2024 Beware of optionality loss | Apr. 12 Financial planning ideas as you think about retirement | Mar. 15 Inflation equals the end of money printing | Feb. 16 Zombie Firms | Jan. 19 2023 Draw what you see | Dec. 18 The asymmetry of the bond market | Nov. 17 The divergence of short-term and long-term perspectives | Oct. 13 Is dominance of big tech in the S&P 500 a problem? | Sep. 15 Financial planning: the effect of withdrawals versus savings in down markets | Aug. 18 Profits declined and the market rose. What's going on? | Jul. 21 Match your investments with your time horizon | Jun. 16 Applying Berkshire Hathaway techniques to your own investing life. | May. 12 One Day In July named Best Investment Firm in the State of Vermont / Plus real estate thoughts... | Apr. 18 Silicon Valley Bank, and its applicability to you | Mar. 17 Optionality is good | Feb. 17 One thing to think about for your 2023 financial life. It will matter. | Jan. 20 2022 2022, and winning the loser's game | Dec. 28 2022 Growth and Value + Businesses start to scale back. | Dec. 16 FTX. And an example of why diversification matters | Nov. 18 Some interesting longer-term financial perspective | Oct. 14 Looking for patterns in markets | Sep. 16 Are Wall St Analysts getting it perfectly wrong again? | Aug. 12 Harold Hamm is not happy | Jul. 15 Staying with what has worked long-term in investing | Jun. 17 Markets cause butterflies | May. 13 Things are not predictable | Apr. 15 Real Estate and Inflation | Mar. 25 On Russia... | Mar. 4 An important principle of markets | Feb. 18 Sliding into 2022 | Jan. 28 2021 Asset Performance - Year in Review | Jan. 7 2021 Wrapping up 2021 | Dec. 31 Some inflation history, and inflation optimism | Dec. 17 Behavior, Bubbles, and Inflation | Nov. 30 Financial Technologies: look but don't touch | Nov. 5 Wealth vs Money | Oct. 15 Free Riding and Indexing | Sep. 24 Back to school: breaking down an index fund | Sep. 3 Space Rocketeers and Creation of Industries | Aug. 13 Captialism Mechanics | Jul. 23 Bird, Jordan, Hamilton, Jefferson: an American Fourth | Jul. 2 Interest rates = financial gravity | Jun. 11 School Bus Jenga. Plus Bitcoin. | May. 21 Taxes. Fun. | Apr. 29 An observation worth considering from Vermont monks | Apr. 9 Investing lessons from bitcoin and baseball | Mar. 19 The Segway | Feb. 26 Firm Update/ One thing to ask... | Feb. 12 Fun things with Gamestop | Feb. 5 Good patterns for 2021 | Jan. 15 2020 A final thought for 2020... | Dec. 22 The dazzling stock market of November 2020 | Dec. 4 Annuities, please go away | Nov. 13 The search, sometimes financial, for happiness | Oct. 23 Advice + Products = Conflicts of Interest | Oct. 2 Investing and politics do not mix well | Sep. 11 Dot-com 2.0? | Aug. 28 Experts and dissenting views | Aug. 14 Two thoughts on market timing | Jul. 31 The U.S. Government opens the door for the financial industry in 401k | Jul. 17 Walt Whitman and the United States | Jul. 3 The bright side of collapse: simplification | Jun. 18 Inequality is emerging as a big winner from Coronavirus | Jun. 5 What is going on with the stock market? | May. 22 Explaining the purpose of bankruptcy | May. 8 Hazards | Apr. 24 United Flight 232 | Apr. 9 A roller-coaster week | Mar. 27 A primer on viral spread | Mar. 23 Fear is normal. It's part of why we're here. | Mar. 20 A crisis builds. Mental preparation. | Mar. 17 Coronavirus | Mar. 4 How to take lots of money from average Americans. A primer. | Feb. 21 Even Warren Buffett didn't beat indexing | Feb. 7 Two paths for real estate investments | Jan. 24 2019 in Review | Jan. 10 2019 A final thought for 2019... | Dec. 27 Predictions and antifragility | Dec. 13 The bowling alley of investing | Nov. 29 Politics, investments, and change | Nov. 15 Crashes and swans | Nov. 1 Markets are high, but so is fear. Why? | Oct. 18 Hedge fund training 101: go after indexing to get attention for your fund | Sep. 20 After inflation, the average stock fund investor lost more than 11 last year. This is one reason why. | Sep. 6 Will we have have a recession? The yield curve weighs in. | Aug. 23 How financial firms make money from your cash | Aug. 9 Looking back a year: 3 things to learn from the Treasury bond market | Jul. 26 Dividends as a form of annuity | Jul. 12 Something to think about on July 4th | Jun. 28 Alternatives to tariffs | Jun. 14 On emotions in investing | May. 31 A cacophony of signals | May. 17 The not-surprising decline of the internal combustion engine | May. 3 Decisions made at the edge | Apr. 19 Looking back to the future | Apr. 5 Our obligation as we see it and first quarter notes | Mar. 22 Share buybacks, an introduction | Mar. 6 A way to think about market ups and downs | Feb. 22 Is art an investment? | Feb. 8 Europe vs the United States - an investor lesson | Jan. 25 John Bogle, creator of the index fund, has died | Jan. 17 2018 stock market observations | Jan. 11 2018 A final thought for 2018 | Dec. 28 Fear and risk protection | Dec. 14 Peeling back the onion: the financial advice business | Nov. 30 Explaining the Dow Jones | Nov. 16 Keeping a wary eye out for inflation | Nov. 1 Two thoughts on current markets | Oct. 19 Consider the null hypothesis | Oct. 5 What do we know? | Sep. 21 The Chart of Shame | Sep. 7 How nouns can help you | Aug. 24 5 big tech stocks. And 5 of their strategies. | Aug. 10 Saving a lot. Often. And again. | Jul. 27 The chemistry of decision paralysis | Jul. 13 The Soviet Union vs Microsoft | Jun. 29 Peanut butter, jelly, and Wall St | Jun. 15 Laggards and leaders | Jun. 1 Every now and then, friction is good | May. 18 Changing and not changing | May. 4 The (arguably boring) importance of a strong Plan B | Apr. 20 Finding Real Estate Joy | Apr. 6 Fiduciary Rule R.I.P | Mar. 23 Indexing and the Venture Capitalists | Mar. 9 Signal vs Noise | Feb. 23 The long-term, quiet glory of dividends | Feb. 9 Elusive Simplicity | Jan. 26 What makes up investment return. It's these three things | Jan. 12 2017 And one final thought for 2017... | Dec. 29 Bitcoin: is it mania, or merely revolution? | Dec. 15 Mutual fund survivorship bias | Dec. 1 The end depends on the beginning | Nov. 3 What we can learn from Scott Legacy | Oct. 20 Preparing for downturns is like landing airplanes without engines: you have to practice | Oct. 6 Unusual thoughts on saving | Sep. 22 Social networks, dopamine, and their relation to investing | Sep. 17 On the value of focusing | Sep. 8 Firm update and some industry observations | Aug. 25 Theologian teaches capitalists a thing or two | Aug. 11 4 behavioral traits that a great investor must have | Jul. 28 The oil business, and why industry sector bets are a terrible idea | Jul. 14 On clients' minds when they first talk to us... | Jun. 30 Investing is a probabilities game. (I'm 97% certain.) | Jun. 2 The lessons of Puerto Rico, and an example of the fee machine of active funds | May. 19 The hedge funder Warren Buffett trounced wasn't all wrong. Just mostly | May. 5 Taxes float and the lessons of April 15th | Apr. 21 Q1 observations, the drag of taxes, and our bull market's future | Apr. 7 401K and 403B, Q1 Dividends, and the mechanics of why active managers almost never outperform | Mar. 24 Optimism in investing wins, big time. Market timing doesn't. | Mar. 10 Index fund portfolio construction. No yawning, this is important stuff | Feb. 24 Fiduciary rule, and where investors lose big money | Feb. 10 Oh attention-grabbing Dow Jones, you toy with us so... | Jan. 27 Index Fund Fundamentals | Jan. 13 2016 2016 Wrap-Up Observations | Dec. 30 A Heartfelt Thought | Dec. 16 The predictable nature of unpredictability | Dec. 2 We know at least 4 things to be true. Maybe more | Nov. 18

Investor Insights

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Beware of optionality loss

April 12, 2024

Optionality has value in finance. Think about it this way. If you are dating someone, there might be, there likely are, a lot of plusses in the relationship. However, there is a slight loss in that your optionality to date someone else diminishes. Or at least there is more friction in the switching process.

Financial firms like to design products that remove optionality, because it makes it harder to move capital. As an example: private real estate investment trusts (REITs), private equity positions, annuities, whole life insurance, and CDs from banks. Even owning a rental house as an investment. All of these remove optionality. Capital gains taxes do so as well, in that they trap capital in areas of lower return and lower productivity when it should be moving to more dynamic, higher return parts of the economy. 1,

When optionality (and related liquidity) are removed from an investment, the expected return needs to be higher to compensate the investor.

As portfolios arrive here, we are seeing growing use of "alternatives," including private REITs and private equity. These products perpetuate the myth that there is a secret sauce beyond indexing to higher returns. The problem is compounded because the accounting often is manipulated.

The problem is that these private markets are not liquid or transparent, and so there is no force that says "this is what the investment is worth" in a timely manner, the way a publicly traded index fund does. Say a private equity manager had a bad year, which many did with their leveraged funds in 2022. If they report the true drop in the fund, not only will their own fees collapse, but the limited partner that invested the capital is going to be unhappy and turn down the invite to play golf at Pebble Beach. So the private equity manager has an incentive to use accounting gimmicks to "smooth out the loss" so that it doesn't hit in one year. Problem resolved, back to the links everyone!

Almost five years ago, Sebastien Canderle at the CFA Institute dove into this topic, if you are interested. This is a well-done piece, and shows the pitfalls of investing in private markets: read it here.

This is something to watch out for. It's not a good situation: as an investor, you don't know the value of your assets. It likely will take many years to find out. In the meantime, your optionality is shut down, as these funds can be difficult to exit.

When someone mentions a financial product that reduces your optionality, you should think hard about the compensation. You are giving something up, you deserve something extra in return.

Dan Cunningham

1. This is a real effect, and it exists at One Day In July. We probably hold north of $50 million of client investments that we would sell and exchange for better positions if it weren't for capital gains taxes. So weirdly, these taxes help entrenched, wealthy financial firms get even wealthier, to the detriment of more efficient firms, or entrepreneurs that could use the capital. I probably should do a full newsletter on this, as the topic is complex.

Financial planning ideas as you think about retirement

March 15, 2024

Today we're going to focus on the practical. No more of this pie-in-the-sky economics theory, let's talk about some retirement financial planning issues.

Lots of people pay for financial plans that come in big binders. Almost no one actually reads the plan, from what I can tell, and some level below "almost no one" actually does anything about it if they have it. One of the problems with a Monte Carlo-type financial plan, where a bunch of inputs are plugged in and then you see some curves that tell you where you might be in 10 or 15 years, is that if you change one input even a little bit the scenario 15 years from now swings wildly.

Keep in mind: the concept of full retirement is extremely new in human history. It's only a couple generations old. This is in part due to the fact that people are living longer.

Let me share some observations that you can use in your own thinking. These are generalizations from many client meetings, so not all of them will apply to you.

  1. Many people are not fully retired throughout their 60's, and even into their 70's. Sometimes they retire and then go back to work part-time. It's often a lighter, more flexible, happier job, but it produces some cash flow. This is good.
  2. You hear a lot about the importance of time and compounding, and the reasons why an investor should get started early. This is true! But the sixties decade cannot be ignored. Capital additions versus removals in a person's sixties matter a lot if they live into their eighties or beyond.
  3. Spending tends to go up when people retire, at least for a period of time. I see plans that predict spending dropping, but with more time on their hands, it seems to increase. For most people, a real budget and spending control is the most important financial planning tool.

    (That being said, you want to live in an economy where other people spend. If people don't spend, companies can't run and transactions don't occur. The savings rate can't get too high or things slow down, as they have on the Asian rim over the past couple of decades. I'm not worried about this in America, we tend to like to spend.)
  4. Later in life medical and assisted living spending become significant. For those of you who have not looked at this, relatively nice assisted living runs about $8,000 / month now, increasing above inflation, and there are waiting lists at that price. I expect this cost to go up significantly as the labor shortage is real in this industry and it is holding the supply back. Clearly this is not affordable for a large percentage of the population, and other plans have to be made.
  5. The direction of the stock market in the first five to ten years of your retirement matters a lot. That's fun because you have no control over it! Remember that from the top of the dot-com peak in 2000, it took over 12 years, including all dividends reinvested, to get back above that point for good, and that included no inflation. We try to hedge this risk by using multiple asset classes, but it's still something you need to consider. The market might just go flat or down for the first decade of retirement, so extra buffer is needed.
  6. There are certain social security decisions that matter, and a lot of the online discussion doesn't mention cost of capital and opportunity costs. So if you're a client and you are in your sixties it's worth talking to your Advisor about this.

Dan Cunningham

Inflation equals the end of money printing

February 16, 2024

All this inflation does have a benefit: we don’t have to hear from certain academics about Modern Monetary Theory anymore. You’re probably thinking “I don’t really care about the PhD path of an economist, I care that my grocery bill is up 20%+ in two years.” Stay with me.

Modern Monetary Theory was/is a dream cooked up by certain economists that a nation that issues its own currency can do so without risk or remorse. Magically, debt does not even have to be issued! The market will absorb the currency increase, and the Federal Reserve can always issue more currency to pay the debt. There is the small caveat that they have to pull back at the correct time if resources such as labor get too tight to avoid inflation.

Except it’s not a small caveat. It probably should have like fifteen asterisks and pink highlighter all over it. Because, as anyone who walks down aisle 7 of a grocery store and looks at the pricing stickers knows, they have little ability to time the currency pullback. And that craters the main theory, which may, in certain contexts, have had some validity.

As the money supply soared and America began to buckle under inflation, the Federal Reserve acted too late in 2022, assigning blame to “supply chain issues.” Here is a graph the Wall Street Journal published last week, showing overall expectations on rate cuts versus reality:

Both of these examples show the Federal Reserve's ability to predict macroeconomic events, such as employment and inflation, is low at best. If you can’t predict it, you can’t react in time, and you end up with eggs doubling in price in a year. On the bright side, an aspiring economist somewhere got a PhD for his or her innovative theory.

There are lots of people on this list that run, manage, or work in businesses who would say “I would never issue that level of debt, that is too risky. What happens when it rolls over at a higher rate, and you have to deal with the interest payments?” First, keep in mind that in Modern Monetary Theory, they are issuing currency, not debt. Something a business can't do. Second, a lot of businesses did issue too much debt, in part because the incentives of managers, particularly in public companies, are tied to short-term results.

However, I don't think the line is as clean between currency and debt as many economists believe. It all gets rather addictive - whether you are printing currency or issuing debt, the short-term boost is fantastic. Your shareholders or voters think you're a genius. The fallout is less thrilling. As the Federal Reserve works to get that excess money supply out of the economy, with higher rates, the government is now facing this (note the interest expense line).

Graph source: WSJ 2/16/24

Theoretically this should lead to lower economic growth, lower asset returns, and a lower standard of living over time as interest expense consumes the nation's resources at a significantly higher rate.

Dan Cunningham

1. Modern Monetary Theory is fantastically complex. As such its implications are not well understood. Remember the One Day In July mantra: if it's not simple, it probably won't work. That which is simple is understandable.

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