Author: Jeff Cedarholm

A Farewell to Marty Whitman

Most of us vividly remember particular incidents in our lives. So it is with my chance meeting with Martin Whitman, founder and driving force behind the Third Avenue Value fund company. He passed away last week at age 93, and to quote his remembrance in last week’s Wall Street Journal, “He was an extraordinary investor, impassioned philanthropist, impactful teacher, and a true capital markets pioneer.” He was all of those things and more. In January of 1999 I took a week off from my day job to attend Benjamin’s Graham’s Columbia Business School course on value investing, resurrected after fifty years and taught by Bruce Greenwald. As you might expect, New York City in January is cold and dreary, and I found myself totally unprepared for the coursework coming at me. On the second day of the course, it was announced that we would have a mystery guest speaker to close the day with a reception afterwards. That speaker was Marty Whitman.

Keep in mind that January 1999 was close to the top of the internet bubble, which made his talk on deep value investing in both the stock and distressed debt markets even more interesting. Obviously, value investing was totally out of favor and Marty, along with other well-known value guys, like Jean Marie Eveillard of First Eagle and Robert Sanborn of Oakmark, was having a hard time and losing clients in that environment. During the reception in his honor, I introduced myself and was surprised how he drew me into a memorable conversation. He asked where I was from, and when I told him North Alabama, he asked where again. When I responded Gadsden, he laughed said he had been stationed at Camp Sibert just on the outskirts of Gadsden during WWII. I quickly understood that he had more knowledge of my hometown during that period than I did, and he enjoyed remembering stories from that time and place. He was very personable and also wanted to know about my family and career. When he found out that I was considering a career change, it became an even more important conversation. He urged me to consider an investing career and to follow a different path. I am forever grateful!

So, you might ask, “What is the relevance of this story”? First, Mr. Whitman was an extraordinary investor and seemed to be passionate about his craft and life in general. His style was global and always deep value. It led to him to outperform the stock market more often than not. Second, he was interested in people, who they were, and what they were doing. He didn’t have to talk to me, but his advice helped. And third, I very quickly learned that although over the years, he had been winning with deep value, that no style, even his, worked all the time. Flexibility and understanding of the rotations of the markets is very important, important enough to understand when and if his style or another style fits into a portfolio. In a 2015 interview he talked about how after the financial crisis, his funds struggled because the Fed’s quantitative easing and the lack of volatility. With the recent volatility, this investment climate appears to be returning to being a “stock pickers market.” Marty, along with many of his deep value peers, is undoubtedly smiling.

Thoughts on the Market

Note: This market review was published on January 23rd, 2018 and may not be reflective of current market or investing issues.

Rule No. 1 – Never Lose Money. Rule No. 2 – Never Forget Rule #1.

~Warren Buffet

Rarely do I listen to the talking heads on the business channels.  But when I do, or even when I listen to forecasts from money managers we know and trust, I am transported back to the late nineties. Back then all you heard was that “technology and the internet has created a new investing paradigm.”  How could you not have all your money in stocks, stocks that had no earnings, but were grossly overvalued?  There were a handful of excellent value managers during that time who refused to participate in the market frenzy, including the one quoted above.  Many lost over 70% of their assets, or were fired, or both!  Today, as markets head ever higher the phrase is that “there are strong earnings.  Global markets are synchronized and the investing environment is good everywhere.”  I just can’t figure out whether I’m in early 1997 or late 1999.

We do a lot of research at Longview.  Mostly we concentrate on global economies, the global investing environment, asset allocation, what to buy, why to buy, what not to buy and on and on and on!  Most economists we respect and follow think we are in the late stages of the economic cycle, meaning that we are much closer to the end of favorable markets than the beginning.  But that is where their consensus ends.  Some economists think this good investing environment could continue for several more years.  Others see storm clouds on the horizon.

Our main investment objectives are two-fold: 1) not to permanently impair your capital and 2) help our clients accomplish their financial goals.  We have done this over the years by growing assets when there is an appropriate environment and protecting assets when there is not.  We are data dependent, hence all the research mentioned earlier.  Eventually, we know we will have to transition from growth to protection.  We are not there yet, maybe not even close.  But we do think the global economy may transition into one that is much slower, similar to markets not seen for over fifty years.  Please understand that “may transition” means that there are multiple future scenarios, and none knows exactly which scenario will appear.  But we do think that there is a probability that the investment tools we now use could be exchanged for ones from a much different time, leading us to morph from grow to protect.

The Times, They Are A-Changin’

Bob Dylan, 1964

Please note, this market commentary is from October 2016 and does not apply to current market conditions.

Is Dylan literature?  Yes says the Nobel Committee and I hardily agree.   If you are a stickler for the term “literature”, Dylan would at least qualify as a poet.  But it is fair to say that the lines around what is and what is not literature have certainly been blurred.  As an aside, The Wall Street Journal reports that Gordon Ball, an English professor at Washington & Lee, was first in submitting Dylan’s name to the committee, some twenty years ago.

But back on point, this blog post is about investing, not literature, although I’m sure Barron’s weekly investing magazine would claim with their long history that they qualify to use the term “investment literature”.  Twelve years ago a client of ours objected to a particular company that was owned by a mutual fund within her portfolio.  She complained to me and wrote letters to the mutual fund company.  And while I procrastinated at first, I finally did a study of what are now called ESG (environmental, social governance factors) oriented funds.  At the time, there were not many professed ESG funds out there and the ones that were did not meet our criteria for returns or risk mitigation.  The best we could do was give our client the choice of keeping the offensive fund or standing by her convictions with the possibility of lower returns.  While she kept the offensive, but more lucrative fund, her objections, along with others over the years have not gone unheeded.

Barron’s just published their first study of sustainable funds, also known as SRI funds.  The terminology gets a little confusing, but SRI stands for socially responsible investing, synonymous with ESG.  More funds are adopting the sustainability mantra, not just because it feels good or their investors are demanding it, but because companies whose managements recognize having less environmental issues and better corporate “manners” tend to have inherently healthier and larger profit margins.  This leads to more sustainable corporate longevity, allowing funds to hold these investments longer, decreasing turnover and thereby enhancing tax efficiency.

One fund company rated high on Barron’s list is Parnassus. Longview’s investing team uses risk mitigation, return, tax efficiency, cost and many times, non-correlation as primary factors in choosing investments.  The Parnassus funds are a large holding in many of our portfolios because of these factors.  In the last twelve years, sustainability has become another primary factor to add to our list.  While the criteria of SRI varies greatly, generally funds that are using these methods are doing very well by doing good.  Yes, the times, they are a-changin’!

Brexit! Wild Markets, Tame Returns

Note: This market review was published on July 14th, 2016 and may not be reflective of current market or investing issues.

As investors, I don’t have to tell you how difficult the investing environment has been over the last eighteen months. Investors, and as such, stock markets are more correlated and interdependent than ever, and the “wisdom of crowds” has an extremely high betting average.  Rarely have I seen a strike out as bad as their collective miss on the Brexit vote.  The “markets” despise uncertainly, so after the vote we saw global stock, bond, and currency markets gyrate like they did last August (2015) and again in January of this year (2016).

As American investors, we are having trouble seeing the global market positives for Great Britain going it alone, although we understand it is not our decision.  Markets thrive on trade and we feel this will, at least in the short-term, make trading between the United States, the European Union, and a now independent Britain more difficult, hence less profitable for all, including us as investors.  Also, we now feel sure other countries within the European Union will be tempted to break away, so the EU will try to make a harsh example of Britain in negotiating new trade agreements to discourage this behavior.  Long-term thinking has the world considering the very future of the European Union and the potential market calamities every time another country holds a succession vote.

As the title suggests, we can expect wild markets and tame returns.

Disclosure: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by  Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.

Lower for Longer

Note: This market review was published on April 26, 2016 and may not be reflective of current market or investing issues.

In 2009, Carmen Reinhart and Ken Rogoff wrote a book entitled This Time Is Different, a play on the theme that it is never completely different, but usually very similar.  Essentially, this is a volume of financial crises statistics, dating back several centuries and including sixty-six countries.  Their prediction was, because we have suffered a credit crisis, it would take ten years or more for the global economy to get back on track.  Well, we are going on eight years and while the United States is slow but growing, most other large developed economies are a mess and their central banks are still hard at work trying to stimulate through monetary policy.  Even though Federal Reserve Chair Janet Yellen and other Federal Reserve governors passed on a chance to raise interest rates last September, after an August stock market mini-meltdown, they did finally raise rates by 0.25% in December.  Their projections at that time were to raise rates four more times in 2016, but after a New Year’s meltdown of almost 11% on the S&P 500, sanity has taken over and now it appears they may raise rates only twice this year.  Why, you ask, is this important?  Our Federal Reserve Bank has just two explicit mandates:  maximizing employment and stabilizing prices, with a third mandate of moderating long-term interest rates.  Unemployment is 5.0% and job growth has been strong, even showing mild signs of wage growth, and some signs of inflation are beginning to creep in.  So what gives?  Mrs. Yellen cites “fragile” global growth and she is probably correct to keep our interest rates lower for longer to help boost growth with our global trading partners, especially Europe.

In addition to interest rates staying low, most predictions for global stock market growth is much lower than normal, anywhere from 3 to 5% in the United States, slightly higher in countries whose asset prices have not appreciated to the high levels that ours have.  Predictions are that this may last 5 to 10 years.  In most developed countries, economic stimulus has boosted risk asset prices to high levels and corporate earnings have just not been able to keep up.  So we probably can expect lower for longer with stock and bond returns as well.  So is there anything going up?  Volatility, of course!  It appears that the next few years may give us, to quote Goldman Sachs, “wild markets, tame returns”.  Hold on to your hat!

Disclosure: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by  Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.



Here Be Dragons

Note: This market review was published on January 11, 2016 and may not be reflective of current market or investing issues.

“’Here be dragons,’ [is] a very interesting sentence.  In early maps, you see images of sea monsters; it was a way to say there’s bad stuff out there.”

                                                Thomas Sander quoted in Wikipedia

The Latin phrase, “HIC SVHT DRACONES”, meaning ‘here are dragons’ first appeared on the Hunt-Lenox Globe circa 1503-1507.  But long before that, images of sea monsters would appear on early maps, warning travelers that much danger awaited them as they sailed into uncharted waters.  After 2015, headed into 2016, this phrase seems to be very appropriate for the investing world.  Last year, with stocks flat in the United States and down in many other parts of the world, there seems to be danger lurking in every country and around every asset class and sector.

In my last blog published in late December, I discussed the possibility of a 60% stock / 40% bond portfolio giving us very low real rates of return after adjusting for inflation (~2.4%)  over the next five or even ten years.  That prospect is discouraging enough, but when added to the “sea monsters” of volatile stocks, commodities and currencies, not to mention the specters of rising interest rates and geopolitical tensions, as an investor, one really  begins to understand ‘here be dragons.’ Last month, I suggested that a broadly based non-correlated asset portfolio might be one solution for not only coping with volatility, but also better protecting assets while holding out the possibility of slightly enhancing returns.

So if you will, think that instead of just the tried and true 60% stock / 40% bond portfolio, an investor should consider using some real estate, some master limited partnerships, and maybe even a slice of managed futures.  In this environment, even that expanded portfolio may not create enough non-correlation to produce a consistent ‘5% real return.’ Then I mentioned “alternative risk premia.”

Over the years, many academics have studied (and profited from) anomalies in global markets.  For over 40 years, the classic work on these anomalies has been done by Eugene Fama (a recent Nobel Prize winner) and Kenneth French.  The anomalies, or styles, identified by Fama and French are those of value, momentum and defensive stocks (although the strategies work with other asset classes), along with carry, which is essentially borrowing at a low rate and lending at a higher one.  By using some long and short strategies, academically oriented investors have been able to produce positive results which offer sources of return that are largely independent of traditional risk factors, thereby helping us diversify the concentrated risk parameters of the “classic” 60/40 portfolio.

Of all the risk parameters Longview discusses, by far the largest risk we discuss on an ongoing basis is the risk of clients not being able to accomplish their long term goals.  Here be the real dragons!  Last month, I also mentioned that “investors need to focus on keeping their risk parameters in mind.”  With domestic stocks and bonds both being highly valued, the use of these new strategies are introducing new risks (not higher risks) allowing us to offset the high valuation risks that are all too obvious.  Remember, market volatility and risks are lurking everywhere, but to get the 5% real, maybe what we need to slay the dragons is hard work and broader thinking, along with a little love.

Disclosure: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by  Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.


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