Ode on a Grecian Turn

“What men or gods are these? What maidens loth? What mad pursuit? What struggle to escape? What wild ecstasy?”

The Townly Vase. Source: British Museum

That’s what John Keats wrote almost 200 years ago while contemplating the bas-relief on a Greek vase. But the words could almost be applied to the political and financial situation in modern Greece.

Not much has changed since the last time we discussed Greece, except that the deadline for Greece to make its debt payments has gotten closer. Last weekend Prime Minister Tsipras called for a referendum on July 5th regarding the latest European bailout proposal. He also instituted capital controls and declared a bank holiday to avert a collapse in the Greek financial system.

Global markets have sold off almost 5% since negotiations hit an impasse last week. For Greece, the consequences are significant. Should they leave the Euro—and start printing and using Drachmas—they could lose access to imports. During Argentina’s financial crisis in 2001 and 2002 that economy collapsed. There were riots; people couldn’t get medications; diabetics died because insulin wasn’t available. Some foresee a similar humanitarian crisis if Greece leaves the Euro.

All-Cap World Index, 2014-15. Source: Bloomberg

But like Argentina 15 years ago, it’s hard to see significant contagion outside of Greece if they go back to the Drachma. Greek debt is mostly held by the ECB and IMF, and they aren’t about to become insolvent. A Greek default may be no more significant than the $40 billion bankruptcy of the electric utility Energy Futures last year. The lights didn’t go out in Texas back then.

Up to now, polls have shown that most Greeks want to stay in the Euro. They prefer having a stable currency and banking system to the chaos and manipulation of their pre-Euro economy. But they also want an end to the current austerity regime. That’s why they elected Tsipras and the Syriza party.

But uncertainty has increased, and along with it, volatility. Keats closed his famous poem with the lines, “Beauty is truth, truth beauty. That is all ye know on earth, and all ye need know.” Next week’s referendum may offer us truth. But as for beauty? We’ll have to see.

Douglas Tengdin, CFA

Charter Trust Company

High on Hope

Is the market full of hot air?

Photo: Davide. Source: Pixabay

Some portions may be. Some shares are so puffed up it doesn’t look like the companies can ever justify their valuations. As an example, take LinkedIn. The professional networking darling went public in 2011 and didn’t look back. The stock’s been on a tear, rising almost 5 times—a 45% annualized return.

But what’s next? The firm is priced at over 100 times this year’s expected earnings, and over 60 times next year’s. Even if they earned a placement fee on every hire in the country, they’d still be overvalued. The last time insiders bought shares—except for exercising options—was in 2011, when the stock was below 100. Lately, all they’ve done is sell.

Source: Bloomberg

Some have called these companies—LinkedIn, Netflix, Salesforce.com—“hopium” stocks. They trade based on the hopes and dreams of their retail investors, and give them a “rush” every time they go up. They generate lots of noise. And investors get the shakes every time their shares swoon. They should be part of an Exchange Traded Fund, with the ticker H-O-P-E.

Valuation matters. When shares are overpriced, the path of least resistance is down. The market may be fairly valued, but that doesn’t mean every value is fair. If you buy something without regard to value—just hoping to sell it later at a higher price—that’s the “Greater Fool Theory.” And if there’s no one left to buy it from you, you’re the greater fool.

Douglas Tengdin, CFA

Charter Trust Company

It Takes A Team …

What can we learn from this year’s NBA finals?

LeBron James. Source: Wikipedia

LeBron James is awesome. The 6’8” forward dominated the NBA finals this year, scoring an average of 36 points per game. By some measures, he had the best performance of any player in any finals ever—leading both squads in points, rebounds, and assists. But his team, the Cleveland Cavaliers, still came up short. They lost the series 4-2, giving the title to Oakland’s Golden State Warriors, the first team in 25 years to win an NBA championship without any Finals experience from any of the players on their roster.

How can someone so skilled fail to bring home the title trophy? The answer is teamwork. “King James” had a great series, but his team had only 16 assists per game—significantly less than Golden State’s average of 23. James put the ball up 33 times per game. There’s four other players on the court—one player can’t do it all.

It’s like that in any significant endeavor. We can do more together than we can individually. We’re social creatures. Whether it’s sports or investing or school or family, none of us is as good as all of us.

There’s no doubt that James is one of the best basketball players ever. This was his fifth consecutive NBA Finals appearance—something that hasn’t happened since the ‘60s. But success is a lousy teacher. It makes you think you can’t lose. Life is a team sport. As Magic Johnson, another great basketball player once said, “Ask not what your teammates can do for you, ask what you can do for your teammates.”

Douglas Tengdin, CFA

Charter Trust Company

Investments, Finance, and Robo-Advisers

What’s the best investment plan?

Photo: Andreas Praefcke. Source: Wikipedia

Lots of people ask for investment advice. They need help managing their money. They talk about the stock market or bank rates. But what they really need is financial guidance.

Classically, finance has three major reports: income, assets, and cash flow. Each of these areas has inflows and outflows—positive and negative entries. An income statement covers income and expenses; a balance sheet shows assets and liabilities; with cash flow there are inflows and outflows. Investment advice just addresses the asset side of the balance sheet—a small part of our total financial profile.

For most of us, our planning needs are pretty simple. When we’re young, we need to manage our income and expenses to save as much as we can and invest that. Ten to fifteen years from retirement, we need to get serious about asset allocation. But for most of our lives, our human capital is worth a lot more than our financial capital.

But simple isn’t easy. It’s one thing to talk about saving—it’s another thing to do it. Saving requires us to invest in ourselves when you’re young and avoid frivolous purchases and expensive credit card debt. Sticking to a budget is critical. As we grow older, it’s more important to manage risk—time is no longer on our side. The last ten years of saving are the most important, because that’s when the magic of compound interest kicks in. For example, if we are able to save $6000 per year starting at age 30 and earn 7% per year, our assets will double from $1 to $2 million in the last 10 years. But the world doesn’t travel in smooth curves. By the end of our accumulation period, we can’t afford to ride through a significant downturn.

Source: Douglas Tengdin

That’s why robo-advising may work for young people, but it’s not so good for people approaching retirement. Because it’s not just about what we make. It’s also about what we can keep.

Douglas Tengdin, CFA

Charter Trust Company

Clearing the Air?

What’s holding back China’s economy?

Photo: John D. Liu. Source: World Bank

One possibility is pollution. China’s economy has grown dramatically over the past two decades, as market-based incentives and expanding global trade have encouraged them to produce more and capitalize on their natural advantages. Over the past two decades, the size of their economy has grown ten-fold, from $1 trillion to almost $10 trillion dollars.

But such growth comes at a cost. While China’s economic miracle has lifted hundreds of millions out of abject poverty, it imposes costs on the environment. After all, you need a lot of power to fuel this growth. Energy production has almost doubled during this time.

Source: World Bank

Lately, Chinese growth has slowed, downshifting from over 10% per year a decade ago to only 7% now. That’s still a lot, but the transition has many people wondering why this is happening.

Pollution is a real problem. Air pollution can be particularly dramatic. Smog and soot slows food production and creates health issues. In Beijing, smog has been reported at 20 times the safe levels. This has grounded flights, closed highways, and kept workers home. Water pollution also makes people sick and contributes to a water shortage. Pollution may be costing the Chinese economy as much as 5% of its economy, or $500 billion per year.

This is reminiscent of the pollution problems western countries had as they industrialized. London’s “pea-soup” smog was immortalized in the verse of T.S. Eliot—“the yellow fog that rubs its back upon the window panes.” All countries have to address environmental issues as they grow.

Ultimately, China will have to manage its environment along with its economy. Otherwise, its future will be shrouded.

Douglas Tengdin, CFA

Charter Trust Company

Our Culture, Our Selves

Does corporate culture matter?

Bust of Socrates by Lysippos at the Louvre. Source: Wikipedia

The short answer is yes. A culture centered on client service and financial accountability will produce higher financial returns; by contrast, a culture with outsized rewards for managers who treat the firm like a personal piggy bank will generate lower returns. But how do we measure corporate culture? One way is by reading the company’s annual report, especially the CEO’s letter to shareholders. This document is an unstructured, free-flowing description of what the chief thinks is important. There’s no SEC-mandated boilerplate or caveats. By examining what is said—and not said—we get a chance to look inside his or her head.

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Nuclear Humility

Can we learn humility from physics?

Castle Bravo Blast. Source: Wikipedia

70 years ago Harry Truman asked the leaders of the Manhattan Project to recommend how atomic power should be used. World War II was wrapping up. Germany had fallen. Japan was on its knees but still defiant. Millions of servicemen were preparing to be redeployed from Europe to the Pacific.

Continue reading Nuclear Humility

Honeybee Investing

Can investors learn from nature?

Photo: Louise Docker. Source: Wikipedia

A new book suggests that they should. Nature is infinitely resilient and adaptive, adjusting to changes in circumstances to improve its outcomes. Even in the harshest environments we find living things growing and reproducing. So we should expect the natural world to teach us some important lessons.

Continue reading Honeybee Investing

Greek Debt and The Music Man

Are negotiations over Greek debt serious?

Dick Van Dyke playing Harold Hill. Source: Wikipedia

When I was growing up one of my favorite plays (and movies) was Meredith Wilson’s “The Music Man.” It tells the story of a smooth-talking travelling salesman who plans to swindle the natives of River City, Iowa by posing as a travelling band instructor–selling them marching band instruments, uniforms and music. Once he collects their money he plans to hop the next train out of town, leaving them without money or a band.

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Fashioning the Future

Where are textiles taking us?

Source: Good Free Photos

For centuries, textiles have inspired trade and technology. The silk road gave us Marco Polo and the Age of Exploration; the Industrial Revolution gave us thread-producing mills in midlands-England and water-rich New England; aniline dyes created intense, basic black fabrics in the early 20th century and stimulated the chemical industry; synthetic fibers like rayon and nylon made wrinkle-free clothes possible and build the fortunes of the DuPont family.

Continue reading Fashioning the Future