Paul H Sutherland http://paulhsutherland.com/blog2/index.php http://paulhsutherland.com/blog2/index.php?entry=12
Japan collapses – sell!

Japan recovers – buy!

Interest rates are going up – sell!

Bonds are going down – buy!

Japan

Japan’s tragedy is on a human scale. The “real” tragedy lies in the fact that people died and others are suffering. Japan’s economic costs are estimated to be between $100 to $300 billion dollars and is not inconsequential. However, Japan’s economy is more than $5 trillion. Putting this into perspective, $1 trillion is equal to $1,000 billion, so in the scope of Japan’s overall financial economy, this tragedy is not economically debilitating. With a global economy of around $61 trillion, it is irrational that a $100 or $300 billion event should move global markets. If Microsoft’s stock dropped by half, that would equal $100 billion. Sad for Microsoft shareholders, but really a non-event for the rest of the world. So why does the tragedy in Japan make investors run from the markets?

Bridges

On the island of Maui, Hawaii, there are 54 one-lane bridges on the two-way highway known as the “Road to Hana.” For a car or small truck, there is no risk of the bridge collapsing under its weight. However, somewhere between the Toyota 4WD pickup and a couple of cement trucks the risk of collapse exists. I would not feel comfortable riding in a cement truck across some of these bridges. If a bridge is rated at 25,000 pounds and I am driving in a 5,000-pound vehicle, I would feel fine. If I were at 24,990 pounds, I would not drive across. Personally, I would want a degree of safety sufficient to compensate me for the risk – perhaps a 10,000- or 15,000-pound margin of safety. Investing is the same way: You want to invest with a margin of safety.

A number of things add a margin of safety to investing:

1. Capital structure (lots of debt = high risk;lots of cash, little debt = low risk)
2. Industry (nuclear energy = high risk; wind, hydro, gas, solar (or combo) = low risk)
3. Company-specific risks (nuclear power station built on an earthquake fault line = high risk; real estate trust with properties leased long-term to the U.S. government = low(er) risk)
4. Management skill, ethics, integrity, culture (BP/Enron = significant management risks; tried-and-true management like Warren Buffett, Bill Gates, Steve Jobs = low(er) risk)
5. Price – i.e., paying the right price (all things being equal, paying 12x earnings is better than 20x) 6) Creating an optimized portfolio through the proper use of asset allocation, security diversification and other portfolio riskmanagement tools
6. Utilizing proven, experienced, successful and educated managers

Management Is the Most Important Risk Management Tool

I am starting to collect stories, concepts and other pieces of data for a new investment book. I am enjoying the continued from page 1 excuse to be introspective about “how we manage” here at FIM Group. I can look impersonally and objectively at our results one security, one trade, one investment and one portfolio at a time and make the following conclusion: Resilient, skilled management is the secret sauce of a company’s longterm success. Poor management can lose money even if the price of their products is rising. With a lot of hard work and a little grace, great management can ride out the storms of business. If you took Bill Gates and Steve Jobs and plunked them into a poorly run business in a tough industry, I am confident that their skills would reward their investors, and the company would thrive. I am equally confident that a mediocre management team could screw up the finest of companies in short order.

How do you quantify fine management? It is both an art and a science. But it starts with virtue, commitment, integrity and authenticity and ends with skills, talent and vigor.]]> http://paulhsutherland.com/blog2/index.php?entry=11
Asia, Asia, China, China, China…

I’ll admit that I am a bit jet-lagged after having crossed the International Date Line on my way back from Sydney, not to mention the sheer exhaustion from having breakfast, lunch and dinner twice in the same day, as well as attending a slew of meetings. But if one more person asks me about China, I think I may explode. Yes, China is going to grow. Yes, it is big and is pulling itself up. Yes, it’s no “joke” that Chinese schoolchildren (and most kids throughout Asia) believe after-school activities are homework, studying and more classes, while American schoolchildren think it’s hanging with friends, Facebook, sports, TV, video games and arguing with their parents. Yes, China’s future is bright, but it’s not at the expense of the rest of us. There’s plenty to go around.

A good friend of mine, Gevas, grew up in Africa. Gevas said that in Africa many governments have an incentive to keep the populace ignorant, and actually don’t mind the “brain drain” of educated people leaving. This offers less challenge to their authority, so that they can continue to plunder the continent’s wealth of natural resources. I think Gevas’ thoughts on this must be kept in our minds as we evaluate the issues around Northern Africa/ Middle East and their quest for popular citizen-engaged governance.

‘Truth Is Always the Victor’

Current entrenched government leaders in Bahrain, Egypt and Tunisia are learning that education, transparency and the people’s ability to connect has a downside. The leaders are blaming (helped by the Internet and cell phones) the West, or their opposition parties for spreading the unrest in the name of openness, engagement and democracy. As communication changes, many areas of the world will experience years of growing pains as a new generation of citizens are raised on social media and more open news sources rather than government’s politicized and propaganda-infused “media machine.” Comedian Stephen Colbert coined the word “truthiness” and has created an industry around political comedy and news as a politicized and self-serving entertainment medium. While there is nothing funny about what is going on in the Middle East – I think truthiness defines the climate of controlled media that is breaking down in that part of the world.

I grew up near a Christian Science church, and we had many Christian Science friends. As a teen, I read Mary Baker Eddy’s book Science and Health with Key to the Scriptures. Recently, I signed on for a trial subscription to The Christian Science Monitor and read a great piece that discussed the Christian perspective of the issues facing Egypt. The article quoted Mary Baker Eddy, and I believe it summed everything up perfectly: “Truth is always the victor.” While the writer most likely had a more “religious-based faith” definition of “truth,” for me it brings up the point that in reality, the truth of an event today, with our communications tools and our interconnected communities, make the reality of an event hard to hide.

‘Truthiness’ Is Out

The world is marching toward a more open society. It’s no longer about us “old guys”; it will be owned by the emerging generation who don’t trust the established media or the so-called “normal” ways of getting to the truth of a situation. Bahrain wants the uprising framed as a religious sectarian opposition-led event, while the common person believes it is about democracy, openness and participation. Of course it is also to end crony capitalism, privilege based on race, caste, family name and subjective favor. Even when analyzing America’s youth, the truth is that they rely on and find more “truth” in what they discover from their friends than they do from established media/news outlets. Like most of the readers of this article, they will come back to realizing that we need to take all information with two bags of salt, and put it through a bit of scientific inquiry.

The Fact Is…Taxi Drivers Are Tolerant

It is fair to assume that democracy is the most logical political form and capitalism is the most logical economic system. Frankly, no matter how you cut it, capitalism is the world’s economic system – even the communists and dictatorships are subject to the rough-and-tumble capitalistic system when they go to trade or engage in economic activity. While some might disagree, I also think that acceptance of racial, ethnic, gender and religious differences is consistent with where the world is headed as we move to a more open society. When traveling I usually sit up front and have great chats with my taxi drivers because they know their real society. Lately, it seems, most of my drivers have sported English as their second language. Many have come from parts of the world that are being challenged with religious, social, economic and ethnic issues. While very firm in their faith, they have consistently seemed tolerant and open to discuss divergent spiritual and religious thoughts. I think there is a disconnect between governments that promote and foster intolerance, fear and xenophobia to keep their citizens in line with the way their citizens really feel. “News” will be sensationalized by the media. You won’t find a news story about the Christian who brings over a nice meal to his Muslim friend at the end of Ramadan. That, unfortunately, does not sell. People are basically good – and reporting on our everyday virtue does not sell newspapers.

News Is About Selling Media/Economics Is About People

If we take the premise of Stephen Covey’s books and writings about the “speed of trust,” and that trust is the key to effectively growing our relationships, business and the world, then we can be optimistic that the events that are unfolding worldwide are birth pangs that will make our world safer and better for business. Naturally, there is significant risk as these countries explode toward an open democracy. This risk is going to be present, especially in the short term, as these countries argue about the meanings of justice, fair trade, regulation, executive power and constitutional integrity. Think about how European investors looked at the Americas as we exploded into a democracy and built our system by trial and error during the 1700s. Keep in mind through the changes taking place in the Middle East that economics is about people and their (mostly routine) everyday movement, not “news.”

As global investors we realize that we cannot hide under a rock and ignore what is going on. Our job is to preserve wealth and have it grow, not have opinions that come true. Upon analysis of the Middle East issues that are even flowing through to China, we see opportunity written all over the current headlines. Volatility is normal, change is normal, cycles in business and social mores are normal. If as investors we embrace change as normal, we will continue to find the opportunity in our changing world. FIM Group is 26 years old, and looking forward to the next 26 years only makes me optimistic. We believe that the world’s changing landscape will be favorable for those who see opportunity – and not just risk – in our future … and that is the truth!]]> http://paulhsutherland.com/blog2/index.php?entry=10
There was one western in particular about a wagon train full of characters, rich and poor, who went seeking a better life. The story was about psychology, faith, stubbornness, trust and truth. During the long journey, the wagon train endured many hardships and was repeatedly attacked by Indians and outlaws. John Wayne played a saddle-weary, leathery ex-military man who had seen it all. He lived hard, but always did what he had set out to do. There was discord among the ranks, and the rich family finally had enough of the fighting and depravation. Despite warnings from Wayne’s character, they turned back anyway. The scene ended with the sight of smoke on the horizon. The next morning the scout came back with a burnt teddy bear that belonged to the family’s daughter, indicating that the family didn’t survive. Of course, the final scene was straight from Hollywood, with the remaining families that “stayed the course” arriving in the promised land with beautiful meadows, running springs and sunny skies.

The investors that panicked out of the market collectively locked in trillions of dollars of losses. But this is not an article about panic or fear – we seem to have plenty of that to go around. Rather, it is about learning. A client asked me a few weeks ago what I had learned from this past year. Her question has since stuck in my head prompting me to articulate what I discussed with her and her husband.

First, we are long-term investors. We don’t manage money market funds, CDs or T-bills as our core business – we use them as tools. FIM Group was not founded on managing cash for clients, we have always been about long-term investing and solid wealth management advice. So our clients are primarily those who wish to accumulate a pool of resources that they can use someday to get through their own “territory” filled with ups, downs, manias, fear, greed, depressions, inflation, recessions, booms and busts. We have grown, because for 25 years we have stuck to our core competencies. When I said that to the client she said, “But Paul, what did you learn?”

I learned that people can collectively panic to an extent much more severe than I could have ever imagined. I manage money consistent with my easygoing, rational and patient disposition. I’ve worked side by side with hedge fund managers that are so short-term oriented that they have more trades in one month than we will have in one year. I have also worked in the brokerage industry where the “product of the day” is what’s important.

Back in the early 1980s, real estate, leverage, leasing oil and gas partnerships were the hot-ticket investments. If you even said the word “stocks,” “bonds” or “mutual funds” to investors, they would have turned and ran. In March 2009, the push was government bond funds and CDs, and the insurance companies were selling fixed annuities – but most people were already savvy due to the collapse of AIG. What I did learn was, based on all the phone calls from clients, that we may have not educated and prepared all of our clients as well as we should have.

While we consistently write about volatility as a side-effect of any long-term strategy, no one likes the downside volatility we experienced up until March 2009. It stands to reason that any person accumulating funds for a long-term need, like retirement, also needs a long-term strategy. Assets fluctuate in value, and to survive the “territory” you have to be flexible and stay the course . . . especially during tough climates. It is a relatively easy feat when the barrage of volatility and depression talk is not present. But realistically, that is the most important time to evaluate the path. So I learned that we need to spend more time discussing volatility, performance, and surviving and thriving as we go through the territory, especially for our new clients. In fact, we actually are going to get quite scientific about the process and are looking to partner with an Australian firm that has spent years studying and creating risk profiles for investors. The other thing I realized was that “everyone can’t manage.” Some CFAs or MBA holders might have all the training and even some experience in the field, but their skills are better for communicating, selling or writing about investing – not actually “doing it.” Suzanne Stepan and I have spent our entire careers as money managers, so our DNA is wired to make decisions.

I learned some startling information from this recent malaise. Investment advisers that pushed indexing and asset allocation were actually championing those investment strategies rather than using them as tools. Why would anyone consciously want a bunch of financial stocks in their portfolio? Or GM, AIG or other bankrupt, unethical or near bankrupt companies? Those investors seem unrealistically ignorant about owning crummy companies in crummy industries, all the while thinking that all stocks are fairly valued. The asset allocators seem equally set on the idea that to be successful or diversified you must own a little bit of everything.At the beginning of the western, the trail master went through each wagon and started throwing out all the unnecessary items – fancy dresses, shoes, a piano, heavy furniture – to ensure a faster, safer journey and to conserve space for the necessary items (like nails, pails, shovels, seeds, livestock and tools) they needed to build a new life. A portfolio that is weighted down by a bunch of retailers, financials and highly leveraged, poorly managed companies is going to have a hard time making it through the territory.

A few years ago my family went on an adventure to the Galapagos Islands. Darwin’s theories had their genesis in the Galapagos, and I will leave this essay with a quote from Darwin. “Nature teaches us that it is not the strongest of the species that survives. It is the one that is the most adaptable to change.” Getting through the territory will take intellect and strength of character, but these qualities will have little value if they are not combined with flexibility.

To learn more please visit www.FIMG.net or call 800-632-5528.]]> http://paulhsutherland.com/blog2/index.php?entry=9
At my investment firm FIM Group ( www.fimg.net) we believe the U.S. will have a slow-growth economy for some time. Worldwide, however, there will be areas of strength and growth like energy, health care, infrastructure and agriculture, especially in regions that are regarded as emerging markets. So as global managers we tend to invest in global companies involved in these industries. Going forward investors will need to be savvier or delegate their management to savvy global managers. At FIM Group we believe that indexing, or just buying the market, is illogical because all that’s available are crummy companies in crummy industries. Why own housing-related investments, retail, tobacco, old-economy manufacturing, banking, finance or alcohol makers when you can own good companies in sustainable industries?


Investors should seek a passionate investment manager who is ethical, honest, has at least 10 years of real money-management experience and loves investing. Don't hire a firm that regards buying and selling mutual funds as management. Hire someone with years and years of real stocks and bonds investment experience. The Virtue of Wealth provides some guidance on finding a good manager (visit www.zenvesting.com)]]> http://paulhsutherland.com/blog2/index.php?entry=8

Gold is an investment that has a place in an investment portfolio and currently we have holdings of gold mining companies in some our client’s accounts totaling between 4% and 8% depending on the clients risk tolerance.

However gold is not a universal “insurance” and needs to be looked at as an investment influenced by supply and demand, manias, and capital flows. Historically oil is the most correlated asset to inflation however some hard currencies, equities, and commodities also have provided inflation protection. High grade bonds can tend to protect from deflation in certain markets.

Gold is to some considered a “carry trade” which means that it is often bough with borrowed money and therefore is influenced by interest rates-low. Bottom line all investments need to be owned for a reason. An investment portfolio’s job is to create wealth or create income for current or future use; gold can help a portfolio meet those goals. Often investors will end up with a “Du jour” portfolio of investments bought because they sounded good at the time, but not coordinated in a rational and well-thought-out and managed investment process. At the end of the day, gold can be added to a portfolio that has its risk and reward characteristics enhanced and evaluated by the addition of gold. Never assume that it is the right investment.]]> http://paulhsutherland.com/blog2/index.php?entry=7 I think socially responsibility is an irresponsible phrase for a more ethical style of investing because it infers that other investors are socially irresponsible. But I believe that there is a balance between the extremes of SRI. Every individual’s ethical framework is different, so after obvious unethical investing like tobacco and alcohol, the arena becomes muddy and gray. As a money manager I try to minimize our impact, but I don’t expect other people to be similarly predisposed. I don’t degrade us because we are using resources, nor do I deny that human beings have influence on the environment, quality of life, and ecosystems. Somewhere between those two extremes I believe there is a balance. I try to attain that balance through a number of ways.
One is I try to come from a point of view that investors cannot do an effective social screen or a rigid selection system on whether an organization is ethically responsible. The oil and gas industry is often targeted as unethical but what I look for are energy companies that realize they are in the energy business and not specifically in the oil business. I look for those that that are trying to help people minimizing their need for oil, while building within their policies an emphasis on true, renewable energy sources all the while being good, corporate citizens. Often those attributes are very hard to locate. What makes it so one company meets the criteria to be owned or not, is purely judgment, and it is not through a tick-off-the-box system.
A lot of social investors have done what I call the “tick off the box”” method of investing. They basically say diversity is important, so they say, “Well, if I have a diverse corporate board that means that we are a more ethical company.” If you have a very diverse board, it does not make the organization any more ethical or responsible than another corporation. You have to look at the ethics of individuals and not make an assumption because a person is of a certain social status, gender, race or religion that they are going to have somehow been beholden with ethical and social virtues. What you want are virtuous, long-term thinkers on the board.
I believe I have to process the attributes of a company on an intellectual level and determine if the investment is balanced and meets our criteria. Most socially-responsible investment companies have significant holdings in the area of health care and pharmaceuticals, and to say that those companies are not marketing drugs the same way that Adolph Coors markets beer is pure shortsightedness. Every company needs to be looked at with scrutiny and with judgment.
Our fiduciary job with each shareholder is to increase their financial security, increase their wealth, and provide a stable income for them after retirement. To me as a fiduciary, it is irrational and illogical to own socially-irresponsible companies. It is irrational and illogical to own a tobacco company that is basically killing people. It is illogical to own a defense company that basically makes products that kill people. I like to say that I try to be economically responsible and whole-brained about the way I invest in our duty as fiduciaries.]]>