I sense that the individual investor is not healthy, or at least, in shock – a deer in headlights.
The slide in crude oil prices has stopped many investors in their tracks. I can feel it. Something is not right. The individual investor is challenged and retrenching.
Many of the best financial advisors and individual investors hold energy-related equities for one reason or another, and they have not been spared by crude oil’s decline. The Energy Select SPDR (XLE) has fallen to levels first reached in 2008 (since before the Financial Crisis), and the Alps Alerian MLP ETF (AMLP), which tracks relatively stable midstream MLPs, has fallen to levels first reached in the first quarter of 2013.
For those that have lost money as a result of the slide in commodity prices from crude oil to copper to iron ore, I’m sorry.
I take it as a personal failure because, for all my life, there hasn’t been a time when commodity prices haven’t been volatile. I know this, and I could have done a better job making sure you were better prepared than most. It is not enough that we didn’t have any energy exposure in the Best Ideas portfolio and that we held the most resilient energy-related equities in the Dividend Growth portfolio.
It’s not enough for me to say that everything we do is by calculated design. We must be more transparent. We must fully explain that it is not that ‘we’re missing something’ or that ‘we don’t know something,’ but that we do what we do in the newsletters to put our members in the best position for success. This may not apparent, and we need to communicate better. We know what we’re doing, and we do the things we do for a reason. We’re not throwing darts at a dart board.
This is why I’ve made it my personal responsibility to do more face-to-face videos on valuentum.com/ on individual companies. I want you to hear my words, see the analysis, and understand the conclusions. I’m going to put more face time in than ever before. I feel that there is something terribly wrong with how we’re communicating, if Valuentum isn’t yet the talk of the investment world. You won’t find others promoting our process. They can’t, even if they want to. You have to come to your own conclusions.
To me, and I’ll be frank, there just isn’t a good reason to part ways with our team, and yes, if you do so, it is personal. There’s not another way to look at it. Valuentum is a window into our team’s thoughts, beliefs, and processes. It is not a screen of widely-disseminated data. It is not a random program on a computer that you log into every day. Our firm is an expression of how we view investing and our main mission: to offer the best and most accessible analytical judgment on securities, from stocks to ETFs. If you don’t recognize our good judgment in the newsletter portfolios, we’ve failed. We must communicate better.
In the Best Ideas portfolio, we’ve generated a 90% return in less than four years, all in front of our member base. The market has been at our backs, but when headwinds come (and they will come), I’m very confident we’ll grow relative outperformance. Further, the Best Ideas portfolio achieved its outperformance with lower volatility than the overall market, and this is really saying something. The market since mid-2011 has been relatively calm and on an upward slope, with perhaps one 10% correction, a correction that we pounded the table on to add protection.
Almost all of our calls in the newsletters have exceeded the market’s performance since inception. Almost every single one.
Still, we must and have to do better.
Our dividend methodology, the Dividend Cushion, has been phenomenal. It has predicted the dividend cuts of Seadrill (SDRL) and Linn Energy (LINE) and even that of Exelon (EXC) and First Energy (FE), just to name a few. There are a dozen more during the past few years that the measure predicted in advance. The empirical evidence supporting down-to-earth cash-flow-based dividend analysis is second to none.
The dividend payout ratio is a dinosaur. I don’t want to re-write the investing handbook, but I certainly want to influence it. The Dividend Cushion is probably the best and most comprehensive ratio for dividend analysis out there, and bloggers have simply been ignoring it and all its success, championing their own products. It’s really a shame that we have investors spending all of their time pouring over the track records of dividend-paying stocks. Yes, we’re back to rear-view mirror investing. The future is all that matters, people.
Perhaps without objection, the Dividend Growth portfolio has performed fantastically, with such big winners as Microsoft (MSFT) and Hasbro (HAS). It is achieving a high-teens annualized rate of return, and we’ve yet to have one dividend cut in the portfolio since inception. Not one. We’ve added some of the strongest companies from General Electric (GE) to Kinder Morgan (KMI), companies that we think will be able to ride out any sort of economic or geopolitical environment thrown at them – firms that are positioned to keep raising their dividends long into the future.
The performance of the underlying methodology, the Valuentum Buying Index, couldn’t be better either. We recently showcased the strong performance of the VBI in a broad documented case study. Members understand that the quantitative VBI should only be used across a broad swath of firms, but that a stock-picker, in building a portfolio, should always employ a qualitative overlay of the VBI.
That’s why our ideas in the portfolio are a bit more refined than those that top the VBI distribution list on any given update. When choosing 15-20 companies in a portfolio, for example, one must use a portfolio management overlay to apply any methodology that seconds as a process for a universe of hundreds or even thousands of firms.
We need to do a better job explaining what we do.
Last weekend, I traveled to present at a local investing chapter. I presented the Dividend Cushion, and I let the individual investor hold the actual financial statements of Microsoft as we calculated it. I’m sure it was a fantastic experience for many, if not all, to learn exactly what an analyst does – the analyst that derives the price target and intrinsic value for stocks, the building blocks of ETFs and mutual funds.
In fact, many came up to me and told me that they loved the presentation. Unfortunately, the person who introduced our firm mispronounced our name. I guess you can say it wasn’t exactly the endorsement I was looking for, after traveling 2 hours to present at the earliest slot of 8am. It’s hard work being new, even though this is our fifth year in business.
The sad truth, at least from my perspective, is that many in our potential client base have been investing for longer than I’ve been alive. Forty, fifty, maybe even sixty years. They’ve been doing what they’ve been doing for a long time, and I can’t change that. The demographic is not being replaced by the ’20-somethings’ either, as most young professionals are just getting their first jobs after years of underemployment due to the Great Recession. Though perhaps a bad example, individual investing may be taking the form of the baseball card industry — young investors aren’t replacing the old.
Yet, I get called a teenager. I get told how bad we are in colorful language. Given our performance, this business doesn’t make much sense at times. Some even ask me how our process performed during the stock market crash of 1929. Others want us to employ 10,000 people in order to pay us a nickel. Don’t they know that Warren Buffett only has a few dozen people in his Omaha office? It’s the conclusions that matter — not the number of people. Ah, the life of an asset manager: Build a portfolio, and you only have to disclose your holdings every quarter or so. But show everyone what you’re doing on a daily and hourly basis in nice prose, and they’ll cancel. It’s painful.
Frankly, I wish I was around to show how Valuentum would have performed during the Great Depression, but I wasn’t. I don’t have that data. Nobody does. I also wish I was there when the mutual fund industry first was taking off, too, but I wasn’t. How we managed to divide the fund industry into market caps and value and growth is beyond me. I think a salesman probably did it and then preached diversification in order to generate more fees. Perhaps that’s it.
It was the 1970s and 1980s and Jack Bogle of Vanguard managed to convince the baby boom generation that we can’t beat the market, even while admitting that there will be winners. He’s convinced Americans they can’t win, and they bought it. Some don’t even invest in stocks, let alone actively-managed funds. It’s been okay. After all, who hasn’t done well in stocks the last 40 years? The next 40 years may be different, however. For one, if we had stopped measuring returns in March 2009 (at the bottom of the Financial Crisis), the last forty years would have been much different. This industry is a marketing machine. When it comes to world history, the stock market is still very, very young.
Nothing wrong with it, but our potential client base believes what they want to believe – what they’ve read in books from the 1980s and 1990s, and what every good financial advisor preaches. But almost all the ‘rules of thumb’ are there to protect them from themselves. Is anybody besides Valuentum really pushing the research industry forward? Has the financial industry simply become the Taco Bell that didn’t want to innovate into a Chipotle? Or the Eastman Kodak that ignored the digital camera? Or IBM that refused to recognize personal computing? I doubt any financial firm will pursue disruptive innovation when they are simply rolling in the fees from investors’ dough. From asset management fees to who knows what they’re charging for — the consumer is getting screwed.
How about this one: diversification. But it’s really “di-worsification.” The word basically means that investors have no clue and must spread out all of his or her assets to survive. Here’s another: “You can’t time the market.” I often wonder if it was an advisor or asset management company that said such a thing because they didn’t want all the paperwork and felt such a mantra was the best approach to keep collecting fees during downturns. After all, how easy it is to preach sticking in the market regardless of what happens? Instead, these investors just cancel their research provider to save money. Crazy.
To me, ‘diversification’ and ‘you can’t time the market’ means: buy a bunch of stuff that generates commissions and keep your assets with us so that we can generate fees. It has the added bonus of helping to explain the up’s and down’s, too. It may seem like good “advice” to some, but to me, it’s nothing more than marketing material to benefit the legacy investment community and the inertia of the system. Ah, inertia — what a major problem in the fund industry.
I’m reminded of what President Reagan once said about his liberal friends: “It isn’t so much that liberals are ignorant. It’s just that they know so many things that aren’t so.” Having studied so much, I am shocked about what many individual investors believe that just isn’t so. Like I said before, I can’t exist in a different time to change it back then. I can only tell you the truth today, put up fantastic performance today, be transparent today, charge pennies for a full hour’s work today, and help you succeed right at this very moment. There are far too many bad investing books. I can’t nor do I want to read them all.
A colleague of mine who also subscribes to a competitor of ours (for incidentally about 30 times more than our annual membership dues) challenged our team on two separate occasions during the past few years, both with Altria (MO) and Baidu (BIDU), stating that he didn’t know why our fair values were so much higher than theirs. I had a number of conversations and shared a number of thoughts with him, and when the Valuentum process was proven correct, I felt that he was more disappointed than excited about what he was learning.
Some people can never be converted, it seems.
This is the dynamic that we’re facing. We’re just not going to be wrong too often. But building a business isn’t about our being right. It’s about helping others be right. And, as is the case, we need to teach. And then teach some more. We can’t just agree with investors in situations when we know that they’re wrong. We also can’t be unreasonably optimistic and pitch idea after idea when the stock market has had one of its best runs in history.
I’m not going to sacrifice our firm’s integrity for anything. I’m not going to set investors up for failure just for a few lousy bucks in subscriptions. And it really is a few bucks.
But sadly, we do lose business because we don’t pitch stocks every other second. We do lose business because we tell investors when we think the market is vulnerable. We do lose business for being honest. You heard that right. I can’t believe it either.
At the end of the day, the common stock investor has to accept two basic facts of the stock market to understand why the Valuentum process is superior to any other wealth-creation strategy out there.
One: he or she must acknowledge that price is different than value and be interested in stocks that are underpriced. Second: he or she must accept that other people must buy those stocks in order for price-to-fair value convergence to occur. Pretty straightforward facts, no? Nobody else has thought of this strategy in the past 100 or so years, but it is not our fault that it is not written in the books investors read 20, 30 or even 40 years ago.
We’re doing something that should have been done decades ago.
Simply put, no other process combines value and momentum into an informative outcome on individual equities, with key emphasis on informative outcome. Others can combine just about anything they want, but sometimes it doesn’t make much sense. I’m often reminded of Motley Fool’s Foolish Four folly when I think about some of things research firms have tried to get individual investors to buy into. I have no comment on that, but you can read about it.
A certain someone in high circles from another firm said that she’d never want to run a research department that serves the individual investor. That turned out to be the right thing for her. She’s doing well. Another certain someone in even higher circles said there’d be no market for DCF valuation analysis with the individual investor. Seeing the “perceived” success in graphical tools of the PE ratio, which is about as rudimentary as it gets, I just don’t know anymore. Others have said that serving the individual investor is one of the worst businesses out there. Is it?
If you ask me, I don’t care what they say. I’m making my living serving the financial advisor and individual investor. It’s my livelihood.
But how do we endure? First, I believe that this industry needs change and a new voice. Second, I feel like I’m the only one that can do it. Others with similar ambitions have conflicts, and they’re not ready to stop the inertia via disruptive innovation because things are so good. The individual investor is simply eating out of the palm of their hand.
Valuentum is a mission – a mission for change, and I will never turn my back on this duty and responsibility. Being the best and working the hardest is all one can do. It’s up to others to notice. Everyone will…eventually.
My dedication, however, means I’m either taking a vow of poverty in the likes of my favorite documentary film producer Ken Burns, or that I’ll manage to show millions of people that, for just a few pennies a working hour, Valuentum is the real deal. You and I both know we are the real deal, and you understand what I’m talking about. The word is spreading, and the legacy investment community knows it.
Without further delay, here’s a few of my recent face-to-face videos on some of the most widely-followed stocks:
Why We Include Union Pacific in the Best Ideas Portfolio
3 Reasons Why We Like Kinder Morgan
Nelson: “eBay’s…Share Price Remains Significantly Undervalued”
Nelson: “IBM…Is In a Lot of Trouble”
Johnson & Johnson Still Strong Dividend Growth Idea
My best wishes to you and yours.
Brian Nelson, CFA
President, Equity Research
brian@valuentum.com