Category Archives: Investing

The Tech and Bitcoin Bubbles.  A Dual Threat?

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Today is Black Friday, the biggest consumer FOMO Day of the year.  Shoppers go nuts to track down the best deals ever on that special something that someone can’t live without.  Items that will cost far more tomorrow, if not this afternoon.  Never mind that many of the items will be available for much less on December 26th.

Think back for a moment to the 2003 to 2007 period, our previous economic FOMO period.  We had low mortgage interest rates and lax underwriting standards for them.  Home buyers flocked to the cheap easy money, often with no income or other documentation required.  The housing demand generated by these loans drove prices up significantly.  Buyers were paying prices for homes and borrowing amounts they could not economically afford. 

Interest rates began climbing in this period, and by 2007 had reached levels that made the payments on the prevalent adjustable-rate mortgages unaffordable.  The owners of those houses could not make the new payments, and fewer new buyers could afford to buy.  This reversed the uptrend in housing prices and put many owners underwater, meaning they couldn’t make their payments or even sell the home.  It accelerated into a housing price collapse.

The crisis, which first hit banks and then the investment markets, tipped the economy into a recession.  Rising unemployment rates put more homes into foreclosure and deepened the recession.  It was the dual events of an artificially fueled housing bubble bursting and high unemployment from a real recession that brought the whole house of cards down, ending up with the the worst economy the US had seen since the Great Depression.

Fast forward to today and we face another FOMO Dual Risk.

The investment markets are currently floated by a small handful of companies in the tech sector.  If this bubble were to burst, many levered investors would be hit with margin calls.  They would face two choices: Sell those stocks into weakness often locking in losses and further weakening share prices.  Or, use cash or other capital to meet the margin calls.

But…

Today a notable amount of “other capital” is in Bitcoin and other similar crypto.  Crypto is not cash, but a commodity and would need to be sold to pledge against a margin call.  This could create a run on the bank in crypto, depressing those values – who knows how far.

And there we have it, another Dual Threat risk.  This could be even bigger than in 2007.

Stay Tuned…

The Bottom Line:  Understand all the risks.

–Michael Ross, CFP®

Convert The Dip…

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Many of you may be familiar with the “Buy the Dip” strategy certain investors use.  It means that when a security or general market takes a dip in price, they use it as an opportunity to invest more money at a lower price – taking advantage of a temporary discount.  In other words, they see it as being on sale.

Deciding whether to convert a traditional IRA or 401(k) into a Roth is often a complex decision.  The decision process must consider current and future projected income, tax rates, deductions, tax preferences and other related programs such as student financial aid and Medicare costs.   Frequently, when a conversion strategy is developed for larger accounts, it will be executed over several years, to avoid moving into high tax brackets and loss of other preferences and benefits.

When a conversion is executed, it is usually done by transferring the current assets from the traditional account into the new Roth account, rather than liquidating the assets and transferring cash.  The income that is recognized is the value of the assets on the date of transfer.  The value being transferred is taxable to the account holder in the year the transfer is made.  Often, the plan will include transferring the assets with the highest short-term appreciation potential first to reduce the income recognized at transfer time.

Now let’s circle back to Buy the Dip.  Once a decision is made to convert a certain value of assets in a given tax year, it is a smart strategy to transfer those assets when their value is low.  That means more assets can be transferred with the Financial Plan’s dollar limit for that year.

Next time your favorite investment in your traditional IRA or 401(k) takes a dip, instead of just buying the dip, Convert the Dip.  When it recovers in price, the gain will be tax free forever.

The Bottom Line:  Convert That Dip.

–Michael Ross, CFP®

There’s A New Fry Guy In Town…

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For quite some time, I have been pontificating two things – well, OK more than two things, but these two came together for me today. 

I believe that investing in non-publicly traded startup and early stage companies offers the potential for returns that can dwarf the returns one can reasonably expect by investing in public companies.  There are many reasons for this, but the reality is, by the time the company goes public, via an IPO, the new investors are buying out the earlier funders and founders.  In other words they are selling to you.  What does that tell you?  These investments come with a much higher risk – requiring much more homework and verification, and statistically the failure rate is higher.  It’s an arena where nobody (except maybe founders) should put all their eggs in one basket.  However, all it takes is one real home run and the duds are long forgotten. 

Besides the higher risk, there is an additional caveat.  Most people cannot legally invest in them.  According to the SEC, you must be “accredited”.   You don’t have to pass a test, just have a high level of income and/or assets.  In other words the rich get richer.

I have also been a fan of AI Robotics.  AI is promising us the moon.  Most of it on a practical basis is still a bunch of hype and truly useful applications to date are far and few between.  I guess if you have a HS term paper due tomorrow, it could be helpful.  The ability to produce smart robots is one of the areas that hold short term economic promise.  A robot that can efficiently do complex non repetitive tasks in a varying environment has real value.  Most of the companies developing and producing these are relative cottage industries.

Today I stumbled across a company called Nala Robotics.  I did some digging.  They are based in Illinois and make a series of fast food kitchen robots.  You can see for yourself here; www.nalarobotics.com  The videos on their site are really cool.  I could only find information on one round of funding for $1.9 million, although I suspect there must have been more than that.

It’s hard to cull information on small closely held companies without really digging.  Since, I am not doing this on behalf of a client, I did a quick search.  Pricing info was vague, but they offer one of their products “The Wingman”, a robotic fryolator for rent at $2,999 per month.  If you do the math, that’s less than what it would cost in salary, taxes, benefits, and workman’s comp for one month of a $15/hr. minimum wage fry guy being available for all the hours a location is open.  I would guess there are other efficiencies.  No sick days. The ability to react instantly to demand as food is being ordered.  It even automatically cleans itself.

It’s hard to tell if Nala will be the grand slam home run in this field.  I would guess the makers of these machines that get the order from McDonalds and the other biggies will go to the head of the class.  It does seem that we are on the precipice of an explosion in this genre and many other AI robots.

This is clearly happening.  Stay tuned.

The Bottom Line:  Rosie Meets Edison

The American Experiment…

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Earlier this week, I attended the Exchange Conference in Miami Beach.  One of the speakers was Jeremy Grantham, of GMO, a well-respected, multi decade institutional investor.

He went to great lengths to point out that while the equity markets in America are overvalued by many historical measures, we have the best economy on the block.  In fact, he noted that since 2015 the rest of the industrialized world has not participated in our economic boom.

He didn’t seem to be able to come up with a reason why.  For instance, they also had low interest rates and went on a Covid fueled fiscal spending spree.  Yet they almost all have slowed down in recent years.  Why not us too?

It made me think.  What is different here?  After pondering a bit, I now have a theory.  The Tax Cuts and Jobs Act (TCJA) took effect in 2018 and brought the corporate income tax rates down from the mid to upper 30’s to 21%.  It is a huge cut by percentage. 

It did a few things.  It brought our corporate tax rates down to levels comparable to most of the rest of the developed world.  No longer would our multinational companies have to keep profits earned overseas, offshore to avoid more taxation upon repatriating them, or be at a disadvantage competing with foreign companies.  It increased profits and Return on Equity for many, so they could raise additional capital at more favorable terms.  Most crucially, it created more cash and retained earnings that could be reinvested in growth, development, and technology.  This created jobs, efficiency and growth.

Was this the catalyst?  Did companies largely divert spending from Uncle Sam to investing in their own growth, productivity, and efficiency?  This investment has been despite higher interest rates.  Efficiency equals economic growth.

The overall earnings of the S&P 500 firms have moved up some 50%+ since the TCJA took effect.  This has meant more economic growth, more jobs, and more innovation, such as AI.  This is the real trickle down.  Every American benefits.

The Bottom Line:  Capital serves us better in the private sector than in government hands.

The Real AI Productivity Boost…

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Yesterday, I was shopping in my local BJ’s Warehouse club.  I turned the corner down a new aisle and halfway down was this skinny machine that looked like a taller version of an oscillating vertical heater, and it was moving in my direction.  As I got closer it started emitting a chime that unlike most warning sounds was rather pleasant and not intrusive.

It had graphics on it that identified it as Tally, the Inventory robot.  It moved slowly down the aisle, stopping at each skid for a few moments and then moving on to the next.  It was very unobtrusive to shoppers.

Having a keen interest in AI robotics, I did some research.  It is manufactured by Simbe Robotics, a non-public company, that appears to have completed a few rounds of private equity capital raising.  Simbe also makes a similar robot for Stop and Shop supermarkets, called Marty.

The robot is part of a system that does inventory tracking, out of stock management, and planograms (making sure things are where they should be).  According to Simbe, it can scan 15 to 30 thousand items per hour, with a claimed 99% accuracy rate, compared to humans at about 65%.

I wondered what it cost?  While Simbe and BJs were tight lipped, some sources claimed the Stop and Shop version was $35K per copy.  This would be plus maintenance and repair, electricity, and the software to make the system work.  My BJ’s is open 96 hours per week.  If a $15/hr worker was assigned to this, it would cost them about $82K per year (including 10% for FICA and Workman’s Comp). 

It seems the age of the affordable AI robot is upon us.  How long will it be until we get its big brother that restocks the shelves?  If all of this seems like a great place to invest in the next wave of productivity and economic growth, it is.  Accessing investments like this is another matter. 

As a non-public company, Simbe and other similar companies can only directly solicit investments from “Accredited Investors”  (meaning already successful).  As they get larger, additional funding comes from private equity firms and funds, who’s investors are not only accredited, but can also pony up rather large minimum investments, often, $500K, $1MM, or more.  It often puts the most exciting and ultimately successful investments beyond the reach or access of almost everyone. 

The first time the general public gets to invest is the IPO, where they are buying out the private equity, which have usually made the lion’s share of gains for the foreseeable future.  Sadly, the game is rigged against most investors by the SEC, who is protecting the public from having an opportunity to make potentially life changing investments in the private market.   Thank your elected officials for their help.

The Bottom Line:  AI Robotics is the real deal.

–Michael Ross, CFP®

Buy Low, Sell High…

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An investment makes sense only if you see a return – either the value increases and/or it produces income of some type.

Most investments have a sponsor, syndicate or other entity that has a stake in you investing in it now.

Years ago, when traditional open ended mutual funds were more popular, the sponsor at many professional dinners I would attend was invariably a wholesale sales representative for one of them.  In exchange for paying a fee, they would get a few minutes to address the group.  Without exception, they would cite a study done by Dalbar that said if you missed the 10 best daily market increases every year, your return over time would be much less than if you were always invested.  The implication was that nobody knew when those days would be or if something was overvalued in the market, and we should always be fully invested – in their fund, of course.

When I would ask what the return would be if we missed the 10 worst days of the year, they would reply that they didn’t have that information and would get back to me.  They never did.

I continue to see that thinking all the time from the investment sales side.  It doesn’t matter what the investment is, to them there is never a bad time to invest in whatever they are pushing.  That’s how they get paid. 

In many cases, the sales squad did not live or work through a bad market or economic cycle.  In other words, they weren’t born yet when inflation was even higher than the last few years, interest rates exceeded 15%, or the stock market crashed in 1987 and melted down again in 2001.  Often, they weren’t adults when the real estate market collapsed in 2009.  They say “that won’t happen again”, and “it’s different this time.”  That’s how they get paid.

Today, I see real estate syndicators acting as if prices and rents always go up.  They don’t.  I see stock analysts telling us that any company associated with “AI” is a good bet.  I heard that with “dot com”, and it wasn’t true.  Every situation is unique.

I am not making a blanket statement that the sky is falling.  My point is that there are always risks, and at different times and in different situations certain investments do not warrant your capital when evaluated on a risk return basis.  My job is to make sure my clients make smart investments that work for them.  Not to pay the sales squad.  That’s why I get paid.

The Bottom Line:  Filter the sales noise to invest successfully. 

–Michael Ross, CFP®

ESG Investing

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ESG investing is a popular theme today.  It involves allocating investment capital to companies that operate on policies of Environmental, Social & Governance (ESG) principals fitting progressive, liberal, socialist, or woke criteria or values.  These policies are often put ahead of earning profits. For profit corporations exist to make money for their shareholders.  They have an obligation to act lawfully and ethically, but other than that, their responsibility is to the shareholders.  Other “stakeholders”, be they employees, customers, communities, nations, etc. should only have their wishes considered to the extent doing so has a direct or indirect benefit to the profitability and growth of the company.

That said, in the absence of a directive by the client, any Fiduciary Advisor with the power to invest in, or influence or vote shares in a company supporting ESG, Equity, or Affirmative Action, without being able to draw a direct line on how that vote or initiative specifically benefits that company, is in violation of their fiduciary duty.  Failure to put the best person in a job, taking actions to reduce sales or revenue, or increasing costs in the pursuit of ESG policies, have no direct benefit for the company, and is rarely if ever, in the interest of the investor.

The Bottom Line:  Fiduciaries have the obligation to put the investors interests first.

–Michael Ross, CFP®

Pennies On The Dollar

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In a capitalist economy, recessions are a good thing.  Just like in nature, the weak put a drag on the strong.  Well capitalized businesses can benefit from a recession.  It is their reward for being well run.

A recession or economic downturn is a painful thing.  People lose their jobs and income.  Assets are often reduced in value.  Businesses that sometimes took decades or generations of development go belly up.  But they are also a healthy process.  Excesses are reduced or eliminated. Resources are freed up for investment in more productive and new endeavors.  Efficiency is rewarded. 

Whether you are looking for places to invest, or you are an entrepreneur seeking to grow your business, a recession can be an opportunity.  Sometimes you have to take one step backward to take two steps forward. 

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How I See It (Part 1)…

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Predictions For 2021 – Part 1

I don’t have a crystal ball, but being well into my 4th decade of helping people navigate the financial world, I like to think I have a good feel for what might be coming down the road.

We all know the pandemic will mitigate and end in the coming months, but what will be left it its wake?  And what is the new normal?  Let’s discuss some of what we might see and encounter.

As the economy fully reopens and people stop sheltering, there will be changes.  Some will be more temporary and some will be permanent.

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