JR Snell Capital Management, LLC

There really hasn’t been any earth-shattering reason to get that lump in my gut telling me to be careful. Maybe it’s because we have guided our portfolios to some recently handsome returns and I’m nagged by a nutty old saying that occasionally bounces around in my head, “If things couldn’t be better, then things can only get worse!”

It’s difficult to check your hunches at the door, but I still manage to stay disciplined and only act on what the actual facts are saying. It also serves to remind me of the title of one of my favorite author’s books, “Dig Your Well Before You’re Thirsty.”  (Harvey Mackay, if you’re interested).

Although sales related, the basic tenet of Harvey’s book is that you need to build your network and to prepare your groundwork BEFORE they are needed. If you wait until you find yourself unemployed or looking for some other professional assistance, it is far too late to attempt to build a plan.

Now, while things are good, is the most important time to prepare a plan of action for market malfeasance. Paradoxically, this one best time also happens to be the least motivational time to do it. And it is this very recent market history with its unbroken chain of recent successes that makes me an even more vocal voice in the woods… and the same reason it gets so danged hard to get people to listen right now.

If you haven’t already done it, it is time to build in a backstop of courses of action to keep you and your investment portfolio on course to your personal goals regardless of what might lurk around the boom-bust corner that the markets have become in the past few years. My clients and I already have. See how we accomplish this here.

Why? Because things couldn’t be better.

buy and hope, investing, investing strategies, investments, Market Comments, market timing, safety, stock market, strategy

Just when we thought the credit rating agencies might have learned their lesson, this little tidbit popped up earlier this year, very low on the radar, “Standard & Poor’s Triple A Ratings Collapse Again. The Question is Why?” wherein it refers to a recent press release, quietly put out by S&P, that it was about to downgrade nearly 1200 mortgage securities that it had recently assigned a AAA rating due to a faulty analysis.

It may have escaped the short memory of the investment world that the credit rating agencies were one of the key pillars that crumbled under the weight of the financial debacle that they helped create. You will recall that it was their admitted ignorance or understatement of the risks associated with securitized mortgages that led to a mass downgrade of billions of dollars of mortgage securities and triggered the collapse.

Expertise we can count On?

The subject of this recent mis-analysis were re-remics, a securitized mortgage instrument (here we go again) comprised of repackaged mortgaged back securities that managed to survive the latest rounds of defaults. This re-rating comes right on the heels of another one that occurred just 3 months ago with aother batch of 224 re-remics.

Most disturbing is the fresh light this casts on the questionable objectivity of the rating agencies which are highly compensated for their ratings, but only after winning the business by outbidding each other. Apparently, rating re-remics commands a much higher fee and the banks are willing to pay it to get the ratings they need to be able to market the securities.

Lessons for the Taking

Individual investors can, hopefully, take away some lessons from the lessons that weren’t learned by the ratings agencies and the banks.

• First, we have no business investing in financial instruments that we don’t completely understand, especially ones that require some sort of engineering by backroom financial geeks. Seriously? When the rating agencies don’t understand them enough to develop the right methods for analyzing them, it’s time to run; run far away.

• Second, even though the loss that the banks that are holding these re-remics won’t amount to more than a blip on their balance sheets, it’s a reminder to the rest of us “sophisticated” investors that proper diversification is key in the face of these human-caused flare-ups that could possibly trigger the next calamity.

• Third, unless you have some sort of twisted financial death wish, stick to the fundamental tools. The “next big thing” in investments is usually a re-hashed, raked over financial product loaded with fees and back-door profits intended to enrich the promoters with little regard for your financial future.

None other than the notorious stock trader, Jesse Livermore, stated it the best, “Another lesson I learned early is that there is nothing new in Wall Street…Whatever happens in the stock market today has happened before and will happen again.”

The big takeaway here  is that in successful investing, there are no crutches, no models, no experts, and there are no short cuts.  With experts like S & P, it’s more important than ever to be able to think for yourself and move deliberately along your own course.

bailout, bummer, credit crisis, s&p 500, safety, scheme

To my chagrin, I am often reminded, by well-meaning clients, that our investment philosophy seems to run counter to the mainstream thought which relies heavily on popular investment theories and hypothetical models such as Asset Allocation and Modern Portfolio Theory.  Not one to take up the whiteboard and start lecturing, I simply point them to our appraisal of these academic theories and their near ruinous application in the real world of investing (How Investing Got Broken).

By no means is this a source of frustration for me.  I know how difficult it is to run against the herd.  It’s natural to feel isolated and vulnerable when you see the masses moving off into a different direction leaving you to your own doubts about the validity of your direction.  Would you feel any different if you knew they were heading towards a cliff in the dark of night?  While that is not necessarily a certainty, our contention is that an overreliance on lab-generated portfolios can lull investors into a blinding complacency that will impede their ability to change direction before they reach the edge.

Rather, my frustration is channeled into the army of well-meaning, but misguided advisors out there that continue to promulgate investment myths based on flawed models that have yet to prove their validity, and, in fact, have led many institutions and millions of individual investors over a cliff.

Nassim Nicholas Taleb, one of my favorite investment philosophers, has been on a mission to expose risk models, such as MPT, as pure academic folly, and his latest rant actually is an indictment of the Swedish Central Bank (the issuer of the Nobel Prize in economics) for legitimatizing a theory that has led to market crashes and huge government bailouts. (‘Black Swan’ Author Says Investors Should Sue Nobel for Crisis. Bloomberg. Oct 2010).  Taleb holds no malice for the theorizers. He wants to hold Nobel accountable for rewarding a destructive fallacy.

While that may seem like a drastic, and perhaps, improbable step, Taleb has cast a light of controversy on the underlying problem of probability models that have undeservedly earned academic respect and legitimacy for which there is no valid basis.

Stay tuned for my next post wherein I dissect the controversy of probability models as they apply in your investment decision-making.

If you have questions or comments regarding the use of investment models, I would appreciate hearing from you.

bailout, buy and hope, investing, investing strategies, safety, stock market, strategy

Yesterday, I had a client mention to me that I had “been busy” lately… which is code for “making his portfolio a lot of money recently”.

Since we don’t believe in the old-school “buy-and-hope” investment strategy (see “How Investing Got Broken”), we tend to sit around for a while (usually in cash) waiting for opportunities… and then we strike and sometimes make a whole year’s worth of returns in a few months… which is a little bit of what happened recently.

In it’s simplest form, asset allocation for most people means that they hold varying percentages of different asset classes all the time. The theory is that when one asset class performs poorly the other asset class will be performing well… thereby smoothing out the bumps… and unfortunately, guaranteeing mediocrity.

Our approach is a little different (see “How We’re Fixing It”) because we prefer to sit on the sidelines until the time seems reasonable to make a move. We don’t feel like we have to be doing something for the sake of keeping busy or pretending that “busy-ness” is the same as profitability.

In an off-the-cuff moment to my client, I equated our management style to that of a hyena stalking prey. We sit in the grass off of the side of the path watching and waiting for an easy opportunity to pass by. We are conserving energy (capital) while we wait so that we will have the energy (capital) to pounce immediately when opportunity presents itself.

There can be long periods of solitude followed by intense periods of feasting, but there is also relatively little risk to the hyena’s life. And this fits our style nicely, thank you.

buy and hope, cash, investing strategies, safety, strategy, timing

For those of you wondering, I’m still here and still active. There are a few reasons that I haven’t written a lot here recently and a few reasons why I am ready to be a little more active poster these days.

Ahh priorities… Clients always get first whack at my time. I might be on the more  “public” tasks of preparing annual reports, quarterly reports, talking to accountants, compiling year-end numbers, or working on each client’s annual Roadmap planning updates.

Or, I might be on the more “in house” tasks of balancing or rebalancing client accounts, analyzing stock positions, considering stock positions, research, trading into or out of something that I like or don’t like, etc.

These two priorities have kept me pretty busy… end of year and most recently end of quarter stuff… But, I’ve also been busy with my second course of action, which is helping new people to become new clients. Since I really take my time with their stuff and all new clients go through the process of figuring out where they are and where they want to be, this can take a lot of time.

After all of this, comes time for blatant self promotion and article-writing… which includes sitting back (a little… not enough to tip over my chair) and observing the world of the markets with a fresh enough eye to comment on them.

While I have had some difficulties getting far enough down the list to get pen to paper (figuratively, of course), there’s the OTHER reason: Any pearl of wisdom starts with a grain of sand that aggravates enough to impel one to action.

Frankly, every time that I look back to my late November post, I observe that what I recommend is what I’m still doing… this is what I’m still thinking… this is how I’m still positioning client accounts. And you know what? The market is still where it was when I wrote the post in November, about 1100 on the S&P 500.

So what’s changed? What’s the “sand in my mussel”?

Complacency. I can feel it creeping in again. I feel it when I talk to clients and prospects and I even feel it in my casual conversations. It is just these times that the general public seems to get a wake up call. Are you going to answer it?

Market Comments, s&p 500, safety, stocks, strategy

Looking back over the last couple of months worth of posts, I’m thinking that it might appear that I’m a little opaque as to what areas of what markets you should be focusing on.

I’m not, so I’ll clear things up before I go AWOL for the week. First, understand that anything can happen over the short-term. What we always work on here in our laboratory is more macro-type thoughts for overall “big picture” positioning for ourselves and our clients. That’s what this is about.

[Sidebar... I think I might have mentioned that we are all about the "return of thought" when managing investments... That is, come up with a prospective course that we believe things will take and position for it. A little more active than reactive, and certainly not passive.]

If there’s no magic bullet or secret formula to this investing thing, the elephant in the room says that those investors who wish to survive (and thrive) in tomorrow’s markets might have to think for themselves (gasp)… or (at the very least) think for themselves enough to know they should hire those people who think for themselves.  – From “How We’re Fixing It”

First, the average inflation rate for the last 100 years or so is about 3.0%. The TIPS market (Treasury Inflation-Protected Securities) is showing the breakeven inflation rate at 1.9%… significantly lower than the 3.0% average. Translation: The market says that economic stimulus and other Fed stimulators (very low interest rates) will not work as planned… Translation: Extended period of very slow or non-growth. Translation: Buy TIPS because the treasury structured them to provide downside protection against deflation (which, of course the Feds assumed would never happen)… and this is really one of the very, very few investments that I can think of that offers this.

We’ve been buying the individual bonds for clients and mixing it up between 7 and 14 year maturities. If you can’t buy the individual things, you can consider the ETF (TIP)… This ETF makes sense for smaller accounts, but they have some additional internal management fees which is why we shy away from them in larger accounts

Following this premise, it wouldn’t hurt to accumulate some longer treasuries… like in the 20 year (give or take 5) range. I hear people whining about only getting 4.20% on a 20 year treasury… but I think if a person accepts what might be the ”new normal”… 4.20% might not look that bad, in hindsight.

We’re not married to holding on to the things for 20 years though. If we were presented with some outsized gains on our treasuries over the next year or two, we wouldn’t be afraid to take the profits and find a new home for the proceeds.

Dividend-spewing, old-line, consumer staples stocks look tasty for a couple of long-term reasons. First, we can get between 3 and 4% on many of these stocks (i.e. HNZ) and their business model isn’t so sensitive to the economic cycle.

Don’t get me wrong… anything and everything will go in the tank if the economy falls off a cliff again (people will even go without ketchup if things get bad). But generally, if our extended-malaise scenario becomes fact, then these consumer staples companies will still be chugging along same as always.

Just be sure to do your homework and feel comfortable that the stocks you’re choosing have low debt and decent enough margins to keep coughing up the dividend if things stay marginal for a long time. Email us if you need some help in this area.

Technically, in the stock market we’re acting a little short-term “toppy”… meaning it’s not a good time to be going after your favorite growth stock. Long-term? At the moment, none of the classic, fundamental, long-term stock market indicators are suggesting that now is a good spot to become a new “buy-and-hold” type of investor. Sorry. Be patient.

The upside to the “new normal” is that we can afford to be patient in the stock market. These days, nothing is going to run away from us for very long. No matter what the economy does, we still believe in volatility. Since volatility is how we’ve always made our money in the stock market, we still believe that there is money to be made in stocks.

As far as the thoughts of chasing stocks for fear of being left behind? We’re content to let everyone else risk heartburn while we just pick at the turkey.

buy and hope, deflation, fed, interest rates, investing, investing strategies, investments, Market Comments, safety, strategy, timing, treasuries, treasury

Utility Stocks (as a group) have forsaken me this year by advancing only about one-fifth of the amount of the S&P 500… which can act as a real short-term boat anchor in your portfolio if you own any quantity at all. Yet, my passion for the sometimes stodgy “dividend machines” still burns hot.

Why?  First, there’s the cash flow.  My favorite utilities ETF, the Utilities Select Portfolio (XLU) is spinning off a 4.31% dividend yield in an environment where a half a percent is doin’ good on your money market. That’s worth taking a little bit of market risk.

Then there’s long term performance. The Dow Jones Utility Index has outperformed the S&P 500 by 4.4% PER YEAR over the last 10 years. This puts the DJUI in positive territory for the last 10 years, whereas the S&P 500 is down almost 20% for the same period. And we are supposed to be long term investors, right?

Then… What’s the problem? Why the dismal performance?

To answer the questions, I think we have to look at it in context of what utility stock underperformance might be saying about the economy in general. The last time we emerged from a recession, the utility averages advanced about 25% in the first year of the recovery (2003). This time, they have only advanced about 4%. My opinion is that there’s nothing wrong with utility stocks per se, but they might be telling us that there is still something wrong with the economy.

Mix this in with the failing dollar, gold hitting all-time price highs, and oil’s recent jump back to the $78 per barrel neighborhood and there’s plenty of evidence afoot to suggest that all is not “right” in the realm.

There are so many variables out there that even Helicopter Ben doesn’t have a real clue. Bernanke (at the moment) must be contented to just dump cash on the U.S. economy and hope for the best… while walking the tightrope.

We have the early indicators of inflation that gold, oil and utility stocks might be showing us on the one hand while we have the deflationary pressures that come with collapsing employment, a housing value slam with a possible double-dip and consumer spending that has all but evaporated.

So, I think utility stocks really ain’t misbehavin’… I think they’re trying to tell us something about the economy. And if I’m hearing them correctly, I think I’d rather lie with my lovable dogs (of late), than to be all loaded up on or still chasing after “recovery” stocks.

deflation, interest rates, investments, Market Comments, s&p 500, safety, strategy

OK… The world is not coming to an end already…. Yes, we have problems… Yes, they are serious… and yes, they will take years (probably many) to resolve.

We have some massive deleveraging as a country and as individuals to work through. Deleveraging is painful, whether you are a nation or a household. As we pay down debt (individually and collectively), those funds have to come from somewhere… Maybe they come from curtailing our spending, maybe we curtail our investing and saving.

If you can think about what you would do personally if you find yourself having to “de-lever”, then you know exactly what is happening with our economy. You know why spending has evaporated, why no one is buying cars, or houses, or Rolexes right now.

You see, it’s not just that credit has tightened up, it has. But, I think we have to recognize that the demand for credit has evaporated as well. It’s for this reason that I believe that simply making credit more available will not solve our problem… We all have to de-lever… pay off debt, pay down mortgages, get off the credit cards, etc.

It doesn’t matter whether you personally find yourself in the position where you must de-lever. If you don’t, your neighbor probably does and the country definitely does… and this is what matters: There’s A LOT of it that is going on.

The solution? Time. Time for Americans to do what they’ve always done: Get up in the morning, work hard and pay our bills. We will take the kids to school and soccer practice and buy a house or a car if we need it.

And we’ll do this all the while and over and over and over until the problem solves itself. It will solve itself because it will all be done with a new attitude, one of frugality and a new conciousness of the difference between a WANT and a NEED.

Maybe we can learn the lessons that our ancestors learned during the Great Depression without having to plumb the same depths of despair.

Frankly, what we don’t need right now is the excessive hand-wringing and scare-tactic speeches that our President has been making as a ploy to get his package passed. And we don’t need the media hype and horror stories thrown at us every single day. We get it… the economy sucks.

What we do need to do is to stop, take a deep breath, relax and to look around. Most Americans are working, have good jobs and are not in trouble with their mortgages. Most Americans are already doing what needs to be done to get us out of this thing. We’re a lot more resilient and creative than ‘they’ think we are!

bailout, bank failures, cash, credit crisis, interest rates, investing, investments, rescue, safety

A couple of months before I started writing blog entries, I “looked into the abyss” on my own personal trading screens here at the office.  It was mid-September or so, right after the Fed let Lehman fail and before the significance of what just happened was really felt by anyone but a few… yet.

Early the morning of the 15th of September as I look at my screens, I’m thinking that I’m seeing a “blip”… you know, a data error, an internet outage, the ghost in the machine… whatever.

Specifically, what’s confusing is that the couple of trust preferreds that I follow (like bonds, but traded on exchanges in $25 hunks rather than the off-Broadway $1000 chunks that a regular bond trades), traded at around $15.00 or so a minute ago and now many of them are now being “bid” at an odd $.50 or so. For a few minutes, I thought the system totally freaked. After a while the 50 cent bids finally were replaced by 3 to 5 dollar bids… then up to about 7 to 8 bucks… finally settling in at about two-thirds of what was bid the day before.

Of course today, I now know it wasn’t the ghost in the machine… it was the abyss. I had looked “over the edge”. I had seen the financial “white light”.

And apparently Hank had seen it too. He met with Congress, made the talk show rounds (white as a ghost, btw) and said SOMETHING to Congress and they gave him the money. So, what was the SOMETHING that scared him so badly?

OK, so thanks to Representative Kanjorski of Pennsylvania (maybe he was talking out of school??), we’ve got a pretty decent idea what happened that day. He says that…

“On Thursday, September 15, 2008 at roughly 11 a.m., the Federal Reserve noticed a tremendous draw-down of  money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two. Money was being removed electronically.

The treasury tried to help with $150 billion. But could not stem the tide. It was an electronic run on the banks The Treasury intervened, but, had they not closed down the accounts, they estimated that by 2 p.m. that afternoon. Within 3 hours. $5.5 trillion would have been withdrawn and collapsed within 24 hours the world economy.”

Watch the video, his explanation starts at about 2 minutes and 20 seconds into it. I also double-checked some additional congressional testimony tapes where Rep. Kanjorski questions Mr. Paulson about this very thing because I didn’t want to foist some “conspiracy theory” crap off on my loyal readers. In the tapes, Mr. Paulson does not deny what happened.

[[He also mentions that there was only the 'lone gunman' and there was no alien autopsy.... Sorry gang.]]

Now we know.

bailout, bank failures, credit crisis, fed, investments, rescue, safety, scheme, treasuries, treasury

Should we have an opinion about the stock market, or even about the direction of the economy? Is it important to set a firm course of action based upon our expectations of what we think will occur in the coming months?

Most readers when asked, would think these questions a bit silly. They’re a bit silly because everyone “knows” you must have an opinion to be a successful investor. Or do you?

Of course, being who I am, I would tend to think just the opposite. Did you ever think that the investors who have a firm opinion about what they believe will occur in the future are taking a risk with their flexibility? They’re messing with an essential investing skill that is the ability to change and adapt to a very fluid and dynamic situation?

Take, for example the annual Barron’s survey from a year ago about what 12 prominent strategists thought would be the course of the economy and the market for 2008. First, not a single one of them predicted a recession even though we were already in a recession at the time of the survey (December 2007). Second, their ending estimates for the S&P 500 were between 1525 and 1750. The S&P 500 closed 2008 at 903.25. That’s an embarrassingly huge miss!

Rather than throw these collective strategists into the “idiot-pile” for their lousy foresight,  I’m more inclined to think them fools for even attempting it. And so publicly too! Oops.

Of course, it would be a bigger shame if they managed or advised others based upon an unflinching adherence to their predictions. That’s a portfolio-wrecking miscalculation and strategy. And this isn’t just one “strategist”… it’s all of them.

So, it’s pretty obvious that it’s a fool’s errand to try to predict the future for any reason, let alone the stock market. This is why it doesn’t matter what I think about the future. The good news is that when I’m stacked up against some of the greatest economists in the world, I figure I’ve got about the same odds as them as being right. The bad news is that those odds are somewhere between slim and none.

What to do?

I think that it is more important to imagine a number of potential scenarios and their corresponding courses of action. From this brainstorming session, you could put together a number of “if-then” statements, much like a computer program would be written. Then you can develop a written plan for the future of your investments in a sequence of decision statements. Maybe a statement would go something like, “If interest rates decrease to below 2%, I will sell my Treasury bill investments.” [This is not advice, only an example.]

As I advise clients and manage portfolios I’m always playing this little “game” with myself. I never make an investment for myself or others without an “if-then” rundown… and right now I’m playing it with the stock market.

Here’s the playbook from my mind at this moment:

1. IF I see that a short term rally is developing, THEN I will invest about 50% of my clients’ growth stock capital.
2. IF any of these stocks loses 10% of their value, THEN I will liquidate the position.
3. IF any of these stocks gains 30%, THEN I will exit the stock and take my (our) profits.
4. IF I see that the rally is coming to an end, THEN I will sell any of these new positions at the slightest weakness.
5. IF I see that the short term rally has turned into a new Bull market, THEN I will commit the second 50% of my client’s growth stock capital to the market.

For the record, I’m still waiting for #1 to be True. I have some other “if-thens” that I’m playing with Treasuries, Investment Grade Bonds, our Utilities Select Strategy and the Dogs of the Dow Plus Strategy but I don’t want to annoy you with the incessant squeaking from my mental squirrel cage.

beginner, buy and hope, dogs of the dow, investing strategies, market timing, s&p 500, safety, stocks, treasuries