2023 closed out with fireworks. Market indices staged an incredible recovery from inflation-era lows, notching near-record values. To be exact, the S&P500 index returned 25.83 percent for the year. The market rebound was most concentrated in growth sectors, particularly technology. Unsurprisingly, these were the same assets that were dramatically devalued last year in the face of raising interest and inflation rates. Comparing historical data to commonly accepted metrics (like P/E – Price/Earnings ratio) makes the current market look grossly overvalued. A quick dive shows that the current P/E ratio of the S&P500 index is 26.35. Simply put, you could expect to return about 3.79% of your invested capital in the broad market today. Historically, the mean P/E of the same index is 16.04, or a 6.23% return. We’re investing in an environment that’s almost 40% less than the historic yield. From a more-inclusive valuation perspective, the market looks fairly valued to me. It’s important to note that this market is dramatically top-heavy, and the “top 10” is completely devoid of value stocks. This seems to be a natural adaptation to modern corporate strategy. Companies that reinvest in themselves tend to get bigger over time. After all, paying a dividend is just the simple act of taking cash off the balance sheet, and into investor hands, which lessens the equity and valuation of a stock. Of the same aforementioned “top 10,” only 4 pay dividends and they’re meager at best. Here’s a valuation estimate, based on bottom-up research from the past 10 years. Our entry point into 2024 is almost exactly fair value: With these considerations, how should you manage your portfolio into 2024?
Temper your Risk and Expectations While I think this market is fine for investors with long-term perspectives and higher risk tolerances, the notable concentration of growth may create added volatility. The past few years have been dramatic to say the least, and I would expect this type of market behavior to continue. If you’re nearing retirement, have a portfolio you’re drawing income from, or simply feel like market volatility could deter you from achieving your long-term plan, you should consider rebalancing to a lower volatility strategy. As a bonus, lower volatility stocks tend to outperform on market downswings, should the market reverse course. Find The Laggards Although market constituents tend to shift together, movement tends to be more pronounced in certain sectors. The result is entire sectors move into overvaluation, while others remain undervalued. Finding undervalued sectors and going overweight tends to increase the risk/reward profile of a portfolio. Additionally, overreactions are common in response to isolated events, such as a one-off bad earnings report. The market tends to pay more attention to undervalued companies when discounts are rare. Finding undervalued opportunities, especially in high-quality companies, may provide the chance to capitalize on a return to fair value. Control the Controllable With less obvious opportunities to capitalize on, a heightened focus should remain on controlling the controllable of your portfolio. Controllable factors include tax management and choosing the optimal investments for your goals. Fixed-income, for example, tends to be much more mathematical and controllable than equity investing. There are hundreds of types of bonds and short-term investments that are comparable, but whose yield potential varies greatly. At the time of my writing, government and agency-backed bonds and short-term investments range from 3.837%-6.316% yield. There’s almost a 2.5% yield gap between similar investments with slightly different characteristics and maturities. A good fixed-income investor can craft a fixed-income portfolio that optimally balances the highest yield for your goals. Let us figure it out for you. Sound financial decisions require significant due-diligence and resources. Active management by War Streets Capital focuses analysis of merit, fundamentals, and opportunities. We ensure that tactical changes in your portfolio adhere to your risk-tolerance, and focus on tax-efficiency. War Streets Capital, LLC is registered as a discretionary Investment Advisor, meaning we have the ability to manage these investment considerations without you needing to worry. We can review your existing portfolio or begin an investment plan to optimize your returns. Let's chat about your future.
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It seems that investors have all but forgotten about the cries of a “prolonged recession.” In stark contrast to last year, economists and market pundits forecast that the rare “soft-landing” may be coming to fruition. The term “soft-landing” is used to describe a scenario where economic growth slows but does not turn negative. In effect, an overly inflationary market can return to a stabilized level, while avoiding a recession entirely.
The Federal Reserve has slowed their interest rate policy and forecasted peak policy may be within a few quarter percent increases. The result? Markets rejoiced. The Nasdaq composite posted its strongest start to the year ever. With the inflation narrative on the backburner, a new 800-pound Gorilla entered the room. Artificial Intelligence, particularly generative AI, has fueled newfound euphoria for the tech sector. Investors believe that the introduction of AI will have such a profound impact that it could be as game-changing as the invention of the internet itself. Just Another Trend? I am typically skeptical of “flavor-of-the-month” investment trends, or fads. Lest we forget, we’re coming off a period of irrationally high markets, fueled by “The Metaverse,” crypto-everything, meme-stock investing, and the inevitable crash that ensued. However, there should be a significant benefit for those companies that use and develop AI successfully – production/labor costs will decrease for some, revenue would increase for others. So where does that leave us in the context of the current market? The Trend is Your Friend A heralded maxim amongst traders: never underestimate how much further a stock (or the market) can go in either direction. But could all this momentum be a cause for concern? Probably not yet. Investors are pack animals and this is fairly typical, visceral behavior for a market rebound. There’s no question, too, that growth and technology stocks sunk well below fair value last year and a return to fair value is only rational. It would be wise, however, to temper your expectations and keep a diligent eye on stocks whose values may be surpassing their expected future earnings. Growth Sectors Are Up, but Value is Down As information technology and consumer discretionary, which tend to be more sensitive and volatile than the market, are flying high with the return to growth, defensive sectors are seeing a much more modest year. In fact, utilities, energy, financials, and healthcare sectors have all posted negative returns year-to-date. Retail investors typically have portfolios that are overweight in technology and consumer discretionary. If you were losing sleep over portfolio swings last year, it may be a good time to posture yourself in more defensive positions going forward. This is especially important for retirees and near-retirees. Interest Rates are Higher than Inflation Finally, we’re working in a market with pricing power. The most recent inflation data suggests that inflation is about 4%. In contrast, short-term rates on treasuries (considered the risk-free rate of return) are greater than 5%. CD’s (insured certificates of deposit) are readily available at 5.5%. Against the interest rate market of the 2010’s, we’re looking at much greener pastures for income-seekers. If you’re a risk-averse investor, there is no longer a necessity to have to accept a high amount of risk simply to provide a reasonable amount of income. Let us figure it out for you. Sound financial decisions require significant due-diligence and resources. Active management by War Streets Capital focuses analysis of merit, fundamentals, and opportunities. We ensure that tactical changes in your portfolio adhere to your risk-tolerance, and focus on tax-efficiency. War Streets Capital, LLC is registered as a discretionary Investment Advisor, meaning we have the ability to manage these investment considerations without you needing to worry. We can review your existing portfolio or begin an investment plan to optimize your returns. Let's chat about your future. The beginning of 2023 has proven to be a fantastic contrast to last year. Markets staged a welcomed recovery from market bottoms, and sentiment has improved, indicating that most investors have rationalized and accepted an economic slowdown. While blue-chip industries remain fully valued, we’re seeing a bit of a renaissance to growth. Notably, the market seems to have realized that technology, especially “big tech,” may be both defensive and reliable during a market downturn.
It hasn’t all been tranquil, however, as cyclical and over-stretched industries are showing cracks. Unsurprisingly, the most pronounced offenders have been interest-rate sensitive industries, such as real estate and banking. One bank collapsed practically overnight and sent a swift shockwave through the financial system. The would-be failed bank, Silicon Valley Bank (SVB), made overly aggressive investments and numerous, belated corrective faux pas, which ultimately lead to their dissolution. In short, SVB had highly-leveraged investments and overly-concentrated deposits in tech and venture capital industries. As interest rates increased, the value of their investments went down, while their deposits simultaneously evaporated as depositors invested elsewhere. SVB announced they would sell investments at a loss, and resell more shares of stock to cover the losses. Investors immediately realized this was no longer a prudent investment and dumped shares, nominalizing the stock value and rendering recapitalization of the company inviable; the FDIC shut them down overnight. Over the next few days, psychological contagion affected several other banks. Investors and depositors feared they would lose investments or deposits and sold shares, or withdrew cash, seeking safe havens from an industry in panic. Another bank, Signature Bank of New York (SBNY), was particularly affected by these outflows likely due to their perception of being “crypto-friendly,” a practice now considered to be dubious by many. They were also quickly dissolved by the FDIC, but this time the government would take action. Emergency support and depositor guarantees were promised for banks and banking clients. Depositors were ensured that their full deposits (well past the typical FDIC insurance limit) would be accessible and that the banking system would bear the brunt of the costs. Banks would be provided loan support to offset their existing investments, and ensure that capitalization was available at a reasonable cost. This seemed to significantly calm concerns, but left a resounding amount of “what-if’s” in investors minds. Regional bank indices remain deeply negative for the year. Larger, more regulated, institutions remain on solid footing. The Federal Reserve remains committed to slowing the pace of inflation to approximately 2% annually. Most of the market committee seems set on keeping rates “higher for longer” in attempt to prevent reflation, a condition of reacceleration in prices. It is notable that bond markets are pricing in rate cuts this year, with intermediate-duration treasuries rates being much lower than shorter-term rates. Investors may be able to take advantage of market perceptions and recent events to capitalize on trends. While many equities have reached full fair value, we’re still seeing sectors well off highs, and conflicting narratives that will leave winners and losers in the current market. Let us figure it out for you. Sound financial decisions require significant due-diligence and resources. Active management by War Streets Capital focuses analysis of merit, fundamentals, and opportunities. We ensure that tactical changes in your portfolio adhere to your risk-tolerance, and focus on tax-efficiency. War Streets Capital, LLC is registered as a discretionary Investment Advisor, meaning we have the ability to manage these investment considerations without you needing to worry. We can review your existing portfolio or begin an investment plan to optimize your returns. Let's chat about your future. We believe you can Do Well and Do Good. Environmental, Social, and Governance Investing (also known as ESG) empowers stakeholders to influence corporations to engage in socially-conscious decisions. By investing your portfolio in an ESG-centric strategy, you can take a more holistic approach to your individual values while still having high-quality investment options. This may also help orient your portfolio to investments that focus on high-quality business practices, while avoiding dubious ones. If you have socially responsible concerns, ESG investing may be for you. Here's how it works: Choose which values are most important to you. You can select from the following socially-responsible values:
Then, choose which business practices you'd prefer to avoid. You can flag the following practices as unacceptable:
We'll manage a portfolio to adhere to your socially-responsible preferences, in addition to your investment goals.
ESG-enhanced investing is a free feature for War Streets Capital clients. Not sure if you want to go full ESG? We can manage a moderate impact portfolio too. Let us figure it out for you. Sound financial decisions require significant due-diligence and resources. Active management by War Streets Capital focuses analysis of merit, fundamentals, and opportunities. We ensure that tactical changes in your portfolio adhere to your risk-tolerance, and focus on tax-efficiency. War Streets Capital, LLC is registered as a discretionary Investment Advisor, meaning we have the ability to manage these investment considerations without you needing to worry. We can review your existing portfolio or begin an investment plan to optimize your returns. Let's chat about your future. The sun is setting on oil, for now. Crude oil futures for May turned negative yesterday, and remain negative today. The reasoning? The cost to accept delivery and accommodate storage for oil is, economically, more costly than the product itself. Further, traders and speculators investing in the derivative assets of these commodities exacerbate the condition. Treasuries sit near historically-low yields – nearly half a percent for a 10-year bond. The Federal Reserve generally targets 2% inflation annually, meaning they may achieve a “real return” loss (-1.5% annually) on your money. Meanwhile, US stock indexes staged a strong rebound from market lows. However, it is likely that the majority of industries are operating at a net loss, and some industries are operating in a zero-revenue environment. Companies perceived as being profitable during the crisis have rocketed, in some cases to record highs, as investors hope they can squeeze any amount of post-earnings change from the dollars they invest. How can you grow your money when “Everything is Worth Nothing”? Investors need to be more patient. Many of the “high-fliers” are companies boosted by short-term trends that will most likely normalize when the crisis passes. Your investment horizon is (most likely) not one or two earnings cycles. Unless you're speculating for short-term profit, the long-term earnings yield for crisis stocks will most likely under-perform the broad market. In general, equities should be valued on their future production, not current. While panic has created a significant dissonance in this theory, we encourage investors to keep a rational, long-term growth perspective. Buy the Seeds, Not the Fruit. There may be increased potential in companies where changes to long-term industry trends are being accelerated, as long as they are purchased at a reasonable value. Examples of existing trends that are being accelerated: Cloud Computing and Remote Storage, Digital Advertising (Web, Social, and Streaming), E-Commerce, Financial Technology, Software as a Service, and Video Game Companies to name a few. I'm Not Dead, Just Dormant. Companies that are certain to stay alive, especially those remaining break-even or profitable, may still hold value. Although they may come out of the crisis less profitable, there may be a lucrative risk/reward profile if a significant discount for shares exists. In this category, focus on high-quality balance sheets, low debt, and current cash flow. Examples of industries in this category would be: Alcohol and Non-Alcoholic Beverage, Banking, “Big Box” Stores, Cosmetics, Grocery Retailers, Insurance Companies, Semi-Conductor (Chip) Manufacturers. Don't Buy Dying Trees. Avoid companies with high debt, lowering margins, or in dying industries. Many companies entering this crisis in a weak financial position will declare bankruptcy. It is easy to fall into the trap of valuing a company for “what it was,” not “what it will be.” Just because a stock once traded at a higher price, does not mean it will ever return to that value. This is easy to illustrate by comparing our last recession, the Financial Crisis. Specifically, Banking and Mortgage companies were hit extremely hard. Below is a chart of the Financials Index since 2005:
Even though financial stocks eventually returned to new heights between 2017-2019, they have since returned below their 2007 peak after the latest contraction. Even buying at the bottom (2009) resulted in a decade of under-performance compared to the S&P500 index. Financial companies are in a much stronger position this time, although not immune. Examples of industries most affected by the COVID-19 Crisis would be Consumer-Facing (Legacy Brick and Mortar, Mall Retail), Entertainment (Casino, Cruise, Hotel, Theme Park), Oil/Gas, to name a few. Let us figure it out for you. Sound financial decisions require significant due-diligence and resources. Active management by War Streets Capital focuses analysis of merit, fundamentals, and opportunities. We ensure that tactical changes in your portfolio adhere to your risk-tolerance, and focus on tax-efficiency. War Streets Capital, LLC is registered as a discretionary Investment Advisor, meaning we have the ability to manage these investment considerations without you needing to worry. We can review your existing portfolio or begin an investment plan to optimize your returns. Let's chat about your future. 10-year treasury interest rates dropped below 1.5% this week.
...Yikes!!! Could you imagine your portfolio only producing 1.5% for the next 10 years, which is lower than the historic inflation rate? Here are some thoughts to boost your mindset and investment yield. Redefine Risk With the financial backing of the "good-faith of the United States of America," treasury bonds are often considered one of the safest places to put your money. That could be why they're so popular right now; there is incredible uncertainty about the economy, given various current events and all-time-high prices for the stock market. However, with the yield being so low, we think there is significant interest-rate and inflation risk associated with treasury bonds. If you're purchasing a 10-year bond, you should have a 10-year perspective. Other investments may have a higher risk/reward profile over a 10-year spectrum. Get Creative with Bonds Bonds are rated by credit agencies and provide a quality rating associated with their perceived ability to meet financial commitments. Treasuries aren't the only safe bond type; in fact, United States debt was previously downgraded in 2011 (from AAA to AA+), suggesting that some corporations were more able to meet their financial commitments than the government in the recession. Here are some bond alternatives that yield more, in order of safest to least safe. *When comparing other bonds to treasuries, you should focus on the highest quality ratings (AA-AAA). You will also find a higher yield at lower ratings, but be advised the default risk is also higher.
Some of these choices can produce a yield up to 2% greater than treasuries! Equities, Options, and Hedging Exposure to companies with excellent fundamentals may have greater long-term opportunity than fixed income, even when starting at a high price. There are lots of name-brand companies that have zero debt, or even extra cash on their balance sheet. These may be companies that you use every day - and won't stop using in a recession. There may be daily price fluctuation, but the earnings yield may also be much greater than fixed income. If you're concerned about current valuations, consider options or hedging:
Optimize your Tax-Efficiency If you perceive the market is high, it is a great opportunity to prepare to "harvest losses" for the future. Up to $3000/year is deductible against your income, and you can carry-forward any additional losses for future years. By keeping your riskier equities in a cash account, you may be able to take advantage of market fluctuations and utilize losses in your favor. Effectively, you can create a tax hedge for your future. On top of this, you can rotate your fixed-income into your tax-advantaged accounts and increase your after-tax yield. Let us figure it out for you. Sound financial decisions require significant due-diligence and resources. Active management by War Streets Capital focuses analysis of merit, fundamentals, and opportunities. We ensure that tactical changes in your portfolio adhere to your risk-tolerance, and focus on tax-efficiency. War Streets Capital, LLC is registered as a discretionary Investment Advisor, meaning we have the ability to manage these investment considerations without you needing to worry. We can review your existing portfolio or begin an investment plan to optimize your returns. Let's chat about your future. You're Paying Unnecessary Taxes Double-taxed... or more. Earnings are taxed first at the corporate level. If a company declares a dividend, it is paid to you after tax and then you are taxed again at the state and federal level. If you reinvest your dividend (as most do), this taxation is compounded annually. If the corporation you invest in stays in business forever, we could theorize that you are taxed on a compound basis indefinitely. Not all dividends qualify for a lower tax rate. Many international equities, master limited partnerships, and real estate investment trusts (REIT) do not qualify and are taxed at the ordinary rate. There is also a holding period before dividend taxation is qualified for the lower rate. Dividends cannot be offset by capital losses. Capital gains can be offset by losses, but dividends cannot be. This means you will pay taxes on the dividends separately, have less flexibility with tax management, and likely have a higher tax burden. Dividend Yield is an Irrelevant and Deceiving Financial Metric Dividend yield has little bearing on profitability. The yield at which a company pays a dividend is determined by management, not financial productivity. A company could be losing money and still pay a huge dividend, or be highly profitable but pay no dividend. It should not be taken as a profitability metric. Metrics such as earnings, cash flow, margin, and growth are far better predictors of performance, and should be paired with financial statement, earnings report, and merit-based analysis. The implication that all dividend-paying stocks are lower risk is a misconception. There are a variety of factors that determine the risk of a specific company, but dividend yield is not one of them.
Many dividend-paying companies have high-risk profiles.
It can be a "bear trap" for your returns. The most lucrative-looking dividend stocks might be the least sustainable. Dividend yields tend to be highest before they are cut. In most cases, a dividend cut will result in a significant drop in share price. If you're picking investments based on dividend yield, you're playing a dangerous game. Paying a Dividend Wastes Company Resources It's idle cash until it's paid. Holding and escrowing dividends means there is always unusable cash on the balance sheet. The cash remains idle until paid to you, and further until you reinvest it. If you're enrolled in a dividend-reinvestment program, you might not get the best price when repurchasing shares. They may constrain corporate spending and flexibility. Dividends decrease total cash flow to the corporation. If more cash needs to be raised to replace this, a debt offering may require the corporation to pay additional interest and administrative costs. Alternatively, shares may be issued and existing shares may be diluted in value. Declaring, Recording, and Paying dividends requires non-essential administrative tasks. This is an unnecessary expense to the corporation and could be utilized in more profitable ways. We like some dividend-paying stocks, as long as they fit our stringent analysis process and are invested in a tax-efficient way. Sound financial decisions require significant due-diligence and resources. Active management by War Streets Capital focuses analysis of merit, fundamentals, and opportunities. We ensure that your portfolio adheres to your risk-tolerance, and focus on tax-efficiency. War Streets Capital, LLC is registered as a discretionary Investment Advisor, meaning we have the ability to manage these investment considerations without you needing to worry. We can review your existing portfolio or begin an investment plan to optimize your returns. Let's chat about your future. Elon Musk, billionaire entrepreneur and CEO of Tesla, is wildly popular for his grandeur ideas focused on mass electrification, global solar sustainability, and commercial space exploration. With a personality as eccentric as his ideas, it's no shock many consider him to be the “real life Iron Man.” He even once tweeted something about building a flying metal suit. I. Am. Iron Man. With Musk at the helm, it's no surprise that Tesla has garnered attention. It's stock, in particular, has experienced a meteoric rise in interest recently. Speculation in Tesla has gone far beyond the realm of typical investors; just try typing “Should I” into your search engine today. As a result of this speculation, Tesla's stock price has increased exponentially. At around a 135 billion dollar market cap, it commands a valuation significantly higher than the three biggest US automakers combined, yet only produced around 1/15th of their 2019 revenue. Most investors would consider the price significantly disconnected from fundamentals. How Did This Happen? There's an interesting battle between 'main street' and Wall Street. All varieties of investors piled into shares, significantly increasing the value of the TSLA stock. This attracted Big Wall Street short sellers, who heavily bet it would sink to a normal valuation. It quickly became the most-shorted American stock; even Steve Eisman, whose story conceived 'The Big Short' movie, reported that he had shorted TSLA. The stock rose so much that he, and many others, closed their short positions with losses. In order to close a short position, you must buy your negative stock position back, increasing the value of the equity even more. This phenomenon is called a “short squeeze.” Right now, TSLA looks more like a “speculative investment product” than an equity. Here's a chart of TSLA stock, and a chart of Bitcoin at it's prime. Can you tell which is which? The similarities are startling with the infamous speculative asset, Bitcoin. Everyone is familiar with the term 'Bitcoin', but are not necessarily sure of what it is. Bitcoin was created to be an unregulated, global currency. The Bitcoin algorithm encoded a fixed amount of 'coins' that could be 'mined' by a decoding process. The mining concept, called 'hashing,' involves computers rapidly inputting strings of characters to achieve a desired output, and is best suited by specialized computers with advanced processors.
TSLA = BTC? Bitcoin became a worldwide phenomenon in 2017, peaking around $20,000/Bitcoin. Years later, it sits closer to $9000/Bitcoin. The unregulated currency gained unwanted attention from international governments, and was ultimately regulated. Most governments consider it to be a taxable, non-currency asset, eliminating the possibility of it ever being a viable alternative to government currencies. Although there is a finite amount of Bitcoins, there are no tangible goods or services backing its value. Simply put, the value of Bitcoin is only what someone else is willing to pay for it. Until the valuation returns to rational fundamentals, TSLA stock is a similar speculative-type asset. Are you looking for high-growth opportunities without speculative-level risk? We prefer to invest in high quality securities based on fundamentals and merit. War Streets Capital, LLC, specializes in active management services. We can review your existing portfolio or begin an investment plan to optimize your returns. Let's chat about your future I/We have no positions in any stocks/investments mentioned in this article and have no intention of entering positions within the next 24 hours. Content presented in this website is for informational purposes only, pertaining to advisory services offered by War Streets Capital, LLC, and should not be considered financial advice. This website does not intend to make an offer or solicitation for the sale or purchase of any product or security. Investments involve risk and are not guaranteed. No warranties are implied. Consult with a qualified financial advisor and/or tax professional before implementing any strategy that may be discussed on this webpage. Monday (1/27/20) selling had intensified, leaving most US-based stock indexes down approximately 1.5% from the close on Friday. The culprit, the Wuhan Coronavirus, caused waves of international panic, travel bans, and quarantine – particularly in the city of Wuhan and nearby regions in China. Journalists have mostly compared the illness to the closest familiar data point - SARS - a 2003 Chinese-origin respiratory syndrome. Coronavirus appears to spread easier and can be spread prior to displaying symptoms (up to a 2 week incubation period). It also appears to be less deadly, with most fatalities being elderly patients with pre-existing conditions. Timeliness is especially unfortunate, with epidemic concerns coinciding with Chinese New Year. Chinese New Year is typically a time of extended leisure, travel, and festivities, many of which have been cancelled. While the events are undeniably regrettable, there is also an economic question at hand: What Does This Mean From an Investment Perspective? Markets react viscerally, but not necessarily efficiently. As of the time of my writing (1/28/20), US indexes have already recovered significantly, sitting only about 1.7% off 52 week highs (historic records). This shows that investors are valuing this event as very low economic impact. This is in stark contrast to Nov. '02 – onward, when the SARS virus took about 10 weeks for peak infections. In the months following, the S&P500 index had fallen over 17% from peak to trough. Correlation does not necessarily equate to causation, but there is a startling significance in investor behavior. It would be reasonable to suspect that the market is not pricing in this event significantly because of lack of perceived physical harm. Afterall, Influenza historically dwarfs these viruses in fatalities. This might not be sound logic, as psychology can cause economic harm in the form of missed-opportunity -- especially during the high-travel and leisure holiday of Chinese New Year. We can safely assume that more time will be spent at home. Where is The Opportunity? Most all Chinese stocks were down with a few exceptions, such as alcohol and medical supply companies. Interestingly, this includes most technology companies, such as social media, search engine, video game & esports companies – activities typically associated with more time at home. The latter seems to be a divergence to fundamentals. Conversely, many US technology stocks (device manufacturers, semi-conductor companies) seem to be headed back to all-time highs, even though their production is highly influenced by China. A global slowdown might impact these companies more than the market is pricing and they may be overvalued. Airline, hotel, entertainment, and oil stocks were down, which can be considered a result of the reduction in travel, and is a more logical move. When it comes to finding opportunity in equities, the key is to find a divergence of stock price versus economic/event impact, and to capitalize on the inefficiency. Make sure your opportunities fit "the bigger picture" and always address the following before making hasty decisions: Always Consider Your Investment Objectives!
Always Focus On High-Quality Securities
If it seems like a lot, it's because it is. Sound financial decisions require significant due-diligence and resources. However, there are always plenty of opportunities and inefficiencies in the market. Active management by War Streets Capital focuses analysis of merit, fundamentals, and opportunities. We ensure that tactical changes in your portfolio adhere to your risk-tolerance, and focus on tax-efficiency. War Streets Capital, LLC is registered as a discretionary Investment Advisor, meaning we have the ability to manage these investment considerations without you needing to worry. We can review your existing portfolio or begin an investment plan to optimize your returns. Let's chat about your future. Wait, are we using Supercars as a financial metric? An extra $100,000 means a lot of things to different people. It could be a Porsche 911, the cost of college tuition for a family member, the down payment for your dream house, or an inheritance that continues to grow for generations. Whichever it is to you, it should be yours. We believe in the power of portfolio optimization and seek to eliminate unnecessary expenses, such as those charged by mutual funds and ETFs (common financial products used by personal investors and most financial advisors). Let's run an investment simulation with "Average Jane." Jane is creating a 40-year investment plan with her Advisor to invest $12,000 annually. Jane prefers to be 100% in equity (stocks). For simplicity of illustration, we'll eliminated taxes from the equation and that the stock market returns 10% annually, Example 1 (Mutual Fund): Jane's generic Advisor recommends mutual funds with a 1.00% expense ratio. This lowers her effective return to 9% and she saves $4,419,502 over her investment timeframe. Not bad, Jane! A solid investment plan turned $12,000 a year into over Four Million Dollars! Example 2 (Index ETF): Jane's generic Advisor believes in "index investing," which is the practice of buying the entire stock market in the form of an investment product (all good and bad companies in a certain market) because they believe they cannot possibly beat the market average. The ETF shows a very low index fee of only .03%, but also holds .6% of the fund in cash. This is common practice for ETFs because they must adjust their assets to accommodate for the purchase and sale of the fund, hold cash for dividends, and make rebalancing adjustments. This lowers her effective return to 9.91% and she saves $5,696,434 over her investment timeframe. Eliminating expenses increased her savings by $1,276,932! Example 3 (Individual Stocks): Jane instead works with a sophisticated Advisor who recommends diversified, individual stocks and does not receive commissions for trading. In our hypothetical situation, the Advisor performs on an average basis, although there may be opportunity to outperform by selecting securities based on merit and fundamentals. Her effective return is 10% and she saves $5,842,222 over her investment time frame. Jane saved an additional $145,788 with her individual stock investments. She saved an extra "supercar" worth of value for her retirement. Summary: Commissions, sales charges, and expenses lower overall investment returns. Most investment products are constrained in their investment approach (as seen in the example of index funds holding cash). The optimal portfolio strategy in our hypothetical example saved an additional $1,422,720 during the investment time frame. We typically avoid investment products managed by third parties to pass the cost savings directly to you. In the event we do recommend or utilize one of these products, it will be scrutinized and with purpose. The optimal strategy provided in this article can only be achieved by active management strategy. Consult with a qualified financial professional before attempting any investment strategy. War Streets Capital, LLC is registered as a discretionary Investment Advisor, meaning we have the ability to manage these investment considerations without you needing to worry. We can review your existing portfolio to ensure you're not paying unnecessary expenses. Let's chat about your future. |
AuthorSteven Singer is the Managing Member and Investment Advisor Representative for War Streets Capital, LLC. Archives
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