stock

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  • Berkshire Hathaway has beaten the S&P 500 going back 20 years.
  • The company is built to endure the most challenging market environments.

The “Oracle of Omaha” Warren Buffett is a legendary billionaire investor and one of the world’s wealthiest people. While his start at a very early age helped him build a fortune, Buffett hasn’t lost his investing touch.

Since becoming CEO in 1965, the Oracle of Omaha has overseen a greater than 4,400,000% return in his company’s Class A shares (BRK.A). This works out to a nearly 20% annualized return over 58 years.

Additionally, Berkshire Hathaway has outperformed the S&P 500 index over the past 20 years. Had you invested $10,000 in Berkshire Hathaway in 2003, you would have more than $71,000 today to the S&P 500’s $62,200.

Buffett, and his investing lieutenants, Ted Weschler and Todd Combs, are huge fans of businesses that regularly buy back their stock and increase Berkshire Hathaway’s ownership stake without him or his investment team having to lift a finger.

Stock buybacks can have a positive fundamental impact on a company. For a company with steady or growing net income, buybacks have the ability to increase earnings per share over time. This should help a company’s stock look even more attractive to fundamentally focused value seekers.

References:

  1. https://www.fool.com/premium/coverage/investing/2023/09/27/if-you-invested-10000-in-berkshire-hathaway-in-200/
  2. https://www.msn.com/en-us/money/topstocks/warren-buffett-is-selling-shares-of-this-high-yield-dividend-stock-and-likely-buying-shares-of-his-favorite-stock-no-not-apple/ar-AA1hkkk9

Unlocking Financial Freedom

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Morgan Housel, The Psychology of Money

Morgan Housel believes that building wealth is more about behavior than anything else. Here are highlights;

1. “Doing well with money has little to do with how smart you are and a lot to do with how you behave”

Think about it for a moment. How much do you spend on important things? How much do you spend on things you don’t really need? Are you living below your means? These questions can tell you how you behave with money, and it is far more important than your income in determining whether you will become rich. Fix it.

2. “A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioural skills that have nothing to do with formal measures of intelligence.”

Are you emotional with money? Emotions beat reason. The lesson was apparent: the most foolish way to make financial decisions is using your emotions.

3. “Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”

What if your business plan doesn’t work? Planning for the plan not to work is an important part of the plan.

4. “Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.”

No one cares that you bought that car as much as you did, no one cares that you bought that shoe as much as you did, no one cares that you bought that phone as much as you did. What’s the implication? Only buy the things you genuinely need; no one is impressed with what you have as much as you are. They can never get the excitement that you get.

5. “Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.”

Learn this lesson early. The ultimate value of money is that it should lead you to control your time. The financial decisions you make, especially work-related, are guided by this thought. If you can do work that will give you freedom over your time but pay less, you will take it compared to a job that will pay higher but steal all your time.

6. “Saving is the gap between your ego and your income.”

You could save more if you could cut down on the things to which you have attached your ego.

7. Compound Interest. Life is in compound interest. This excerpt on Warren Buffet does justice to this;

More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.

Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.

Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.

Consider a little thought experiment.

Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.¹⁶

What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000?

And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids.

What would a rough estimate of his net worth be today?

Not $84.5 billion.

$11.9 million.

99.9% less than his actual net worth.

Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years.

His skill is investing, but his secret is time.

That’s how compounding works.

Morgan Housel, The Psychology of Money

History of Blanton’s Single Barrel Bourbon

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The history of Blanton’s, the world’s first single barrel bourbon:

Master Distiller Elmer T. Lee introduced the world to Blanton’s Single Barrel Bourbon a year before he retired in 1985 from Buffalo Trace Distillery.

In doing so, Les revolutionized the industry by creating the “super premium” category of bourbon with the world’s first single barrel bourbon.

This idea was somewhat radical at the time because it challenged the identity of what most folks thought bourbon to be.

Today, most bourbon distilleries offer one or more single barrel bottlings, but Blanton’s was the first, and is still believed to be one the finest, single barrel on the market.

The distiller’s website describes Blanton’s taste profile as sweet, with notes of citrus and oak. The creamy vanilla nose is teased with caramel and butterscotch, all underscored by familiar baking spices such as clove, nutmeg, or cinnamon.

Blanton’s Original set the standard for single barrel bourbons in 1984. Best served neat or on the rocks. Bottled at 46.5% alcohol by volume.

References:

  1. https://www.blantonsbourbon.com/pages/our-bourbon