State of the US, Rally, 100 Clients

Three Things is back.

I took some time off from the weekly "Three Things" format because, frankly, the market was so crazy earlier this year that a weekly newsletter on a variety of topics just didn't cut it. Instead, I tried to frequently spam you with data about market corrections/rebounds, contextualizing the decline we experienced, what we should do, etc...

I had to reach pretty deep into my bag of tricks to find compelling reasons why you shouldn't panic in the face of an unprecedented decline, but we made it through that period and we'll be even more resilient when the next thing hits. I hope you found those emails valuable in the midst of chaos. 

Here we are today, June 9th, in a different situation that is perhaps not as scary to our portfolios, but is certainly an inflection point in each of our lives. I hope you find this newsletter similarly valuable. 

--Adam Harding, CFP 

(if you're new to this newsletter, "Three Things" is my regular thoughts and comments about three relevant topics I encounter throughout the week)

Thing #1: State of the Country

Sometimes the best thing to do is stop, listen, digest, think about your next move, then act. This applies to investing, it applies to relationships, and it applies to the change going on in our country right now. Here are some thoughts: 

The murder of George Floyd is the most recent in a long line of injustices against the black community in our country. Nearly 30 years ago on the Senate floor (1991), in the wake of the Rodney King verdict, which acquitted four police officers who were caught on videotape beating King, Bill Bradley offered the following:  

In the 1960s, James Baldwin, in the midst of great racial advances in civil rights, said, "beware the fire next time.’’

In the last twenty-four hours, another warning bell has rung and other fires have burned. If we as a nation continue to ignore the racial reality of our times, tip-toe around it, demagogue it, or flee from it, we’re going to pay an enormous price. What we need now, at this exact time, is hope and accountability. Accountability for the conduct of the police officers, and hope that the system of justice can work. (link) 

While the reality of history repeating itself may make you cynical, I'd encourage you to be optimistic. Conversations are taking place across the country in parks, streets, (virtual) classrooms and chatrooms, and at the dinner table. These conversations could inspire great change.

We clearly need a more just criminal justice system, real economic opportunity for more people, and everyone fulfilling their citizenship responsibility by making informed voting decisions. We also need reliable access to information and facts --which the current media environment is not committed to. I don't recommend you get your investment advice from CNBC and I think it's worth being similarly cautious about the current events you absorb from the mainstream media. 

Regardless of where you stand on the issues, I think we can all agree that society, as a whole, benefits from equal opportunities in employment and education... But it also benefits from maintaining relationships with people who are different than ourselves. Different perspectives means a broader rage of perception (your Johari Window)...

But more important than any of this is something I'll call "A Future Story"...

Perhaps this is just a different way to say hope, but the point is that people need to believe that their efforts today won't be for naught. We need to fight for and preserve the ability for everyone to craft their own future story, regardless of how society categorizes them based on race, ideology, gender, political party, etc. 

Thirty years from now I hope we are able to look back on this time as a real turning point. To get there, we can’t lose hope and we have to hold ourselves accountable.

I always try to use volatile market conditions to help investors build resilience and become better and more disciplined --I don't see any reason why societal turbulence and social unrest can't also allow us to emerge as better human beings. 

Thing #2: Market Rally

I'm human, just like you.

When things were going crazy in February and March, we all were having the same emotions -- mostly fear.  We know the process for making investment decisions, we know the data, and we know that the market has always bounced back. Yet we still have to actively fight off our fight-or-flight instincts in order to stay the course. I feel we mostly were able to do that/

After all, the news was terrible and famous investors like Bill Ackman were claiming that "Hell is coming" in a March 18th CNBC interview. The market hit a bottom on March 23rd and hasn't looked back since. 

More recently, Warren Buffett came out on May 3rd and announced he'd dumped all of his airline stocks after their unprecedented decline. Since that time, airlines have staged a tremendous rally... Even the Oracle of Omaha sold at the bottom.

Even the most famous investors fall victim to their humanity every once in a while.  

Nonetheless, In both blogging and individual client communications, I communicated an assumption that the rebound in the stock market would be rapid, particularly with the tailwinds provided by pre-COVID record-low unemployment and economic strength, as well as low interest rates and government stimulus. However, I would have never predicted the rise we've seen over the last 2 months, even as news hasn't gotten particularly better.

If you find it puzzling when a bleak economic report emerges from the press, only to be accompanied by a positive surge in the stock market, you’re not alone. The last few weeks have produced many examples of a stark contrast between stock market performance and economic indicators. So why the apparent disconnect?

I say this a lot, but markets are forward-looking, meaning current asset prices reflect market participants’ aggregate expectations. Those expectations include whatever future economic developments are anticipated and their potential impact on cash flows, which are key to a stock’s value. For example, if the market expects the economic environment to weaken company cash flows, stock markets may react well in advance of when we observe the impact on cash flows, as expectations are embedded in prices. And the eventual direction of the stock market will depend on how the economic outcome compares to expectations. If things aren’t as bad as expected, poor economic news can be greeted with a positive stock reaction.

We'll continue to remember this when investing for the future. 

Thing #3: 100 Clients

Nearly all companies start out small with the intent to get big. 

Big sounds impressive.

Big seems prestigious.

Big tends to compensate owners well. 

...But being big also comes with at a cost. You lose your relationship to the customer. 

In wealth management, how well you know someone is a decisive factor in giving advice.

Last month I participated in a Zoom meeting with a client and her estate planning attorney --we were working to restructure her trust to reflect new distribution wishes between her three adult children-- and without a thorough understanding of her family dynamics, I wouldn't have been any help in this meeting. We worked together, no stone was left unturned, and the trust reflected exactly what the client wanted.

Clients' attorneys only come around every few years, CPAs come around once or twice a year, but the wealth advisor is constantly engaged. If you're not frequently engaged, it gets hard to build a thorough understanding of what's important and what drives decisions and strategy.... This is what bigger firms are not good at.  

The raw quantitative inputs to a financial plan (income, net worth, tax rates, etc.) are super important, but they only go so far in building an approach. To put us in the best position to reach our desired outcomes, I have to really understand the behavioral traits of clients, their history when it comes to investing, their values and objectives, family, etc. 

When something like COVID-19 comes along and shaves 35% off the top of the stock market in about a month, an advisor's ability to bring a sense of calm is not about the raw quantitative data, it's about knowing who you're working with, leading with empathy, and then building solutions with a deep understanding of the person across the table from you... This too is what big firms are not good at. 

In the last 4 years, I've built the infrastructure to support a big firm and we've grown significantly. Yet, in the last few months I've spoken with most clients about the future of the firm and the overwhelming preference is that size doesn't matter, but personalized service does. In light of this, to preserve the nature of the work, I'm instituting a cap on the number of client relationships to 100. We're just barely below that right now (about 91).

I'm doing this to preserve my commitment to current clients, and to make sure we continue to do impactful work. I may open it up to more clients if I add necessary staff and technology to scale our offering, but for now we're staying small. 

Onward, 

Adam