NewsLetter Vol. 10, No. 5 – December 2017

Dear Reader:

From an article by Paul Lim (one of my favorite columnist) in Money:

“A new survey released this week by Fidelity Investments shows that wealthy young millionaires have staggeringly high expectations for market returns for the coming year. Millionaires who are either millennials (roughly 20 to 36 years old) or Gen X (37 to 52) expect their investment portfolios to return 16.4% next year, according to Fidelity’s 2017 Millionaire Outlook Study.
To put that in perspective, that’s double the historic average annual return for a 60% stock/40% bond portfolio since 1926. What’s more, that’s nine percentage points higher than what older millionaires (specifically, baby boomers) expect to gain next year.”
Bill McNabb, Vanguard’s CEO, quoted in Financial Advisor in late November: “Valuations are starting to get pretty rich,” he says. “You certainly worry about a flash point. A 10 to 15 percent move in equities would not be unprecedented in history from these kinds of valuations. And whether that happens in 6 months, in 12 months, or in 18 months … sooner or later it’s going to happen. To deny that and think some ¬policymakers can navigate things so that we never have another correction again, that won’t happen. The markets need to cleanse.”

Ninety percent of Texas wine grapes are grown on the South Plains. Of course, until I moved to the South Plains, I didn’t even know Texas made wine. Turns out there are lots of them.

12-2017_South Plains of Texas

From FastCompany: 12 Incredibly Useful Things You Didn’t Know Google Maps Could Do
Some of the best features of Google’s mapping app are among the hardest to find — until you know where to look. These are some VERY useful tips.

From my friend Leon:

• More people live in New York City than in 40 of the 50 states.
• The word “Pennsylvania” is misspelled on the Liberty Bell.
• There is enough water in Lake Superior to cover all North and South America in one foot of water.
• It would take you more than 400 years to spend the night in all of Las Vegas’s hotel rooms.
• There is enough concrete in the Hoover Dam to build a two-lane highway from San Francisco to New York.
• The entire Denver International Airport is twice the size of Manhattan.
• The number of bourbon barrels in Kentucky outnumbers the state’s population by more than two million. I guess we won’t be running out of bourbon any time soon.

These excerpts from’s “Navigating Uncertain Rewards and Certain Risks” by Bob Seawright CIO for Madison Avenue Securities are a bit long, but I thought it was worth devoting the space. The bold highlights are mine.

Equity investing offers uncertain rewards but certain risks, no matter how beautiful the weather or calm the seas. These risks are often opaque to us. There is no way to know if and when those risks will bite and what the extent of the damage will be.

Yet investing in stocks is crucial for investors to reach their financial goals because of the returns they provide. Risk and reward are inherently connected. Suppose, for example, back in 1928 you had invested in stocks (the S&P 500). Bonds (10-year U.S. Treasury notes) and cash (three-month U.S. Treasury bills) and held through the end of 2016.

Over that period stocks averaged 11.4% annual returns, bonds 5.2% and cash 3.5%. In other words, if you had invested $100 in each of those categories, at the end of 2016 you would have had $1,988 in the cash account, $7,110.65 in the bond account and an astounding $326,645.87 in the stock account — over that period stocks earned 165 times more than cash and 46 times more than bonds.

Risk & Returns
Unfortunately, however, that enormous benefit comes with drawbacks of risk. Stocks suffered enormous losses of more than 20% six times between 1928 and 2016, and in 23 of the 89 years — roughly one in four — provided negative returns…

Many people claim to be long-term investors. Very few really are.

Some investors react to drawdown risk by hoping to buy stocks that only go up. Those stocks do not exist. For example, most people would cite Amazon as exactly the type of stock they want to own. A $10,000 investment into Amazon shares purchased at its initial public offering in 1997 is worth roughly $5 million today, far better than market returns.

However, Amazon shares have seen daily declines of 6% or more 199 (!) times, have fallen 15% over a three-day span on 107 different occasions and have suffered at least 20% pullbacks in 16 of its 20 years of public trading. The drawdown risks have been immense….

What to Do?
The best advice most of the time is to accept that drawdown risk is the price paid for the returns stocks provide compared with bonds and cash. Other possible investments, despite the latest financial engineering techniques, cannot measure up in performance either. For example, when analyzed on an asset weighted basis, as Simon Lock has documented, if all the money that has ever been invested in hedge funds had been invested in U.S. Treasury bills instead, the overall results would have been twice as good…

The current long bull market may have lulled investors into a false sense of security, thinking that there are no risks lurking beneath the surface. Smart investors will prepare for inevitable drawdowns before they happen. Reality may bite, but it need not eat you.

If you’ve not seen my recent Client Letter on this same subject, drop us a note by clicking here and we’ll send you a copy.

From my friend Leon:
You only need four correct out of ten questions to pass.
1) How long did the Hundred Years’ War last?
2) In which country are Panama hats made?
3) From which animal do we get cat gut?
4) In which month do Russians celebrate the October Revolution?
5) What is a camel’s hair brush made of?
6) The Canary Islands in the Pacific are named after what animal?
7) What was King George VI’s first name?
8) What color is a purple finch?
9) Where are Chinese gooseberries from?
10) What is the color of the black box in a commercial airplane?

Remember, you need only four correct answers to pass.

• Although the bicycles of today look nothing like the first machines to bear the name, in 1418, an Italian engineer constructed a human-powered device consisting of four wheels.
• There are 200 million university students worldwide. I’m sure glad my class is limited to twenty.

Deena and I recently traveled to Cape Town (on Air France) for a speaking engagement and decided if we were going that far (twenty-nine hours and a seven-hour time change), we’d take a few extra days for fun. From that experience, here are two items to add to your bucket list.

• For wine lovers, take a day trip to Stellenbosch, home of some of the world’s great wines. If you do, I’d encourage you to contact Jonathan Snashall at
Jonathan is an international consulting winemaker, spent two years in the European Master of Wine (MW) program, and has been a very keen observer of the Cape wine scene for the last 30 years, spending the last 15 as a winemaker. He was an incredible guide and we could not recommend him more highly.
• Check out the Londolozi Game Preserve. We’d been there about 17 years ago and of all the places we’ve been in the world, the few days there were among the best we’ve ever had. We had the same experience this time around. See the animals up close and personal. Three nights is all it takes to have the experience of a lifetime.

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Believe it or not, these are my pictures.

From the ABA Journal — ranking of nations’ adherence to the rule of law (out of 113)

Rank Score U.S. Ranking of Specific Factors Rank Score
Denmark 1 0.89 Constraints of government powers 13 0.81
Germany 7 0.83 Absence of corruption 20 0.73
U.K. 10 0.81 Open government 12 0.78
U.S. 18 0.74 Fundamental rights 21 0.75
France 21 0.72 Order & Security 31 0.8
China 80 0.48 Regulatory enforcement 19 0.71
Russia 92 0.45 Civil justice 28 0.65
Venezuela 113 0.28 Criminal justice 22 0.68

The following is a news report from back in March that my friend Knut recently sent me. It may be a tad old, but it still obviously reflects the feelings of our Security regulators.

From OnWallStreet:
SEC Chief Rips into DOL Fiduciary Rule
The acting SEC chair isn’t mincing words on the Department of Labor’s fiduciary rule. “I have a very nuanced view of the DOL fiduciary duty rule: I think it is a terrible, horrible, no-good, very bad rule. For me that rule was never ever about investor protection,” Chairman Michael Piwowar says. “To me, that rule, it was about one thing and it was about enabling trial lawyers to increase profits.”

Q1- Q3 2017 Lobbying Expenditures — InvestmentNews


Pro-Fiduciary Anti-Fiduciary
Financial Planning Association – $30m Insured Retirement Institute – $350m
Consumer Federation of America – $140m Financial Services Institute – $420m
Investment Advisor Association – $125m National Assn of Insurance and Financial Advisors – $1.7m
American Council of Life Insurers – $3m
Investment Company Inst. – $4m
Securities Industry and Financial Markets Assn. – $5.3m
$295,000 $14,770,000

• “If past history was all that is needed to play the game of money, the richest people would be librarians.” — Warren Buffett
• “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” — Charles Munger
• “If you are bearish or bullish long enough, you will eventually be right.” — Unknown
• “Your time horizon is not the day you retire — it’s the day you die.” — Mari Adam, Florida planner
• “I am proud to be paying taxes in the United States. The only thing is — I could be just as proud for half the money.” — Arthur Godfrey, entertainer
• “People who complain about taxes can be divided into two classes: men and women.”
• “In theory, there is no difference between theory and practice. But, in practice, there is.” — Jan LA van de Snepscheut
• “The market is not an accommodating machine.” — Peter Bernstein
• “When the tide goes out, you can tell who’s swimming naked.” — Jimmy Buffet
• “In a bear, market stocks return to their rightful owner.” — Warren Buffet
• When you make a trade, why do you think the other side of the trade is prepared to lose money so you can make money?

Excerpts from an interesting Wall Street Journal article that my partner Brett shared with me:

There’s something about economic growth and stock markets, across the developed and emerging world, that doesn’t add up. For most of the past decade, the stock markets of developed countries have powered higher even as their economies struggled with sluggish growth. By contrast, emerging-market economies have grown dramatically but their stock markets have been dismal.

“It’s difficult to imagine a very large and persistent disconnect between equity markets and the real economy continuing indefinitely,” said Eswar Prasad, a senior fellow at the Brookings Institution. U.S. stocks have climbed 76% over the past decade, outperforming India’s market by more than 10 percentage points, the Brookings program calculated. Over that same period, however, India’s economy grew 89% vs. just 14% for the U.S. Over the last decade, China’s economy has more than doubled in size while its market has declined 35%.

This observation is true whether focused on the biggest emerging markets, or on all emerging markets collectively. Over the past decade, emerging-market economies have nearly doubled in size, growing at an annualized rate of 6.6%, according to data from the International Monetary Fund. “Things that cannot be sustained will eventually end,” Mr. Prasad said, “and the concern with financial markets is that adjustments happen not gradually, but very rapidly, and in a way that creates turmoil.”

He has no prediction as to when. Markets can move unpredictably for years. But Mr. Prasad said, “ultimately a reckoning for both the economy and financial market will come.”

12-2017_WSJ Graph

A private tour of the Sistine Chapel
Try the different views. I particularly liked the Architectural View.
1) How long did the Hundred Years’ War last? 116 years
2) In Which country are Panama hats made? Ecuador
3) From which animal do we get cat gut? Sheep and Horses
4) In which month do Russians celebrate the October Revolution? November
5) What is a camel’s hair brush made of? Squirrel fur
6) The Canary Islands in the Pacific are named after what animal? Dogs
7) What was King George VI’s first name? Albert
8) What color is a purple finch? Crimson
9) Where are Chinese gooseberries from? New Zealand
10) What is the color of the black box in a commercial airplane? Orange (of course)
What do you mean, you failed?

Me, too! And if you try to tell me you passed, you is fibbin’

Let me preface this with the observation that it is absolutely, positively NOT a recommendation. In fact, I still can’t get my head around the concept, but having recently passed $11,000 appreciating nearly 1,000% this year — it’s hard to ignore.

As Barron’s noted, “The market can’t decide if Bitcoin is the next Apple of” Barron’s went on to remind readers that “Gold’s best year came in 1979, when the precious metal more than doubled in price, to $512 per ounce in the spot market. The rally continued into January 1980, when gold peaked at a nominal price of $850. But it was downhill from there. Gold tumbled 65% over the next five years, and didn’t retouch its 1980 high until 2008. On an inflation-adjusted basis, 1980 remains the high-water mark for gold.”

Whatever the future, we haven’t heard the last of Bitcoin. The Commodity Futures Trading Commission just approved plans by the CME and the Chicago Board of Options Exchange to introduce Bitcoin futures. According to Barron’s, Nasdaq plans to offer its own futures next year and Cantor Fitzgerald will introduce a Bitcoin options product.

I think I’ll stick to a $5 scratch off card.

ThinkAdvisor Morning Briefing — Vanguard Issues Its Most Subdued Outlook in a Decade

12-2017_Outlook of Subdued Mkt

… to be the first recipient of the TD Ameritrade Advocacy Leadership Award. I’m the little guy in the middle.

TD Ameritrade Institutional created the TD Ameritrade Advocacy Leadership Award to recognize individuals who have made outstanding contributions to advance the long-term viability, vibrancy, and growth of fiduciary investment advice and the RIAs who provide it.

“We decided it was time to recognize the most vocal and tireless champions of fiduciary investment advice. Harold exemplifies the power that one, dedicated voice can have in rallying an industry to move forward — his prolific body of work makes him a natural as our inaugural award winner,” said Skip Schweiss, managing director of Advisor Advocacy and Industry Affairs for TD Ameritrade Institutional. “TD Ameritrade remains committed to advancing the profession for independent advisors and investors, and we hope that others are as inspired as we are by Harold’s passion for supporting the RIA industry through financial planning, investment advice, writing and teaching.”

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Hope you enjoyed,


Harold Evensky
Evensky & Katz / Foldes Financial Wealth Management