Wall Street Journal columnist Holman Jenkins writes frequently about Tesla.  He is skeptical that Tesla will survive as it is currently constituted, as am I.  His column from June 22, 2018, titled “A Tesla Crackup Foretold” states why he is skeptical, as you might deduce from the title.  Jenkins’ prose is sometimes dense, so I will try to translate it.

Government Policy

Teslas have been made more attractive to purchase for consumers because of a $7,500 Federal tax credit.  Some states have additional tax credits.  However, the Federal tax credit will start to go away after Tesla sells its 200,000’th car, which is expected later this year.  Thereafter, the Federal tax credit will be reduced over time and will ultimately go away entirely.  Tax credits are better than a price reduction on the car because tax credits directly reduce the purchaser’s taxable income.

Now, ironically, according to Holman Jenkins, it is government policy in a different way that could whack Tesla.  The Federal government sets mileage and emissions standards at the automaker level, not at the individual auto level.  If an automaker (such as GM) wants to sell a lot of gas-guzzling SUV’s and pickups, that is fine with the government, as long as the same automaker also sells enough zero-emission vehicles to offset the high-emission big vehicles.  That’s why GM sells the Volt and now the Bolt, and why GM doesn’t much care about the profitability of the Volt/Bolt because GM more than makes up for the losses through those vehicles via profits in their large vehicles.  Tesla doesn’t have the option of using their e-vehicles as a loss leader; Tesla must make money (eventually) on its e-vehicles because that’s all they have.


Although Tesla continues to be considered the best electric vehicle option available, other e-vehicles are improving, and they are available at a better price relative to Tesla, and there is little motivation for the other automakers to raise e-vehicle prices as long as they are making money by selling other vehicles while complying with Federal emission standards.  So, whereas government policy and incentives have favored Tesla heretofore, it will harm Tesla going forward.  This is one reason Tesla’s CEO Elon Musk has become more aggressive in his earnings calls and through his Twitter account, and it is also why Tesla just announced it was laying off 9% of its management team.  Tesla needs to become cash flow positive and soon because they need to service the estimated $10 Billion of debt on their balance sheet.  Tesla is having well-documented problems meeting production for its new Model 3 and they just erected a big tent in their parking lot to create more room for Model 3 production.  It is California, but a tent?  How can you ensure quality control if you are building in a tent?  Check it out:


Elon Musk is brilliant.  He is distracted by a lot of other businesses and projects (Solar City, Space X, Boring, Hyperloop), but Tesla’s production and cash flow situation seems to have his full attention right now.  I believe Tesla will either need to acquire a division that spins off enough cash flow to prop up the electric car business, or it will itself be acquired (maybe by Apple?  Just a guess).  I don’t expect the Tesla auto to disappear with the rollback of the Federal tax credit, but I do expect Tesla’s business model to be different within 2 years.  I don’t advocate shorting Tesla because Musk is so talented, and if Tesla is acquired its stock could run up, but I am not bullish on Tesla as it is currently constituted.

Constant Reinvention

In order to be successful in the long run, I believe people and companies have to reinvent themselves constantly.  What worked yesterday isn’t necessarily going to work tomorrow, at least without some tweaking.  At a minimum, you need to constantly reassess your current business or investment strategy because there is always a change in the markets and/or a new technology that is nipping at your heals.  If you have found something that works or makes you money, chances are someone else out there has also figured that out and will have priced you out of the market at some level.

Andy Grove

The late Andy Grove, one of the founders of Intel, titled his memoir “Only the Paranoid Survive.”  In order to employ the mentality that you constantly need to reinvent what you are doing, you have to be paranoid that you are one step away from being obsolete.

Quant Investing

I believe one of the most glaring, real-time examples of constant reinvention is Quant Investing.  By Quant Investing, I mean investors who take mega-terabytes of data from the past performance of securities, put all of that data into a supercomputer, and then try to divine patterns from the data that the investors will then try to exploit in the markets in the future.  The very best Quant investors, by their own admission, are correct only a little better than half of the time.  And, what worked 2 minutes ago may not work in the next minute because the input factors may have changed.  That’s why the best Quant investors, firms like Renaissance Technologies and Two Sigma, hire and overpay for Physics Ph.d.’s and the like – the biggest brainiacs on the planet – people who can figure out an edge to exploit that may only work for a fraction of a second, and who then can move on and find the next investing edge to exploit.  All in a hope to bat a little better than .500, which, if enough money is allocated toward it, can result in outrageous profits.


On one level, mere mortals probably won’t be successful at Quant Investing.  Only the best can succeed.  You may think you have a “system” that works for you in the market, but it is likely that other factors or even luck caused you to win.  However, on another level, I think it is very appropriate to have a mindset that you need to constantly reinvent yourself.  Such a mentality is focused on the future instead of the past.  Use the past as a basis, but always be on your toes in an effort to make sure your strategy is appropriate for what you believe is going to happen over the next few months or a year.  Don’t rest on your laurels – or any other decorative flora.  You don’t need to have psychological paranoia, but you need to be on the lookout.  I love learning new stuff every day and thinking about how what I have learned applies to the future investing world.


The featured song in the hit Broadway musical “Wicked” is titled “Popular”.  “It’s not about aptitude, it’s the way you’re viewed,” Galinda tells Elphaba, in an effort to spruce up Elphaba’s appearance and image.  It failed – Elphaba became the Wicked Witch of the West.

Index Funds

Is the S&P 500 Index on a bull run because its fundamentals are strong?  Or because it is Popular?  Is it truly aptitude?  Or is it the way it is viewed?  The same questions can be posed about other indexes, such as the Nasdaq 100 (QQQ), as well as some of the main component companies therein, such as the FAANG companies (Facebook, Apple, Netflix, Alphabet (as opposed to Elphaba)).  If the answer is more on the side of that these indexes are going up because they are Popular, then we are heading for a hard and rapid fall once word gets out that they are no longer Popular.  People invest in index funds because of their liquidity, but they may not be that liquid once their popularity wanes.

Howard Marks

Howard Marks is the legendary head of Oaktree Capital Management, a fund manager based in Los Angeles.  Yours truly has had the pleasure of hearing Mr. Marks speak a few times.  He writes a periodic newsletter that is posted on the Oaktree website.  His most current newsletter was posted this week.  In the newsletter, he shows that companies that are components of indexes have outperformed companies that are not index components, all other things being equal.  Index-component companies outperform because index investing is currently Popular.  This doesn’t make sense for Marks because, if the fundamentals are the same for both companies, then their stocks should be similarly priced, but they aren’t.  Marks, a fundamental value-based investor, would buy the unpopular company that is not an index component because the popularity of the index fund is temporary, and the unpopular company will prove to be the better value in the long run.  Marks’ overall point in this newsletter, at least in the first part of it, is self-serving:  that passive index investing will never fully supplant active investing (such as that which Oaktree Capital does) because there will always be better values through active investing.  Makes good logical sense to me.


I agree with Marks that there will always be a place and a need for active investors.  Only active investors care about and therefore allocate more of their capital toward companies that do a better job of managing their capital.  That’s why I previously stated I believe index funds should not be able to vote in corporate governance issues.  However, I don’t believe the market is currently in a Popularity Bubble.  Corporate earnings are strong and are projected to grow even more, higher interest rates notwithstanding.  There have always been companies that appear to be overpriced (Popular!) and those that are underpriced.  It is the job of the active investor to flush out one from another, and it is the job of the index fund manager to ensure that their investors are adequately diversified such that their company-specific risk is minimized.  The market will work these issues out in real time.

The Motley Fool

The Motley Fool is an investment service with a website founded by brothers David and Tom Gardner in 1993.  It is a free website and I encourage anyone who wants to learn more about investing and to improve their financial literacy to go to fool.com and read the articles there.  The saying goes that you get what you pay for, but in this case, I think you can learn and gain a lot by reading these free articles.  There are embedded ads in the articles – the Fool owners and employees have to get paid somehow – but if you don’t get sidetracked by clicking on ads, the site is worthwhile.


As you can tell from the photos of the founding Gardner brothers, The Motley Fool is a serious financial website with an irreverent delivery.  Their mission, as stated on the home page of the fool.com website, is “Helping the World Invest – Better”.  They are in business specifically to help readers do a better job of investing their own money.  The Motley Fool doesn’t get paid commissions, and their advice is independent of any brokerage or other financial institution.  They get paid through advertisements on their website, so their job is to generate as much site traffic as they can by posting the best investment vice that they can.  They do offer a paid subscription service called Stock Advisor for $99/year, which is a good value in my opinion, but you can still read plenty of good articles through the free site.  Unlike other sites such as Seeking Alpha, the authors of the articles on fool.com work for fool.com, which means that fool.com endorses any of the investment opinions put forward on their website.

High Tech

Having been founded in 1993 during the beginning of the dot-com era,  The Motley Fool initially made its reputation by touting high-tech stocks.  Good idea, and good timing on their part.  They continue to tout high tech stocks, but not entirely.  One of their current top picks, for instance, is Tractor Supply Company, a big-box retailer that caters to rural America – not high tech.  Their analysis and picks are mostly fundamental in nature (meaning they look at individual companies’ finances and try to find value therein) and long-term.  Don’t go to fool.com if you are looking for quick trading pops.  Do go to them if you want to invest your retirement money in individual stocks.


One piece of advice that I received early on is that you should develop hobbies that will either earn you money or improve yourself or both.  Nowadays people (not you or I, of course) spend hours each month looking at videos on Facebook, YouTube, Instagram and the like.  Think about cutting the time that you look at social media in half, and instead better yourself by reading The Motley Fool or a similar site with the time that is no longer devoted to social media.  Another idea?  If you see an article you like on fool.com and have further questions about it, contact me and we can discuss it together and maybe we can both learn something.

I do subscribe to Stock Advisor but I otherwise have no connection with The Motley Fool.  I am writing this post only because I admire their website and because I think you all can benefit by reading it.


Social Security Depletion

“By 2034, those (nearly $3 Trillion of) reserves will be depleted and Social Security will no longer be able to send it its full schedule of benefits,” according to the latest annual report by the trustees of Social Security and Medicare, which was released on June 5, 2018.  Although not surprising, it is nevertheless a warning that things could change drastically for Seniors unless something is done about it.

Here is a link to a Wall Street Journal article on the subject:


Good News/Bad News

The good news is that there are nearly $3 Trillion of reserves and employment is at record levels, so there is enough money to pay 100% of all benefits for the next 16 years.  Thereafter, there will still be money coming in from the SS Payroll Tax such that benefits will still be paid at some lower percentage.  This means that Social Security is not on life support and benefits will still be paid out.  This all assumes that nothing is done politically to shore up the Social Security fund – there is still plenty of time for politicians to do something.  As we have seen recently, it seems that politicians typically act only at the 11th hour, when there is a cliff they are about to go over.  We haven’t arrived at the cliff yet, though we may be able to see the cliff.

The bad news is that there will be a cliff and something needs to be done.  Some ideas currently out there:

  • Increase the maximum income level subject to the 6.2% Social Security Tax.  In 2018, that maximum is $128,400, meaning that wages above $128,400 are not subject to the SS tax.  If that maximum was bumped up higher, that would help, but it would be another tax on the wealthy, which at some point might not be a viable political option.
  • Increase the tax rate from 6.2% to something higher than that.  Remember that employers match what you are taxed at so that a 1% tax increase on you is a 2% increase in funding to the SS Trust.
  • Increase the minimum age to receive Social Security.  People live longer now (if they don’t get hooked on smoking or opiates or if they don’t engage in gang activity), so maybe 70 is the new 65.  The minimum age for Full Retirement benefits will be pushed up as it is for the next several years.
  • Make benefits subject to means testing, meaning wealthier retirees may not be able to collect their full benefits if they otherwise have enough money to live on.  Forfeited benefits would go back to the trust fund to be given to the needier.   Warren Buffet is an advocate of means testing.


I believe something will eventually be done politically to ensure 100% of Social Security benefits are paid.  The AARP is a very tough political lobby and they will make sure their constituents won’t suffer.  Any political resolution will occur at the 11th hour, with some deadline that needs to be addressed.  I believe there will be a combination of a small increase in the tax itself coupled with an increase in the maximum income subject to the tax.  I don’t see an increase in the age brackets nor do I see means testing.

The more important thing to keep in mind is that you need to save money for your retirement.  You cannot rely on Social Security to 100% fund your retirement.  Prepare for the worst (Save!) and hope for the best (new laws to shore up Social Security).

Labor Force Participation Rate

The Bureau of Labor Statistics and the Federal Reserve Bank of St. Louis put out great data and great charts.  Maybe the St. Louis Fed buys Google Click Ads so that their charts pop up first when you Google a subject, but their charts are great.

The latest chart follows the release of the May Jobs Report on June 1, 2018.  The headline was that the US economy added 218,000 non-farm jobs in May, which caused the Unemployment Rate to fall to 3.8%.  It was the 92nd consecutive monthly increase in non-farm payrolls and the lowest Unemployment Rate since prior to 1989.

The growth in jobs is great news, but what I want to address here is the Labor Force Participation Rate, which is the number of employed plus unemployed but looking divided by the total population over Age 16.  Here is a link to the chart by the St. Louis Fed:


The chart shows that the LFPR has been stalled at between 62.3% and 63% for the past 4 years.  That’s a very tight range for 4 years.


Economists and market watchers are looking at the LFPR to see what happens next (isn’t that always the case?).  The issue is:  If the LFPR remains constant and the Unemployment Rate also remains constant or continues to fall, does that mean wages will rise?  And if wages rise, does that mean inflation will go up?  And if inflation goes up, will interest rates also go up?  Gaze into the crystal ball.


There is evidence that wages are rising.  This website shows that hourly earnings (on a macro level) have increased for 7 months in a row and 11 of the last 12.  However, the annual increase is 2.7%, which is still pretty tame.  One line of thinking is that the increase in wages will incent more of those who are not currently participating to actually participate.  We will see how that plays out, but I’m skeptical.

Aging Demographics

I believe large demographic trends explain a lot of economic phenomena and that the aging workforce populace explains a lot of the decline in the LFPR from the 67%-range during the 1990’s to the current under-63% range.  The Baby Boom Generation is retiring en masse, a lot of them early.  Our overall population is aging – not as much as Japan’s, but it is very significant.  Younger people tend to work more than older people.


I look at the LFPR chart a little differently.  Perhaps the period from about 1978, when the LFPR broke above 63%, until 2014, when it broke back below 63%, was the anomaly.  Perhaps the 63% level is equilibrium – as it has been for the past 4 years.  If you go back many years, the LFPR flirted with 60% in 1956 but didn’t actually rise above 60% and stay there until 1969.  Then it rose throughout the remainder of the 20th Century until reversing and falling during the 21st.  I don’t believe the slightly higher wages in our current economy will incent to non-participators out of their couches.  It would take drastically higher wages to do so, something that isn’t happening in our current global economy.


My take on all of this is that you should Buy Stocks.  I don’t see inflation picking up because labor costs are globalized.  I don’t see the LFPR increasing because US wages are not increasing fast enough and because the population continues to age.  The unemployment rate may go down more but I don’t think it will ultimately result in significantly higher inflation.  Cast your fishing line into the water; get off the pot; use any metaphor you want, but you should be long stocks in this environment – not your entire investment portfolio, but enough so that you are comfortable with the risks therein.


The Retirement Pyramid

This appeared in Kitces.com, a renowned financial blog.  It is called the Retirement Pyramid.  It looks like it was drawn by a grade schooler but there is real wisdom in it.  Here it is and let’s have a discussion about it:



It is hard to read and the top got cut off, so here is what the top of the pyramid says:

Avoid at All Costs!  No!:

  • Market Timing
  • Financial Salespeople
  • Permanently Losing Capital
  • Mingling Politics with Investing

It’s difficult to avoid financial salespeople, and so I would say you should avoid Bad financial salespeople.  As a Financial Planner, I believe most people in any economic circumstance can benefit from the services of a good Financial Planner, and we don’t work for free.  That said, don’t take major flyers with your money, which is how you can permanently lose capital.  As heartily as you hold your political beliefs, over time, markets can perform about the same regardless of who sits in the White House.


The second level of the Retirement Pyramid says the following:

Moderation At Best!:  Current Events and Account Monitoring:

  • Checking your account balance frequently
  • Watching financial media
  • Worrying about your finances

In short, Chill Out!  Take a long-term perspective and everything will be ok.  This is good advice to live by.  Maybe having a cocktail once and a while will help with this.  Financial media can be helpful to traders, but, in retirement, you should not be a trader.  Being a trader can make you tear your hair out, and, as a retiree, you may not have much hair left.


Below the middle line, the tenor changes from negative to positive.  Of the following, it says to Use Freely:

  • Save! Save! Save!  Increase your Savings Rate
  • Compound Interest
  • Dollar Cost Averaging
  • Avoid unnecessary taxes and expenses
  • Diversify your assets and income

You should always avoid paying taxes unless you break the law.  Work with a financial planner to develop and implement a financial plan that diversifies your assets and income sources and avoids taxes all at the same time.  For instance, dividends are tax-advantaged – invest in a diversified basket of steady dividend-paying companies and you will check a number of these boxes.  Dollar cost averaging means don’t put all of your chips on the table at once.  Put your chips in over time.  You like the company but the timing may or may not be right, so you put a little in now and a little more in over time.  It is a good way to build a solid portfolio.


Indulge!  Invest in Yourself $$$!:

  • Read
  • Learn
  • Experience
  • Listen
  • Acquire skills to increase your income
  • Work to control your emotions
  • Focus on long-term vs. expiring knowledge
  • Establish healthy eating and exercise habits

These are the path to leading a good, healthy, happy productive life in retirement.  Work on personal skills and development rather than worrying about your finances.  You won’t enjoy your retirement unless you are healthy enough to do the things you want to do.  You don’t need to go back to college in retirement and become an electrical engineer in order to acquire skills to increase your income.  For example, do you like pets?  Maybe you can start a pet-sitting business in your home.  Watch pets when you can or want to, and go on vacation when you want, and get paid for it.  Taking care of pets is a good skill that is much in demand.


This Retirement Pyramid is part financial advice and part a guide to healthy living.  It is a great way to think about how you want to plan for your retirement.  Start today!


Can a company have a $750 Billion market cap and still be under the radar?  Microsoft seems to be just that.  With all the talk of the FAANG stocks, you don’t hear as much about MSFT, Mister Softee.  All they have done is continued to grow, continued to leverage their domination of computer operating systems, and continued to adapt to the changing software marketplace.  Perhaps they have had a few mistakes along the way, but Microsoft is a true success story and one that hasn’t been written about as much in recent months.



The above chart is a monthly chart of MSFT from about February 2014, when Satya Nadella became CEO, until now.  MSFT has risen from about $38 to about $98 during that time, a 158% increase.  Nadella has led the transformation of MSFT’s mission from “a PC on every desk” to “empower every person and every organization on the planet to do more” – a much larger mission.  While retaining its dominance in PC operating systems (Windows and Office), MSFT has grown in several areas, including:

  • Cloud computing;
  • Gaming (XBox)
  • Social Networks (acquisition of LinkedIn); and
  • Artificial Intelligence.

MSFT has always been an acquisitive company and it remains so today.  It is recently acquired or is in the process of acquiring several AI companies.  “Hitting on all drivers”; “Poised to double cloud revenue by 2022”; “$1 Trillion Market Cap by 2021” – these are some of the quotes from recent Wall Street analyst reports on MSFT.  As well as the stock has performed, perhaps it is poised to perform even better in the ensuing years.  With a diversified stable of products, MSFT is no longer a one-trick pony, and therefore not as vulnerable to competition.

Credit goes to Nadella for moving MSFT forward and positioning it as it currently is.  Nadella’s predecessor as CEO, Steve Ballmer, tripled MSFT’s sales revenue but not its stock price – MSFT was at about $45 when Ballmer took over and $38 when he retired 14 years later.  Ballmer became CEO in January 2000, right before the “dot-com bust”, and remained CEO until Nadella replaced him in February 2014.  Ballmer’s reign also contained the “Great Recession” of 2007-2008.  The point is that Ballmer was the victim of bad market timing, but nevertheless, MSFT’s performance since Nadella took over is in stark contrast to its performance during the 14 years of Ballmer.

The Future

I see MSFT as having a well-diversified product line and as a major player in a number of different markets.  MSFT hasn’t had to testify before Congress about influencing news feeds (Facebook), hasn’t come under criticism for gathering and hoarding personal information (Alphabet), and is not reliant on one product for the bulk of its profits (Apple iPhone).  MSFT has quietly been executing on its strategy and I believe is well-positioned for more to come.


5G is going to be a game-changer. It is going to disrupt the world, and it will be happening soon. 5G is expected to start to be rolled out this year and it will continue to roll out over the next few years.  I believe 5G and all of its ramifications are not priced into the market currently and so there are opportunities to play the 5G roll-out especially on the long side.

What Is It?

5G is shorthand for the 5th generation of wireless technology.  I refer you to this article by PC Magazine for the specifics and technicals.  If you want to further geek-out, read the Wikipedia entry for 5G.  Most smartphones currently operate on 4G, if they are not on WiFi.  5G is a quantum leap above 4G in the following areas (according to the PC Magazine article):

  • Greater speed to move more data;
  • Lower latency to be more responsive; and
  • The ability to connect more devices at once.

New Phones

Your current 4G phone will not be compatible with the 5G technology.  That means as 5G is rolled out and you want to participate in the new technology, you will need to purchase a new phone.  As many phones as Apple sells now, think about how many more they can sell if all of the current phones become obsolete!  If you don’t think this bull market has any more legs, think about that!  The current largest company in the world still may have a lot of room to grow.

Home Internet

I believe this is the most disruptive application for 5G: It can (might?) replace your cable internet provider.  Just put a 5G modem in your house, and Voila!  Internet access that is a quantum leap faster than anything that is generally available today!  Google Fiber, if you are lucky enough to live in one of the very few areas that offer it, offers 1 gigabit of power.  5G will offer 1 gigabit right out of the box, without having to dig up streets or lay any new cables or even connect new wires in your home.  Just plug in your modem and it comes seemingly from the air.

This plays right into the cut-the-cord trend.  Currently, you can cut your cable tv and go to over-the-air networks and streaming services, but you still need to pay for internet access in order to stream.  If and when 5G is made available for home internet, that could literally kill cable tv and cable internet access as we know it.  I don’t like the prospects of companies such as Comcast and TimeWarner because of 5G.

How To Play 5G

If you like the concept that all current cell phones are soon to be obsolete, then you should own stock in the current largest cell phone vendors.  Samsung and Apple are the two largest players, but they together account for less than 40% of the market.  The remaining big players include Huawei and other companies that are difficult to buy.  Even Samsung, as large as it is, is very difficult to buy for US investors.  The easiest way to play Samsung for US investors is to buy the South Korea ETF (EWY), which is about 20% comprised of Samsung stock.  That leaves Apple as one of the purest plays for cell phone 5G.  I don’t believe there will be a new entrant that is currently not selling cell phones who will be a player in 5G phones.

If you like the home internet meme, then I really like AT&T and Verizon, which are likely to become the dominant home internet providers over the next few years through 5G.  AT&T is currently being dragged down by issues related to its proposed acquisition of TimeWarner, but I really like T’s future, and you get a 6% dividend at the current price.  VZ has been performing better than T, and you don’t have the uncertainty of a pending merger.

As for the hardware related to 5G, Intel and Qualcomm will be among the leading US players in 5G.  There are a lot of international firms involved that are harder to play for US investors.  The current issue involving Chinese company ZTE is all about the future leadership of 5G.  I would stay away from the ZTE controversy – there are a lot of other ways to play 5G.


The hype surrounding 5G is not overstated.  The home and business tech world will look much different 5 years from now than it does currently because of 5G.  Keep your eyes open to the opportunities and the possible pitfalls.