TIME TO REBALANCE?
     You've likely heard that the stock market is the only store in which consumers refuse to buy products on sale, and instead demand to pay full price, if not more than for full price, for all of their purchases.  It's more fun to by growth stocks like Apple, Amazon, Facebook and Google when all of our friends are buying them also.  It would seem illogical to not!  But, what does JAM VIEWS continually instruct us?  Most everyone, especially the experts, are more often wrong than right.  It's just this human nature which makes life on the planet so damn interesting.  If we knew the right answers, and always made the correct decisions, what fun would that be?
     This week I want to help us, one more time, understand value stocks (value investing) versus growth stocks (growth-momentum investing).  Jason Zweig, The Intelligent Investor columnist, claims that the boring value stocks "are nearly the cheapest they've ever been compared with growth companies."  Growth stocks have outperformed value stocks over the past decade "by one of the longest and widest margins on record."  But, let's also be clear on an important point that these value companies are not wildly inexpensive historically relative to their own earnings and assets.  They are wildly cheap only relative to the growth stocks' expansive valuations.  Make sense?
     So, even if an investor was currently bullish on the stock market, a swap, or partial swap, into more value stocks or value funds might be prudent.  Let's look at some startling facts (remember, JAM VIEWS prefers facts and statistics instead of media and government narratives).  Likely surprising to you today, Grandma's boring value stocks have outperformed the cool growth crowd for the majority of time since the 1930's, according to a recent report released by Research affiliates, LLC, based in Newport Beach, California [Tip: If visiting Newport, make sure you golf the Pelican Club overlooking the Pacific and then settle up all wagers across the street at the Twin Palms Night Club - it can be life-changing!  But, I digress...].
     But, here's where it gets interesting.  According to Savina Rizova, head of research at Dimensional Fund Advisors, when growth has historically outperformed value for a decade, in the ensuing decade value stocks outperformed growth by more than 8% a year!  Even when value lagged growth by 3% per year for a decade ending in 1998, it completely turned with value outperforming by 6% per year for the next decade.  6% or 8% more a year for 10 straight years has a huge effect on a 401k or 529 Plan.
     Now, if or when that happens again soon, what will most real humans with 401k's do, as well as most 24-year old Bloomberg financial reporters advise?  They will continue to buy high, sell low, and never create substantial wealth.  They check the printout from the HR Director, and then buy all of the "good" ones (best PAST 5 or 10-year track records).  Then, after a few years they sell those and buy the new "good" ones, because they just can't stand listening to their spouse one more night tell them what the guy on CNBC said!  Trust me on this one.  We had the privilege of serving over 3,000 clients, and the most important rule we learned was, and is, "First, do no harm."
     So what are growth stocks/funds, and what are value stocks/funds?  When dealing with mutual funds or ETF's, instead of individual stocks, as 98% of us should be, decisions are easier since the fund name may actually include the terms "Growth" or "Value."  If not, the 1-pager tear sheets will list the top stock holdings.  In simple terms, growth stocks have high earnings growth rates, trade at higher multiples to earnings (P/E ratios), and are expected to continue or accelerate their growth rates in the future.  Also, they tend to be the "cool" companies with the new products, services and software.  These are the companies in the news and make for enjoyable cocktail party banter.
     Value stocks tend to trade at lower multiples to earnings, grow slower, and possibly pay nice quarterly dividends {Tip: Do you ever wonder why people choose to hold long-term savings in 1/2% bank accounts instead of in blue chip stocks with 4% dividends?].  Value stocks may be utility stocks (Duke Energy, Dominion Energy) or consumer durables and non-durables (Proctor & Gamble, Johnson & Johnson, Ford), and many times the lines may blur as previous growth companies mature and slow their growth rates but increase their stability, such as maybe McDonalds or Disney.
     Remember that in the stock market, if you are the only one who is right, you are wrong.  So, in value investing many times you must be patient, very patient, before valuations correct themselves.  This why most real people cannot stay the course.  They can't stand to listen to Watercooler Joe's harassment on why they are wrong one more day!
     Speaking of long waits, value investors are now moving into more Japanese stocks after their underperformance for thirty years.  In 1987, Japanese blue chips traded at more than 50x earnings.  Today the Nikkei 2255 trades at 14x earnings, while the U.S. S&P500 trades at 20x earnings.  It's confusing math for most of us to get a feel for what that means, so for example:  If Nike earns $5 per share in net earnings, then in the U.S. that stock would be trading at a price of $100 per share.  If Sony earns the same $5 per share, in Japan it would be trading at only $70 per share.  Wall Street Journal writer Peter Landers asks us to consider Toyota Motor Corp. only trading at 10x earnings, or Honda Motor Co. where today "you get the whole motorcycle business for free."  Finally, remember our lessons that no one, and no computer, has ever been accurate predicting up and down stock markets, so timing never works.  Yet, modest tweaks and tilts and leans allow you to potentially maximize returns and minimize the effects of those unavoidable miserable turns.  The main key is to stop allowing human nature, chemicals and emotions to push you in the opposite direction, like the rest of the crowd.
     Resist the crowds.  Your place is not among them.  Time for a tweak?

"Those held in highest public esteem are neither the great artists nor the great scientists, neither the great statesman nor the great sports figures, but those who master a hard lot with their heads held high."  -  Austrian Public -Opinion Poll, "Man's Search For Meaning"

                                                    

** For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.

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LEAD A LIFE OF SIGNIFICANCE IN 2020
     Since we've spent the last two years learning how to outperform our competitors and generate significant wealth, let's use some of this power to have a significant impact on the world this year.  "To be loved by our friends and feared by our foes!"  One of the modules I would teach in our Rookie Broker Training Program focused on getting involved in charities and community organizations.  Our fun maxim was, "We must first save the world so that when we own it, it's a beautiful place we can be proud of!"
     Whether through philanthropy, capitalism, one-on-one, or leading a movement, use all of your JAM VIEWS knowledge to make an impact out there.  Be significant.  Be relevant.  Make sure it matters that you were here.  Let's address some possibilities, as well as the examples of a few amazing overachievers who have recently moved on to their next adventures.
     Private giving in the U.S. is up approximately 8% over the last year with Americans voluntarily giving away around $430 billion in 2019.  Wow! [Wait a minute, you mean to tell me that when taxes are lowered not only do the Government tax receipts rise, but private giving to those less fortunate greatly increases also?].  A great misperception in our country today is that the vast majority of giving comes from the Gates and Waltons of the world, but this couldn't be more wrong.  Karl Zinsmeister (great name!), author of the Almanac of American Philanthropy and editor in chief of Philanthropy magazine, states, "The lion's share of America's vast philanthropy comes from ordinary citizens, 100 million of whom make charitable gifts annually, with the average donating around $3,000.  In addition, 77 million citizens volunteer time and labor.  This broad generosity powers 1.5 million independent nonprofits."  Karl must be a JAM VIEWS reader because he continually stresses, "Studies show that philanthropic efforts are more effective than government in the amount of social repair accomplished per dollar."  Or as we question, "Why would we raise taxes, lower philanthropy and give the money to the incompetent bureaucracies to redistribute for us?"
     For the last few years I have researched the organ donor problem as much as possible, as it appears to be such a "fixable problem" if capitalism and free markets were enabled.  Of course, there are a multitude of ethical, moral and logistical challenges to overcome, but didn't we also have some guys take a walk on the moon?  Over 40,000 people could be possibly saved yearly with kidney donations alone, and you and I each have one extra to spare!
     As I have learned, the network and self-interest incentives are at the root of our underperforming system for transplants (sound familiar?).  But, the Trump Administration recently proposed new rules to make transplants easier.  One will increase eligible reimbursements for donors to include travel, lodging, lost wages and child-care expenses during post donation recovery.  Second, the 58 organ procurement organizations will now be evaluated not only on survival rates, but also on the rates at which they transplant available organs.  This will possibly encourage nearly 75,000 more transplants a year to give more people a fighting chance.  This is significance.
     Fazle Hasan Abed, a finance executive for Shell Oil wanted to get involved when a cyclone hit Pakistan in 1970 killing hundreds of thousands of people.  The next year war transformed East Pakistan into Bangladesh and left millions more in misery.  Mr. Abed sold his London apartment to fund the startup of Bangladesh Rehabilitation Assistance Committee (BRAC) in 1972.  He passed away recently at age 83, but not before BRAC became one of the world's largest nongovernmental aid organizations with 90,000 workers in 11 countries, running 36,000 schools and centers along with a university serving 12,000 students.  Wow!  Interestingly, Mr. Abed introduced capitalism to fund his mission.  BRAC operates numerous businesses, including a microfinance bank, a clothing retailer, and dairy processing operations, all which fund more than three-quarters of their budget.  How can that not stir your emotions about the power of one human with a mission?!
     Michael Budney, the son of Polish immigrants, learned the machinery trade and eventually founded Atlantic Machine Tool Works in 1940 in Connecticut making parts for Pratt & Whitney aircraft engines. He recruited new Poles for his business, built motels for them to live in and provided health care with polish-speaking medical staff.  By the late 1960s, Atlantic had 2,000 employees and annual sales of $35 million.  Mr. Budney officially retired at age 104, yet remained in the shop every weekday until his recent death on December 4th at age 108.  That is the definition of significance.  His impact will echo through generations of Americans.
     I know you are likely tired of me harassing you to get off that couch and impact the world beyond your wildest dreams, but look at all of these amazing stories going on around you!  Do you remember the Meryl Streep movie "Defending Your Life" when she has her life review sessions, and the "heaven staff," which includes Rip Torn, applauds the movie playbacks of her courage and her life that overcame fear?  This is similar to the stories in the long list of near-death-experience books which describe the life-review movie.  Maybe it's true.  Maybe it's not.  That's not really important.  I will tell you that this little reminder is a powerful tool that can give you inspiration and motivation to build something spectacular, to weather a period of great failure, or to stop feeling sorry for yourself just long enough to be significant for at least one more person out there.
     This week I hope you think about the $430 billion of philanthropy and the over $20 trillion of capitalism occurring for good in our country in 2020.  Add your part.  Steel the mind.  Make your impact.  You have an amazing movie to make!

"Render unto Caesar the things which are Caesar's and unto God the things that are God's."  -  Jesus

** Many thanks to the WSJ, Forbes and Fortune the above quotes and statistics.
** Photo credit goes to twitter.com

SEE THE GREATER TRENDS
     Do you remember the scene from the movie "Patch Adams" in the mental hospital when the grouchy businessman neighbor teaches Robin Williams to hold up four fingers, but to look past them to see the true solution, therefore blurring them to eight?  He urged Patch to look beyond problems to see the true issue.  As we build and protect our special organizations in this new year, we must see past the noise and understand the greater trends.
     As a young financial advisor, and with the help of many people much smarter than myself, I was able to see that technology would then enable a new business model creating boutique wealth management companies.  These boutiques could provide the same level of expertise and access for investors through advanced automation and partnerships with Wall Street, while providing the small company personal service and attention which had nearly become extinct in the the large firms.  In a rare moment of clarity, I got off the train carrying everyone else, and with a little bit of luck and a lot of hard work, was able to build this model to serve clients in 42 states and 5 countries.
     Our busy task list, the trillion emails in our inbox, and the sensationalized media divert our daily attention from the big picture.  In business and the economy, we focus on the noise of here and now while Adam Smith's "invisible hand" is actually creating the broader result, or negatively, bringing us the next Black Swan to destroy our best-laid plans.  This year let's promise to take a breath, raise our head out of the trenches, and see through the fog and friction of warfare [and I promise to stop mixing so many metaphors!].  Let's look at a few bigger trends:

1.  Bet on America!  I love the following synopsis from the Wall Street journal last year. "The lesson here is that, as Warren Buffet likes to say, don't bet against the United States to succeed.  America makes mistakes, voters sometimes hand power to misguided politicians, and the public sometimes succumbs to financial manias that turn into panics and crashes.  But left to work, trade and invest without too much political interference, Americans unleash their energies in productive fashion.  Stocks fluctuate, but over time they go up - often in years you least expect it."  Amazing.  We must look past stumbles and short-term failures, and put our chips on winners, not just America but also those quality companies and quality people you should never bet against.  I have a short list of people I would never bet against.

2.  There's a ton of oil, the U.S. is a net-exporter, and it plays a smaller and smaller role every year.  So, there will be short-term spikes and crashes in prices and production in which fortunes can be made and lost, but long-term it will not be the controlling variable it used to be.  We will have plenty of it, thanks to fracking and other technologies, until the world's smart people figure out how to make nuclear and sustainable energies, and the batteries, economically-self-sustaining without tax dollars.
     President Trump alluded to the same last week when he basically said, "Why am I messing around in the Middle East?  I don't need their oil anymore."  Around 21% of global crude and petroleum products flow through the Straight of Hormuz, and oil prices barely budged last week with the threat of war.  Richard Soultanian, co-president of energy consulting firm NUS Consulting Group, said despite the geopolitical risks, the market is still oversupplied, and he points to record supply from the U.S. and OPEC's resistance to meaningfully reduce global output.  Move onto water.  Water is the next oil, and it will even be congruent with your save-the-planet mission.

3.  We have already won the trade war with China, but they haven't told you yet.  The daily tweets and media stories declaring trade Armageddon, when impeachment hearings or other scandals have a light news day, are just noise distracting you from the Invisible Hand.  In his Political Economics column, Joseph Sternberg recently provided a clear synopsis.  "China's current-account-surplus  -  the amount by which its exports of goods and services and income from overseas investments - has shrunk for years.  It's likely to tip into a deficit early this decade, meaning China will import more goods and services (and receive less profit from overseas) than its exports."  That might be startling to you.  Let's repeat, soon China will be importing more than it exports.
     To accommodate this radical global economic shift, China will have to entice more foreign investment into its domestic economy - factories and service companies.  This will demand that China implements better rule-of-law protections for foreigners and intellectual property, even human rights.  In other words, everything we have been arguing about will come about simply because of the demands of demographics and silent rules of free markets.  Don't we keep saying in JAM VIEWS that money rules all?  Markets always override government interventions.  See past the 8 fingers.

     Shut out the noise and think through the larger trends in your business, charity or world mission.  On Oct. 21, 2016, Politico wrote, "Wall Street is set up for a major crash if Donald Trump shocks the world on Election Day and wins the White House."  The S&P 500 has risen approximately 46% since then.  The Bureau of Land Management released its plan to be green and install a 7,100-acre solar farm in the desert outside Las Vegas, but it's now being opposed by the Greens because the arrays will disturb the desert tortoise, the Kit Fox and the Threecorner Milkvetch plant.  Keep chanting to yourself, "It's all nonsense!"
     Finally, a thought to help us foresee the bigger picture, hang a frame in your home office of Dorothy Lange's 1936 iconic image, "Migrant Mother."  I know I am planning to.

"Haste ye.  Walk while you have the light, lest darkness come upon you, for he that walketh in darkness knoweth not whither he goeth." John 12:35

** Many thanks to the WSJ, Forbes and Fortune for the above quotes and statistics.

** Photo credit goes to www.iucnredlist.org

** For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.

** To access JAM Views directly please visit jeffreyamartinovich.blogspot.com 

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WHAT ACTUALLY IS CAPITALISM?
     Election years bring us so many labels of division and derision which cause us instinctively to take sides and choose our tribes.  Of course, recent years have been controlled by identity and oppression labels, the majority of which I still can't understand, although I am trying since the NPR radio station carries no other stories!  Yet, nowhere are labels and terms more misunderstood than when the politicians attempt for a few minutes to finally address business and economics.
     The term "capitalism" is, again, being demonized as manipulative, controlling, elitist, and destructive.  Yet, in the true implementation of free-market capitalism this ideal is rather transparent, freeing, bourgeois, and enabling.  Politicians, professors, and the media reiterate these incorrect definitions because they have never received a proper economic education, or because they are intentionally misinforming others who care not to educate themselves.  So, we need a refresher this week.  JAM VIEWS Members counteract this manipulation by continually seeking knowledge.  Knowledge is power.
     Instead of causing our eyes to glaze over with technical definitions, let's simply describe what free-market capitalism means to us today.
     First, Barton Swaim in the WSJ described that is is not a planned system such as a socialist-communist society.  He states, "A socialist economy is, by definition, a system - it must be created, planned, vigilantly monitored and forcefully regulated in order to function.  But a market economy has no plan."  Adam Smith first described this as "the invisible hand."
     Second, Friedrich Hayek summarized in "The Use of Knowledge in Society" that a "modern market economy is an immeasurably confusing and constantly changing combination of associations and exchanges - not a 'system' of any kind."  This is why artificial government inputs, such as price controls or minimum wage laws, always create opposite the desired effect, unfortunately many times long after that misinformed congressman has been re-elected for "helping" the poor.
     Third, capitalism demands the correct allocation of capital (money), and only the capital, itself, understands where it is supposed to flow.  History is replete with proof that mortal man cannot determine, or predict, the correct allocation.  Only in modern media do we unfortunately believe the talking heads, Monday morning quarterbacks, who claim to have called market corrections, interest rate movements, and the next Google.
     Fourth, therefore, capitalism requires money to be earned and spent by individuals working in their own self-interests.  The antithesis is to give this money to a non-free-market entity, the government, which by definition is a socialist entity with no profit motive, no competition, and no demands for increased productivity or efficiency.  Hence, Capitalists cannot understand a citizen's desire to transfer capital to the government through taxes, even when the specific goal may be the betterment of his fellow man.  Higher taxes are inherently illogical to a Capitalist.
     Let's pause for a current checkup on the recent capitalism infused into our U.S. economy after nearly a decade of determined socialist intervention.
    The Good:  Due to the recent tax reductions (TCJA) and the war against needless government regulation, 1) over the past year, wages for the bottom 10% of American workers have jumped 7%, and for workers without a high-school diploma have grown 9%, 2) labor-participation rates (people who can work working) have reversed long declines and are now increasing in every category, 3) even though the Congressional Budget Office had projected the creation of only 2 million jobs by this point, 7 million have actually been created, 4) even though the Federal Reserve had projected 5% unemployment at this point, it is setting records at 3.5%, and 5) the U.S. is the only Group of Seven country that will post GDP growth above 2% for 2019.  Wow.
     The Bad:  It all gets erased if we never control the spending.  We are all rearranging the chairs on the deck of the Titanic and fiddling while Rome burns.  Will the capitalists, so few left among us, pull the spending eject button and cut entitlement spending (Social Security, Medicare, Medicaid, and 75 other programs), or at least cut the future growth of these line items?  Will Maverick eject before the flat spin takes him out to sea?  It's likely too late to save Goose, but will Mav live to fight another day?  Can anyone who commits to push the eject button ever be elected, or re-elected?
     Even on top of this entitlements looming disaster, Congress recently passed $1.4 trillion more in discretionary spending, 2,300 pages with "little debate or objection."  The bill threw in $425 million in "election security grants" (Russian Collusion?), EPA budget increases (Increases?!), tax breaks for race-horse and Nascar owners (What?) and distilleries (Well, that one makes sense!).  The Export-Import Bank was reauthorized for 7 more years (scam piggy bank for Boeing), the flood insurance program was extended (Nebraska min-wager pays for millionaire coastie's beach house rebuild), and Nancy gets federal funds for a San Francisco Park (To clean up the needles?).  A significant percentage of Americans want to raise your taxes and give these people more of your money!  Have they completely lost their minds?
     Tax receipts have grown 4% over the last year because of the tax cuts (do you understand that?), but spending grew 8%.  A trillion here, a trillion there, and soon we will be talking about serious money!
     Fight for the capitalists.  Understand what words truly mean instead of blindly accepting media narratives.  The capitalists are our final and only hope.  And, as Ayn Rand exhorts, "When I say 'capitalism,' I mean a full, pure, uncontrolled, unregulated laissez-faire capitalism with a separation of state and economics, in the same way and for the same reasons as the separation of state and church."  Stay diligent!

"Unfortunately, socialism could only work in a utopian vacuum of, I don't know, golden retrievers, but not with humans on planet Earth.  It never has. " - Bob Vukovich, "Just One More," Ash Press, 2020

** Photo credit goes to you tube.

** Many thanks to the WSJ, Forbes and Fortune for the above quotes and statistics, especially Barton Swaim, Gary Cohn, and Kevin Hassett.