Guess what stock this is?

Sep 16, 2019 | About Bonds, Current Investments, Economic Commentary, Investment Philosophy, Investment Soapbox

Our belief resides in the fact that economies grow through productive means – not monetary stimulus.

Imagine if you had this in your portfolio one year ago – you would be up 100%!

Wish you had bought it back in 2018, right?  Well, it isn’t a stock – it is a bond.  And it illustrates what is wrong with our global financial system.  I would have used ‘capital markets’ but didn’t want to affiliate the word ‘capital’ aka true capitalism with today’s market place that determines the price of money since the system of setting the price for money today is the furthest thing from a free market.  Today’s marketplace unfortunately is controlled and manipulated by a handful of central banks around the world.  Within the walls of these institutions likely are bright people but it might be that when separated from a text book or classroom, they struggle with common sense.

Maybe we are missing something – but to us the reality today is that our monetary system is out of control.  If monetary policy of forcing rates to 1 or 2% didn’t create the growth they were looking for, what makes them think that zero (or negative) will.  Our belief resides in the fact that economies grow through productive means – not monetary stimulus.  Maybe stimulus encourages investment in productive assets – supporting future economic growth – but it seems that today’s central planners believe monetary stimulus equals growth – which isn’t true.  In fact – unintended consequence are bubbles and the misallocation of capital.

What has the past 10 years of extreme monetary policy (cheap money) generated? 

First and foremost – it generated $16 TRILLION of ‘assets’ (we would call liabilities) that no one who values their capital should touch in a million years…

Here is a chart showing the market value of negative yielding debt around the world.   Five years ago – it was about zero.  Today – $16 TRILLION.  And global GDP has grown by $10 trillion over that time frame.    Not a good return in our opinion and creates a larger problem of how to get out of this addiction.  Our thoughts were summed up well in this Forbes article.

Second – Unicorns (private companies valued over $1 billion).

When money in your pocket costs you to hold it – then you are incented to put it ‘to work’.  Unfortunately, cheap money has no value and results in malinvestment.  Similar to the late 90s – when companies focused on ‘clicks’ – it seems today it is more important to focus on revenue growth than profit growth – which to us is illogical.  However, GS (Bloomberg article) tells its clients as much – focus on revenue growth and not profits – now – their incentive is about 4.4% in fees per IPO – with having done close to $6B in IPOs – they have earned close to $262 million selling new IPOs just this year alone.  So – they made $262mm selling companies they are telling their clients to buy – maybe they should roll that $262mm of fees into all those money losing companies for 10 years – since it is such a good deal. (Bloomberg League Table – 9/4/2019)

WeWork – IPO announced.  The last valuation of WeWork was done at a $50 billion valuation by SoftBank.  Today IPO price talk of WeWork is $10-15 billion.  How does the value of an asset decline by $35 or $40 billion in such a short time frame?  Well some examples that come to mind are Enron and WorldCom in early 2000s – but these were both frauds.  Others would be CSCO, MSFT and many other Tech companies in FY00 – but these are all in a bubble.  Well – today you can include WeWork, UBER, WORK, LYFT and many other multi-billion companies that don’t make money, may never make money, but the reason to buy it was growth at any cost.  Well, once the market wants a return on its capital, the downside is treacherous (remember when people paid for ‘eyeballs’ and ‘clicks’ in late 90s).  But how should one determine a return on capital or how to assess what their returns should be?  It comes back to our philosophy of knowing what you own.  This philosophy leads us to our final symptom of crazy monetary policy – the rapid growth of passive investing.

Third – Passive Investing –  Talk about being as far away from knowing what you own. 

If you want a market return – that is fine but just don’t pay anyone for it. Go do it yourself and pay about 5 bps in low cost ETFs.  However, if you actually want to know what you own – like where you put your money, how much is it earning and what is the thesis around why the value of the asset you own is supposed to grow over time – then passive investing is one of the worst ideas ever.  It reminds us of all the water cooler conversations in the late 90s where the topic was someone’s great stocking picking abilities – don’t confuse a bull market with investment skills – the results can be devastating to your capital.

Go capture Beta (passive investing) just don’t pay for it. If you want a portfolio constructed from the bottom up – then pay for it.  But in doing so – know what you are paying for and if you look at your statement and it consists of 8-12 funds or a hodgepodge of stocks, then you might want to think long and hard about what you are paying for – you may have just paid for something that could have been free.

 

 

 

 

 

We Buy Assets Not Stories

Jun 19, 2019 | Current Investments, Investment Philosophy, Investment Soapbox

Ever watch a movie that had a bad ending?  

One negative aspect of watching a movie with a bad ending is that you spent a couple precious hours of time that you can’t recoup.  Investing in stories with bad endings causes damage similar to that of lost time – in your case – you lose capital – and if you are working, you need to then spend more hours working to recoup the capital lost.  This is a simple analogy that illustrates why our investment philosophy is to prefer buying assets and not stories with bad endings.

How does Ballast define a story versus an asset? An asset is something that most of the time has cash flow or a clear path to terminal cash flow.  A story tends to have negligible or negative cash flow with the promise that a happy ending provides a cash windfall.  Given these definitions – it becomes clear why we don’t spend much time in the public equities market looking for ideas – most of the time we find stories – whose ending is unclear and uncontrollable.

Lending to an established business with a stated return – that is an asset.  Investing in a crazy uncle’s idea on how to revolutionize the automobile industry – that is a story.

Let’s investigate with some concrete examples since at Ballast our philosophy is to openly share ideas.  Side note – If you have to invest in something to find out what is in it – that is like paying to watch a movie with a bad ending and not even getting to see the movie trailer.  By definition a bad idea (whether it turns out well or not!).

Two assets we have recently acquired for qualified clients:  

  1. A dairy loan in Idaho where we lent money with a projected IRR of 18% over 2 years.  Here we are secured with collateral that exceeds the value of our note, receive monthly interest and have line of sight to a terminal value.
  2. Another was a trade based on the Hong Kong Dollar – this is as much a story as an asset – but the beauty is that you get a full refund (note matures) in the scenario the movie has a bad ending.  What more could you ask for? Here you have a note with an imbedded currency option from a high quality bank – in the end, receive par plus a multiple on the favorable performance of the currency. Watch a movie for free – if it has a good ending, you could make 3 or 4x your money, but if it has a bad ending, the movie theatre refunds your money.

What are some bad ending movies Ballast has watched but not participated in? Clearly one “movie” we love to watch is Tesla – A Tall Tale.  They don’t pay dividends and the business consumes cash – so clearly more of a story.  What will be the ending? We don’t know but even with a good ending there is no guarantee the price of admission was worth it. Over the past two years they have been up 50% as well as down 50% on your story (Bloomberg) with not certainty of the ending.

Ballast buys assets not stories.  Sure there are always good stories – but stories are where capital most likely goes to get destroyed. Assets are what builds capital. Most investments have both an asset and a story component – and the key is making sure that the asset doesn’t get destroyed in an event the story has a bad ending.

How Much Money is Your Wealth Actually Making?

May 14, 2019 | Investment Philosophy, Investment Soapbox

We like to have certainty in returns.  As much certainty as you can get.

– By Steve Harms, CPA, Chief Financial Officer

I’ve been reading and hearing “experts” pontificate where to find “yield” or “return” in the environment we find ourselves in today.  So first…Where do we find ourselves (not an all-inclusive list)?

  • Extended period of unreasonably low interest rates – like 5,000 year lows: Post WWII average on 10-year US Govt bond is 6% versus 2.56% post Global Financial Crisis (GFC). [1]
  • Extended period of overpriced equity securities based on fundamentals (longest bull market in history)
  • Companies issuing cheap debt to buy back stock
  • Monetary authorities continually manipulating supposed free markets with Quantitative Easing, currency manipulation, trade wars, interest rate normalizing followed by political pressure to not normalize rates, etc.
  • Economic uncertainty among some investors and consumers, while some tout we are in the midst of economic boom

So where do you go to find the best return while considering the risk?

I’ve read and heard some “experts” state that you need to be in equities today for your best chance at the highest total return possible.  What is “total return?” Some say total return is measured by adding interest received and receivable, dividends and distributions received, capital gains, and capital price appreciation based on increase in market price of an asset.  Oh…and by the way, keep in mind that total return should also include capital losses and capital price depreciation. Total all of the preceding and divide it by the cost of your investment and you get your total return.

Therefore, given that since May 2009 the S&P 500 has an annualized total return of approximately 12% and even in the last 2 years the S&P 500 has annualized total return of over 10%, [2] many advisors are concluding that you should be heavily invested in equities with strong dividends and upside price appreciation propositions.  We’re not saying you shouldn’t be in public market equities, but there is a different way to get strong returns without taking such big unknown risks as what publicly traded stocks inherently have.

Returning to calculating total return for a bit.  I have a more conservative, personal measure of total return.  It’s interest, dividends, and distributions received plus/minus capital gains/losses (aka…cash in my pocket).  Most would call this cash-on-cash return, but I personally don’t want to count on “on paper” gains that rely on timed sales.  Analyzing how much money my money is making I want to only “count” what I’ve received in cash and what is contractually owed to me in cash.  Price appreciation on investments and future dividends are not contractual. They can go away at any time. Company boards have to approve dividend payments.  If the cash flow isn’t there, boards can reduce and even eliminate dividends. This bull market has lasted so long that some think it’s a forgone conclusion that price appreciation is here to stay…forever and ever…because the market has always, over time, had positive price appreciation.  Individual stocks have not, but overall, the market over time has had positive total return…to date.

There is no certainty in future dividends or capital appreciation.  Even dividends received in the future and capital appreciation happens, there is no certainty either of those will continue.  What happens if when you really need cash from your investments, the market is down considerably, and dividend payments have evaporated?  Companies have leveraged themselves quite a bit during this bull market run. If revenues decrease and cash flow is hurt as a result, cash will be needed to service debt and dividends might get cut.  Again, dividends are not contractual. Debt payments are.

We like to have certainty in returns.  As much certainty as you can get. If we follow our rules of knowing what you own and why you own it, we believe we can get as much return (or close to as much return…cash on cash) as those taking equity risk (i.e. risk that your net worth can decrease significantly from one day to the next, and that your cash flow that you have been receiving from your equity investments could go away or be reduced significantly year over year).  Portfolios we have built are constructed to generate as much return through cash flow as opposed to random market price return. With a mix of core fixed income (contractual cash flow), strategic fixed income (contractual cash flow with some upside potential), and alternative investing, we have portfolios that earn steady cash on cash returns that can be relied on, even when market prices decline.  Why risk your hard earned and diligently saved wealth on something that might be worth a lot less next year and not generate the cash flow it has recently? Isn’t financial freedom having assurance that your cash flow will always be coming and your principal will not be “decumulated” over time?  There is risk in any investment, although I argue that risks are significantly mitigated using the Ballast process.

1  “A History of Interest Rates” by Sydney Homer & Richard Sylla, Bloomberg

2 Bloomberg

Know what you own – and does it matter?

Mar 12, 2019 | Investment Philosophy, Investment Soapbox

How many people really know what they own? We ask this question with the purpose of encouraging people to pause (sit quietly) – and ponder this question.

When time is seemingly in short supply, even in today’s hyper-productive technologically improved society, it seems our attention and knowledge has been hollowed out by tweets, snaps, and soundbites.  As long as someone says – ‘ yes, the price of what you own today is higher than what it was yesterday’ – we don’t spend much time thinking about it.

However, what happens if one morning you wake up and someone says the price of what you own is 20% less than what it was yesterday…

If that 20% translated into thousands, hundreds of thousands or even millions of dollars, that information might cause you to spend all day thinking about what you own.  From our experience, that ‘market information’ or opinion of value is entirely subjective. If what you own: generates cash flow, has economic value, is accretive to achieving an investment objective and is properly sized in a portfolio, then it doesn’t matter.  DO NOT translate this last point into ‘invest for the long term’ or ‘dollar cost average’ or some other ‘stay the course’ statement.  We abhor ‘dollar cost averaging’ and ‘decumulation’ statements because we don’t believe your investment success should be based on whether you “die at the right time.” These statements seem to originate from people who don’t want to bear any responsibility for assessing value, don’t want to take the time to opine on value and really shouldn’t be in the investment management business.  

At Ballast – we know what we own. Full stop. On any given investment we spend hours, days or even weeks evaluating whether we believe it is priced right and will work towards achieving your investment goals. If you don’t know the asset and the value of that asset – how can you really know what you own?

Two Things to Consider Before Investing in Individual Stocks or Equity Funds

Sep 5, 2018 | Investment Soapbox

It seems like no matter where you look, you’ll find an article (or two… or three… or more) about how the stock market either is going to continue to see bullish gains or about how it is edging closer to an impending correction.  There are many different opinions supported by a number of different facts and theses when it comes to this.  In fact, you may even have your own opinion based on how you feel the economy is performing and how certain companies will overperform or underperform in both the near and long term.

 

Value

All predictions aside, let’s talk about value.  A potential and prudent buyer of a company (or part of a company) is going to do their own analysis and determine what they think the company is worth: VALUE. In determining that value, one will perform various amounts of research (finding comparable company transactions, discounting projected future cash flows, etc.).  We don’t want to elaborate too much on valuation theory though.

 

The point is that value can be calculated and determined, and there is science behind it.

 

Price

Then, let’s talk about the amount you eventually have to pay for the company (or part of the company) if you determine you actually want to own it: PRICE.  Many times, the price you have to pay may be much greater than or much less than the value you calculated when performing valuation.

 

Let’s think about overall supply and demand in the US stock market today.  It seems that based on the overall higher prices, demand is outpacing supply.  So, who is buying?  Who is investing aggressively in the stock market, resulting in higher prices?  On one hand, it makes sense with projected economic growth, low unemployment, rising wages, etc. that investors would be buying at higher prices, expecting more income in the future.  On the other hand, with the baby boomer generation (who relies on fixed income) entering retirement, one would think that they would be selling equities and reallocating into more of a cash-producing fixed income “type” of portfolio.  This transition results in a lot of supply that might push prices down.

 

The point here is price is much more supply and demand driven, and there is less science behind it than value.

 

 What is the main point?

It is our belief that as prudent buyers, if you want to own equity in companies, determine value before you even look at the price of the company.  That is, determine the price you would be willing to pay for the value you’ll be acquiring.  Then, go out and see what the stock is actually trading for.  It might be priced at a discount, but in today’s world, it is probably priced at a premium.

 

If you want to see the wonder of stock pricing, watch the trading for a few days.  Prices of stocks go up and down sometimes for no apparent reason.  A stock may dip in price one week (sellers outpacing buyers) and could rebound the next week (buyers outpacing sellers).  But why?  Sometimes we think no one knows…

 

Which brings to mind the awesome scene in the classic movie Wolf of Wall Street where a seasoned stock broker (Matthew McConaughey) tells a new colleague (Leonardo DiCaprio) “…nobody, if you’re Warren Buffet or if you’re Jimmy Buffet, nobody knows if a stock is going to go up, down, sideways, or around in circles, least of all stock brokers.” 

 

The point we are trying to make is that there is so much going on in the market (speculative buying and selling based on what an investor thinks a company is going to make – or not make – in the future, short positions, hedging positions, company stock repurchases, insider trading, etc.) that it is hard to know when and why a stock is going to continue a bull run or if all of the sudden, the bears are going to hit it for a prolonged amount of time.  However, if you want to have equity positions in your portfolio, be careful, be prudent, do your analysis of value, and leave your emotions out of your decision-making process.

Our opinion is that there is a lot being paid for equity in publicly traded companies today based on tomorrow’s value.  The problem is that if you pay for tomorrow’s value today, you may be giving up the potential for exponential returns (e.g. 2 and 3 times your money in 5 to 10 years), which is something you should be hoping for in taking equity risk.

Contact us to find out more

More Regulation…Will it actually protect investors?

Jun 4, 2018 | Investment Soapbox

A couple of years ago, the U.S. Department of Labor passed what has commonly been know as the “DOL Fiduciary Rule.”  The document runs over 1,000 pages so I have never actually read the entire thing.  However, I have read a lot of commentary and explanations about it.  After every article, I would think, “What’s wrong with this? If institutions and individuals are doing what is right for the investors (consumers), then meeting the obligations of this should not be a problem.”  But a lot of parties out there that sell individuals products or services that “manage” retirement funds did not like this at all…for many different reasons.

One major reason for the gripes against the DOL Fiduciary Rule was the cost of compliance.  Compliance is already a major cost for many financial institutions, broker-deals, Registered Investment Advisors, etc.  Yet, we still have numerous bad actors in this space who invest people’s hard-earned savings into things they (the “advisor”) would never invest in themselves or that the client has no business investing in.

 

The courts have now vacated the DOL Fiduciary Rule, and the talk is that the SEC’s Best Interest Rule will cover what the DOL Fiduciary Rule was going to cover anyway. All “advisors” will have to meet a higher standard when investing their client’s funds.  However, after the SEC released its proposed Regulation Best Interest, one of the commissioners stated,

 

“The name of the rule, in and of itself, is confusing and can cause retail investors to reasonably believe that broker-dealers are required to act in their best interests.  Perhaps it would be more accurate to call this regulation ‘Regulation Status Quo’.”

 

In the end, you want an investment professional working for you that is putting your money to work in the proper way to accomplish YOUR goals – Not in a way in which meets the goals of someone who fits a profile that looks like you.  You don’t want an advisor creating the most commissions and fees for the advisor, broker, agent, and whoever else is involved in the structure, but you should want an investment professional that will leave most of the returns for the risks you are taking to YOU.

 

A lot of people think the more recognizable the name and the bigger the brokerage or institution, then the more compliance and oversight will be in place to ensure that your funds are being managed appropriately. However, almost every day I see headlines of those big institutions paying big fines to a regulatory agency for someone in their organization not doing the right thing for a client or a group of clients.  So, if we can’t rely on big organizations to create the compliance and oversight structure to make sure bad things are not done with good savers’ money, how do we ensure that our funds will be invested and managed appropriately for us?

 

I think the only way to solve this problem is to work with investment professionals that do the right thing…that you know do the right thing.  There are a lot of advisors out there that can talk a really good game and can sell a suite of funds or products, but is that really doing what is right for you?  Are they getting you the return you should get for the risk you are taking?  Is there proper risk management being performed on your individual account?

There are a lot of questions that savers and investors should be asking themselves.  Ballast Capital Advisors has investment professionals with years of experience that prove their ability to manage accounts appropriately.  We don’t have a sales team devoted to meeting “Asset Under Management” growth goals or sales goals.  We have a mission to not only do a great job for our clients, but also to get their investment portfolio properly allocated in order to provide them the cash returns that they can rely on (now and/or in the future).

– Steve Harms

Contact us to find out more