A Kodak Moment

Shares of Kodak soared more than 2,700% from July 27 to July 30. If you had a crystal ball or insider information, you could have turned $100,000 into $2.7 million as the stock rose from $2.13 to $60. The average trading volume for Kodak (KODK) for the past five years has been 481,000 shares. Two days before shares of Kodak climbed sharply, 284 million shares changed hands.

KODK_chart

The price of Kodak soared because they received a $765 million loan under the Defense Production Act so it can begin producing pharmaceutical ingredients.[1] I had no idea they manufactured drugs. Oh, and on the day before Kodak announced its deal, the board of directors awarded its chairman 1.75 million shares of company stock.[2]

Eastman Kodak was founded in 1888, 132 years ago, primarily to produce film for cameras. Eastman Kodak was a powerhouse, a blue-chip. They were added to the Dow Jones Industrial Average in 1930, where it remained for seventy-four years. Eastman Kodak was part of the nifty-fifty, a group of high-flying growth stocks, during the 1960s and 1970s, along with Bristol-Myers, Coca-Cola, GE, IBM, Pepsi, Pfizer, Sears, and Xerox. In 2012, Kodak declared bankruptcy, and one year later, they emerged from bankruptcy protection, a different company to focus on five divisions: print systems, enterprise inkjet systems, micro 3D printing and packaging, software and solutions, and consumer and film.[3] Pharmaceutical manufacturing is not one of their stated divisions.

My first photography class was in 8th grade. I borrowed my aunt’s 35 millimeter Pentax camera for a school project. I went to Thrifty’s Drug Store to purchase a roll of black and white film. When I finished my project, I dropped off the film at the drive-up Kodak kiosk in the mall parking lot. I returned a few days later to pick up my pictures – a few I still have today. When I became a stockbroker in the early 90s, Kodak (EK) was one of the first companies I purchased. It was going to be a cornerstone of my portfolio because of their growth prospects and dividend yield.

The recent move in Kodak shares may tempt you to hunt for undeveloped stocks in hopes of quick riches. Before you take the plunge and start buying low-priced, speculative stocks, here are a few suggestions to help you avoid some common mistakes.

  • Greed. Since peaking at $60, Kodak stock has dropped 72% to $17.05. The stock remains volatile as speculators try to trade around the news and catch another shooting star. I believe most traders will eventually lose money on this stock as greed attracts speculators like a moth to a flame.
  • Diversify. If you plan to purchase companies trading below $5, buy hundreds of them because most of them will lose money. If you can find one Kodak, among 99 losers, you’ll make money. According to YCharts, 2,826 companies are trading between $1 and $5 per share, so choose wisely. Spread your bets around the table.
  • Limit your speculative capital investment to 3% to 5% of your taxable trading account assets If you plan to purchase stocks below $5. If your account balance is $100,000, then your speculative trading pool will be $3,000 to $5,000.
  • Margin. Day traders try to amplify their gains by purchasing stocks on margin. My recommendation is to avoid margin entirely, but if you must use it, limit your debit balance to 10% of your trading account value.
  • Using options to leverage your gains on low-priced stocks is not recommended because an option is a wasting asset. Professional options traders will increase the implied volatility on options contracts for speculative stocks like Kodak, making them very expensive. For example, the implied volatility for Kodak’s August 21 call option with a strike price of 15 is 300, meaning option traders expect the shares to move up, or down, by 18.8% daily. By comparison, McDonald’s implied volatility is 21, or 14 times less volatile than Kodak.
  • Nimble. If you’re one of the lucky ones to buy a low-priced stock before it takes off, enjoy the ride. If possible, sell enough shares to cover your original cost and let the remainder run so you can play with the house’s money. However, if the stock starts to fall, cut your losses and move to a new idea.

Kodak was a juggernaut, generating more than $10 billion in sales in 1981, employing more than 120,000 at its peak, and producing 50 million Instamatic cameras between 1963 and 1970.[4] However, it lost its way, and it’s now trying to rebrand itself – again. I don’t know how Kodak’s deal will develop, so tread lightly and be careful.

Nostalgia often leads to idle speculation. ~ J. Paul Getty

August 4, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

[1] https://finance.yahoo.com/news/kodak-stock-skyrockets-deal-drug-200548406.html?.tsrc=rss, By Michelle Jones, July 29, 2020

[2] https://www.cnbc.com/2020/08/01/eastman-kodaks-top-executive-reportedly-got-trump-deal-windfall-on-an-understanding.html, Reuters, August 1, 2020.

[3] https://en.wikipedia.org/wiki/Kodak, Website accessed August 3, 2020

[4] https://theweek.com/articles/481308/rise-fall-kodak-by-numbers, The Week Staff, October 3, 2011. Website accessed August 3, 2020

I’m Afraid to Invest

It is a tough time to be an investor. The political, social, and racial environment is troubling.  Despite the stellar long-term performance of the stock market, investors are nervous about committing capital to stocks. If you’re frightened to invest, consider a monthly dollar-cost averaging program.

Let’s assume you can invest $120,000 today, but you’re not ready to push all your chips to the center of the table. In this case, invest $1,000 per month for ten years in Vanguard’s 500 Index Fund. Did this strategy work? After ten years, your $120,000 is now worth $219,537 – generating an average annual return of 11.8%.

If you expand your time horizon to twenty years, your $1,000 monthly investment is now worth $651,021, earning 9.1% per year.

How about thirty years? After thirty years, your automated monthly investment program of $1,000 is now worth $1.72 million, averaging 9% per year.

What about a forty-year timeline? After forty years, your investment is now worth $6.16 million, producing an average annual return of 10.4%.

Let’s look at a fifty-year time horizon. We now will invest $1,000 per month into the Investment Company of America mutual fund because the Vanguard 500 Index fund is not available. Your investment is now worth $57.76 million. The average annual return was 10.9%.

After sixty years, your dollar-cost averaging program has turned your $1,000 monthly investment into $195 million! The average annual return was 11.2%.

After fifty or sixty years, the numbers are ridiculous and probably not obtainable for most investors. I doubt many, if any, people can commit to investing monthly for sixty years. However, if you’re skittish, starting a monthly investment program could be your ticket to better returns.

Times are hard, but probably no worse than they have been over the past sixty years. Despite challenging times, the stock market has always marched higher. The key to long-term investment success is to follow your plan, save your money, and invest often. Do not let short-term market moves, or the media, derail your financial plans.

Be not afraid of growing slowly; be afraid only of standing still. ~ Chinese Proverb

June 29, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Investment source: Morningstar Hypothetical, returns are pre-tax, net of fees.

7 Stock Picks

Are you looking for a few hidden stock gems as the market climbs higher? You’re probably familiar with big cap names like Facebook, Apple, Amazon, and so on, but what about smaller companies? Here are seven stocks that may justify a look.

Altra Industrial Motion (AIMC). Altra Industrial Motion Corp is a United States-based company that designs, manufactures, and markets mechanical power transmission components. The company’s reportable segments are Power Transmission Technologies, which includes Couplings, Clutches and Brakes, Electromagnetic Clutches and Brakes, and Gearings; and Automation and Specialty segment consist of Kollmorgen, Portescap, Thomson, and Jacobs Vehicle Systems. It generates a majority of its revenue from the Power Transmission Technologies segment.

Bloom Energy (BE). Bloom Energy Corp is engaged in providing electric power solutions. The solution of the company includes Bloom Energy server, which is a stationary power generation platform to provide uninterrupted power. It earns revenue from the sale and installation of its energy servers to direct and lease customers, provides services under its operations and maintenance contracts, and by selling electricity to customers under PPA agreements.

Clarus (CLAR). Clarus Corp engages in the design, manufacture, and marketing of outdoor equipment and apparel for climbing, mountaineering, backpacking, skiing, and other outdoor recreation activities. The company’s products are principally sold under the Black Diamond, Sierra, and PIEPS names through specialty and online retailers, distributors, and original equipment manufacturers throughout the U.S. and internationally. The operating segments of the company are Black Diamond, which is the core revenue generator, and Sierra. Black Diamond segment offers products including high-performance activity-based apparel, rock-climbing footwear and equipment; technical backpacks and high-end day packs; trekking poles; headlamps, and lanterns; gloves and mittens; and skincare and other sport-enhancing products.

iRadimed (IRMD). iRadimed Corp is a US-based company that mainly develops, manufactures, markets, and distributes a Magnetic Resonance Imaging (MRI) compatible intravenous (IV) infusion pump system, and MRI compatible patient vital signs monitoring system, and accessories and services relating to them. The company provides a non-magnetic IV infusion pump system which is designed to be safe for use during MRI procedures. The MRI products of the company are sold primarily to hospitals and acute care facilities in the United States and internationally.

Malibu Boats (MBUU). Malibu Boats Inc designs, manufacture, and sells performance sports boats. The boats are used for water sports, such as water-skiing, wakeboarding, and wake surfing. The performance boats are sold under the Malibu and Axis Wake Research brands. The company uses an independent dealer network to sell its products, primarily in the United States and other countries. It operates under the segments of US, Australia, and Cobalt. The U.S. operating segment primarily serves markets in North America, South America, Europe, and Asia while the Australia operating segment principally serves the Australian and New Zealand markets.

PaySign (PAYS). PaySign Inc is a prepaid debit card payment solutions provider as well as an integrated payment processor that has many prepaid debit cards in its portfolio. It designs and develops payment solutions, prepaid card programs, and customized payment services. Through the platform, it provides services, including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service. It manages programs for many of the pharmaceutical manufacturers with co-pay assistance products designed to maximize new patient acquisition, retention, and adherence.

The Meet Group (MEET). MEET s a leading provider of interactive live streaming solutions designed to meet the universal need for human connection. The company’s ecosystem of live-streaming apps enables users to interact through one-to-many live streaming broadcasts and text-based conversations. The apps, MeetMe, LOVOO, Skout, Tagged, and Growlr deliver live interactions and meaningful connections to millions of users daily.

All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.” – Peter Lynch

June 18, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Disclaimer: Names, data, and descriptions are from Ycharts. PWM does not own any individual positions in the seven securities. The post is not an offer to buy or sell securities.

 

What I Miss?

The NASDAQ, Dow Jones, and S&P 500 are posting positive returns over the past year, and the NASDAQ is up more than 9% for the year. These leading indices were down more than 30% less than three months ago as investors reacted to the COVID-19 virus. Since the virus outbreak, our country has experienced depression-era economic data and witnessed civil unrest. Investors have been scratching their heads to try and reconcile the performance in the stock market with the reality on the streets.

The stock market is up more than 40% from the March 23 low, and it has turned in the best 50-day performance in history. It’s hard to fathom a stock market trading at all-time highs while our economy and cities struggle. We have experienced the worst pandemic in more than 100 years, the bleakest economy since the depression, and, according to some, racial tensions not seen since 1968. However, the market is forward-looking and data-driven, and it’s anticipating our country will realize better days ahead.

In March, investors, and a few financial professionals, panicked. One prominent investment firm in Texas sold their client’s entire stock holdings in early March to ride out the storm. I believe his clients are still in cash.  A renowned hedge fund manager said, “Hell is coming.”[1] Another stated, “I would say it’s one of the most overvalued, maybe the second-most overvalued I’ve seen.”[2] Sometimes the safest investment strategy is to do nothing. And trying to time the market is a fool’s errand

With hindsight, market timing appears easy, but it’s not. It’s impossible. Boeing is now trading above $200, so buying it in March at $95 seemed like a no brainer. But, at the time, airline capacity had fallen by 95%, and Boeing was battling the government to obtain certification for its 737 Max. There are twenty-two analysts that follow Boeing, and their average price target is $157, or 26% below its current price.[3] Despite Boeing’s recent performance, it is still down 47% from its high.

After more than thirty years in the investment business, I’m still looking for a better strategy than buy and hold. Owning a globally diversified portfolio of low-cost funds is still hard to beat. During the first few weeks of the market rout, bonds performed well. They provided safety and support.  As the market recovered, the baton was passed to different asset classes like growth stocks, value stocks, international companies, emerging markets, real estate, and small-cap stocks. Each sector performed well at one time or another. Each category contributed to the performance of the portfolio.

Our investment models were active during the market correction. They are designed to keep our client’s asset allocation and risk tolerance in check. Initially, we were selling bonds to buy stocks, and then as the market rebounded significantly, we sold stocks to buy bonds. At one point, our models were allocating money to real estate funds, despite being down more than 40%. I was hyperventilating as our software allocated funds to this asset class. The real-estate allocation has been a stellar performing asset class over the past couple of months, outperforming most of our other asset classes. Our models are now in positive territory for the past year.

A globally diversified portfolio of mutual funds is not sexy. While some funds are rising, others are falling. It seems I’m forever apologizing for an underperforming asset class. Investors, apparently, only want to own funds that grow in value, but the funds are always changing leadership positions, which is the root of diversification.

What is the best way to find a portfolio that is the right fit for you? A financial plan is a powerful tool to help you define and refine your goals. Your advisor will use the data to align your investments with your objectives. If your finances are in sync with your aspirations, you’re more likely to stay invested through thick and thin. As the markets fell, we were regularly stress-testing our client’s financial plans, and the drop impacted not one. Despite the rout, our client’s financial plans remained intact. If your strategy is working and you’re on track to reach your goals, do not make any changes, and dare to stay invested.

Most experts do not know what’s going to happen tomorrow, and the stock market has been tormenting professionals for centuries. Do not let the opinions of others derail your dreams. Instead, focus on your goals, think long-term, pay attention to your plan, and hold onto your investments.

“Sometimes, the most important thing to do is to do nothing.” ~  Debasish Mridha

June 5, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and are not suitable for every investor.

 

 

 

 

[1] https://www.theguardian.com/business/2020/mar/27/hell-is-coming-how-bill-ackmans-tv-interview-tanked-the-markets-and-made-him-26bn, Rubert Neate, March 27, 2020.

[2] https://www.marketwatch.com/story/this-is-second-most-overvalued-stock-market-that-billionaire-investor-david-tepper-has-ever-seen-2020-05-13, William Watts, May 14, 2020.

[3] https://money.cnn.com/quote/forecast/forecast.html?symb=ba#:~:text=Boeing%20Co%20(NYSE%3ABA)&text=The%2022%20analysts%20offering%2012,the%20last%20price%20of%20184.30., website accessed June 5, 2020

PWM Weekly Market Update

Happy Saturday,

The Great Wall of China is open to visitors, the NFL draft is in high gear, and Georgia is letting some businesses reopen. If you need a hair cut and you like to bowl, a visit to the Peach State may be in order.

Our rebalancing software runs weekly, looking to sell expensive assets and buy cheap ones. It’s an automated process. We did not rebalance any portfolios this week as volatility continues to tumble. For the first time in a while, it felt like a typical week, as far as investments are concerned.

The US Index of Consumer Sentiment is an indicator I follow. The 68-year average for the index is 86.7, and the recent reading is 71.8. When consumers are optimistic, sentiment is high. When consumers are pessimistic, sentiment is low. The all-time high was 112 in March 2000, before the Dow Jones Industrial Average fell 33% from March 2000 to March 2003. The historical low was 51.7 in May 1980 before stocks rose 228% from 1980 to 1987. In March 2009, consumer confidence touched 57.3, before the market climbed 236% from March 2009 through yesterday. The moral of the story: When consumer confidence is low, it’s an excellent time to buy stocks.

The current asset allocation for public pension funds is 49% stocks, 23% bonds, 7% real estate, 19% alternative investments, and 2% cash. The 30-year average annual median return for pension funds was 8.3%.[1] The S&P 500 returned 8.2% over the same time frame.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 fell 1.3%
  • The NASDAQ fell .67%
  • International Stocks fell .95%
  • Emerging Markets fell 1.5%
  • Long-Term Bonds rose 1.8%
  • Gold rose 2.5%
  • Oil fell 34%
  • Chinese Stocks fell .85%

If you’re looking for some good news, I recommend watching Some Good News on YouTube hosted by John Krasinski (The Office, Tom Clancy’s Jack Ryan, A Quiet Place, & 13 Hours). He hosts the show form his home and highlights good news from around the world – and space. Here’s the link to his channel: https://www.youtube.com/channel/UCOe_y6KKvS3PdIfb9q9pGug

Like a drink of cool water to a weary, thirsty soul, so hearing good news revives the spirit. ~ Proverbs 25:25 (TPT)

Bill Parrott, CFP®

President and CEO

Parrott Wealth Management

http://www.parrottwealth.com

[1] https://www.nasra.org/investment

7 Things to Do During a Quarantine

The Coronavirus is spreading. Countries and cities are in lockdown. Our government and businesses are encouraging their employees to work from home, and senior citizens are advised not to leave their houses. It’s a dark and dire time for the global community, so how can you make the best of a bad situation? Here are seven ideas.

  • Go for a hike with your family and enjoy the great outdoors. You can explore new trails in your city while keeping a safe distance from others. My family and I hike our neighborhood trail with our dog Cricket. We put a bear bell on her to let the snakes and other creatures know we’re coming. The bell also helps us locate her because she’s a lab with a mind of her own. After being cooped up in our house, it’s nice to go outside and enjoy Mother Nature.
  • Read a book. It’s an excellent time to turn off your TV because there is nothing but bad news on the airwaves and there are no sports to watch. Here are a few of my favorite books: The Fountain Head, The Hunt for Red October, Jurassic Park, The Old Man and The Sea, Catch-22, American Rust, Atlas Shrugged, The Firm, Treasure Island, Oil!, The Invisible Man, The Adventures of Huckleberry Fin, The Adventures of Tom Sawyer, The Count of Monte Cristo, The Once and Future King, Lone Survivor, Amateur’s, The Worst Hard Time, The Right Stuff, Moneyball, Into Thin Air, The Perfect Storm, The Grapes of Wrath, East of Eden, For Whom the Bell Tolls, To Have and Have Not, and The Hobbit.
  • Play a game. As a family, we’ve played board games for years. When my daughter was younger, most of the games involved horses like Herd Your Horses or Horse Show. We now play Catan, Ticket to Ride, Hive, Monopoly, Uno, or Mexican Train.
  • Learn a new hobby. You can access hundreds of thousands of free platforms online to learn a new language or skill from the comfort of your home. Numerous universities are offering free online courses because of the crisis. I’m learning to play the guitar. I’m horrible, but I’m having fun.
  • Fix up your home. Have you been waiting to paint a room, clean your garage, or wash your windows? With time on your hand, you can now tackle your growing to-do list. My daughter and I are going to build two vegetable boxes and a border for our rose garden.
  • Write a letter to a friend or family member. A handwritten note is a novelty, so spread some cheer with your penmanship.
  • Read the Bible. The Bible has about 365 verses on fear or worry, one for each day. Proverbs is a great place to find wisdom, and it has 31 chapters in Proverbs, one for each day. Psalms, Romans, Hebrews, Galatians, Song of Songs, Ephesians, Matthew, Mark, Luke, John, and the other 56 books are worth a read.

When I was growing up, I played baseball. During one game, while playing left field, a left-handed batter hit a line drive toward me, and because a left-handed batter hit it, it had a wicked slice. It was spinning away from me, and it was too late for me to adjust my path. It got past me and rolled to the fence. We lost the game; I burst into tears, and I thought my life was over. However, it wasn’t the end of the world. My dad, who is left-handed, spent hours hitting me fly balls, and I turned my weakness into a strength.

The world is not going to end tomorrow, and we will live to see another day. Don’t let the weight of the world keep you down. We will defeat the virus. Be strong and keep the faith!

The wolf will live with the lamb, the leopard will lie down with the goat, the calf and the lion and the yearling together; and a little child will lead them. ~ Isaiah 11:6

March 19, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

 

 

 

 

 

 

Too Late to Sell?

The Dow Jones is down 18.8% for the year, so is it too late to sell? Investors have sold $34 billion in equity mutual funds and $17 billion in bond funds as they seek safety from the rout in global assets.[1] The news is ominous, and the headlines are bleak. Investors are voting with their dollars, and it’s clear they don’t want to own stocks.

In December of 2018, investors sold $133 billion in funds before stocks rose significantly in 2019. In October of 2008, investors liquidated $128 billion in mutual funds, a few months before one of the great bull markets in history.

It’s never too late to sell because stocks can always fall further. William O’Neil, the founder of Investor’s Business Daily, recommends selling your shares if they fall 7% to 8% because a small loss can turn into a big one if you don’t cut your losses. He said, “You don’t want to take a loss, so you wait, and you hope, until your loss gets so large it costs you dearly. This is by far the number one mistake most investors make.” Enron shareholders had the opportunity to sell their shares at $90, or $80, or $70, or $60, or $50, or $40, and so on before it traded to zero. I’m sure investors in Enron would have loved to sell at any price above zero, regardless of their cost basis.

An investor who sold their holdings in August of 1987, avoided the stock market crash on October 19, 1987. If you knew the Oil Embargo of 1973 was coming, you could have sold your stocks in 1972 and avoided a 41% drop in the S&P 500 from 1973 to 1974. If you sold your shares in 2007 before the Great Recession, you missed a 50% drop in the market. Of course, selling before a correction when stocks are at an all-time high is difficult, and predicting the future is impossible.

When stocks are falling, emotions transcend facts. Not many people care that stocks produce superior long-term results when their accounts have lost 20% in a few weeks.

It’s easy to look in the review mirror and say what you would have done, but what should you do today? Should you sell? Here are a few suggestions to help you decide.

  1. If your stocks are keeping you up at night, then sell your shares. If you’re losing sleep, you own too many stocks.
  2. If you need your money in one year or less, do not invest in stocks. My nieces and daughter must use their money to pay for tuition, room, board, and books, so they invested in a money market fund. I don’t need my retirement money for 10 to 15 years, so I’m 75% invested in stocks.
  3. If you’re retiring in the next two or three years, invest in U.S. Treasury Bills to cover three years’ worth of household expenses.
  4. If you don’t have a safety net, sell stocks. A recommended safety net is three to six months of expenses. If your monthly expenses are $10,000, keep $30,000 to $60,000 in cash.
  5. If you have high levels of debt, sell your stock to reduce your obligations – returns are fleeting, expenses are forever.
  6. If you need money to purchase a home, car, boat, plane, or any expensive item, sell your stocks and move the proceeds to cash.
  7. If you’re 100% allocated to stocks, reduce your equity exposure, and sell some of your holdings.
  8. If you know stocks are going to drop 20% tomorrow, sell today.

With the drop in stock prices and interest rates, bonds may be a riskier investment than stocks. The current yield on the 30-Year U.S. Treasury is 1.5%. The ten-year average Is 3.1%, and if rates rise back to the average, bonds will fall by 20%. In 1980, the 30-Year U.S Treasury yield peaked at 15.08%. If rates returned to their all-time highs, bonds would fall 75%![2] The iShares 20+ Year Treasury Bond ETF (TLT) is up 26.3% for the past year, but it fell 10.5% this week as interest rates rebounded from their remarkable lows.

Money market funds and savings accounts offer low rates. The one-month U.S. T-Bill is yielding .33%.  The current inflation rate is 2.33%, so you’re losing 2%, before taxes, to park your money in a safe account. Cash accounts and short-term bonds are not sustainable solutions for creating wealth over time.

The Dow is down 18.7% year-to-date and off 9.8% for the past year. It’s up 30.6% over the past five years, 118% for the past ten years, and 9,390% since 1930.[3] It’s impossible to know what stocks will do tomorrow, but over time they will rise.

My first full year in the investment business was in 1990, and the Dow Jones Industrial Average fell 4.25% that year; from June to December, it dropped 21%. I was devastated because every stock I bought plunged in price. However, 30 years later, the Dow is up more than 740%.

Is it too late to sell? If selling your stocks will bring you peace, then sell. However, stocks have always recovered, so make sure you’re selling for the right reasons and not from a position of fear.

Be strong, keep the faith, follow your plan, think long-term and good things will happen.

We have nothing to fear but fear itself. ~ Franklin Delano Roosevelt

March 15, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

 

 

 

 

 

 

[1] https://ici.org/research/stats/flows/combined/combined_flows_03_11_20, Website accessed 3/14/2020.

[2] https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

[3] YCharts

How to Survive a Stock Market Correction

The Dow Jones Industrial Average was less than 500 points away from touching 30,000 before the Coronaviraus arrived and spooked investors. In less than two weeks, the Dow Jones has fallen almost 13%, and it appears the selling will continue until a vaccine arrives, hopefully soon. As the market climbed higher, bears were calling for a correction and they finally got their wish. Stock market corrections are common, and they occur about every three to five years. A bear market lasts approximately 18 months, while a bull market will run for about eight years.[1]

How can you protect yourself against a bear market attack? Here are a few suggestions.

  1. Don’t panic! A market drop is normal, painful, but normal.
  2. Don’t make any changes to your portfolio during the initial phase of a market correction. Let the market find its footing before you make any significant changes to your investments.
  3. Cash is king. If you have a cash cushion, you’re less likely to make rash decisions regarding your stock holdings. How much cash is enough?  My recommendation is for you to hold three to six months of expenses in cash. If your monthly expenses are $10,000, then your cash account should be $30,000 to $60,000.
  4. Invest in U.S. T-Bills if you’re nearing retirement. A suggested amount is three years’ worth of expenses. If your annual expenses are $100,000, invest $300,000. The safety of T-Bills will allow you to survive a typical correction. If you invested in October 2007, you could have lived off your T-Bills for three years while waiting for the Great Recession to end. The Great Recession lasted from 2007 to 2009, where stocks fell 53%, so your bonds allowed your stocks to recover.
  5. Diversify your assets. A balanced portfolio of stocks, bonds, and cash will help cushion the blow from a market drop. During a market drop, your bonds will perform well.  During the 2008 market selloff, long-term U.S. government bonds rose 25.9%.[2]
  6. Rebalance your portfolio. You will sell appreciated investments to buy depressed ones, or buy low and sell high. If you rebalance your portfolio, you can take advantage of lower stock prices. Rebalancing allows you to keep your risk level and asset allocation in check.
  7. Eliminate your margin balance. A sure way to lose more money than you intended is to use leverage.  If you use margin to buy securities, I would encourage you to eliminate it. The best way to make a bad situation worse is to employ excessive margin in a down market.
  8. Stay invested. The two days following the stock market crash of October 19, 1987, the Dow Jones Industrial Average rose 16%. Despite the dramatic drop on Black Monday, the Dow ended 1987 in positive territory, and it has since risen 1,380%, including the recent selloff.[3]
  9. Look for bargains. Is your favorite stock now 25% cheaper? If you’re not sure what to purchase, buy a broad-based index fund.
  10. Think long term. A bear market lasts about 18 months. You may own your investments for years, maybe decades, before you need the money, so think generationally to help you get through the dark days of a market downturn.
  11. Markets recover. The stock market has always recovered! It may take time, but they eventually rebound.
  12. Have fun. The market will go up, down, and sideways long after we’re gone. Instead of worrying about the daily moves in the stock market, get outside, and enjoy your friends, family, and hobbies while you wait for stocks to bounce back.

Stock market corrections come and go. The market is a long-term wealth creation machine occasionally disrupted with short-term pullbacks. If you apply these ideas, you may have an opportunity to benefit from the long-term performance of the stock market.

Even though I walk through the darkest valley, I will fear no evil, for you are with me; your rod and your staff, they comfort me.  ~ Psalm 23:4.

February 27, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

[1] https://www.forbes.com/sites/robertlenzner/2015/01/02/bull-markets-last-five-times-longer-than-bear-markets/#12745f772dd5, Robert Lenzer, January 2, 2015, site accessed 3/10/17.

[2] Dimensional Fund Advisors 2016 Matrix Book.

[3] YCharts. DJIA – October 19, 1987 to February 27, 2020.

Are You Emotionally Attached to Your Stocks?

It’s easy to fall in love with a stock, especially if you handpicked it yourself. Over the years, I’ve talked to scores of investors about their favorite stocks, and most prefer to hold on to them forever regardless of allocation or performance. If you’re emotionally attached to a company, try not to overlook several risk factors.

It’s easy to get anchored to your original purchase price. If your stock falls below your purchase price, you might be reluctant to sell it for a loss for fear of admitting you were wrong. Another challenge for investors is when a stock drops below the all-time high. If it hit the high price once, it must do it again. Of course, it doesn’t have to do anything.

Enron traded at an all-time high on August 23, 2000, closing at $90.75 per share. At its peak, Enron’s market-cap was more than $70 billion, and, at the time, it was the 7th largest publicly traded company.[1] Two years later, it would be worthless. As a comparison, Berkshire Hathaway is currently the 7th largest publicly traded company.

Here are a few companies that are currently trading off their all-time highs: IBM peaked at $215 on March 14, 2013. It’s now trading at $135, down 37%. Boeing peaked at $440 on March 1, 2019. It’s currently trading at $339, down 23%. Tesla traded to an all-time high of $385 on September 18, 2017. It’s currently trading at $328, down 15%. Exxon traded at $104.37 on June 28, 2014, and it is now $69.25, down 34%. 3M sold at $258 on January 26, 2018. It’s currently selling for $166, down 36%. These companies may return to their peaks, but in the meantime, they’re a drag on portfolios.

During my career, I’ve found investors fall in love with three types of stocks. The first is a company located in their backyard, the second is a story stock highlighted on TV, and the third is a mega-cap stock.

Locals in California, pick Apple. Oregonians run with Nike, Washingtonians click on Amazon or Microsoft. Texans ooze over Exxon and Tennesseans like the way FedEx delivers. Investors who own homegrown stocks like to hold them forever.

Story stocks get big headlines. Tesla gets a lot of screen time, as do recent IPOs like Uber, Peloton or Beyond Meat. If it’s new, it must be a winner, but not always.

Mega-cap stocks like Apple, Microsoft, Alphabet (Google), Amazon, Facebook, Berkshire Hathaway, Visa, JP Morgan, Walmart, and Procter & Gamble are popular holdings, and, rightfully so. These battleship stocks have stood the test of time and have rewarded shareholders handsomely. Mega-cap stocks also have another benefit to shareholders in that consumers use their products daily.

By investing in homegrown stocks, you might miss opportunities in companies scattered around the globe.  Advantest Corporation is a Japanese company, which is up 148% year-to-date. Fortescue Metals Group in Australia is up 137%. Li Ning Company in China is up 213%, and Hotai Motor in Hong Kong is also turning in a stellar performance, up 108%.

A basket of globally diversified index funds will remove the emotional attachment of investing and give you exposure to thousands of companies. It’s easy to fall in love with Tesla, not so much with a small-cap international index fund. Also, your diversified portfolio will allocate a portion of your assets to bonds, and no one falls in love with a bond fund. However, when the market corrects, you’ll be glad you own a bond fund or two.

A financial plan will also help you with your emotional attachment. A good plan will quantify and prioritize your financial goals. Your plan will also direct your advisor on how best to construct your investment portfolio. Your plan and portfolio will synch to your goals.

Despite the numerous benefits of financial planning, a recent study by Vanguard found, “many advisors are not preparing financial plans for their clients.” Their study found that only 47% of advisors created a formal plan for clients with $100,000 to $1,000,000.[2]

To achieve long-term financial success, create a financial plan, invest in a globally diversified portfolio of mutual funds, and keep your fees low.  If you follow this plan, you might fall in love with your results!

Love is patient and kind; love does not envy or boast; it is not arrogant or rude. It does not insist on its own way; it is not irritable or resentful; it does not rejoice at wrongdoing but rejoices with the truth. Love bears all things, believes all things, hopes all things, endures all things. ~ 1 Corinthians 13:4-7

 

October 28, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

[1] https://www.begintoinvest.com/enron-stock-chart/, Website accessed on October 23, 2019

[2] The Vanguard Advisor’s Alpha® Guide to Proactive Behavioral Coaching, Donald G. Bennyhoff, November 2018.

Should You Invest in an IPO?

We like shiny new objects. For investors, the object is the initial public offering or IPO. Getting in on the ground floor of a hot offering is a huge draw. A few high-profile private companies are now publicly traded. Companies like UBER, Pinterest, Slack, Lyft, Chewy, Beyond Meat, Levi Strauss, Zoom Video, Smile Direct, and Peloton are now trading publicly. How have they performed?[1]

  • UBER = Down 24%
  • Pinterest = Up 11%
  • Slack = Down 41%
  • Beyond Meat = Up 110%
  • Lyft = Down 47%
  • Zoom Video = Up 28%
  • Chewy = Down 23%
  • Levi Strauss = Down 16%
  • Smile Direct = Down 13%
  • Peloton = Down 7%

According to CNBC, 120 IPOs have come public this year, and 57 are trading down, 48% of the issues are trading in negative territory.[2] Not all IPOs are bad, of course, as Coke, Pepsi, McDonald’s, Starbucks, Home Depot, Costco, Walmart, Amazon, Apple, and Google have performed well over time.

When a company issues shares to the public, the founders and early investors are cashing out. Companies hire investment banks like Goldman Sachs or Morgan Stanley to help sell and market their shares. The banks conduct roadshows to introduce the company to investors and receive indications of interests. If you’re lucky, your broker will give you a few shares of the offering. Once the deal closes, the stock will start trading on the open market where investors who weren’t able to get shares during the offering phase can now purchase the stock.

For Example, the IPO price for Beyond Meat was $25 per share. It started trading at $46 and quickly popped to $72.95 before closing at $65.75. The founders, owners, and early-stage investors were in well before the offering. Investors in the IPO received shares priced at $25. The public was able to buy it between $65.75 and $72.95. On the first day of trading Beyond Meat soared 192%! However, only early stage investors and IPO participants realized this gain. If you bought it at the top, you lost about 10% on the first day.

The IPO market is reeling because of the poor stock performance of Peloton, Uber, Lyft, Slack, and a few other high-profile names. As a result, We Work, and Endeavor Group Holdings canceled their offerings. Endeavor has sited “weak stock market demand” as a reason for suspending their IPO launch.[3] We Work, on the other hand, will be a Harvard Business School case study someday on how not to handle an IPO. Investors grew concerned with the company’s valuation, the CEO, and the lack of profitability. Since We Work announced they’re terminating their IPO, the CEO has stepped down and the company may lay off one-third of their workforce.

Mutual funds and large institutions are significant players in the IPO market, and some are speculating that they may forego investing in IPOs in the future because of the recent poor performance. Don’t hold your breath. Do you remember the Tech-Wreck? From April 2000 to October 2002, the S&P 500 fell 44% because of the extreme valuation in technology stocks, and the feeding frenzy with dot.com IPOs. Investors bid up the prices of Pets.com, eToys, and Webvan only to have them evaporate into thin air a few months later. Despite the disastrous performance of the IPOs in the early 2000s, large institutions are still investing in new offerings.

I worked at Morgan Stanley during the insane days of IPO listings and investors couldn’t wait to buy a new offering regardless of what the company did or where it would price. They didn’t care because their intent was to flip the stock as soon as possible and pocket big money. This strategy worked until it didn’t. Tulip Mania?

Should you invest in IPOs? Most brokerage firms have strict policies on who gets shares. You won’t be able to cherry-pick the best stocks and you’ll be forced to buy both good and bad names. And most allocations to retail investors are small. In a hot IPO like Peloton, you may only receive 25 shares. If you want to participate in this arena, limit your allocation to 3% to 5% of your investment capital.

Shiny objects eventually fade, but speculators will always be attracted to peddlers promising short-term gargantuan gains. If you’re late to the party, you could lose a significant amount of money.

Be careful. Do your homework. Invest wisely.

What has been will be again, what has been done will be done again; there is nothing new under the sun. ~ Ecclesiastes 1:9

September 27, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

[1] YCharts

[2] CNBC, Carl Quintanilla Twitter @carlquintanilla, September 26, 2019 @ 10:54

[3] https://www.cnbc.com/2019/09/26/endeavor-pulls-plug-on-ipo-day-before-debut-wsj-reports.html, Riya Bhattacharjee, September 26, 2019