The Amygdala is the part of your brain that plays a “primary role in the processing of memory, decision-making, and emotional responses, including fear, anxiety and aggression.” (Wikipedia). Studies of human behavior related to investing show that the amygdala kicks into high gear during periods of stock market volatility and/or during market corrections. Fear generated by the amygdala is why people tend to sell while the market is cratering, buy when the market is at a high, and generally not to act rationally.

Economic Man vs. Amygdaloid Man

Most economic theory has the base assumption that the investor is always rational and always acts in their own best interest. For instance, the “efficient frontier” theory says that an investor will always choose an investment that provides them for the highest possible return for the lowest possible risk. This is all very rational and machine-like. Nobel laureate Richard Thaler calls this the “economic man” theory, after which he proceeds to shoot holes in that theory. Economic Man assumes that such man doesn’t possess an amygdala, or at least that they are able to squelch any input that the amygdala and its onslaught of emotion and fear will have on one’s ability to make rational decisions, especially during volatile markets.

Contrast “Economic Man” with “Amygdaloid Man”, wherein most if not all decisions are made by gut instinct and ruled by fear. Which do you think is closer to the way most investors make decisions about how and when to invest their money? They probably know they should be more rational and they even may try to do so, but the amygdala is very strong and more than counteract any rules or rationality one tries to use when they invest.

Quantitative Strategies

It is for this reason that the investment world is moving in the direction of quantitative, computer-based trading strategies, specifically to try to keep the fear and emotions out of the decision-making process. If an investment manager relies purely on rules, or, better yet, on proven quantitative models for how and when to buy or sell securities, studies show that such an investment manager is more likely to achieve the ultimate goal of investing, “buy low and sell high”, and thereby make money for their clients and themselves.

IMO

We are in a period of higher stock market volatility. Please try as best you can to keep your foot on your amygdala and to not get too involved with the day-to-day ups and downs of the stock market. One good way to keep your amygdala at bay is to work closely with a professional investment manager (such as myself!). If you work with a professional and at least talk through decisions you are considering, you are much more likely to make a better, more rational decision and to establish goals, plans to meet your goals, and to stick with your plan.

This article from one of my new favorite websites, Medium.com, was written by a former tech entrepreneur who sees similarities between 1999, the last year of the “dot com” boom prior to the crash of that market that started the next year, and this year. The author provides anecdotal evidence, such as rich tech guys shopping for private jets, company CEO’s achieving celebrity status, and a strong tech jobs market, as evidence that we are perhaps about to face a stock market crash similar to that which happened in 2000-2001. I disagree with the author’s assessment, and for the following reasons:

• Capital Markets Are Tighter: Yahoo.com had its IPO in 1996 after having been formed a year prior. Pets.com, DrKoop.com, Webvan.com, and other examples from 20-25 years ago were all nascent companies with nothing other than an idea and easy access at the time to public capital markets. Compare that with recent IPO’s such as Uber, Lyft, and even Facebook, all of which were well established with years of an operating record (albeit one of net losses) prior to their IPO’s. The point is that not everything with a .com is being financed now, and for those companies that are financed, the weeding out process is taking place in the private markets now, prior to IPO. There is still plenty of failure among start-ups, but the difference is these are not publicly-traded companies. One could argue that the pendulum has shifted too far in that it is now overly difficult to navigate into the open waters of the public markets. Regardless, retail investors are no longer investing directly into start-ups as they effectively were in 1999 and just prior, and the media does not focus on start-ups that fail prior to IPO.
• Job Skills Are Lacking: Young people who can code are earning $6 figures (as the Medium.com author laments) because they are unique in that they possess the minimal skills needed to break into the tech world. Ask any employer and the lack of skilled workers is among the most difficult problems they face. Our educational system is not properly geared to turn out workers with the skills needed in today’s marketplace. This is not to defend these kids and their haughty attitudes – there is no justification for acting like you are God’s gift when you land a job as a coder that pays well.
• Celebrity CEO’s Are Not A New Thing: Corporate pioneers have often been eccentric. Think of Howard Hughes. J. Pierpont Morgan, Henry Ford, and John D. Rockefeller were all well-known figures during their own times. Despite the “politics of destruction” that we have today and the patches of resentment that follow the titans of industry, Americans have always had a high level of fascination and respect for industry veterans who have helped to make their own lives better or more interesting. I don’t view the current focus on Zuckerberg, Bezos, Musk, et. al, to be historically out of the ordinary.
• Market Fundamentals Remain Good: Corporate earnings are strong and are getting stronger (perhaps at a somewhat slower rate than before; the P/E Ratio on the S&P 500 is currently under 18 (per the WSJ), which is not overly high and is lower than a year ago; and interest rates are low, as the 10-Year US Treasury yields less than 2.5%. Our economy remains strong and there is little indication that a recession is near or that the stock market is about to crash.

IMO

Of course, I could be wrong, and we could start a big correction tomorrow. Geopolitical risks seem to be driving a higher level of market volatility, and these risks could escalate at any time. Debt at all levels of government is already high with no indication that deficit spending will abate. So, there are risks out there, but I don’t see 2019 as a replay of 1999.

Last week I wrote how important it is to have a plan for each day and to execute on that plan. Today I am writing about how to prioritize all of the tasks that you have or that you give yourself on any given day.

Rock, Pebbles and Sand

I am inspired by two articles: This one by Jari Roomer posted on Medium.com, and this one about the Rock, Pebbles and Sand theory that is currently popular in the blogosphere. Both have a similar message: that you need to prioritize based on what acts or tasks will be the most consequential toward achieving the most important goals that you have. These are the “rocks”. Move the rocks first, and make it a priority to move the rocks, because they are the largest and require the most thought and energy, but have the most impact. Once you have moved the rocks to where you need them to be, then you can turn your attention to the pebbles (somewhat easier to move but still lumpy), and then to the sand (fine particles that fill in the lumpy spots) if and when you have time. In his article, Roomer discusses the 80/20 rule, where 20% of your daily tasks result in 80% of the impact you desire. Like rocks.

Do the Biggest Task First

Another variation on this theme is to complete the biggest task first, when you are freshest of mind and have the most energy. I am a morning person so I like to work first on those tasks that require the most tasks or energy. Once I get those done, I feel like the remainder of the day will be easy relative to what I have already accomplished, and that if I don’t get much more done for that day, I can consider my day to have been at least a small success. For me, talking to people on the phone or in person doesn’t require as much energy as does just sitting there and thinking about writing or solving problems, so I tend to schedule my conversations (if I have a choice) for later in the day.

Allot a Finite Time

Roomer says one should go so far as to allot a specific amount of time for each task during the day. He refers to Parkinson’s Law, which is that work tends to expand to fit the time allotted to it. Setting a goal of 2 hours, for instance, to accomplish a task also is a way of taking control of the situation and not to let the event take control of you. When you have an in-person meeting or a call, you typically set a deadline for when it should end. Why not do the same thing for a task that you are working on? If you have an urgency to finish something, self-imposed or not because you have other things to do, then you may devote more mental or physical energy to that task and you may do a better job with it. Doing so may also allow you to pay attention to some of those pebbles and sand that otherwise you may not have time for.

Create Value

Roomer’s advice is, “The only thing that matters is the value you create.” He means Value in the broadest sense, not just building something that someone else will buy for a higher price. Think about everything you do in terms of creating value for yourself or others, and you will see what you do every day in a different light.

IMO

The “Rock, Pebbles and Sand” concept provides you with a good visual way to look at your tasks and to decide which are the most important. Roomer’s article is more specific as to how to prioritize. Both get to the same point, which is that some things are more important or more impactful than others and that you should prioritize those things so that you will feel a sense of accomplishment.

I was unfortunately reminded of this maxim recently. Make sure you check your account and asset beneficiaries with every life event, and at least once every year! You may say you don’t what happens after you die, but you really should want your money that you worked so hard to make or save or your life insurance proceeds that you paid for all of these years to go to the person that you intend for it to go to. It would be a shame if your wishes don’t happen.

Life Event

Marriage, divorce, birth, and death are the most frequent life events. Things like beneficiary statements tend to fall through the cracks with a divorce because you are probably in a mindset to move forward and not to look back and deal with stuff during a bad part of your life. However, you could be talking lots of money, and if assets are not divided up by family court, and even if they are, it is very important to make sure you change your beneficiary statements after you divorce. Then, if you remarry, you will need to change them again if you want your new spouse to inherit your wealth. Have you had children or even grandchildren during the past year that you want to include in your estate? Make sure their names are included as alternate or sub-beneficiaries if you can do so.

Family Trust

Although it is not a “life event”, the formation of a family trust is of similar magnitude. Make sure your beneficiary statements reflect your new family trust, at least as the alternate beneficiary, since some accounts require the spouse to be the primary beneficiary. It may be worth it to obtain the spousal consent required and to make the family trust the primary beneficiary, especially if you and your spouse are the trustees of the family trust. Why do this? Because assets in a family trust will avoid probate, whereas assets not in a family trust may not avoid probate.

Beneficiary Statement Takes Precedence

You may say, “I have a Will that says my spouse inherits everything. Why should I change my beneficiary statements?” The answer to that is that beneficiary statements take precedence over a will for specific accounts. If you have life insurance, the insurer will pay the benefits directly to the named beneficiary, regardless of what the will says. A dirty little secret is that a will isn’t worth much if your accounts have named beneficiaries, which they likely do, and if you have a family trust. A will is more useful if you have or own assets in your own name free and clear and wish them to pass to a specific person, and even then they may need to go through probate.

How

How do you change a beneficiary? Simple. Go online to the home page of the bank, brokerage, insurance company, etc. where your account is. Likely there is a “Forms” tab. Find the Change of Beneficiary form, fill it out (make sure to include the account number), sign it, and send it in. While you are on the site, you can log into your account and hopefully it will tell you who the current beneficiary is.

IMO

I can speak from personal experience that these beneficiary designations fall through the cracks and need to be proactively updated more often than you probably do. If you don’t keep them updated and then you tragically pass away, it could leave a real mess for your loved ones to deal with at a time when they likely aren’t emotionally equipped to do so. Save them all a big headache and make sure your beneficiaries are correct and current while you are still alive.

This article on Medium.com proposes 5 steps that you should do each day to plan what you want to accomplish for that day. I agree with it wholeheartedly. In order to be successful, however you define your own success, you need to have a plan for each day and determine how and when you plan to accomplish your daily goals.

Especially for People On Their Own

I believe a Daily Plan is especially important for those of us who are on their own, meaning those who don’t go to a steady job every working day. If you have a job and work for someone else, perhaps your day is planned for you and your only plan is to complete the tasks provided to you. However, if you are on your own in any capacity, Daily Planning is a must. If you are on your own, there will be many distractions that will be more fun or interesting than what you really need to accomplish on any given day. I speak from experience on this matter.

Sense of Accomplishment

Your goal every day should be that at the end of each day you will have accomplished part or all of what you set out to accomplish at the start of the day. If so, you should feel good about yourself. What if you get to the end of the day and you got done part of what you hoped to but not all of it, and you are angry with yourself for not getting it all done? Perhaps you have set too high of a goal for yourself. Maybe there isn’t enough time in the day for you to get done all that you desire. If so, for tomorrow and future days, set more realistic goals. You want to feel that you move the pile forward every day, even just a little bit, and you should give yourself a pat on the back for having done so, even if you perhaps moved that pile only 3 inches instead of the 6 inches you had hoped to.

IMO

What does all of this touchy-feely babble have to do with financial planning or investment management? Well, the second word in financial planning is “planning”. Whether you plan for your entire financial life and well being or whether you plan just for what you hope to accomplish today, the planning element is an essential part of the process. Both Ben Franklin and John Wooden, the Wizard of Westwood, said some version of, “Failing to plan is planning to fail.” Essential advice from two different American sages!

In my last blog post I wrote about Howard Marks’ book, “Mastering the Market Cycle”. Howard Marks is the legendary investor who has led Oak Tree Capital Management for years. One of my critiques of the book was that Marks didn’t lay out a case for where we are now, in his opinion, though I noted that such was not the purpose of the book. This post will spell out where I think we are now.

Roller Coaster

I wrote that I like a roller coaster analogy better than Marks’ pendulum analogy. I believe that we are still in the “heading upward” part of the economic roller coaster. Others have said we are in the “late innings” of a rally that started 10 years ago. I don’t like the “innings” analogy because it implies that the game will soon end. I believe the economy still has room to run. GDP growth in the US has accelerated from the 2%-range to the 3% range. Unemployment has declined to 3.6%. Wages are up, albeit less than some may like. The 10-Year US Treasury Bond is in the 2.5%-range, which is not high enough to choke off borrowing. Such statistics are not indicative of a looming recession. The stock market is a leading indicator, and while it has its wobbles (mostly due to uncertainty related to world trade), it has touched record highs recently. Investors do not believe we are soon headed to recession, or else they wouldn’t be buying. Could things change? Of course, but the statistics are strong. Some investors will always believe we have had too much of a good thing and so they will sell at the first indication of trouble ahead. Howard Marks believes you can be a cautious buyer during an upswing such as I believe we are on now, and I agree.

Debt Bomb

Marks writes that, for every downturn, you can usually look back in time and see some sort of debt bubble. For instance, the last recession we had was caused by the subprime loan crisis. Now we have an emerging issue with student loans as default rates have risen. Not to downplay it, but the student loan bubble has been known for years. It will not sneak up on us like the subprime crisis did. $1.5 Trillion of outstanding student debt is a lot, but it pales in comparison with the $22 Trillion of US Government debt, plus the unknown Trillions of dollars of state and local government debt. Government debt is, I believe, the debt bomb that could sink us all. No country has ever been $22 Trillion in debt, so we don’t know what would happen if problems occur. So far, so good. Some cities have declared bankruptcy, but municipal bankruptcies have declined during the last 5 years. Some states don’t look particularly good (Illinois), and their debt has been downgraded. If and when the stock market crashes, I believe we will look back and point to growing government debt as having been the spark that lit the flame.

Demographics

The other macro issue that has been written about (but not enough in my opinion) is aging and declining demographics. Other developed countries such as in Western Europe and Japan are really having trouble growing because their replacement birth rates are well below the 2.0 that is needed to sustain their own populations. The US is somewhat better off at 1.8 and is at about 2.0 when you factor in in-migration. It is very difficult to grow an economy more than 2% when your population isn’t growing. Speaking of government indebtedness, it is increasing difficult to fund Social Security and Medicare and other government programs that rely on younger people effectively paying for older people when there aren’t enough younger people paying into the system.

IMO

I believe we are still upward trending and we should all look to buy cautiously. Make sure your portfolios are diversified among asset classes, and certainly that you don’t have too much of your net worth tied up in the stock of one or just a few individual companies. The icebergs on the horizon aren’t stuff like trade with China or a 10 Year Treasury Note at a rate in excess of 3%. Instead, we should be watching to make sure our Federal, State and Local governments are still able to services their debts and that they (hopefully) don’t add too much to their already choking level of debt. We should also keep an eye peeled for even more declines in our birth rates as well as the ability to keep Social Security and Medicare solvent.

I just finished reading “Mastering the Market Cycle” by Howard Marks, the legendary head of Oaktree Capital Management. I have had the pleasure of hearing Howard speak in person a couple of times, and he is very engaging and funny. Howard comes from the University of Chicago, the same school as Milton Friedman, so Howard’s economics are relatively supply-side and “conservative”.

Pendulum

One of Howard’s core theses in the book is that markets move in a pendulum. Too much pessimism begets opportunities, which leads to buying and stock market rallies, which eventually leads to irrational exuberance, which leads to selloffs and stock market corrections, so we end back with too much pessimism. Back in the trough where we started, but maybe a little higher than above because the economy usually has positive growth. Here is a photo of a graph of Howard’s pendulum that I drew myself (isn’t it lovely?:

Pendulum or Roller Coaster?

I agree with Howard that markets run in cycles, and that pessimism can be overdone which can lead to great investing opportunities. However, I take issue with the pendulum analogy. A pendulum implies that the forward and backward movement in markets is even, that it takes as long for a bull market as it does for a correction. History doesn’t back this up. Bull markets can take years or even decades; we are currently in a bull market that started in March 2009. Corrections, instead, are a short, sharp shock. Even the 40%-50% correction of the Great Recession occurred over only about 2 years from 2007 to early 2009,. Stocks take the stairs up and the elevator down. Now, the thrill with a roller coaster ride is on the way down. That’s not so with the stock market, so I will give you that flaw in my analogy. Also, on a roller coaster ride, you usually disembark at the same place where you got on, and that’s not the case with the stock market. However, the pendulum analogy also implies an even arc, which Howard also doesn’t imply. So neither analogy is perfect, but I like the roller coaster better because market corrections are much more violent than are bull markets.

Not a Straight Line

Another problem with both the pendulum and roller coaster analogies is that both imply that the way up and the way down are either straight lines or parabolic arcs that one can easily discern. The reality is much different. As we all know, the market wants to deke and head fake us every millisecond. Instead of a straight or parabolic line, the more accurate representation is that of a Richter Scale readout, such as this:

Inflection Point

Because of the market volatility that represents like a Richter Scale readout, it is very difficult at any given time to figure out where we are within the cycle. If it was easy, then there wouldn’t be any discussion among the Federal Reserve Bank board members about what to do about interest rates. More than that, we would all be millionaires. However, I agree with Howard’s point that fortunes are made at the inflection points, where bear markets turn to bulls and vice versa, along with the intestinal fortitude to invest contrary to then-prevailing market conditions. Another investing legend, Paul Tudor Jones of Tudor Investment Corporation, says the same thing.

The difficulty is that we aren’t at an inflection point on either side. At any given time, it is much, much more likely that we are in the middle of a bull market or, less likely, in the middle of a correction. What does Howard Marks say you should do then? During an upswing, he says, go ahead and buy, but be very cautious. During a downswing, look for an opportunity to buy, and don’t worry so much about buying at the very bottom. At every circumstance, Howard says, the decision should be whether the price you are paying is more or less than the intrinsic value of what you are buying. If you think you are getting a bargain, then buy it, no matter the market conditions. The market will eventually come around to your evaluation. This also takes intestinal fortitude, and it is much easier said than done.

IMO

Howard doesn’t tell us where he thinks we are right now – are we in a bull market, or has the bull run its course and so we are at an inflection point? That is not the objective of “Mastering the Market Cycle”. However, I have some thoughts on this that I will spell out in my next blog posting.

As of April 30, there is film and there are reports of insurrection and protests in the streets in Venezuela. Guaido, the man who would be President and who is supported by the US and many other nations, is exhorting Venezuelans to take to the streets to overthrow the incumbent Maduro government. Guaido is also seeking support of the Venezuelan military.

Pessimistic

I expect Guaido’s efforts not to succeed and for him to be arrested. I expect that the socialist/communist Maduro government to survive and retain control. I expect the Venezuelan economy to continue to fail and for its people to continue to be repressed. I am pessimistic because Maduro is backed by many bad actors, including Cuba, Russia, and Iran, who won’t hesitate to use force including ground troops to keep their puppet Maduro in power there. Unless the US is willing to match force with force and for the US government to withstand being put down as an imperialist power bent on war, never mind that the Cubas, Russias, and Irans are also bent on war, then our man Guaido will be the loser along with the Venezuelan people and Maduro will remain.

Refugees

In February 2019, the United Nations estimated that about 3 million Venezuelans, or about 10% of its pre-strife population of 30 million, had fled the country. Many more have left since then, and many more will flee as this unrest and repression continue. Most are fleeing to other South American or Spanish-speaking countries, with neighboring Colombia the destination of the most refugees. The US must and is helping these refugees at their destinations. This is in contrast to Venezuela and the Maduro government itself which has turned away humanitarian aid because the acceptance of such would indicate that their socio-economic experiment has failed.

Lesson

There is no investment or financial planning lesson to be learned here, other than to avoid going to Venezuela and to avoid owning its currency. Venezuela is an OPEC member and has vast oil reserves which are not being produced, which is resulting in somewhat higher world oil prices. Venezuela will not get its oil production back on line any time soon so don’t look for a drop in prices just yet.

The lesson here is with Socialism. Maduro and his predecessor Chavez have implemented Socialism and Socialist economic concepts properly. We are all seeing what happens to an economy and to a people when Socialism is applied. Socialism sounds like a great economic theory to the academics who tout it and to the bleeding heart, guilt-ridden, and revengeful populace who want to tear down those who have been successful above them. Power to the people, right? Now we have some politicians here in the USA who believe Socialism is the right way to go here because they know a better way to make it happen. I implore you all to look at what is happening in Venezuela and understand that something like that can happen here in the US if we accept as a whole that Socialism is the way to go. Socialism has resulted in the deaths of millions upon millions of people over the past 100+ years. Socialism has resulted in miserable economic conditions every time it has been tried. Don’t let it happen here in the land of freedom and free enterprise, the USA!

Analysts and media talking heads often act ambivalent, nonplussed or even disappointed when Apple reports its quarterly earnings. Such as, “Apple reported 2nd Quarter 2019 revenue of $58 billion, which was down 5% from the same quarter last year but in line with expectations.” Ho-hum, their revenues were less than last year’s same quarter, which is something we expected. And, la-di-da, their profits for the quarter were $11.6 billion, also about what we expected.

Admire It In Awe

Instead, let’s take a step back and just admire Apple’s revenue and earnings. $58 billion of revenue and $11.6 billion of earnings during the quarter after Christmas? That is incredible! It doesn’t seem that the iPhone era is dying out any time soon. Even absent any new blockbuster products since the iPhone in 2007, Tim Cook and Apple have been able to produce and execute and create a profit machine that is without parallel.

Future Cash Uses

Investors seem happiest about Apple’s announcement as part of their earnings report that they intend to allocate $75 billion of their cash hoard in order to boost dividends and stock buybacks. Apple had over $80 billion of cash and short term investments on its balance sheet as of 12/31/18, and with the cash they generate through product sales, Apple should have no problem achieving the $75 billion dividend/buyback goal. This move also shows that Apple is maturing as a company, although it may also show they are having difficulty developing new products. This bears watching next quarter and beyond.

Shareholders

Shareholders seem to agree with my outlook rather than that of the naysayers in the peanut gallery. Apple’s stock rose from about $200 prior to the earnings report to about $210, an increase of about 5%. Shareholders appear to see a rosy, highly profitable future with Apple. The iPhone era may be slowly fading, as some in the media say, but it isn’t gone yet and it has a long, highly profitable remaining life.

5G

I own an iPhone (also a MacBook Pro), and I have recently noticed that my iPhone sometimes is receiving 5G mobile internet signals since I live in a densely populated area. That’s nice, but my phone isn’t a 5G phone, so while it may be getting a 5G signal, my phone isn’t able to take advantage of the speed that 5G offers. As 5G continues to roll out, guess what? Anyone who wants to completely take advantage of 5G service will have to buy a 5G phone. Reports are Apple will begin to offer 5G-capable phones sometime in 2020. I like what 5G offers, and I like the concept of Apple customers trading in their current phones, even the latest Generation X phones, for 5G-capable phones. Another potential future mother lode of cash for Apple.

IMO

Kudos and congratulations to Apple and its management for this tremendous achievement! Though you may disappoint the analysts who follow you as well as some in the financial media, most people love your products and are very proud and excited for you.