April 4, 2023
Tick, Tick, Tick...what is our most precious commodity?
I suggest that time is our most precious commodity. It is so precious, and as we get older it seems to go faster. If we step back and reflect, we know that we should make the most of our time. How we spend our time will be different for everyone; it depends on one’s priorities in life. However, I suspect we would all agree that expending energy on stress and anxiety is not a good use of time.
Say No to Stress!
First, let me say, my personality is predisposed toward stress and anxiety. I suspect I would generally be considered a type A personality. If you perceive me as “relaxed and calm”, I urge you to ask the team at August Wealth or my family for their opinion on my personality traits. I strongly suspect “impatience” is one of the traits that would come up consistently. I get stressed and anxious when I am not performing at my best. I can argue that this propels August Wealth forward. It helps create a strong culture of service and sense of urgency, but I also must admit that it also drives people nuts. Including me! I still can hear my father telling me in my youth “REEEEELAX.” It was good advice then, and it’s good advice now.
I’ve had many discussions over the past month with people concerned about various risks in their lives, or just generally anxious about the state of the world. I am never dismissive of risk, but it is important to put risk into context. It is very important to understand the likelihood of certain risks occurring, as well as considering the millions of other risks that exist that are potentially being overlooked.
Some recent discussions with others have included the following topics: nuclear war, war with China, a beach house that may flood someday, artificial intelligence, and others. All of these are surely risks, and these risks can effect change. Yet, it is important to consider that the world is constantly changing regardless of whether our attention is focused on it or not. Essentially there are lots of other risks that we are blissfully unaware of but are causing changes in subtle ways all around us.
I look for, assess, and rank the probability of risk in financial markets, geopolitics, and regulation every day. For me, it is imperative to ask the following:
What is the likelihood of such a risk occurring?
If that risk is extremely low, it needs to drop down the priority list.
For example, a house that has a chance to flood in my area of Compo Beach in Westport, CT is a real risk. This happened during “Superstorm” Hurricane Sandy. Lots of damage occurred, there was lots of reconstruction, insurance premiums rose, and generally it was a real pain in the neck.
However, it’s important to emphasize what a wonderful place Compo Beach and our community in Westport, CT is 99% of the time. So, most days, it’s just beautiful nature and a wonderful part of the world to enjoy and appreciate. Because of this, I propose our focus should be on that 99% of the time, and not spend time and energy on the stress of another superstorm (which might come).
I am not suggesting dismissing the risk out of hand. If you want to live in this area and enjoy it, mitigate your risk where possible, and move on to enjoying life. The next storm is truly out of your control.
Prioritization, Risk Mitigation, and Resiliency in Life and Investments:
If you can let go of the distractions which are taking away from that 99%, you will live a happier, healthier, and more fulfilled life. Many people describe me as acting calmly in chaotic, uncertain, and risky situations. This may be true, but it is not my natural pre-disposition. It is only through work and practice that this is possible. It is intentional, and if I can do it, so can anyone.
Life and investing are remarkably similar. We weigh the risks of inflation, growth, recession, political risk, regulatory risk, and company specific risk. We prioritize those risks and mitigate risks where possible. We then focus on what is likely to happen in that 99% (over the long term).
What tends to happen in that 99% of time?
People, countries, and companies move forward, they learn, they innovate, and they develop. They figure out ways to shape their environment (hopefully for the better). Change continually happens all around us, but we do not always notice it until we look back in time.
Stress and anxiety will cause many to suffer needlessly by:
Distracting your attention from where you wish to be spending time and energy.
Making poor decisions because you want to get rid of emotional stress.
Missing opportunities to improve your life over the long term.
Where emotions deviate from reality is the space that provides fertile opportunity in investment. This is growth, and where there is growth, there is opportunity. Understanding the opportunity and understanding the emotion of the masses and exploiting, that is what I love to do.
I would describe the risks in today’s financial markets as widely dispersed and varied. They include higher rates, inflation, geo-politics, bank and deposit safety, technology disruption, regulatory changes, and many others. On the flip side, prices for many assets are lower and these risks may be reflected in current prices. We continue to be positioned defensively, but in our conversations and analysis it seems clear that many others are investing cautiously as well.
I tend to get a little bit uncomfortable in crowds. Crowded spaces of people and crowded thinking with the masses always makes me a little nervous.
THE INVESTMENT PROCESS Through my investment process I like to ask myself three questions: (1) What do I know? (2) What am I thinking? (3) What am I doing?
1. What do I know?
Margin debt has been paid down.
Cash levels have been increased.
Investment in Treasury bills is popular.
Investor conversations have been focused on being cautious.
The interest rate market is predicting lower rates by the end of 2023.
Technology companies have risen strongly in price since the start of 2023.
2. What am I thinking?
The market might be underestimating the risk of re- investment. There seems to be a lot of capital invested in US 2-year notes and shorter. Where will they invest if the rates on 2-year notes drop from 4% to 2%?
The banking issue seems to be solved in aggregate, and even though interest rate volatility is high, it seems the government’s continued approach to protect investors from sudden losses seems very much intact. My view is that it will slowly erode the value of paper currency slowly over time. It is imperative to own assets that will protect you against this erosion.
The prices of many share prices of what we would deem quality value companies have declined. Companies with high profit margins, producing lots of free cash flow, and that have long term growth prospects are companies we feel will protect our wealth.
Many of the innovative tech companies we own have performed strongly. This may be due to the hyper focus on artificial intelligence because of the popularity of ChatGPT. These companies have been in our portfolio for a long time because artificial intelligence is not new, and it requires certain companies to achieve growth in this field.
The high level of interest rate volatility should continue to decline, and it may not have large impact on the equity market.
3. What am I doing?
Increased exposure to precious metals driven by lower interest rate expectations, a weaker US Dollar relative to other currencies, and the overarching thesis that paper currency continues to slowly lose value over time.
Profit taking on some of our technology shares.
Increased duration from 2-year notes to longer maturities.
Slight increase in overall weighting toward stocks over bonds as we become more concerned about re-investment risk.
Increased weighting in oil and gas companies to take advantage of lower prices in these commodities.
As always, if you would like to discuss your portfolio or our views, we welcome your questions.
Joe
Joseph Cardello, Principal
August Wealth Advisors, LLC
51 Riverside Avenue, First Floor
Westport, CT 06880
Direct (916) 461-9451 toll free (800) 985-9477
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