Our thoughts

 

April 2009
 
 
 
Isaac Newton and the Man with the Megaphone
 
 
Some would say that Isaac Newton was the smartest person who has ever lived. After all, Albert Einstein developed an amazing breakthrough that changed the way we look at the world, but Isaac Newton developed three of them.
 
However, it’s important to remember that even the most brilliant among us are fallible and can get caught up in the buzz of an exciting notion.
 
The South Sea Bubble
 
In the early 18th century, the South Sea Company was the fastest growing investment in Britain. Shares were quickly snatched up right from the beginning. Seeing this initial success, the South Sea Company quickly issued more shares. The stock was rapidly consumed by the voracious appetite of the investors. The entire country was in an investing frenzy—so much so that they barely knew what they were putting their money into. They had no problems, for instance, with the inexperienced management of the company; all they saw were stock values going through the stratosphere. 
 
The directors of the South Sea Company insisted that real profits were around the corner, and they even outbid the Bank of England for an additional 31 million pounds of government debt in 1719.  The value of the stock skyrocketed, increasing tenfold over the course of one year. But one dreary day in September 1720, it all came to an abrupt end. The buying frenzy stopped and stock values began to plummet. Shares of South Sea Company went from a high of over 1000 pounds in June 1720 to a price of 135 pounds just three months later. There was no profit.
 
Isaac Newton was among those investors, and it’s believed that he lost the equivalent of $4,000,000 in today’s money. I’ve heard that he actually knew that there was no real potential for profit—he was simply caught up in the excitement, entranced by the stock that rose from 100 to 1000 pounds so quickly. One of the smartest men in the world succumbed to irrational exuberance.
 
The Man with the Megaphone
 
I was driving home on one evening, listening to a journalist on NPR bemoaning the state of his profession. In the interview, he said that in-depth analysis and discourse were being edged out of the media by “a man with a megaphone,” a source that makes quick statements as fact without proper context or background. 
 
This metaphor struck me. It’s true that the media feed us bite-size statements. And even though they are true most of the time, sadly they are also very incomplete.
 
Take, for example, a recent interview given by Warren Buffett in which he said that he thought we’d be in an economic recession until the end of December. Many media outlets took this handy sound-bite and ran with it. What they neglected to include was the rest of the statement.  Buffett also said that he thought the markets would recover much sooner than December. This latter piece of information balanced out the doom and gloom of the former. Plus, it made sense—the markets typically  recover before the rest of the economy. But the whole complex explanation wasn’t as convenient for the pundits and reporters—so only the sound-bite made it to the nightly news. 
 
In some ways this is not a new problem. But what’s different in today’s world is that the media is so pervasive and we’re so busy that we barely have time to digest the bite-size chunks of information that the media gives us, let alone scrutinize and analyze them. Careful, in-depth consideration gets tossed by the wayside.
 
So, how does this relate to the investment process? Many times I’ve received calls saying, “I’ve heard that this is a good investment,” or, “I’m hearing that this is something to be done.” I generally ask the client where they heard the information, and usually the source is lost on the memory. 
 
More important than the source of such information, though, is the careful consideration of how the information should be used. Nothing is ever totally black or white; nothing is ever a sound investment idea for everyone
 
It’s important to weigh the information and look at in the context of your own personal situation. After all, all investment decisions involve some degree of risk. So we must decide whether it’s a type of risk that’s already included in the portfolio, making the addition a highly dangerous one.  Or is the risk unique to the portfolio and offset by other holdings? These are just a few of the questions that need to be addressed before taking action.
 
We can address those questions together, and we can assess and scrutinize new ideas as they come up. And we can learn from history’s mistakes, such as Newton and the South Sea Company. From them we can learn not to get caught up in the excitement of an idea, the buzz created by the “men with megaphones.”  We need to look for the truth, which is more complicated than isolated facts. For a fair and balanced truth, all the facts need to be gathered, weighed, and put into context.
 
I’m reminded of the words of Bertrand Russell: “The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts.” I think a certain amount of doubt is healthy when it comes to investing. It means not accepting all information at face value, but rather taking the time to investigate the truth. It also means knowing that nothing is a “sure thing,” but that every decision involves a certain level of risk. It means that you’re a wiser investor.
 
Until next time…

 

 

February 2009

Inflation. It’s always around to a certain degree. A little bit doesn’t hurt, but a high level of inflation can really affect us. Throughout the years, some of us have experienced high inflation. Others have read about in economics textbooks. For many of our generation, the effects of inflation were almost pleasant: We could take our savings and deposit them into money market accounts with yields of 12% or more. We had to pay a lot for the mortgages on our homes, co-ops, and condos—I remember paying 17%! But then we saw the price of our homes increase by over 20%.

 While the new administration faces the daunting task of righting an ailing economy, we need to question what the side effects of the medicine will be. Will the proposed infusion of capital cause additional inflation? It's very possible that new public spending priorities could put extraordinary pressure on policy-makers and monetary agencies, creating a demand to print and spend more money. Whether it's entitlement programs, public emergencies, or other irresistible causes, I'm sure we haven't heard the last of government spending—nor can we with absolute certainty anticipate all that is yet to come. Will this new spending create a desirable level of inflation that the economy can handle or a rise unpredictably beyond what we might expect? After all, it has happened before.
 
Like our government leaders, we have to adjust to new pressures and new needs in a changing environment. What will it mean to our nest eggs that have already been severely damaged by the worst equity and bond market in my memory? What will be the value of a fixed rate CD or long-term bonds and other “safe” (in terms of protection of principal) investments in a highly inflationary economy? These are questions we need to ask and take into consideration when evaluating our portfolios.
 
In the words of John Maynard Keynes: “When the facts change, I change my mind.”
 
There’s no doubt that the facts have changed. So now we need to figure out how best to handle the new set of facts. There are numerous strategies we can investigate and evaluate. As always, the right solution can be different for each portfolio. However it’s clear that this is something we need to take a close look at with this new perspective.
 
I’ve already discussed this with a number of clients, and I plan to talk with everyone about it. I welcome your calls at any time to discuss these strategic questions as well as any concerns or anything you might have on your mind.
 
 
 

 

 December, 2008

 As 2008 draws to a close, I’d once again like to thank you,  for another memorable year—albeit one filled with challenges and concerns. It’s important that you know how much I appreciate your loyalty throughout this year, as we have weathered the storms, grown, and learned together.

Also, I truly value the introductions you have made for me this year. It’s such a wonderful feeling to know that you appreciate and value my services as much as I value your loyalty. It’s working with clients like you that makes my job so satisfying and rewarding.

Once again this year, I’d like to show my appreciation and honor you—my clients—by making charitable donations in your name. This is a tradition I started last year, and plan to continue annually. 

Last year, when I made this annual donation, I encouraged you to let me know what issues were closest to your hearts. Throughout the year, I’ve had the privilege to speak with some of you about such issues, and as a result I feel more connected and in-tune with your priorities. Therefore, I’m happy to include those special causes in the charitable donation this year.

In addition to those gifts, I’ll also be investing once again in our country’s future by giving, in your names, to the DOME Project—the organization that helps “at risk” children turn their lives around. 

According to the New York City Department of Juvenile Justice, a year in a detention facility for one offender costs taxpayers over $200,000.  The DOME—an acronym for Developing Opportunities through Meaningful Education—in lieu of incarceration, spends less than $6,000 annually per child to educate them, advocate for them, support them, and get them on the right track—not to mention the exponential benefits of turning someone’s life around, from a burden to society into a contributing citizen.
 
I’m so inspired by the DOME Project and the children who benefit from it. I’ve had the pleasure of meeting some of these young people and have been truly moved by their strength in the face of great obstacles. It takes a wonderful sense of optimism to take a bad situation and see the potential goodness in it. Meeting those kids—and even watching my own kids grow up—reminds me of one of my favorite songs by Louis Armstrong: “I hear babies cry, I watch them grow, they’ll learn so much more than I’ll ever know…” And as the song says, I truly believe it is a “wonderful world.”

And really, that outlook of optimism can be applied to practically anything in our lives—it’s an outlook that I consistently strive to maintain and one that I try to encourage in you, my clients. In thinking about this past year and in moving into the year ahead, it’s important that we remember the inherent good in the world around us and maintain a sense of hope.

My goal for all of you for the new year is, to paraphrase the words of Henry David Thoreau, that you walk “confidently in the direction of your dreams.” I think that’s exactly what we all need this holiday season: confidence, optimism, and a dream to follow.

I hope you’ve enjoyed my messages throughout the year, and that they’ve provided you with a certain level of understanding about the confusing financial information we’re deluged with on a daily and sometimes hourly basis.  Now more than ever it’s critical that we’re able to take a step back and look at the big picture. That’s why it’s so important that we keep in touch about what’s going on, not just in the financial industry in general but also in each of your lives.

As always, please let me know if there are any questions or concerns you’d like me to address in future videos or email messages. I certainly want to speak to issues that are most important to you, and I’m always interested in your feedback. 

I wish all of you, your families, and friends a wonderful, healthy holiday season with positive cash flow!

Till next time…

December 2009

 As we head toward the end of this most difficult year, I remember our sentiments this past summer, when many were attributing the economy’s difficulties (which were modest by today’s standards) to the cost of oil.  We posited: “If only we could get the price of gas down to $2.00 a gallon, then things would be ok.”

The bottom line, though, is that short-term market calls generally don’t work. For varying reasons, the things we expect to happen often don’t, and vice versa. Mark Twain once said, "I have known a great many troubles. But most of them never happened.” Indeed, it often happens that the thing we worry most about doesn’t occur, but instead a different and unanticipated problem crops up.

So, given the fact that short-term calls in the market are virtually impossible, we find ourselves at somewhat of a loss for guidance in navigating the immediate future. The question arises: “What do we do?”

As I see it there are three basic choices, each with its own benefits and shortcomings:

1) Liquidate your assets and wait.  The advantage of this strategy is that as long as these difficulties continue we can comfortably avoid the bad news and our principles will remain static.  The danger of this strategy is that market rises are usually dramatic and pre-date any economic news—plus, even if you did hear news of a rise, it might be one of those unreliable short-term forecasts.  The fact remains that liquidating your assets would cause a locking-in of the loss with no hope of recovery. Just imagine, for example, how people who liquidated equity portfolios in 2002 felt when the market soared in 2003. 

2) Build a buffer with new money and dividends.  It’s feasible to take dividends in cash and invest in low-risk investments.  The advantage to this strategy is that it will reduce the volatility of the overall portfolio.  If cash is needed in the near to mid-future and the market doesn’t recover in time, you’ll have liquid assets that need not be sold at a loss.  If the cash isn’t needed in the near future, however, these low-risk investments will lag behind the rest of your portfolio during a recovery.

3) Consider this market the ultimate bargain of a lifetime.  We can invest in markets that are at extreme discounts.  If—and when—the markets recover, we could potentially recognize great profits in addition to seeing our portfolios recover to prior values and beyond.  Of course, this is the most emotionally difficult plan of action, because there’s no telling how long this downturn will last.

I’d like you to consider these three options, because despite the tenuousness of this situation, we must make a plan of action. I’m reminded of William Arthur Ward’s saying: "Trouble is temporary. Time is tonic. Tribulation is a test tube." It is in trying times like these that our patience and fortitude are tested. But still, we must remember that this situation is temporary. So please, think about these alternatives as we talk over the coming months. Of course, if you’d like to discuss it sooner, please call me and we’ll arrange a time to talk.

Best wishes for the new year.
 

 

October 23 2008
 
Crisis
 
The financial crisis.
 
The banking crisis.
 
The liquidity crisis.
 
These days, crisis is with us everywhere. When we get up in the morning, it’s right there in the morning paper. We go to our computer, and our home page has the same message. Turn on the news—it’s there again.
 
How do we deal with it?
 
Two things I know:
·        Hiding our heads in the sand won’t work.
·        Nor will staring at a computer screen and watching the market move minute by minute.
 
I’ve been talking to people and reading about people who deal with different types of crises on a regular basis, in order to gain some insight on how best to cope with such situations. I’ve spoken with doctors, school psychologists, and law enforcement officials.
I’ve read about people in the civil rights movement of the ’60s. All of these people have faced struggles and challenges, both on a daily situational basis and on a much grander scale.
 
After talking with them, I came to the conclusion that the key to working through any crisis is not to focus on the problem, but the resolution. This isn’t denial. It’s quite the opposite—it’s a proactive approach to dealing with a problem. Rather than hiding in fear or pointing fingers, we can spend our energy coming up with the solution and looking to the future. It requires equal amounts of optimism and pragmatism.
 
While the crisis at-hand is quite different, I am reminded of the civil rights hymn “Keep your eyes on the prize.” This is a wise mantra for any struggle, and one I often call to mind. No matter what the challenge, keep your eyes on the prize.
 
How does this relate to you and me? Our plans and dreams have been challenged. We need to focus now more than ever on solutions. What’s the right thing for us to do today?   If we ask that question when we look at our situations, we’ll see things clearly and be more able to tolerate the ups and downs we most certainly face. I also believe our lives will be richer than those in panic mode and those obsessed with the explosion of information that bombards us each day.
 
Till next time.
October 6, 2008
 
The current financial crisis has clearly been a very difficult time for all of us. Much has happened recently to shake confidence in our financial systems. The media has been using terms like “historic” and “nothing ever seen like this before.”
 
While it’s true that this situation is different, if we take a step back and look at the bigger picture, I think that its magnitude is no greater than others I’ve experienced in my career.
 
After college, I found a job with a highly respected financial institution. Entering into the industry, I was in awe of the powerful institutions around me—and was even amazed by the massive buildings that housed them. I can remember being impressed by names such as Arthur Anderson, Salomon, Drexel Burnham Lambert, and Kidder Peabody.
 
A few years later, however, the respected institution I worked for was on the verge of bankruptcy and was taken over by a French company. Even those other big-name firms ended up falling by the wayside one by one.
 
If you think back, though, those awe-inspiring institutions had as much power and influence as the victims of the current financial crisis—Bear Stearns and Lehman Brothers.
 
In my opinion, there is a common thread in situations such as these: hubris. This term, of Greek origin, indicates an overabundance of ego and a lack of fear of reprisal. In early Greek literature, however, hubris was usually punished.
 
The good news from my perspective is that we have always emerged after such events with a strong recovery and unprecedented growth. In no way can I guarantee that this will happen nor give you a time-table for recovery—although I truly wish that I could. I have confidence, in our economic systems. They are in no way perfect, predictable, or smooth, but based on past experience and past performance they have always allowed our country to recover and continue to grow.
 
As I look ahead I see potential for huge global growth, because stormy times have, in the past, been a spark that ignites opportunity.
As always I welcome you to call with any questions or concerns.
 
Alan Grodin
Northern State Financial, Inc
 
 
Alan Grodin is a Registered Representative offering securities through American Portfolios Securities Inc. Members FINRA, SIPC. Investment Advisory Services Offered through American Portfolios Advisors Inc. (RIA)
 
 
 

 

 

 

 

I've heard that Warren Buffet (perhaps the greatest investor of all times) has said... You need two things to be a great investor:

 Above average intelligence... and Above average willpower.

 I am always hopeful that the combination of myself and my clients will generate more than above average intelligence. Maintaining our willpower is our challenge. Great investors worry when the market is soaring... by the same token, Great investors are greedy when markets have tanked. That is what I mean by willpower and probably the reason why some very smart people are poor investors..

 

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