I think about investments a lot ... which makes sense given my profession.
Yet, there are three key investments I think are more important than any monetary investment you can make.
The first is in yourself - in your physical and mental health. I recently spent a whole month introducing my approach.
Physical and mental health was a major topic at last weekend's Genius Network Annual Event in Arizona. I enjoyed listening to speakers like Peter Diamandis, Andrew Weil, Christopher Voss, and Dave Asprey - which brings me to key investment #2.
Find Your Genius Network
"You are the averrage of the five people you spend the most time with." - Jim Rohn
I have always believed that you can predict a lot about your future, based on the quality of the people you spend the present with. That is why I think participation in quality peer groups is critical. Peer groups help us set higher standards for our behavior, help us aim higher in our aspirations, and they help us stay better focused and committed to big-picture goals.
I belong to several executive and business leader peer groups like Genius Network, EO or Strategic Coach—groups that double as advisory boards, counselor’s offices, and idea factories. They allow me to see, hear, and discuss things I don't normally think about, talk about, or even notice. Peer groups bring blind spots to my attention and keep me fully connected to trends that are transforming industry on a global scale.
I've gained partners, life-long friends, and ideas that will last a lifetime. I've also started taking my son, Zach, to these events so he can get a headstart.
Dan Sullivan, founder of Strategic Coach, met my son and proclaimed "The book reader!"
Good memory.
Which brings me to my third key investment - and the one I'm most proud of.
Spread The Wealth
It is not enough to have a good mind; the main thing is to use it well. -Rene Descartes
Like many parents, I wanted to teach my children that, to a large extent, they control what happens to them. One of the first ways I did that was to set up a "game" for them to earn video games. Some parents try to limit the amount of time their kids spend watching TV or playing video games. Instead, my kids earned their games by reading books. Here is a photo from way back then.
Paid With Play.
Here's how it worked. Every 10 books earned them a video game, and every 100 books earned them a video game console. When they finished a book, it was their right, and my obligation, to take them to the bookstore for us to pick up the next book together. Likewise, when they finished the requisite number of books, it was their right, and my obligation, to take them to the computer store (does anyone remember CompUSA?) for them to choose whatever game (or console) their heart desired.
How Can You Encourage a Jump to the Next Level?
“Don’t just read the easy stuff. You may be entertained by it, but you will never grow from it.” – Jim Rohn
There came a point when I wanted one of my sons to start reading grown-up books. He was comfortable reading a certain type of book, and didn't want to read the kind of books that I read. So, I created a bonus system that counted a particular book as three books. I didn't force him; I just let the easier path to a reward "whisper" in his ear what to read. Once he finished that, he never went back to teen fiction.
It's a great way to learn about your kids.
I used the bookstore to get a sense of how the boys were doing. For example, I might say "I notice that you read five books in that series, maybe you'd like this book". Or, "That sure is a lot of science fiction; what was the last biography you read?" For the most part, though, I didn't care what they read. The key was to get them to want to choose certain books for their own reasons. Ultimately, their preference meant they were learning to love reading - and once you love reading, you'll eventually branch out on your own.
It Puts Them In Control of Their Destiny and Rewards.
My younger son likes competition. He also broke or misplaced many things. So, in order to earn back the Game Boy unit that he lost, I challenged him to read five books in five days. These weren't easy books either. It was designed to stretch him, and also to teach him that he could read a book a night. The bet was that he either finished all the books in the allocated time, or none of them counted towards games or Game Boys. On the other hand, if he read a book a night for two weeks, not only would he get to have his Game Boy back, the books would count towards a game too. It worked like a charm, and we were both happy.
So, Who Got the Better Bargain?
To end the game, as they entered their teenage years, I upped the ante a little. 500 books meant they got a laptop of their choice and had beaten the system. Both boys cashed in ... and probably felt like they were taking advantage of their dad. I got what I wanted, though; my boys love reading, and I was able to teach them two key ideals.
- The secret to growth is to constantly challenge yourself
- You can accomplish anything you put your mind to … one step at a time.
That is an investment that pays dividends for a long time.
November Round Table With John DeTore - Part 2
Peak Capital is running an online roundtable in November with our CIO John DeTore, John Mauldin, and Sam Stovall. You can check with them to get the full answers from the various panelists, but I wanted to share some of John's answers ahead of time. I previously shared Part 1. This is Part 2 and will finish this piece.
November 2019 PCM Roundtable
Peak: Consensus suggests the U.S. economy is slowing and that trend will continue. What might cause an unexpected rise in GDP going into 2020?
John: Well, a cascading set of trade deals would now set us up for that. It would be politically beneficial for Trump to wrap them up soon. So that means 1) he will try really hard, and 2) other countries (and his political adversaries) will use that to their advantage. I have no idea who will win that one. For instance, look for the house to ignore USMCA until the election.
Peak: The Fed takes its cue from the economy, so it is unusual with virtually full employment and strong wage growth they are cutting rates, and everyone expects QE4. Any non-consensus views about the Fed's policy going forward?
John: Well, they are cutting rates not because the economy is weak, but because they figured out that they overdid it in 2018 by raising the rate. They started out too low, they raised it too much, and are now in the process of fixing it.
Peak: Earnings season started strong with better than expected earnings from banks. Are initial results going to be reflective of the broad market's earnings for the remainder of 2019?
John: Earnings are not going to be a problem for us.
Last year, earnings benefitted from very substantial corporate tax relief and deregulation. This will continue for several years, but the benefit is front-loaded, and the tailwind will ease off.
We fall into the trap of looking at year-over-year EPS growth to judge the strength of our public companies. They are earning good money! Profits are not being driven down by any undue systematic force. Even if they don’t grow fast, they are still quite profitable.
Peak: Looking out 12 months, 1 month prior to the 2020 election, do you believe the stock market will be higher, lower, or generally flat from today's level?
John: The market assumes Trump will win and very much will want Trump to win, if only to avoid the painful experiment with the far-left policies of the current Democratic candidates.
You would think Trump would be unbeatable given the success of the economy and a democratic candidate pool that is oddly positioned to the left of the Democratic party in general.
But there really is Trump Derangement Syndrome (TDS) in the country today …don’t remember there ever being a President with such venomous detractors since Nixon … right before his resignation. So, we can’t assume. And Hillary might get into the race which will cause the market to take off if only for the entertainment value.
The answer to the question is that I am biased to the market being higher. If it looks like Trump will probably lose the market will have a hard time with this and could be off quite a bit.
Peak: The search for yield has not gotten any easier in 2019. What concerns do you have for pension plans and retirees who require steady income?
John: A lot of concern. Long-term rates, in fact, act as a negotiation between generations. Retirees, who need income, lend their life assets to young families, who borrow for home formation. As discussed earlier, long-term rates are too low.
While “too-low” rates do in general stimulate the economy, lots of awkward or even negative side effects occur:
Not to sound all 50’s about it, the solution for income for retirees (that don’t pursue active management) might be to seek out strong US public companies that have significant dividend yields. The S&P yield is now competitive with bonds. Remember also that we have gone through a multi-decade process of accepting that stock-buybacks are often preferred by investors to dividend yields. You don’t just get the dividend payment, you get the buybacks in the form of capital appreciation.
Those who are interested in alpha should find approaches that will work in the new environment. The three major sources of return available to typical U.S. investors are bond yields, the stock market, and a return from active management.
As yields fall, active management must work less well to keep up. The bar has been lowered.
There has been a mass exodus from active management into index funds and ETFs. So many people I talk to say they don’t want to take the risk of active management. But a S&P index fund has more risk than most retirees should take with the core of their assets. Active management in general needs a careful new look by investors.
Peak: Switzerland, Germany and Japan have negative yields going well out on the yield curve. Do you expect negative yields at any point in the U.S.?
John: No … but I didn’t think they would go as low as they have so far either.
I’ve heard educated arguments that falling yields are a counter-intuitive result of too much government debt. But this just seems wrong-headed to me. I brought it up earlier: the yield of bonds is set by supply and demand. Supply is certainly up given our deficit spending, but, counter-intuitively, rates are down. I am left with only one good answer: demand is up more than supply.
My suspicion is that the culprit is the post-2008 waves of regulation with its haircuts to allowed leverage, and complex capital ratios that favor first-world sovereign bonds. I see no reason why so many would be willing to hold a bond at negative rates unless they really had no legal choice. The sky is not falling, there are many great places to invest capital for positive rates.
To answer the question, sooner or later we will better understand why negative rates happen. We should try and fix it. If we don’t, it's probably a matter of time 'til it happens here.
Peak: Correlations between stocks and bonds this year have made maintaining a diversified portfolio relatively easy. Anything on your radar that may make this more difficult in the future?
John: Bonds obviously respond to changes in interest rates. Stocks, through the P/E ratio, also respond to interest rates in the same way. Lower rates mean a higher P/E, all things being equal.
In periods of rapid rate changes or big changes in inflation expectations, the two asset classes will be correlated because they are both responding primarily to rate changes. Both will have positive returns when rates drop.
Hmm … but right now the market has refused to play this game. While the yields on bonds are in many cases at ALL TIME LOWS, the corresponding yields on stocks are near average. It is as if the stock market is saying: “these really low bond rates are crazy ... this can't last for the next 5-10 years … I’m waiting this out.” If the market ends its obstinance and plays along, IT WOULD NEED A 50x P/E multiple. It might even be saying “The stock market is rational, but the bond market is a bubble.”
The stock market is responding to the EPS side of the equation, though. When EPS come though unexpectedly, the market rises. When perceived growth increases the market rises (and the bond market falls).
In addition, the market has been really (too) preoccupied with politics and the political divide in the country right now.
This adds up to a low correlation between the stock and bond markets. It is lower than usual and will eventually go back to normal.
Catalysts that would cause low correlation to rise:
Peak: If I gave you a magic wand that allowed you to change just one thing about the financial markets or investing, what would it be?
John: (I genuinely, seriously wish I had invented high-frequency trading back when it was fun and innovative. I promise I would put my $B’s to good use.)
But seriously, I wish we would pass legislation (tax or regulation) that made it attractive to spinoff companies rather than merge them. Many evils in our economy stem from too few firms that are too large and influential (drugs, tech, banking). This is doable and would affect income disparity more than any of the proposals I hear from politicians. It would add many more senior and middle managers who are talented and can drive innovation better with some independence.
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