Anxiety, Lazy Brains, and Investing

Why invest? Why get an education? Why not just live for today? Why plan, be forward-looking or think about the future? Of course these are loaded questions, but the answer is simple: We must be forward-looking because we live in the future and have no choice but to assume that the world will be here tomorrow, that the economy will not crumble and my home will still be standing. I must assume that my three little, noisy boys will eventually go off to college, and that my wife Amy and I will enjoy playing with our own grandchildren one day. It seems that today, more than ever before, anxiety and worry have taken hold of our American psyche and put us in a “mental” place that’s far removed from reality. 

This anxiety appears to be rooted in current events, creating a pervasive feeling that society is adrift and that nothing is working as it is supposed to. Government can’t seem get out of its own way, and there is a definite lack of leadership both locally and nationally. Compared to past leaders who’ve emerged at important times, like Thomas Jefferson and Martin Luther King, Jr., it seems today that there are few leaders we can point to who are long on actions and short on narrative. Add to this sentiment the fallout from living in an instant information age with a daily overload of bad news – ISIS, Syria, Greece, Kathmandu’s earthquakes – and it feels like we are living in very risky times. We are also living in a time of great discoveries and technological advances – 3-D printing, robotics to name just two – but some Americans view these as threats rather than opportunities. As a result, a number of Americans will simply “give up” and merely choose to “get by.”

FIM Group’s average Balanced portfolio generates more than 4% in cash dividends and interest. FIM Group’s average Balanced Conservative and Yield Income portfolios have yields in excess
of 4.5%.

Brain science teaches us that half of our energy is used by the brain. To save energy, our brain likes to create habits, simplify things that are complex and avoid any challenge that might require a change in the way we see and believe. To me, all this uncertainty creates a bountiful place to invest. And for the individual who thinks and uses her or his brain for something more than surfing the net, gaming or watching sports, the opportunities are boundless. 

If we allow our brains to see what is real, we would see a very different landscape:

1. Our economy is growing and has been growing.

2. It is true that uncertainty/anxiety have a downside, but the upside is that people save and invest more. This helps raise prices on investments and lower interest rates, but the effect is very uneven as most investors interpret it as a trend. They tend to buy what is going up or has gone up already instead of what is a good value. This creates a lot of opportunity for those investors 

3. People are content to live more modestly, by design or by necessity. This is good long-term as it builds more resilience into our economy, because more stable households equals a more stable country.

4. We are educating ourselves like never before. College enrollment rates over the past 30 years have increased from 26% to more than 40% today. Career and technical education is booming as everyone from giant manufacturing companies to the local building trades are scrambling to find people who have skills. Community colleges are retooling themselves to provide education to the new jobs that are needed.

Last week I spoke with Priscilla Were, who runs a private boarding school in rural Kenya, about the importance of values and character-building in education. She said providing a child an education costs about 10,000 Kenyan shillings (or $100) per student, per year. I asked how this was possible, and she explained that the school has a garden, which supplies students’ food, and that the students make their own school uniforms.

America is expensive – so we assume it is expensive everywhere. With a $100 annual education expense, developing communities will advance quickly.  The bottom line is that the world’s knowledge economy continues to drive forward, setting the stage for greater productivity and resilience into the future.

5. America is rich. It is estimated that total world wealth is USD $241 trillion (2013) and the USA’s portion of that is USD $100 trillion. So if you’re an American, be grateful. To be among the wealthiest 50% of our world requires a mere USD $4,000. 

6. We rise to the challenge. Despite hypothecations and forecasts from the media on how we were all doomed by Ebola, it is being contained and under control even though the World Health Organ-ization (WHO), local governments and others responded a bit clumsy at first. While AIDS has devastated the world – we have found drug therapies that allow a child with the virus to live a full, active healthy life. Polio is non-existent in most of the world – and the cause of polio’s rare return is ignorance – people not immunizing their children by choice. 

Why It Is Rational to be Optimistic

I will not chat about investors or investing in general – rather, I will discuss FIM Group’s portfolios. We all eat, and while some believe that a calorie is a calorie, thinking that a calorie from a hamburger, Coke or potato chip has no different health benefits than a calorie from almonds, blueberries or kale is just plain silly. Dieticians call the unhelpful yet tasty and attractive calories from soft drinks and processed foods “empty calories.” And like empty calories, there are “empty investments” that sound good and look attractive, but are not really investments at all. Some investments become way overvalued – just like a food that requires (i.e., costs) a lot of calories to give any real nutrition, there are investments whose prices are so high that they have little ability to add fuel or nutrition to a portfolio. So let’s talk about FIM Group’s “healthy” portfolio characteristics.

A Healthy Portfolio 

A friend of mine owns a tea company. I asked her to give me a blend of teas that “might taste like dirt – but are good for me.” I drink hot tea all day, not really for the taste but more out ofhabit and the need to stay hydrated. The tea doesn’t taste like dirt, but it’s good for me – it’s doing its job. All of our portfolios are designed assuming clients are patient and understand that investments will fluctuate in value, and who understand that investing is a long-term, multi-year endeavor with no finish line. For younger, working clients, the job is to “invest in more growth-oriented investments that grow wealth without the constraint of needing current income, with less emphasis on dampening volatility.” FIM Group-managed port-folios are not designed to look attractive – they are constructed carefully, opportunistically and with a long-term and risk-managed focus one investment at a time. All of our portfolios are designed assuming clients are patient and understand that investments will fluctuate in value, and who understand that investing is a long-term, multi-year endeavor with no finish line. So let’s look from the top down at what we own and are attracted to, and where see the opportunities today.

1. We are attracted to cash dividend-paying securities. FIM Group’s average Balanced portfolio generates more than 4% in cash dividends and interest. FIM Group’s average Balanced Conservative and Yield Income portfolios have yields in excess of 4.5%. 

2. We favor companies that have solid balanced sheets with reasonable debt levels. A good balance sheet allows companies to weather the storms,
attract good employees, provide
stable dividends and grow. 

3. We like companies that we understand – real estate, energy, food, utilities, healthcare, technology and companies in basic industries where we can ascertain their prospects, threats and opportunities. 

4. We like good management that is values-driven and whose interests are aligned with investors. We favor companies that are family-owned or controlled, where management is incentivized long-term to benefit the shareholders and think about their social contract with society, their customers, the commons and their employees. FIM Group’s largest holdings are in family-controlled holding companies that have a few major shareholders, or smaller companies that are often managed/controlled by the founder or founder’s family. 

5. We look for companies generating lots of cash and cash flow or that have
a lot of assets that are selling at prices much less than their breakup value or the present value of the future cash flows and income and profits.

There Are Always Bargained-Priced Investments Somewhere

So notice that we did not mention in the five points above anything about indexes, ETFs (exchange-traded funds, or mutual funds), the S&P 500, passive management or asset allocation. Though these are considered “hot” or “nutritious” areas in which to invest by today’s standards, to us they are empty, expensive and oversimplified solutions. For our team at FIM Group , one of our fiercest beliefs is that price matters. This dictates that we look at each investment one at a time and constantly assess their appropriateness in client portfolios. 

We know that life, the economy and investing are cyclical and that prices rise and fall. We also know that anxiety, greed, and lazy brains can move asset prices far above and below the levels justified by changes in their fundamentals. Our job as an investment team is to bring flexibility, discipline, and patience to the work of managing healthy portfolios for the long haul. We must be willing to cut through the negativity that pervades society, take advantage of sentiment and behavior-driven price swings, and yes, be willing to lose a beauty contest or two along the way.