Altus Insight- June, 2013
The Altus Insight
Market news, commentary and relevant topics for today’s alternative asset investor
Date: June 30, 2013
FR: Forrest Jinks
RE: Paddling with the Stream
We are excited to announce that thanks to reader requests, we will be starting a mid-month email detailing the various projects in which we are involved in addition to investment opportunities that may arise. These emails will only go to our existing investor database and the readers of this newsletter who opt-in to this new distribution list. While specific projects or funds may occasionally be mentioned in this publication, the majority of our activity and investment opportunities will be provided only to those on our new mailing list. If you are interested in subscribing, please respond to this email and we will make sure you are included in future distributions.
Now on to the meat of the matter…
Government intrusion: Much of the country is in uproar about the government blatantly infringing on the rights of its citizens through the Prism program and other revelations. I am one of those citizens. I despised the Patriot Act and I loathe the government collecting metadata from phone and technology companies, spying on journalists, and lying to Congress. Even more sickening is the hypocrisy of those that supported George Bush’s intrusions into private citizens’ lives who are now slamming the spying carried out by the current administration as well as those that slammed the Patriot Act (including Obama himself) who now support the current intrusion on freedoms. But what is happening isn’t new or surprising. Government intruding into the freedoms of American citizens is nothing new. Abe Lincoln, a President considered by many (including the current President) to be the greatest President ever, orchestrated a simultaneous raid on all the telegraph stations in the Northern States and confiscated all telegraphs sent within the previous three months. As is more commonly known, he also suspended the rights of habeas corpus and shut down several courts. Franklin Roosevelt, another popular President, imprisoned thousands of citizens of Japanese descent (and many of Chinese descent because the effort wasn’t made to distinguish between the two) during World War 2. Despite my aforementioned opinions (and emotions) on the matter, it is important that I distance myself from those opinions when considering current circumstances in light of my investing decisions. From an investing perspective, a trend towards greater government intrusion into our freedoms would normally go hand in hand with greater government intrusion into the economy, which of course we are also seeing. Government involvement in the economy creates favored asset classes or subclasses (like solar companies) with subsidies, favors, or tax breaks that can create profitability despite poor business or market fundamentals. Government involvement also increases the volatility of the economy and thus the markets (or vice versa) through inconsistent government action (i.e. different administrations, different pet projects) and by interfering with natural market operations which in turn hinders efficient capital allocation and increases the size of economic swings when they finally occur.
The other factor that has to be taken into account during periods of increasing government intrusion is an increase in regulations (generally more easily absorbed by big companies than small). A study completed by economists at North Carolina State University found the following:
“We find that regulation added since 1949 has reduced the aggregate growth rate on average by about 2 percentage points over the sample period. As usual, with the compound effect of growth rates, the accumulated effect of a moderate change in the growth rate leads to large effects on the level over time. In particular, our estimates indicate that annual input by 2005 is 28 percent of what it would have been had regulation remained at its 1949 level.” [Emphasis mine]
There are few that would argue for a country or economy with no regulation, but in light of studies such as the one quoted above, it just might be, that government intervention into the economy may not only increase volatility and create favored asset classes, it could also be hurting growth of the economy (and thus the standard of living of its citizens).
All this talk of increased government intrusion necessarily leads us too…
Investing in the Fed, the Economy, or the Company?In the real world an improving economy would indicate growing profits which would lead to an increase in stock prices. In our world the improving economy results in obscure language from the Fed saying they may consider tapering their massive quantitative easing at some point in the future. In the bizzaro world in which we now live, word of improving economic conditions leading to a reduction of Fed involvement in the economy results in an immediate and severe drop in stock prices. No longer is the market as a whole investing in the strength and future of particular companies, nor is it even investing in the tide of the economy which can raise or lower the profit of companies in general. The market is “investing” (if it can even be called that) in the sediment of the rest of the market and trying to beat the investor next door in or out of the market to take advantage of their next move. This is not investing, this is speculating, but the reason for the actions of so many in such speculations is understandable when traced back to the actions of the investors trusting their traders/mutual fund managers/hedge fund manager/etc. Stock prices are checked every few minutes with portfolio gains and losses easily calculated. If a portfolio isn’t keeping up with the market, there is a good chance that the cash will be moved to the latest and greatest star in the market. Outflow of capital results in companies having to adjust their positions, putting further pressure on the markets. Only the organizations with strong trust of their investors (or individual investors with high levels of discipline) can afford to truly have an investment strategy and stick to it. My hat is off to those organizations/investors. If you are an investor in the stock or bond markets that reacts to the short term moves of the markets I ask that you question your investment goals and the way you manage your investments. If you are doing it for the thrill and excitement…more power to you. If you are a trader and have the time to spend staying that tuned into the market…more power to you. But if you are investing with the future in mind (retirement, college education, new house, legacy, etc.) please understand there are far better alternatives. Some people get lucky and catch a shooting star, but an investor is far more likely to be successful by obtaining consistent returns, being patient, and placing money in solid investments. Not only will investing for value nearly always outperform the trading type investment in the long term on a relative basis, long term investing has far better tax treatment which increases absolute returns.It is absolute returns we as investors should be the most concerned with.
Absolute Return Strategy: I would bet that many, if not most, of the readers of this article could bump their investment returns by several percentage points without changing their overall investment strategy or their risk profile. Quite possibly the most overlooked aspect of investing is taxes. While a trader may brag at a Christmas party of their 15% gains for the year, the quiet guy in the corner may have obtained 3% gains for the year which could be the same net gains with a lower risk profile (and lower transaction costs) ON THE SAME ASSET. And this speaks nothing of strategies using different asset types, investment structures or investment vehicles. Additionally, investment structures and strategies can be used not only to reduce the taxes owed on the gains from the investment itself, but actually be used to reduce the amount of taxes paid on income from non-investment sources. It is not uncommon for people to increase their take home income/gains by 20, 30 or even 40% by working with the right accountant to restructure the investments and business. With an increase in knowledge (and possibly a good referral), you might be surprised how much benefit might be achieved. Due to increased volatility of the markets from the aforementioned government interference (which does not appear to be going away anytime soon), it isn’t enough to simply invest in the markets and hope for the best. As the saying goes, “Hope is not a strategy.”Altus Equity is not a licensed accountant or investment advisor, but we are experts in investment structure and many asset classes, and we have a pretty strong understanding of tax strategy as well (we will leave the specifics to the professionals). As a service to our subscribers we are happy to schedule a session with you to brainstorm your specific situation and share some of the strategies that are working for us. Please contact us to see if we can help you find some money.
Until next month,