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Investor Returns vs. Unrealized Gain/(Loss) Cost Basis Reporting

Investor Returns vs. Unrealized Gain/(Loss) Cost Basis Reporting

 

Written by Ethan S. Braid, CFA on 11.01.2016

 

The author, a fee-only registered investment adviser with more than seventeen years of experience, manages $80 million dollars of client assets for high net worth investors.  The goal of the article is to help consumers learn the difference between investor return on investment and unrealized gain/(loss) cost basis reporting for an investment.  Many large custodians ($500 billion or more in client assets) do not show investor return on investme on nt on their clients’ statements.  Instead these custodians simply demonstrate the unrealized gain/(loss) relative to cost basis on the securities held in an investor’s account.  Since this gain/(loss) is shown from an unrealized taxable gain/(loss) perspective, investors frequently believe they are losing money on an investment when in fact they are making money.   

 

 

Why am I losing money?

 

In my role as an investment adviser, I have the distinct privilege of providing advice to clients who have achieved great success in their respective careers and businesses.  Many have degrees from the top universities of the world.  They are highly specialized surgeons, attorneys, entrepreneurs, educators, engineers and CPAs.  They are smart, disciplined and worked exceptionally hard to create their wealth.  Yet so many times over the years, clients have asked me why they are losing money on securities they hold when in fact they are making money.  How could this be I wondered, my clients are smart, how can they not realize they are making money and instead think they are losing money?  The factor causing the confusion is how custodians demonstrate gain/(loss) on client statements.  Many custodians only show unrealized gain/(loss) as it relates to cost basis and nothing more.  ROI is ignored.  To help mitigate the confusion, I have produced this educational article.

 

Let’s start with return on investment.

 

Return on investment (ROI), a very simple and important performance metric, is often neglected on many custodians’ statements. 

 

ROI = (Investment Ending Value – $ invested)/$ invested

 

It is important to note that for securities that pay dividends, all dividends paid, whether in cash or in additional shares of the security, need to be included in the investment ending value.   If the dividends are in the form of additional shares, then the ending value of those shares will be used for the ROI calculation.

 

An example for the sale of a stock that was held for ten years:

 

  • Purchase of XYZ for $50,000 with no further additions, $ invested = $50,000
  • Cumulative dividends reinvested in XYZ over 10 years in the amount of $20,000
  • At the end of 10 years XYZ is liquidated for a total investment ending value of $65,000

 

ROI = ($65,000 - $50,000)/$50,000 = 30%

 

Total Pre-Tax Profit = $65,000 - $50,000 = $15,000

 

How would unrealized gain/(loss) cost basis reporting be different?

 

Sticking with the same example, we first need to highlight how unrealized gain/(loss) is reported.  Custodians report unrealized gain/(loss) on their statements as follows:

 

Unrealized gain/(loss) = Current Value – Cost Basis.

 

Current value is what you could sell the investment for.  Cost basis is what you invested + any dividends or capital gains that have been re-invested.  In this case, the cost basis would be $50,000 + $20,000 = $70,000. Therefore, on many custodian statements, the 30% ROI for the above investment would instead appear to be an unrealized (loss) calculated as:

 

Unrealized gain/(loss) = $65,000 - $70,000 = ($5,000) (loss)

 

This investor has made a cumulative pre-tax return on his investment of $15,000 or 30%.  His custodian however, is showing that he is losing money to the tune of ($5,000).  How confusing.  Frustrated?  Blame the IRS.  The custodian is focused on showing what would happen, in terms of taxable activity, if the investor sold the investment today.  Because past dividends have already been received and taxed, those dividends adjusted the cost basis of the investment upward by the amount of the dividends received.  Since the investment’s value is currently less than the total of the $ invested plus the past dividends received (and taxed), it could be sold for a loss.  This loss however is a tax loss.  The tax loss of ($5,000) does not change the fact that the investor had a pre-tax return of $15,000 overall. 

 

Don’t forget the dividends!

 

In my experience, when addressing this topic with clients and prospective clients, neglecting dividends is often at the root of the confusion.  Additionally, many investors do not know the difference between ROI and unrealized gain/(loss) vs cost basis.  Most investors tend to look at the unrealized gain/(loss) reported on their custodian’s statement and forget that the cumulative dividends need to be either added to the current value or subtracted from the cost basis, in order to calculate ROI.  Cumulative dividends would be added to ending value in the ROI calculation if they were never reinvested.  Cumulative dividends would be subtracted from cost basis in the ROI calculation if they were re-invested.

 

Examples

Ex. for adjustment of Current Value in the ROI calculation, dividends were not re-invested:

 

Adjusted Current Value = Current Value + Cumulative Dividends Received in Cash

 

ROI = Adjusted Current Value/$ invested

 

Ex. for adjustment of Cost Basis in the ROI calculation, dividends were re-invested:

 

Adjusted Cost Basis = Cost Basis – Historical Value of Cumulative Dividends Re-invested

 

ROI = Current Value/Adjusted Cost Basis

 

Ethan S. Braid, CFA

President

HighPass Asset Management

800 – 672 - 7916

www.highpassasset.com        

 

About the author of this article.

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.  Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry over 17 years ago. Mr. Braid earned a BS in finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA charterholder.  The CFA program is a graduate level, globally recognized, multi-year program with a focus on investment knowledge.  Candidates for the program commit an average of 900+ hours of cumulative study time to complete all three levels.

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as:  estate planning, retirement planning, investment analysis, mergers & acquisitions, business history and behavioural finance.  Mr. Braid has a passion for business history with a focus on the late 19th & early 20th centuries.  To date, Mr. Braid has read 72 books on the subject areas above.

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting.  Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

This article is provided by HighPass Asset Management for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.

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How to Pick a Great Financial Advisor

 

Written by Ethan S. Braid, CFA on April 22nd, 2016

 

The author, a fee-only registered investment adviser with more than sixteen years of experience, manages over $70 million dollars of client assets for high net worth investors.  The goal of the article is to provide consumers with a solid process to select and then evaluate a great financial advisor.

 

 

Background

 

The thought of finding a financial advisor can produce a range of emotions for the average investor spanning from intimidation to relief.  While there are some great financial advisors there are also plenty of salesmen disguised as financial advisors.  Some financial advisors are well educated while others have no education.  Some financial advisors have credentials that require years of graduate level study and add-value while other financial advisors have credentials that nearly anyone can earn with minimal difficulty.  Not all financial advisors are required to act in their clients’ best interest.  According to the Department of Labor, investors receiving conflicted investment advice can expect their investments to underperform by an average of 100 basis points.  Over the duration of the client-advisor relationship, such underperformance can add up to very large sums of money in the form of foregone earnings.  Therefore, finding a true advisor should be the objective of every consumer searching for a financial advisor.  This article will teach consumers a process by which they can find, interview and evaluate financial advisor candidates.  The article will be divided into four focus areas:

 

  • How to find great financial advisor candidates.
  • Questions to ask during the interview.
  • Items to observe after the interview.
  • How to evaluate the financial advisor after she has been hired.

 

What Does a Great Financial Advisor Look Like?

 

Great financial advisors are out there, but they are in short supply.  In my estimation, great financial advisors make up somewhere between 10 – 20% of the army of financial advisors in the United States.  Great financial advisors, will have the following traits and skills:

 

  • Puts the client first, at all times.
  • Well educated in finance, accounting or economics.
  • Has read numerous books to help develop her own investment philosophies.
  • Experienced.
  • Values of:  loyalty, honesty, fairness, hard work and integrity.
  • Transparent.
  • Follow-through.
  • Fee-only.
  • Passionate about being an advisor.
  • Has a well-defined process for helping clients.
  • Problem solver.
  • Analytical thinker.
  • Positive attitude.
  • Does not sell products.
  • Has no conflicts of interest.
  • Trustworthy.
  • Listens.

 

How to Find Great Financial Advisor Candidates to Interview – Values Matter.

 

Looking in the right places is important when searching for something or someone.  For example, if you tried fishing for tuna in Lake Michigan, you can fish all you want, but you won’t catch a tuna!  The same goes for finding a great financial advisor, you need to look in the right places.  I am firmly of the opinion that birds of a feather, flock together.  Consider that statement when searching for your financial advisor.  You want a person who shares your values.  You want an advisor who at a minimum has core values that consist of:  honesty, loyalty, integrity, trustworthiness and fairness to the client.  Shared values and common interests help bring people together.  Who do you know that is honest, loyal, trustworthy, has integrity and is fair?  Chances are that his or her financial advisor has those same values. 

 

Make a list of the values you are looking for in a financial advisor.  Most likely, a number of those values are your own personal values.  Then apply that initial screen, let’s call it the values screen, to the people in your life who you believe are successful and currently working with a financial advisor.  Examples include:

 

  • Friends.
  • CPAs.
  • Coworkers.
  • Family members.
  • Attorneys.
  • Your Physician or Dentist.

 

Once you have produced your list of potential referral sources, ask them, “who is your financial advisor?”

 

Tough Questions to Ask the Financial Advisors You Interview.

 

  • How do you get paid?
  • What are your top five most important values?
  • Will you be my fiduciary, on all of my accounts?
  • Do you sell life insurance or annuities?
  • What licenses do you have?
  • Tell me about two planning cases that you worked on where your advice had a significant, measurable impact on the client’s life.
  • What is your education?
  • Are you fee-only or fee-based?
  • Tell me about the books you have read.
  • Describe your investment philosophy.  
  • How did you develop your investment philosophy? 
  • How long did it take to develop your investment philosophy? 
  • Which persons were most influential in the development of your investment philosophy?
  • Can I see your tax return?
  • How do you invest your own wealth?
  • Do you personally own the investments that you recommend to clients?
  • How did you create your wealth?

 

This list of questions will help you analyze and examine the financial advisor.  Do not be afraid to ask these difficult questions!  You are considering turning your life savings over to the individual.  Given the significance of the decision and the high costs associated with choosing a bad advisor, you must ask these questions.

 

Any flinching or unwillingness to answer these tough questions are your signals that the advisor is unfit to manage your wealth

 

Great financial advisors who are confident in the value they offer clients will be more than willing to field these tough questions.  They will immediately respond to these questions in a transparent and straightforward manner.  They will be proud of their process and happy to describe it to you.  A great financial advisor will not be ashamed of her fees and instead will make sure you understand how you pay for her services and why the fees are justified. 

 

Ultimately, you can consider these questions a way to further analyze the character of the advisor you are interviewing.  Character matters when you are trusting someone with your wealth.  Identifying a solid character can help you separate the minority (true advisors) from the majority (salesmen).  True advisors put their clients first at all times.  Salesmen are looking out for themselves.  Do you want to be advised or sold? 

 

Items to Observe.

 

  • Follow through.
  • Trustworthiness.
  • Does the advisor give your case her, “all?”
  • Transparency.

 

Both before you select a financial advisor and during the asset transfer process after you have selected an advisor, there are certain boxes you will want to check to confirm you made the right choice.  Follow-through helps build trust.  When someone tells you they are going to do something, especially if a deadline is involved, you expect they will make good on their word.  If they don’t, then you begin to question their reliability and trustworthiness.  An advisor who demonstrates follow-through is showing you that he or she is thorough and organized.  Important qualities for someone managing your wealth.

 

When I speak of the advisor giving your case their “all,” I am referring to the advisor putting her heart into it.  For anyone who played a sport in high school, college or professionally, I am referring to the feeling you had when you left the field knowing that you gave all you had to give.  Like Vince Lombardi said, “leave no regrets on the field!”  Ideally, your advisor works on your case, and all of his cases, with passion, loyalty and commitment. 

 

Why do I make an issue of the advisor giving your case his, “all?”  There are a lot of advisors who just go through the motions or cut corners.  When it is your wealth and your future at stake, you don’t want your advisor providing you with lip service and boiler plate documents.  You don’t want an advisor who has her assistant build your financial plan and then acts like she did it herself (unfortunately, this is an all-too-common practice).  Going through the motions is a great way to achieve mediocrity at best. 

 

Evaluation

 

Evaluating a financial advisor is not always easy.  One problem I see often is that investors mismatch the time horizon of their expectations for returns with the time horizon of the investments in their portfolio.  For example, many times I have met investors who became displeased with their advisor over market losses within the first year of the client-advisor relationship.  At the same time, the investors held long term investments that needed to be judged over seven to ten years and not one year. 

 

Therefore, setting expectations properly will help to evaluate the advisor’s performance.  For example, when analyzing advisor managed investments, be careful to compare apples to apples and not apples to oranges!  If you have a balanced portfolio, you should not be benchmarking against the Nasdaq and vice versa.  

 

Ultimately a great financial advisor will have solved your planning problems and shown you a path towards your goals.  A great financial advisor will manage your wealth in a manner that is consistent with your individual risk tolerance.  A great financial advisor will help you grow your wealth at a rate greater than inflation.  A great financial advisor will spend a considerable amount of time asking you questions, learning who you are and listening to your story.

 

Some questions to think about when evaluating your financial advisor:

 

  • Was a benchmark set?
  • Do you have the right benchmark?
  • Are you happy with the advisor’s communication strategy.
  • Is the advisor paying attention to your account?
  • Is the path to your goals realistic?
  • Does the planning solution make sense to you?
  • Were your problems solved?
  • Did the advisor ask you lots of questions?
  • Did the advisor listen to you?

 

 

Ethan S. Braid, CFA

President

HighPass Asset Management

800 – 672 - 7916

www.highpassasset.com        

 

About the author of this article.

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.  Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry over 16 years ago. Mr. Braid earned a BS in finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA charterholder.  The CFA program is a graduate level, globally recognized, multi-year program with a focus on investment knowledge.  Candidates for the program commit an average of 900+ hours of cumulative study time to complete all three levels.

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as:  estate planning, retirement planning, investment analysis, mergers & acquisitions, business history and behavioural finance.  Mr. Braid has a passion for business history with a focus on the late 19th & early 20th centuries.  To date, Mr. Braid has read 70 books on the subject areas above.

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting.  Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

This article is provided by HighPass Asset Management for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.

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DOL Conflict of Interest Rule (Fiduciary Standard) - Can you Teach an Old Dog New Tricks?

Written By Ethan S. Braid, CFA on March 22nd, 2016

Over the last five years the Department of Labor has been hard at work crafting a proposed rule to address rampant conflicts of interest that currently exist in the market for retirement advice to retirement plans and IRA owners.  Overall the thrust of the proposal is in the right direction and will ultimately benefit the American consumer.  However, the rule is far too complicated and provides too many exemptions to the same business practices it seeks to ban.  There will be unintended consequences of this proposed rule.  In this article I will highlight what is good about the proposed rule, what is bad about the proposed rule, the opposition to the rule and what the unintended consequences of the rule will be.

 

The Good.

 

The DOL correctly identified that a significant problem exists in the marketplace for retirement advice:  conflicts of interest.  According to the DOL, research suggests that consumers who receive conflicted investment advice can expect their investments to underperform by an average of 100 basis points per year over the next 20 years.[1]  For many investors, this could result in underperformance that amounts to over $100,000 of foregone investment gains.  The DOL specifically states, “Non-fiduciaries may give imprudent and disloyal advice; steer plans and IRA owners to investments based on their own, rather than their customers’ financial interests; and act on conflicts of interest in ways that would be prohibited if the same persons were fiduciaries.”[2]  “Advisers commonly have direct and substantial conflicts of interest, which encourage investment recommendations that generate higher fees for the advisers at the expense of their customers and often result in lower returns for customers even before fees.”[3]

 

Translation = your so-called “financial adviser” can take advantage of you, legally, if they are not a fiduciary.

 

In the proposal, the DOL acknowledges what HighPass has been saying for years:  investors do not understand the difference between brokers and investment advisers.  Specifically, the DOL states, “consumers often do not read the legal documents and do not understand the difference between brokers and registered investment advisers particularly when brokers adopt such titles as “financial adviser” and “financial manager.””[4]    

 

Translation = consumers don’t understand the products they are being sold, how their adviser is getting paid or what legal standard (suitability vs. fiduciary standard) the adviser is following.

 

Way to go DOL!  In my sixteen+ years of experience as a financial adviser I have met with hundreds of investors.  My personal experience has been that even the most sophisticated investors can fall victim to conflicts of interest and hidden fees.  No investor I have met, in my entire career, has ever been able to properly identify the non-transparent commission as well as ongoing fees that they were paying for the numerous variable annuities I have reviewed.  As the DOL points out on page 21932 of their proposal, the variety and complexity of financial products has increased which in turn has widened the information gap between advisers and their clients.  With brokers and dual-registrants (a financial adviser registered as a both a broker and an investment adviser) referring to themselves as “financial advisers” it is easy to see why the consumer is so confused.  Consumers often do not realize that their financial adviser is just a product salesman in disguise.

 

I commend the DOL for properly identifying a major problem that consumers are up against and attempting to take action to solve the problem.  If put in place, I do believe that consumers will certainly benefit.  A great number of financial advisers who, for years, have been ripping off their clients, would no longer be able receive massive hidden fees when investing a client’s money in an IRA. However, it appears that the rule may not be as effective as one would hope…

 

The Bad. 

 

The bad can be summed up in one word:  lobbyists.  In reading the proposal, it becomes readily apparent that lobbyists had a heavy influence on the individuals at the DOL who developed the proposed rule.  The proof is in the numerous exemptions and exceptions to the proposed rule.  Some of these exemptions will allow financial adviser sales and compensation practices, that would otherwise be prohibited for a fiduciary, to continue.  For example, brokers often receive revenue sharing, 12b-1 fees, and other compensation from the parties whose investment products they recommend.  If these brokers were treated as fiduciaries, the receipt of such fees could violate the code’s prohibited transaction rules.[5] The DOL is proposing to allow these compensation practices to continue by providing a Best Interest Contract Exemption.  According to the DOL, the exemption requires the firm and the adviser to contractually acknowledge fiduciary status, commit to adhere to basic standards of impartial conduct, warrant that they will comply with applicable federal and state laws governing advice and that they have adopted policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest, and disclose basic information on their conflicts of interest and on the cost of their advice.[6]

 

So on one hand, the DOL states that consumers don’t read legal documents given to them by brokers and don’t understand the important differences between registered investment advisers and brokers.  The DOL has gone so far as to state that, “disclosure alone has proven ineffective to mitigate conflicts in advice and that most consumers generally cannot distinguish good advice, or even good investment results, from bad.”[7]  Then on the other hand the DOL is providing brokers with the ability to engage in prohibited transactions that a fiduciary could not engage in by simply having the client sign a form that contractually acknowledges fiduciary status!

 

Translation = DOL thinks investors are dumb.  But wait a minute DOL, you said that investors don’t read or understand legal documents and yet you are going to allow the same behavior you want to eliminate (prohibited transactions), to continue, so long as brokers provide disclosure documents to clients and both the broker and client sign a form contractually acknowledging fiduciary status.

 

 

The Opposition.

 

When you threaten to alter the way an industry charges consumers, even if the change is for the better, there will be a fight.  In this case, broker dealers, insurance companies, mutual fund companies and financial advisers have all fought back against the DOL.  These industry participants argue that by enforcing fiduciary status on all brokers and advisers who counsel IRA investors, there will be significant disruptions to both advice and service.  They claim that forcing advisers to always do what is in the best interest of the client will result in:  less investment advice, higher up-front fees, and a reduced level of assistance to investors, particularly to investors with smaller accounts.[8]  Under the current system, they argue, brokers will service smaller investors because they can give these investors a free financial plan when the investor buys a product like a variable annuity.  In other words, so long as investors pay 7% hidden loads with ongoing high fees and trailer commissions, brokers and financial advisers will be willing to service these clients.  But take away the ability to sell products with massive hidden commissions and require brokers and financial advisers to work for a transparent fee and be required to always put client interests first and all of a sudden they don’t want to do the work anymore.  Great!  Maybe all of these bad apples will quit!  What is wrong with putting your clients’ interest ahead of your own, at all times?  Here is what I have to say to the people at the insurance companies, broker dealers, etc. who are making that argument:  take a good long look at yourself in the mirror, if you don’t feel ashamed, something is wrong with you.

 

The Unintended Consequences.

 

A problem that the DOL correctly identified is going to metastasize and grow into something larger, uglier and more problematic.  The DOL in their proposal noted that the typical investor does not know the difference between a broker and a registered investment adviser.  The DOL accurately mentioned that brokers use titles such as “financial adviser” implying significant investor confusion. In the late 1990s brokers began to hijack the title financial adviser.  Now, nearly two decades later, consumers don’t know the differences between brokers, registered investment advisers and the more common dual-registrant (a financial adviser who is registered as a stockbroker and an investment adviser).  As a result of this consumer confusion, investors are often completely oblivious to hidden fees, products sales and conflicts of interest because they mistakenly think that their financial adviser is looking out for them.

 

Much like the issues that have developed from dual-registration and brokers using titles like “financial adviser,” allowing every broker who manages IRA accounts to tell clients they are “fiduciaries” is going to create even more confusion.  This will result in advisers who work for insurance companies or broker dealers telling clients they are fiduciaries and selling the benefits of working with a fiduciary.  I promise you however, that many of those advisers will not tell their clients that they are not acting as a fiduciary when they sell the client a variable annuity in the client’s trust account or a maybe a life insurance policy for the ever elusive and unicorn-like “tax-free” growth of the client’s money.  The end result is going to be a lot of very confused investors.  Can you teach an old dog (100s of thousands of financial advisers who have been brokers their whole career) new tricks?  I am doubtful.

 

HighPass Opinion & Suggestion.

 

The general direction of the proposed rule is very good.  In some ways however, I think it goes too far.  Not all IRA accounts should be subject to the fiduciary standard nor should all brokers or financial advisers who provide guidance to IRA accounts.  The proposed rule attempts to provide exemptions and exceptions but the end result will be confusion.  In my opinion, the DOL should simplify this overly complicated proposed rule.  My suggestion is as follows:

 

No-one can call themselves a “financial adviser” unless they are a fee-only fiduciary, have no conflicts of interest and thus do not sell any products, including insurance.

 

Everyone else (which will be over 80% of existing financial advisers) will use the old title of stockbroker or call themselves a dual-registrant.  All clients who work with a stockbroker or dual-registrant must sign a one-page form that boldly and explicitly states that their financial adviser is not required to act in their best interest and that the investor’s portfolio may underperform due to higher fees and conflicts of interest.

 

Let the investor decide what is best for them.

 

Ethan S. Braid, CFA

President

HighPass Asset Management

800 – 672 - 7916

www.highpassasset.com        

 

About the author of this article.

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.  Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry over 16 years ago. Mr. Braid earned a BS in finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA charterholder.  The CFA program is a graduate level, globally recognized, multi-year program with a focus on investment knowledge.  Candidates for the program commit an average of 900+ hours of cumulative study time to complete all three levels.

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as:  estate planning, retirement planning, investment analysis, mergers & acquisitions, business history and behavioural finance.  Mr. Braid has a passion for business history with a focus on the late 19th & early 20th centuries.  To date, Mr. Braid has read 70 books on the subject areas above.

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting.  Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

This article is provided by HighPass Asset Management for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.



[1] Federal Register/Vol. 80, NO. 75/Monday, April 20, 2015/Proposed Rules, page 21930

[2] Federal Register/Vol. 80, NO. 75/Monday, April 20, 2015/Proposed Rules, page 21928

[3] Federal Register/Vol. 80, NO. 75/Monday, April 20, 2015/Proposed Rules, page 21930

[4] Federal Register/Vol. 80, NO. 75/Monday, April 20, 2015/Proposed Rules, page 21934

[5] Federal Register/Vol. 80, NO. 75/Monday, April 20, 2015/Proposed Rules, page 21946

[6] Federal Register/Vol. 80, NO. 75/Monday, April 20, 2015/Proposed Rules, page 21948

[7] Federal Register/Vol. 80, NO. 75/Monday, April 20, 2015/Proposed Rules, page 21952

[8] Federal Register/Vol. 80, NO. 75/Monday, April 20, 2015/Proposed Rules, page 21946

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Oil - Ignore It

Written by Ethan S. Braid, CFA on 12.29.2015

 

HighPass first commented on commodities and oil over two years ago in an article written on March 28th, 2013.  In that article, “Avoiding the Bond Bubble,” the case was made for why commodities were a poor diversification option and why oil appeared likely to fall.  Oversupply, a stronger dollar and a slowdown in China were the three headwinds noted that could eventually bring oil down.  Oil was $94 a barrel when that article was written.

 

A lot has happened to commodities and oil since March of 2013.  My concern back then, that we could see fantastic price destruction in commodities, has become reality.  Today oil trades at $37 a barrel.  Oil is 60% lower in price over the last two years and an incredible 75% below the 2008 high of $150 a barrel.

 

Recently the stock market has experienced selling pressure on days that oil has gone down in price or when the outlook for oil has indicated even lower prices may be ahead.


Why?

 

Memories of past depressions may be partly to blame.  History shows that there have been periods in time when falling commodity prices preceded depressions.  For example, the depressions of 1920 – 1921 and 1929 – 1939 experienced significant commodity price declines at the beginning stages of the depressions.  However, in those depressions, commodity (the price of steel for example) price drops were a result of lower demand.

                                                    

Lower demand from an economy in trouble is not the case in 2015.  Instead, oversupply and a stronger currency have been the primary drivers of the recent commodity declines.  The U.S. economy continues to grow.  According to the Federal Reserve Bank of St. Louis, total nonfarm payrolls were 137.3m in November 2013, 140.2m in November 2014 and 142.9m most recently.  Real GDP was $15.6t in Q3 2013, $16.0t in Q3 2014 and $16.41t most recently. 

 

Therefore, despite the decline in oil the general economy continues to grow.  An investor would be wise to disregard the daily price movements in oil as a reason to sell or buy stocks.  The economy is improving.  Dividend yields are attractive.  Credit is available.  Valuations for the stock market, while slightly above long term averages are not in bubble territory. 

 

As long as the economy continues to expand, the end result of cheaper oil is likely to be increased profits for many businesses.  Cheaper fuel results in less of a burden on businesses that must routinely buy fuel.  Cheaper fuel means consumers will have extra funds to spend on both services and products. Forget oil and stay invested

 

 Ethan S. Braid, CFA

President

HighPass Asset Management

800 – 672 - 7916

www.highpassasset.com        

 

About the author of this article.

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.  Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry over 16 years ago. Mr. Braid earned a BS in finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA charterholder.  The CFA program is a graduate level, globally recognized, multi-year program with a focus on investment knowledge.  Candidates for the program commit an average of 900+ hours of cumulative study time to complete all three levels.

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as:  estate planning, retirement planning, investment analysis, mergers & acquisitions and behavioural finance.  Mr. Braid also has a passion for business history with a focus on the late 19th & early 20th centuries.  To date, Mr. Braid has read 65 books on the subject areas above.

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting.  Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

This article is provided by HighPass Asset Management for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.

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Efficient & Rational Markets? Not a Chance!

Written by Ethan S. Braid, CFA on 8.24.2015

The trading action in the markets today was intense.  Speculators ran about like wild gazelles being hunted by lions, dashing this way and that merely at the sight of other gazelles running.  In other words, speculators were acting without thinking.  Does anyone believe that the market swings that took place today were “efficient” or carried out by “rational investors?” 

In the 1960s Professor Eugene Fama of the University Of Chicago Booth School Of Business developed the Efficient Markets Hypothesis (EMH) when completing his PhD thesis.  The EMH asserts that stock prices at any given time accurately reflect all of the relevant information available to investors.  The EMH relies upon a belief that investors as a group are rational and perceive relevant data on stocks in the same manner.  Furthermore, the EMH states that because the market is efficient no investor is able to outperform the market because there are no inefficiencies to exploit.  What nonsense!

A review of the pricing action for Intel Corporation throughout the trading day of Monday August 24th clearly shows just how irrational investors can be.

8.21.2015        Intel market cap & shr price              4:00pm:           $126 billion $26.56/shr

8.24.2015        Intel market cap & shr price              9:30am:           $119 billion $25.20/shr

8.24.2015        Intel market cap & shr price              1:10 pm:          $131 billion $27.63/shr

8.24.2015        Intel market cap & shr price              4:00pm:           $124 billion $26.29/shr

Why was Intel worth $12 billion more (a 10% increase) at 1:10pm than the company’s market value of $119 billion at 9:30am?  What caused Intel to open $7 billion lower on Monday than the company’s closing value on Friday?  In just a little over three hours time on Monday morning, Intel saw a tremendous gain in valuation of $12 billion only to then experience a $7 billion loss in valuation in the remaining three hours of the trading day.  The market was efficient?  Investors were rational?  Who are we kidding!?

There was no available information on Intel that could be used to justify such wild and dramatic swings in the company valuation.  Instead, Intel was moved by the herd of speculators buying and selling based upon their personal predictions regarding how Intel may or may not fare as data is released on China’s economy.  No doubt, a large number of speculators were influenced to buy or sell just on the basis of fear or greed after they saw the price movements in the stock.  I believe that a number of the persons who traded Intel today did so without even factoring China into the equation.  In short, speculators placing bets moved the valuation of the company, wildly, throughout the day.  This was hardly evidence of rational behavior!

What is Intel really worth is the logical question we should all be asking right now.  Is the company a deal at this valuation?  I say absolutely.  An analysis of the dividend yield, profitability margins, balance sheet strength, earnings yield, cash flow generation, innovation potential as well management’s game plan all points to a very compelling investment opportunity.  I believe that Intel is worth more than the current price it is selling at.  As an investor however, you have to be patient and willing to hold an investment such as Intel through trading days like today.  You have to be able to ignore price movements caused by speculators and be prepared to wait, years potentially, before the herd recognizes that Intel deserves a higher price than its current market value.  With the right amount of patience, there could be a significant profit opportunity for Intel investors that would certainly defy the EMH. 

Ethan S. Braid, CFA

President

HighPass Asset Management

800 – 672 - 7916

www.highpassasset.com        

 

About the author of this article.

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.  Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry over 16 years ago. Mr. Braid earned a BS in finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA charterholder.  The CFA program is a graduate level, globally recognized, multi-year program with a focus on investment knowledge.  Candidates for the program commit an average of 900+ hours of cumulative study time to complete all three levels.

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as:  estate planning, retirement planning, investment analysis, mergers & acquisitions and behavioural finance.  Mr. Braid also has a passion for business history with a focus on the late 19th & early 20th centuries.  To date, Mr. Braid has read 63 books on the subject areas above.

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting.  Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

This article is provided by HighPass Asset Management for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.