Updated: Nov 2
April 15, 2018
To: Customers & Friends
From: Christopher Weil & Company, Inc.
We (that is, all of us on the planet) live, it goes without saying, in perilous times. It would be pointless to list the thousand-and-one reasons why this is so because we all know what they are. But it is not a bad thing to remind ourselves that there has never been a moment in the recorded history of the planet when the times have not been perilous -if not for all, then at least for most. And no one is immune, ever.
Could there be a more stable and comfortable community than Montecito, California? Fire and flood are no respecters of persons (or communities) and Montecito has been transformed such that it will take years or decades (and for some locations, never) for it to become again what it once was. It is true that the consequences of a disaster in the United States (or in any developed country) are mitigated to some extent by a sophisticated response infrastructure (emergency responders, insurance, alternative housing and so on); as contrasted with, say, disasters in Syria or the Congo. But mitigation only goes so far and cannot make up for the lost homes, the lost livelihoods, the lost communities. And no mitigation can make up for the lost lives.
All of which is by way of introduction to the topic of the quarter: how do we invest (when we wear our investor hat), how do we advise (when we wear our financial advisor hat), and how do we manage (when we wear our investment management hat) in perilous times. Which means, of course, how do we invest, advise and manage ... period.
In the interests of transparency (and because so often the assumptions and preconceptions of those of us in the various financial services businesses are unspoken or unacknowledged or even unconscious), let me set out a few such assumptions and preconceptions that condition CWC’s financial advisory and managerial relationships; assumptions and preconceptions, to be clear, that we bring with us to every such relationship.
We believe that the ownership of assets (companies public or private, real estate) is by far the best way of building and sustaining wealth, but that it is daylight madness to forget that not all equities (nor all times) are created equal. So a simple-minded commitment to “own stocks” or “own real estate” can be a recipe for disaster. Do we need to be reminded of the conglomerate craze of the 1960’s, the real estate syndication craze of the early 1980’s, the tech/dotcom craze of the late 1990’s, the housing boom of the early and mid 2000’s? All ended badly, and trillions of dollars of investor value were ultimately lost. Discrimination is all. Quality is all. And, unless you’re speculating, diversification is all.
We believe that making any financial recommendations, and particularly investment recommendations, in a vacuum is almost certainly a recipe for disaster as well. This is why we will not engage a new financial advisory client until we have a comprehensive understanding of his/her/their life circumstances. Specifically, this means an understanding of their family situation, their assets and liabilities, their sources and amounts of income (now, going forward, at retirement), their business operations (if any), their various insurances, their estate plan, their obligations, if any, to children and/or parents, their philanthropic interests, the impact of potential inheritances, their tax liabilities (income, estate, gift) as well as any particular objectives and purposes they seek to achieve.
We believe there cannot be a boilerplate or one-size fits all approach to financial advisory services. Every person, every family is unique; and so must our advisory services be. It is certainly true that, generally, with increasing wealth comes increasing complexity but our attitude is that complex financial life or not, everyone with whom we do business deserves customized services. Which leads me to disclose a dirty little secret of our business. Customization, real customization, is only economic to the service provider if it is consistently providing services to families with significant net worths. This is particularly true in those cases where the service provider is seeking to scale its business at a respectable growth rate, which most are. At CWC we are trying to square the circle, meaning that we seek to provide custom advisory services to the high net worth market but have made the strategic decision to provide the same level of customization to individuals and families with lesser net worths. I won’t go into our long rationale for this except to say that we have found that this is a happy way for us to do business. It also translates into a slower growth rate for our business in the short-term, but a very satisfactory one long-term.
We manage and advise as if every one of our clients is going to live forever. We have no use (unless pressed to the wall by the client) for any plan or scheme that contemplates reducing or eliminating net worth over life expectancy (or any other finite term). There are three reasons for this. First, no one knows how long he or she is going to live and no one knows what the costs attendant on a long life might be. It is only prudent, therefore, to assume long life and significant costs. Second, there is nothing worse than waking up at age 85 and realizing that you will be out of money at age 92 (or so I am told). If there is anything that will hasten the day of your demise, this discovery is it. Third, few parents plan to effectively disinherit offspring, so the issue of spending down net worth rarely arises where there is a child or children. That said, we do occasionally deal with someone, usually childless, who tells us “I don’t care if I leave anything to anyone or not.” This is generally a flip “first response” from someone who wants us to believe it’s him/her first and the rest not at all. (“I came in with nothing, no one ever gave me anything, I am fine going out with nothing.”) We would never directly challenge anyone on this attitude, but it usually turns out that with a little more discussion something deeper and more profound emerges. People, even the most hard-shelled, want to leave some kind of legacy, some kind of imprint that says, “I was here; I made a difference.” And people, even the most hard-shelled, will at some point reveal what form they would want that legacy to take. It could be a gift to a hospital that took particularly good care of a dying parent; it could be a bequest to the Humane Society from an animal lover; it could be a bequest to a national park that has been a favorite vacation spot; it could be a college scholarship program from someone who recognized the value higher education played in their life; it could be a bequest to an arts organization that has provided much personal and community pleasure. The list is endless and it needs only some time and sympathetic questioning to uncover the reasons why maintaining a meaningful net worth can translate into the deep satisfaction that a legacy commitment entails.
We believe that, despite what our training and experience might tell us about what is “right” or “appropriate” in the lives of our clients, at the end of the day we must take guidance from the “facts on the ground” (which is to say we must be responsive to the reality of the client’s situation no matter how “out of variance” this reality may be with what we believe constitutes best practices). One classic example of this is what happens when we come across a case of “undue concentration.” Mr. and Mrs. A have a $20 million net worth consisting of a home ($3 million), cash ($1 million), a retirement plan ($4 million), an art collection ($2 million) and one stock position ($10 million) in a publicly-traded company they own as the result of a stock-for-stock sale of their own company some years back. Almost always, in a situation like this, the clients know full well the risk they are taking with this concentrated position. And they don’t care. They have owned the stock for a long time and it has done well for them. The tax cost of selling to diversify would be material. And, for better or worse, they feel a loyalty to the company and all it has represented to them. In this case, to the extent we argue the case for diversification and the risks of undue concentration, we would be preaching to the unconvertible. Far better to expand our discussion to ways in which the risks might be mitigated while maintaining the position (or most of it). Our task as advisors is to bring to the client relationship what we believe constitutes best practices across the spectrum of personal and business finance, work within these practices where it is possible and sensible to do so, but work within the conditions imposed by the reality of client circumstances where it is not.
We believe that the most consistently successful strategy for building and sustaining wealth has four components. First, know thyself (A)…meaning understand your life situation in its entirety, including any discrepancies between what you have and what you need; second, know thyself (B)…meaning determine in a cold-blooded (that is, realistic) manner how you are going to close any gaps that may exist between what you have and what you need; third, recognize that the world is filled with “instruments and devices” (stocks, bonds, mortgages, insurance policies, wills/trusts, real estate, private business opportunities, loans, contracts and so on) that constitute the vehicles in which wealth is resident --and that there is no way anyone can know all there is to know or be able to determine with any finality how your best interests will be served; and fourth, establish and cultivate a relationship with an advisor that has the experience and the competence (and the right chemistry) to serve as your guide, sounding board, researcher, question-asker, quasher of misguided enthusiasms, investigator, mediator, recommender (for and against), challenger and extra pair of eyes. At the end of the day you are responsible for your own decisions, but at the start of the day your life will be made easier and more satisfying if you are in partnership with an advisor that brings all of these roles to the table on your behalf.
So then … how do we advise and manage in perilous times? In a way, just by holding fast to our “constants” (what we bring when we show up for an advisory engagement). The rest of the answer consists largely of refinements and nuances (of which there are hundreds, maybe thousands). Our execution on these refinements and nuances will vary from case to case and is what brings value to an advisory relationship with clients.
For example, we believe that real estate should be a core component of any asset mix. Unfortunately, there are countless ways to buy and/or finance real estate badly that can make a good investment in theory a bad investment in fact. We know this and advise accordingly. For example, we believe that ownership of common stock is a core component of any asset mix, but obviously not all companies are created equal. Diversification characterized by cautious selectivity (of asset classes, sectors and managers) can mean the difference between prudent and imprudent risk. We know this and advise accordingly. For example, we believe that there is one “best” way to accelerate wealth creation and that is through entrepreneurship (which could mean you as the entrepreneur or you as the financier of the entrepreneur). But entrepreneurship means more than just big risks of loss. As those who have financed early stage businesses know, there is always the risk of longer-than-expected development periods and the need for more money (and often down rounds) so that early stage investors must be in a position to continue investing or risk serious dilution, even if the company is ultimately successful. We know this and advise accordingly. For example, we believe that for most people, most of the time (even the well-to-do) the opportunity to invest in qualified personal or business retirement plans should be exploited. And we note that, particularly for senior for-profit and not-for-profit institutional leaders, there are certain relatively unfamiliar IRS Tax Code provisions that allow them to materially augment normal contribution limits. We know this and advise accordingly. I could go on; but you get the point.
Finally, let me not duck the big question: what about volatility and the risks of material declines in stock market values? From the location of 30,000 feet above the fray (distance correlates with perspective; the farther out the broader the perspective), here is our response:
Good assets, held for the long term, can be expected to increase in value.
Preoccupation with annual performance is misleading, to put it mildly. Generally, performance should be assessed over much longer periods, say ten years. “Up” years (or periods) are always “corrected” by “down” years (or periods) and only the resultant long-term annualized total returns (dividends + interest + capital gains -capital losses -management fees -inflation) represent true, or real, before-tax performance.
We have discovered, over many decades and many “experiments,” that certain attempts to hedge against down years, particularly market timing and various option strategies, rarely produce anything more than the net equivalent of a long-term buy-and-hold strategy (always assuming that you are buying and holding good quality assets whose prices bear a realistic relationship to something resembling “fair” values … an assumption, by the way, that makes a compelling case for active management).
There are techniques we do employ that mitigate, to some extent, market volatility (where the “market” usually means U.S. large caps as measured by the S & P 500). By far the most important of these is plain, old-fashioned diversification into a variety of asset classes that represent investments away from exposure to classes selling at or near historic highs to positions that represent quality assets at what we view as more reasonable prices. Examples would be investment in certain western European and emerging market positions to augment our positions in a variety of U.S. small and mid-cap companies. We also diversify, where client circumstances warrant, into short and intermediate term bond portfolios as a percentage of total client liquidity.
One last point as to all we have talked about above. CWC believes that the ultimate test of any opinion, attitude or conviction (whether financial or otherwise) is the extent to which these are translated into action. In our case, the translation is simple. We eat what we cook. Our staff invests in everything we recommend to clients and in meaningful amounts. We are always either the largest or among the largest investors in what our investors own. This guarantees nothing except that our opinions, attitudes and convictions are sincerely held and that we are absolutely willing to put our money where our mouths are.
Information contained in this publication is obtained from sources believed to be reliable; however, no representation as to accuracy and completeness of this information/data can be provided. Data used may be based on historic returns/performance. There can be no assurance that future returns/performance will be comparable. Neither the information, nor any opinion expressed herein, constitutes a solicitation by us for the purchase or sale of any securities or commodities. This publication and any recommendation contained herein speak only as to the date hereof. Christopher Weil & Company, Inc., with its employees and/or affiliates, may own positions in these securities.
All investments involve risk, including the risk of losing principal. It is vitally important that you fully understand the risks of trading and investing. All securities trading is speculative in nature and involves substantial risk of loss. Further, the investment return and principal value of an investment will fluctuate; Upon liquidation, a security may be worth more or less than the original cost. Past results do not guarantee future performance.
Investment in mutual funds is also subject to market risk, investment style risk, investment adviser risk, market sector risk, equity securities risk, and portfolio turnover risks. More information about these risks and other risks can be found in the funds’ prospectus. You may obtain a prospectus for CWC's mutual funds by calling us toll-free at 800.355.9345 or visiting www.cweil.com. The prospectus should be read carefully before investing. CWC's mutual funds are distributed by Rafferty Capital Markets, LLC—Garden City, NY 11530. Nothing herein should be construed as legal or tax advice. You should consult an attorney or tax professional regarding your specific legal or tax situation. Christopher Weil & Company, Inc. may be contacted at 800.355.9345 or email@example.com.