Reboot Your Cyber Security

On the Money:
 

“What amazes me more than any spectacle of boom-and-bust is our capacity as a species to witness speculative bubble inflating and bursting – or, to have read about the most notorious case studies, such as Tulipomania or the South Sea Bubble – and yet fail to remember the inevitable outcomes.”
 
          — Ace Greenberg, former CEO of Bear Stearns

             (from his memoir, The Rise and Fall of Bear Stearns)

“It’s a frightening thought, Frank”
 
The ultimate signpost — that’s what flashed to the world last week. The Federal Reserve completely caved. What does this mean? Is it a good thing? How should we be positioned? 
 
Last week I discussed these questions with my partner Steve Korn, Fielder’s Chief Investment Officer. You can listen to our conversation HERE.  
 

 
Here are some of the highlights: 
 
Steve Korn:  “The Federal Reserve is in the process of doing something that’s never been done before in the terms quantitative tightening. This extra three trillion dollars that they added to their balance sheet they’re now slowly taking that away…  And the ramifications of which no one knows what may happen. So we’re in uncharted waters with respect to the Federal Reserve pulling back the punchbowl … and I would argue that what we saw in December was the start of that.
 
… In December the current Federal Reserve Chairman Jay Powell made some comments to suggest that he would not at all change the quantitative tightening and the path they’re on… (But) after the market gets wonky, and stocks are down, and assets are down … he reversed course… Now rate hikes are kind of on hold… So it is a complete reversal… 
 
If we thought that our government was going to be conservative and take a moral high road, yesterday put a nail in that coffin. They are going to continue to support asset prices and markets, because not doing that could lead to complete chaos…
 
Frank Byrd:  Governments don’t get elected by cutting benefits and raising taxes. The path of least resistance is to stimulate and accept higher inflation, which of course is a slippery slope…
 
Steve Korn:  With the baby boomers now starting to retire … we are just demographically entering a period where our spending naturally is going to go up a lot more… Does the government now get religion and take the moral high road?  And do we have to have increases in taxes? Definitely possible if Democrats take charge in 2020. But do we reduce spending? I’m skeptical personally. But that path would be highly deflationary into rising debts… I just don’t think it’s the likely outcome. 
 
Or the second path is we keep spending, whether we raise taxes or not, and our Federal Reserve and our government effectively continues to use the printing press to create more dollars to put more money into the system… and assets are off to the races…. we keep growing…
 
So what do you do? Right? What do you do if the federal government can prop up asset prices?… The dirty little sin is the retiree who is just clipping coupons on fixed income or (living off of) utilities dividend stocks thinking that they’re safe. They are completely wrong footed if that’s the case. The value of their income will be eroded away. And ironically that person would be better served, although much more volatile, to own assets that will inflate with the asset inflation… There you’d want to be in real assets. You want to have real estate, equities…
 
Frank Byrd:  So the question is, looking forward, what do we expect to happen? … The key question that we all have to ask ourselves is: Do you believe that assets — and by that, I mean stocks, bonds, real estate …  stuff … owned stuff —  Do you believe assets or cash will outperform in the decade ahead? That’s the key question. What do you believe? … We believe that central banks will succeed in their global coordinated efforts to debase cash.
 
Steve Korn:  It’s a frightening thought, Frank. It’s really frightening.
 
Frank Byrd:  And that means you want to own stuff –  whether it’s companies — public or private  — stocks — whether it’s real estate — stuff —  assets….
 
You can listen to our full conversation here:  
 

HEAR FULL AUDIO

Importantly, we discuss why one should prepare – and potentially hedge – against higher volatility in asset prices.  Further, we share thoughts on whether it makes sense to sit on the sidelines and wait for a chance to buy assets at cheaper prices. 
 
Please reach out if you’d like to discuss how to best position your own affairs for a more volatile, inflating world. 

Yours in the Field,
 

Frank Byrd, CFA

Disclaimer: While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein.

Since 2007, over two thirds of the world’s economic growth has come from China. It is thus critical to understand China looking forward. Fielder’s Chief Investment Officer, Steve Korn, and I have conducted extensive research on China over the past decade. We understand the nuance – or the “yin and yang” – of the country. There is both great opportunity and great risk. 

On the one hand, we believe some of the greatest innovation and growth may well come from China in the decade/s ahead. On the other hand, we are cautious given what we believe is a debt-fueled real estate bubble that, in time, may dwarf the crisis felt by the US and Western markets in 2008. 
 

You can listen to a replay of Steve and I discussing this subject in greater detail HERE.

Not Your Grandfather’s World
 
Is your portfolio stuck in the 1980’s? Do you basically have your grandfather’s portfolio? Figuratively speaking, are you invested in Wal-Mart in an Amazon world?   
 
Extending the analogy geographically, are you invested in GM without even considering Toyota? That would be silly, considering GM’s market capitalization ($53 Bil) is dwarfed by Toyota’s ($196 Bil).
 
Most investors are under-invested internationally. Consider that over half of the world’s stock market capitalization is comprised of companies outside of the U.S. Furthermore, three quarters of the world’s GDP is derived outside of the U.S. 
 
Nevertheless, U.S. investors have allocated only ~16% of their portfolios to international stocks.* That equates to making an outsized “bet” that the U.S. will out-perform in the coming decades. Granted, in the past decade, that has been the case: US stocks have indeed outperformed international stocks.* 

International companies, however, have been growing their sales faster than U.S. companies in the aggregate. And international companies are a better value. You can buy more earnings for your investment dollar.**

The next 20 years will surely look different than the last 20 years. Is your portfolio looking toward the road ahead? Or in the rear-view mirror? Let us know if you would like some help adjusting its view. 

Yours in the Field,
 

Frank Byrd, CFA

*Per Morningstar research (estimate of investor allocation to international stocks is as of 2017).

**International companies, however, have been growing their sales faster than U.S. companies in the aggregate. And international companies are a better value. You can buy more earnings for investment dollar.**

Disclaimer: While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein.

“Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.”

      ― Nassim Taleb, Skin in the Game

This week I was interviewed by Dan Ferris on his podcast. The topic was founder-led companies. Dan wanted to know why we believe this is a special universe that improves the odds of long-term success.

You can listen to the podcast HERE. (My part begins at minute 24:15.)

In the interview, I make some of the following points:

We want to invest alongside people who have a track record of success, have significant “skin in the game”, and have incentives closely aligned with our own (as shareholders).
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Founders Are Different
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The person who gave birth to a company is often best equipped to nurture, lead, and inspire the people who comprise the company.  Founder CEOs are more likely to have the will and the power to make tough decisions that go against conventional wisdom. This can lead to bolder product innovations, more inspired team-members, happier customers, and even better capital allocation decisions. 
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Some Good, Some Not
 
Research shows that founder-led public firms have historically invested more in capital expenditures and generated more patents.  They have also generated better long-term stock returns historically.* 
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However, not all founders are created equally. Some are past their prime. Some don’t have “skin in the game”. Some run unprofitable businesses.
 
Skin & Soul
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It is not just skin in the game that matters. Soul in the game matters too. Founder-CEO’s are more likely to have it. They are often driven by a longer-term vision and sense of legacy. When a CEO has skin and soul in the game, we trust that their interests are better aligned with ours as shareholders.
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Values

Investing in founder-led public companies also aligns with our personal values. We want to invest in businesses that are innovating  –  that are creating new and better technologies and services that make all of our lives longer, safer, easier, more efficient, and more enjoyable.
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Our Approach
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Fielder Capital has developed a proprietary strategy that invests in a diversified portfolio of founder-led companies. This is one of several strategies that we may employ within a client’s portfolio (when appropriate).
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To receive our report on founder-led companies, including a list of the most notable research we’ve identified on the subject, simply reply to this email with “report please”. 

To hear the podcast interview, just click HERE.  (My part begins at minute 24:15.)

Happy Fathers Day! 

Yours in the Field,

Frank Byrd, CFA 

*Two notable examples of research on founder-led stocks are:

• Zook, Chris; Allen, James. The Founder’s Mentality. Harvard Business Review Press. 2016.
• Fahlenbrach, Rüdiger. “Founder-CEOs, Investment Decisions, and Stock Market Performance.” 2007 (revised 2009).

For a list of other supporting research, you can download our full report HERE.

IMPORTANT DISCLAIMERS

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HISTORICAL RESULTS ARE HYPOTHETICAL.  Past performance discussed in most of the above referenced research on founder-led companies is from back-tested hypothetical results. They do not reflect actual trading in real accounts. Future performance may be materially lower in actual client accounts. Since back-tested performance does not represent actual performance, it should not be interpreted as an indication of such performance.  Actual future performance of the strategies referenced in the text and links above may be materially lower in actual client accounts.  There are inherent limitations with such hypothetical back-tested results.  For instance, such results do not reflect the impact of alternative market and economic scenarios.  Nor do such hypothetical results reflect how an investment adviser’s decision-making process managing actual client money might negatively impact actual results.  Furthermore, back-tested performance has the advantage of the benefit of  hindsight, which actual portfolio performance does not. 

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MAY BE RISKIER.  A portfolio of founder-led stocks may invest in far fewer stocks than a traditional market index, such as the S&P 500 (“the market”).  Further, such a portfolio may typically have a higher percentage allocation in smaller and/or higher risk stocks.  Accordingly, a portfolio of founder-led stocks will likely experience substantially more price volatility than a traditional market benchmark.  It may thus not be suitable for certain investors.

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NOT A SPECIFIC RECOMMENDATION.  The reference to any specific company or stock in the text or links above is for informational purposes only.  It does not constitute a recommendation for investment in any individual stock.  Fielder does not maintain an opinion on the merits of any particular stock mentioned and warns they could be very poor investments in the future. Fielder’s employees or its clients may hold a position in some of the stocks mentioned herein. Please refer to Fielder’s Form ADV for more detailed disclosure.

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GENERAL:  NEITHER FIELDER CAPITAL GROUP LLC, ITS PRINCIPALS, ITS EMPLOYEES, NOR ANY ENTITY MENTIONED HEREIN CAN BE HELD LIABLE OR RESPONSIBLE FOR ANY OUTCOMES RESULTING FROM ACTIONS OR INACTION ARISING AS A RESULT OF REVIEWING THE ABOVE MATERIAL.  FIELDER CAPITAL GROUP LLC IS UNDER NO OBLIGATION TO NOTIFY YOU OF ANY ERRORS DISCOVERED LATER OR OF ANY SUBSEQUENT CHANGES IN ITS OPINIONS.  THE INFORMATION AND COMMENTARY PROVIDED IN THE STATEMENTS AND LINKS ABOVE ARE FOR INFORMATIONAL PURPOSES ONLY.  NOTHING THEREIN, INCLUDING ANY CHARTS, TABLES AND GRAPHS, CONSTITUTES INVESTMENT ADVICE OR ANY FORM OF RECOMMENDATION, AND SHOULD NOT BE CONSTRUED AS SUCH.  NOR DOES ANY OF THE ABOVE CONSTITUTE A SOLICITATION TO BUY OR SELL ANY INSTRUMENT OR TO ENGAGE IN ANY TRADING OR INVESTMENT ACTIVITY OR STRATEGY.  ANY PROJECTIONS, MARKET OUTLOOKS OR ESTIMATES ARE FORWARD LOOKING STATEMENTS AND ARE BASED UPON CERTAIN ASSUMPTIONS.  OTHER EVENTS WHICH WERE NOT TAKEN INTO ACCOUNT MAY OCCUR AND MAY SIGNIFICANTLY AFFECT THE RETURNS OR PERFORMANCE OF INVESTMENTS MENTIONED HEREIN.  ANY PROJECTIONS, OUTLOOKS, OR ASSUMPTIONS SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE ACTUAL EVENTS WHICH WILL OCCUR.  FURTHER, THE VIEWS AND OPINIONS CONTAINED HEREIN MAY BE CHANGED AT ANY TIME WITHOUT NOTICE. YOU SHOULD NOT RELY ON THIS INFORMATION FOR TAX, LEGAL, ACCOUNTING, OR INVESTMENT PURPOSES.  THIS DOES NOT PROVIDE ADVICE CONCERNING THE SUITABILITY OR VALUE OF ANY PARTICULAR INVESTMENT IN ANY SECURITY, STRUCTURED PRODUCT, FUTURE, OR OPTION, OR REGARDING ANY INVESTMENT STRATEGY. CERTAIN INVESTMENTS REFERENCED IN THE TEXTS OR LINKS ABOVE MAY BE UNSUITABLE FOR CERTAIN INVESTORS.

“The best fighter is not a Boxer, Karate or Judo man.  The best fighter is someone who can adapt on any style.” 

          ― Bruce Lee

Dear clients and friends:
 
Four years ago, I announced that Fielder was entering the business of helping individuals and families manage their assets and financial affairs. Why enter this business?

 

The Inspiration 
(or Exasperation) 

After the 2008 financial crisis, friends and relatives often asked me what they should do with their money. Some shared what their financial advisers were recommending. It made me cringe. Many of their strategies struck me as naïve extrapolations of the past rather than forward-thinking. It seemed like people were paying high fees for questionable advice that was riddled with conflicts of interest. 
 
Then I got mad. It made me recall what happened to my grandparents. Growing up I watched them slowly go broke. Initially, they were quite wealthy. My grandfather sold his cotton seed oil business in the 1960s and retired. He figured that he had more than enough money to live off his interest. Through a combination of poor planning and inflation, their wealth dwindled. By the time my grandmother reached her 80s, she was broke. How did this happen? What could they have done differently?  These questions haunted me as a young man.    
 
After the financial crisis, I realized that many people faced a similar type of threat. Central banks were engaging in unprecedented financial repression, robbing savers of interest income and inflating asset prices. People desperately needed thoughtful, objective guidance.  Rather than rise to meet this demand, many traditional firms seemed too wed to their lucrative, conflicted legacy business models.  
 
Moreover, the world was changing. I realized that if I was going to thrive – and help others thrive – I needed to change too. I could not afford to be anchored to legacy business models, cost structures, or mindsets. I needed an independent mindset, a totally flexible investment mandate, and a low-cost structure. In short, I needed to be adaptable. This is why I launched Fielder’s private wealth business four years ago. I wanted to help people in a way other firms appeared unable or unwilling to do. 
 

What the Billionaires Do

Billionaires often hire their own Chief Investment Officer (CIO) to manage a dedicated “family office”.  The family office works for the billionaire, not a bank or brokerage firm. It decides if and how to use firms like JP Morgan or Goldman Sachs (and shields the billionaire from their sales pitches). The family office also advises in other areas such as insurance, debt, and estate planning. 
 
Fielder aims to provide this type solution to families who do not have the scale or appetite to build and manage their own family office. Rather than a single family bearing the full expense of our infrastructure, it is shared among our collective client base. 
 
Over the past four years, Fielder has grown from serving one client to 37 client families. We manage over $185 million on their behalf. Our capabilities have grown significantly as well.  Last year, Steve Korn joined as a Partner. Steve and I have known each other for over 20 years. He brings significant and relevant experience. Before Fielder, Steve was a CIO for two separate family offices.    

Adaptation

Markets, economies, and politics have changed – and are changing – dramatically.  Now is not the time for extrapolating the past into the future. We must adapt to a new environment. Consider …
 
 

The Past 4 Decades: Since the early 1980s, we have been blessed with favorable demographics (baby boomers and women entering the workforce), falling interest rates, falling tax rates, and rising risk appetites. This gave us the gift of rising asset prices (stock, bonds, real estate, etc.). 
 
The Present: Yesterday’s mid-teens interest rates have fallen to today’s zero bound; yesterday’s workers are today’s retirees; yesterday’s free-market politicians are today’s populists. Central banks are experimenting with more aggressive financial repression. Interest rates in Germany, Japan and other major economies are now negative.  That means savers literally pay to own a bond. 
 

Not that this necessarily foretells hardship ahead. Perhaps we are blessed with low inflation and steady growth for years to come. It is possible. But so is the opposite. Our mandate is to help clients balance their assets in a way that contemplates different potential future paths. We think about potential downside, while seeking to maximize exposure to the serendipity of human innovation and progress. 
 
The only way to thrive in a fast-changing, uncertain world is to be adaptable.  We must evolve. One way we’re doing that is with Direct Indexing. We recently obtained a new software solution that enables us to tailor an index with a basket of individual stocks rather than using an ETF or fund. This lets us proactively harvest tax losses while still closely tracking the underlying index. Hypothetically, a client may be able to realize tax losses even if their index portfolio is up in a given year.* 
 
Another area in which we continue to enhance our capabilities is alternative investments.  We believe that some of the best opportunities may come outside of public markets. Steve Korn has led our search for attractive opportunities off the beaten path, such as in private equity or real estate.

Over the past four years, we have earned the trust of our 37 client families. This inspires us. It energizes us. We are excited to continue building on that trust in the years ahead. 

Respectfully, 

Frank Byrd, CFA

*Direct indexing may not be cost effective below certain account sizes. Further, loss-harvesting might not provide any tax advantages in some account types. Thus, we do not use direct indexing for all clients or accounts.

Disclaimer: While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein.

Amen of the Week

“The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

          – Mark Zuckerberg, Founder of Facebook     

I saw her across the room. Wow.  She was beautiful, but there was something else about her – something special in her smile. I had to meet her. As I made my way across the room, the adrenaline surged.  All of a sudden, fear and doubt took over.  Chances are she would reject me.  Hopefully, she’ll be nice about it.  Surely, someone like this has a boyfriend.  (That, or she must be crazy.)  Thankfully, a rational courage came back to me. The worst thing that could happen is that this pretty stranger snubs me.  That was a risk I could handle. Who knows? Maybe, she really is special … my perfect match in the universe. Besides, let’s face it:  I’m kinda of a catch. (Self-delusion in times of doubt does have its advantages.) With my courage regained, I walked over and met my future wife.

Nine years later, I still think back on that night and its powerful lesson on risk. I came so close to not meeting the most important person in my life – all due to a momentary irrational fear (or flawed risk/reward appraisal). What made the risk so worth taking was not the hindsight that it paid off so well. After all, she could have rejected me. Rather it was the high upside/downside potential that was so attractive.

Now here’s the weird thing: Many, if not most, investment professionals and academics seem to misunderstand this basic concept.  They’re obviously not stupid people.  Rather, they’re intellectual prisoners to a dogma that fundamentally distorts the nature of risk and reward.  The foundation of modern portfolio theory is the presumption of a “risk premium”. Translated into English, this means that assets with higher risk earn higher returns over time.  Stocks are inherently more risky than cash, so investors should be compensated with higher returns for accepting that risk. That’s their reasoning, at least.

Fielder rejects this framework at its foundation. Specifically, we reject the notion that taking higher risks endows one with the right to higher rewards. Yes, aiming for higher rewards requires one to accept higher risk. But it does not necessarily work the other way around.  If I get drunk, put on a blindfold, and run back and forth across Fifth Avenue at rush hour, I am not therefore entitled to good things happening to me. Just the opposite. Hazardous risk-taking (small upside, big downside) is more likely to bring bad things than good. And so it is with investing.  One of the main problems we see with traditional asset allocation is that it does not consider valuation. Rather, it presumes that past returns and volatility are indicative of what we should expect in the future. This approach leads to over-allocating to risky assets after long periods of good times and under-allocating to risky assets after long-periods of bad times. The reward/risk of internet stocks during 1999 was akin to running drunk and blindfolded across Fifth Avenue. Owning the S&P 500 in the early 1980s was more like introducing yourself to that attractive stranger.

Which kind of risk is your money taking today? Now is a good time to do three things:  First, try to understand how much risk is in your portfolio. This can be quantified a number of ways. Second, carefully reflect whether your personal temperament is comfortable with that risk level. Finally, explore if the mix of investments in your portfolio should be realigned to improve the odds of achieving your return needs, while remaining within your personal tolerance for risk. 

Yours in the Field,

Frank Byrd, CFA

Disclaimer:

While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities.  It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein. This information is intended only for the recipient of this email.  Under no circumstances should this report be shared with or forwarded to anyone else without the express permission of Fielder.