Tuesday, May 14, 2019, Delray Beach, Florida


Notes From My Journal

18 Things You Absolutely Should Know About Investing in Art

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Ah, Gabriela! My middle school crush. Her father, Eric Albreicht, an eminent art critic, had lined every wall of their home with beautiful paintings.

The walls of our house were lined with books. (Books were also piled high on every surface and held up one leg of the dining room table.) My mother, a close friend of Eric’s, was an art lover too. But she could afford only reproductions.

When, some 29 years later, I began to buy art, I bought it for the love of my mother’s intelligence and for the standard of beauty that Gabriela’s father had set for me.

Collecting for love and beauty is a perfectly defensible motive. But as my purchases ran into the hundreds, I began thinking of art as an investment.

I’ve been buying art for more than 40 years. I have owned and run five galleries and have a current collection of more than 1000 pieces. And though I still buy for love and beauty, I temper my enthusiasm by following a set of guidelines I’ve developed along the way. 

  1. Art has no intrinsic value. Its value is determined entirely by the market.
  1. The most important factor in the current value of a work of art is the reputation of the artist among market insiders.
  1. The most important factor in the future value of a work of art is the artist’s prominence in art history books. Next is the importance of the museums that display his/her work. Third is the number of corporations and wealthy individuals that own it.
  1. From a value perspective, when you are buying established dead artists you are buying historical artifacts.
  1. The fine art market has very little resemblance to the financial markets. It is smaller, more controlled, and less regulated. In terms of participants – brokers, buyers, and critics – it is very small. In terms of dollar values, it is quite large. (The most recent figure I found valued the global art market at almost $64 billion!)
  1. Contrary to other assets, diversifying does not increase safety with fine art. Specialization does. It’s better to collect 100 pieces by one artist you admire than one piece by each of 100 different artists.
  1. Evaluating individual pieces of art is easier now that auction records are available online.
  1. The factors that matter most in valuation are: artist, medium, size, rarity, and style/period.
  1. Like most tangible assets, rarity and “quality” affect price appreciation. The “better” pieces typically outpace ordinary pieces by a considerable degree.
  1. As a general rule, oils are more valuable than acrylics… acrylics are more valuable than gouaches… gouaches are more valuable than crayon and ink pieces… crayon and ink pieces are more valuable than ink pieces… and ink pieces are more valuable than pencil sketches.
  1. “Buy what you like” is bad advice for the new investor. That’s because what they like is not typically what they like after they have been in the game for a dozen years.
  1. The touted 10% historic return for fine art is contrived. The actual return for most investors and collectors is probably closer to the rate of inflation.
  1. That said, if you can afford to buy “museum quality” art, it’s quite possible to earn 10% overall. I’ve done as well or better in the last 30 years. (Not so well in the first 10.)
  1. To maximize profit and minimize risk, buy the most representative examples of the best-known artists you can afford.
  1. Start slowly, investing in just one to three artists. Stay with them forever if you want. If you wish to expand your collection horizontally, move slowly.
  1. Constantly upgrade your collection. When you have the chance, sell two or three lower-quality works to purchase a single higher-quality one.
  1. Art has three distinct financial and estate management advantages: It is portable. It is transportable. And for the most part it is non-reportable.
  1. If you don’t take daily aesthetic pleasure in your art, you are missing most of its value. In other words, if you aren’t in it for love and beauty in addition to asset growth, you are better off with stocks.
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Sunday, May 12, 2019, Delray Beach, Florida


Notes From My Journal

My Partner Is Much Richer Than I Am – So Why Don’t I Invest Like He Does?

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Bill Bonner (partner/mentor/friend) made a massive fortune by investing 80% of his time and money in a single business. He is a cautious investor. But he’s also – from my perspective – a very courageous and committed investor. He sticks to one thing.

I’ve made my fortune, less impressive than Bill’s, by hedging my bets. I invest 80% of my time but less than half of my investible income on my main business. The rest is in proven, income-producing assets that grow without much prodding from me.

I don’t regret investing the way I do. Had I followed Bill’s path, my net worth might have been only a fraction of what it is today.

It comes down to this: To my mind, the most important factor in investment success has to do with psychology. Not the market’s insane psychology, but my own. That’s what I was thinking while reading an interview with Aswath Damodaran, a finance professor at NYU’s Stern School of Business, in Forbes recently.

I liked this bit particularly:

I tell people that the person you have to understand best to be a good investor is yourself. It’s not enough to understand what Warren Buffett does and [what] Peter Lynch does. It might surprise people, [but] I spend very little time reading investment books…

We live in a Google Search world. People think that if they search long enough, they can [find] answers to their questions, when in fact what they need to do is to stop and think about the questions and think through their answers.

We need to own our own investment philosophies. We need to think through what we think about markets.

If you have a deep understanding of macroeconomics, the investment markets, and you are a courageous and committed investor, you should invest the way Bill does. But if you have only a superficial understanding of those worlds and limited confidence, you may be better taking my approach: Work your ass off, focus on income, favor investments that you understand, and employ the three cardinal rules of investment safety: diversification, position sizing, and stop-loss strategies.

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Wednesday, March 13, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

Lessons From What I Learned Losing a Million Dollars

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Part 2: Misunderstanding “Investing”

As a student of literature in college, I came into my adulthood knowing little to nothing about investing. That did not deter me from making money, but it did diminish my ability to convert that growing income into wealth.

As my income went up, so too did my spending. And of the spending I did, the most foolish were my “investments.”

I put quotes around that word to highlight a point: My ignorance of investing was profound. In fact, I could not even define the term. I might have attempted by saying something about putting money into stocks and bonds, but that sort of vagueness is not helpful. In fact, it is one reason most “investors” fail to grow their wealth faster than inflation.

When you think of investing as something as nebulous as putting money into stocks and bonds  (or commodities or futures or real estate or gold mines), you lose the opportunity to examine the difference between different modalities of “investing” – such as trading, speculating, betting, and gambling.

And when you don’t make these distinctions, you can justify foolish behavior by giving it a name it doesn’t merit: i.e., investing.

Wealth Building vs. Investing

Let’s start with this. There is a difference between accumulating wealth and investing.

Accumulating wealth is a good and sensible objective. But investing? It’s an activity – something you do with your money – to achieve the goal of accumulating wealth. Whether it can achieve that purpose depends heavily on what you are actually doing, which depends on your definition of investing.

Examples: my art collection, my botanical garden, my vintage cars, etc.

If you ask me to part with these treasured things, I will refuse. If you point out that they are “just sitting there,” costing me money (insurance/storage/maintenance), I will point out that their values have appreciated over the years and will likely continue to do so. In other words, they are investments.

I’ve been aware of the falseness of this posturing for many years. And I’ve written about it many times, pointing out that the problem with the word “investing” as generally used (especially by the financial industry) is that it puts a sort of seal of approval on a wide range of financial activities – from the cautious to the prudent to the speculative to the downright reckless.

So how do we distinguish?   READ MORE

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Monday, March 11, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

Lessons From What I Learned Losing a Million Dollars

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Part 1: The One Secret That All Successful Money Makers Know and Use

It was the only one left in my audiobook library. I didn’t remember buying it. I’d never heard of it or its authors (Jim Paul and Brendan Moynihan). And the title wasn’t a turn on: What I Learned Losing a Million Dollars.

I mean, really. There are probably millions of businesspeople and investors that could make such a claim. You lost a mere million? Don’t bore me. I want to hear from someone that’s lost a hundred million!

But it was, as I said, the only audiobook in my library. So I began listening to it… and was drawn in.

The first third was a breezy memoir of Jim Paul’s early life, education, and how he rather accidentally became a commodities trader, earning big bucks and living large. Then there was the downfall – a pretty exciting account of going broke and into debt fast.

I almost shut it off there, thinking I’d heard the best part, but I’m glad I didn’t. What followed was an analysis of not just Paul’s pride-bound bad thinking but of the mistakes all investors make sometimes (and some investors make all the time), as well as other insights that rang true.

Paul’s account of his experience is, in part, the story of a smart person that cared more about being right than making money. It is also a portrait of the mortal sins of wealth building: arrogance, ignorance, and greed.

In reviewing the mistakes that led to his million-dollar loss, Paul first examines his trading strategy. Was the strategy wrong? Should he have been using another one?

Then he takes you through a quick review of the strategies of some of the most successful investors of modern times. He demonstrates that each of those strategies was different, and all of them had rules that forbade practices that were followed in the others.

The rules that worked for George Soros, for example, are very different than the rules that worked for Warren Buffett. John Templeton’s strategy worked well for him, but would have not worked for Peter Lynch, and vice versa.

Paul concludes, convincingly, that there is no such thing as a successful trading strategy, and that the search for a winning strategy is a waste of time and money. Instead, he argues that if there is a secret behind the fortunes of Buffett and Soros and the like, it must be something they all did. And when he looked for it, he found it.

The single protocol followed by all of them, regardless of their profit strategies – was about limiting losses.

Paul doesn’t argue that any profit strategy can work. His point is that any profit strategy that isn’t coupled with a loss-prevention strategy is doomed to fail.

I thought about this. And it is true of my experience. Nearly every time I put money into an enterprise without some sort of stop-loss mechanism, I ended up losing most or all of it. And if I look at how I acquired and built wealth over the last 40 years, the strategies that worked all had serious downside protection.

When I consider an investment these days, I spend no more than a moment thinking about the upside potential. I’ve been doing business and investing long enough to know that dwelling on how much money you can make reduces your investment intelligence by about 98%. So when someone pitches an idea to me, I focus my thinking almost entirely on how I can limit my losses if things don’t work out.

There are three ways that I limit my losses:

  1. I use stoplosses– actual stop losses for stocks or equivalencies for other assets – to close out my position at a predetermined point if the investment goes south and hits my “get-out-now” number.
  2. I use positionsizing to determine how much I will invest in any given project. This is very powerful, perhaps the most powerful technique for safeguarding and developing wealth. I have a predetermined dollar figure that I will invest in businesses about which I know little, and another for investments about which I know a lot. When you have a modest net worth, that figure might be 5% of it. As your wealth grows, you reduce the percentage. These days, I never invest more than 1% of my net worth in any single investment or business deal.
  3. I diversify. My investment portfolio consists of real estate (mostly income-producing but some land banking), “Legacy” stocks (large, well-capitalized, dividend-bearing stocks), super-secure bonds (if the yields are decent), private lending (for secured assets), business ventures, options (selling puts on Legacy stocks), and cash.
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Sunday, March 3, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

What You Should Ask Your Money Manager… Right Now

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Money managers – just like your broker, banker, and insurance agent – make their money by selling you a service. If you don’t know what exactly they’re doing for you or how much they’re charging you, you’re vulnerable.

And yet, most investors, probably 8 out of 10, don’t know these things.

If you hire a plumber to fix a leaky faucet, you know exactly what they’re doing and how much you’re paying them. But when your money manager recommends something – some sort of amazing new investment that guarantees your principle while simultaneously giving you an upside equal to the market – you probably only vaguely understand the transaction. And you may have no idea that they’re being paid multiple times for selling you that deal.

The financial industry is very, very good at three things:

  1. Inventing financial products that are difficult to understand
  2. Hiding the fees they charge their clients
  3. Making sure they get paid even if their clients lose money

There are plenty of regulations in place that are supposed to make such costs transparent. But most of the disclosures are in small print and peppered with legal terms.

I’m not suggesting that all fees and charges are unfair. In fact, decades of consumer advocacy have reduced the number and types of tricks brokers, financial advisors, and money managers use to fleece their clients.

But there are still things to watch out for…

Some money managers and financial advisors don’t offer much to their clients. They’ll scratch the surface but, in the end, provide only a narrow range of financial services. Make sure what they offer fits your needs and includes diverse asset allocation, stock and bond recommendations, reporting, and so on.

Most of them will also charge you a fee for any financial advice. And some will collect commissions on any transactions. All of a sudden, it’ll start costing you to do anything with your managed money – including just talking about it.

Another problem is that they have a predisposition for mutual funds. They like mutual funds because they are easy. But as you know, mutual funds are very expensive.

And that’s not all…   READ MORE

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Sunday, February 3, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

Principles of Wealth #25*

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“Hard money” advocates and precious metals dealers contend that gold is not only the safest way to store wealth but also a very good way to grow wealth. The truth is, gold is a valid way to protect wealth from certain unlikely economic situations – but for the ordinary wealth builder, owning lots of gold is both risky and unwise.

There is a school of economic theory that puts gold above all other asset classes.

Here’s the argument:

* Stocks can go up but they can also go down. The same can be said for real estate, commodities, and bonds. But over the long haul, gold will preserve an investor’s wealth because of its intrinsic value.

* President Nixon made a huge mistake in 1971 when he took the dollar off the gold standard. When the dollar was tied to US gold reserves, the government could not print more dollars than there was gold to back them up. Now, the government had the freedom to print as many dollars as it wanted, backing them up with Treasury bonds (promises to repay the debt sometime in the future).

* When nothing can stop the printing of dollars, politicians will print them in an effort to speed up economic growth. But as the number of US dollars in circulation increases, the value of the individual dollar goes down. This causes inflation spikes that make virtually every asset other than gold – stocks, real estate, commodities, and bonds – worth less.

* In 1970, before Nixon’s decree, an ounce of gold could be bought for about $35. In 2019, that same ounce of gold would cost about $1,290. Meanwhile, as US debt has skyrocketed, the risk of a massive economic collapse has become more and more likely. Any day now, we could see banks freezing assets, the stock market crashing, bondholders losing everything, and “blood in the streets.” Gold will then be the only currency that anyone will accept. And here’s the silver (gold) lining: When that happens, the value of an ounce of gold will soar to $5,000 and even $10,000. Investors that own gold will become the new rich.

So… is that likely? That’s the million-dollar question.   READ MORE

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Friday, February 1, 2019, Los Angeles, California


From My Work-in-Progress Basket

What You Can Learn About Investing From a Las Vegas Casino

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The last time I was in Las Vegas for more than a business meeting was when my children, now grown and with children of their own, were in high school. We spent a week there, marveling at the mega-hotels, getting lost in the cavernous casinos, riding the rollicking rides, shopping in the scenic super-malls – generally swept away by the sounds and scintillations of that surreal, synthetic city.

Las Vegas offers a special kind of fun. It won’t give you the expansive fun of trekking the desert or the aesthetic enjoyment of walking through Rome. It’s more like a B movie or a Keno girl cinched up in lace and silk stockings: a type of sensory indulgence that you can’t be proud of but you don’t feel ashamed of either.

I remember the reaction of Son Number Two, who was reading Will & Ariel Durant’s history of ancient Rome at the time. Shaking his head, he kept saying, “This is surely the end of the American Empire.”

One can’t deny that thought. In terms of size, sumptuousness, and spectacle, there is no other place in the world like Las Vegas. (I’ve not been to Dubai.) The vast, opulent malls America pioneered in the early 1990s prepare you for the size of it – and Disney World/Land can give you an idea of how friendly replica environments can be. But they are but cartoons to the masterpiece of marketing and merchandising that is Las Vegas. Las Vegas is a one-and-only and offers a sui generis experience to all who visit.

A World Unto Itself

Take the Bellagio…

The casino is larger than several football fields and jam-packed with roulette tables, poker bars, and one-eyed bandits. It has its own mall… a deluxe promenade that rivals Worth Avenue or Rodeo Drive, featuring the same deluxe stores (Gucci, Armani, etc.) you can now find in every major tourist city around the world.

Walking into the lobby you can’t help but be awed by Dale Chihuly’s Fiori di Como, a glass sculpture composed of 2,200 hand-blown glass flowers and covering 2,000 square feet of the ceiling.

In addition to dozens of casino-side eateries and buffets, the Bellagio offers at least a dozen first-class restaurants, bars, and nightclubs within its buildings, as well as several theaters.

Outside, a water show takes place every 30 minutes. It is a wonder of science – computer engineering and plumbing – that provides a spectacular, three-dimensional representation of show tunes and opera that ranges from charming to breathtaking.

And there is the Bellagio Fine Art Museum, which displays, I was surprised to discover, large (if not great) works by Picasso and other 20thcentury masters.

The first half of the Bellagio cost something like $1.6 billion in the mid-1990s. The second half, built later, cost more.

Defining Our Terms

Three billion dollars is a lot to risk on a new business. But was this a gamble?

Were the people that invested in the Bellagio back then gambling? Were they, like the people sitting at the casino’s blackjack tables and slot machines, risking their money against the odds?

Or would you call it an investment?   READ MORE

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Tuesday, January 22, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

Principles of Wealth #24*

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The banking industry promotes the idea that money stored in cash instruments (such as saving accounts, CDs, and money market funds) is safe money and a riskless financial strategy. But it is not true. Cash, like every other asset class, has risk.

On Saturday, Ted reads an article in The New York Times predicting that the president’s new tariff plan will decimate international commerce. Sunday morning, he reads a WSJ article pointing out that the stock market is dangerously overvalued with an average P/E ratio for the DOW of 25. At noon, he reads an essay by an economist he admires that points out that US debt is now higher than it has ever been.

He goes to bed feeling uneasy.

Monday morning, he calls Joe, his stockbroker. “What’s going on with the market?” he asks.

“You’ve seen the numbers?” Joe replies.

“What numbers?”

“It’s down.”

“How much down?”

“About 10%.”

“Is that bad?”

“It’s not good.”

“And my account ?”

He hears the tapping of fingers on a keyboard. “You should be relatively okay,” Joe says. “Your portfolio is very conservative.”

A bit more tapping. Then, “You are down just a bit more. Around 11.5%.”

“Shit,” Ted says. “I knew this was going to happen. What do you think I should do.”

“That depends on how you feel about the future. Our analysts believe this is a dip in a long-term bull market.”

“I don’t believe that,” Ted says. “Sell.”

“Sell everything?” Joe asks.

“Everything.”

“And do what with it?”

“Just leave it in cash.”

The tapping again.

“Okay,” Joe says. “You are out. Your money is sitting in cash.”

“Good,” Ted says “I feel better.”

“Then you made the right decision,” Joe says. “What could be safer than cash?”
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From My Work-in-Progress Basket

Principles of Wealth #23*

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Tuesday, December 18, 2018

Delray Beach, FL.- Wall Street promotes the idea that investing in stocks and bonds is the sensible way to grow rich. But a strategy that focuses solely or even primarily on stocks and bonds is a flawed strategy. The prudent wealth builder knows this.

Pat told me about the great delivery service he’s been getting from Company A. “The other guys,” he said, “they just drop the packages over the fence. But Company A’s guy drives in and delivers my packages to the door.”

“I really like this company,” Pat said. “So I did some research. And based on what I learned, I think it’s a good investment. I’m going to buy their stock.”

It sounds smart. It reminds me of how, in One Up on Wall Street, Peter Lynch described his amazing success as the manager of Magellan Fund, which made 29.2% from 1977 to 1990, bringing the assets under management from $18 million to $14 billion.

“Invest in what you know,” was Lynch’s most popular investment rule. He attributed his success to his habit of going beyond the spreadsheets and looking under the hoods of the businesses he bought. He argued that the average investor could do the same.

He was wrong about that. And there’s a good chance that Pat will be wrong about the trade he’s about to make.

Why do I say that?

Because the average investor can’t possibly know enough about the stocks he buys to achieve a 29.2% return over a long stretch of time. The average investor, in fact, can’t even achieve the average overall market ROI of 9% to 10% over time. The average investor makes a third of that, if he’s lucky.

When Lynch talked about investing in companies you know, he meant that you should know more than you can ascertain from the public filings, from the balance sheet, the P&Ls, metrics such as P/E ratios, etc. He liked to get inside the industry a bit, get to know the players, ask questions of the execs and the frontline workers.

Lynch had the power to do that. The average investor doesn’t. At best he can do the kind of research that Pat did on Company A. But that’s not nearly enough. He’s still very much on the outside.

I’ve been “inside” the investment advisory business for more than 30 years. I have known dozens and dozens of managers and analysts. I know many of the best-known gurus. Most of them are smart. Most of them are driven. Some of them beat the market for a while. But few can match Lynch’s record. (And Lynch’s performance, let’s not forget, ended after 13 years.) So how can the average investor expect to do what even the pros can’t?

No matter what you hear from Wall Street, the stock and bond markets are not there to help the average investor get rich. They are there to provide fees and commissions to brokers, managers, and analysts.

Buying stocks and bonds is a sensible thing to do if you see it as a part, and only a part, of an overall investment strategy. What the smart investor should expect from his stocks and bonds is what the market is willing to give average investors. And that is average returns – 9% to 10%. Not 29.2%.

Now I agree with Lynch and I’ve said it a thousand times:  The smart way to build wealth is to invest in what you know. But when I say know, I mean know inside and out. I mean know with your eyes closed. I mean know the beating heart of it.

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From My Work-in-Progress Basket

My No Brainer “System” for Knowing When to Buy a Stock

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Sunday, December 9, 2018

Delray Beach, Florida.- Most of the stocks in my core investment portfolio – my Legacy Portfolio – are dividend-paying stocks. And since I don’t rely on cash from those dividends for current income, my practice is to reinvest it.

The common way this is done is automatically through a dividend reinvestment program (DRIP). That is an order you give to your broker to use the dividends of a stock to buy more of that same stock.

When I designed the Legacy Portfolio (with the help of Tom Dyson and Greg Wilson), I wanted very much to reinvest the dividends, but I was doubtful about DRIPs. My question to them was a simple one:

“In every other investment I’ve ever made, the price I pay for the asset matters. I assume this applies to stocks. If that’s true, why would I use DRIPs, which are designed to buy more of the same stock regardless of the price?

“What if, instead of automatically investing each dividend in the selfsame stock, we accumulated the dividends as they arrived, kept them in cash for a while, and then invested them in just one or maybe two stocks that were currently underpriced?”

Tom and Greg did a fairly extensive analysis of my proposition and came back with the encouraging conclusion that such a practice would increase overall yield. (I don’t remember the differential, but it was significant.)

I mentioned this in a recent videotaped interview that Legacy Publishing group did with Bill Bonner, Doug Casey, and me. And it prompted a viewer to write this to me:

“I’ve read your strategy for buying income-producing real estate. You determine whether the asking price is fair or not with a simple formula: 8 times gross rent. What I want to know is if you have such a simple formula for determining the value of a particular stock, both for making the initial purchase and for re-investing the dividends.”

This is what I told him…

Determining a “fair” price for a dividend stock is a bit more complicated than it is when you are valuing income-producing real estate.

For one thing, stocks are shares in businesses, and businesses are more dynamic than houses and apartment buildings.

They are dynamic and they are organic. How they change is not up to you. Rental properties, on the other hand, are fixed and tangible. Except for an event like a hurricane or fire (which can be insured against), they change only when you do something to them (add a bathroom, paint the walls, etc.).

Which is to say it’s easier to get a reliable estimate of the market value of a rental property. You compare it to similar properties in that location at that time.

That said, there are numerous ways to determine whether a particular stock, a stock sector, or the market is  “well” or “fairly” priced.

As Bill Bonner pointed out in his December 7 Diary, Warren Buffett’s favorite yardstick was to measure the relationship of total market capitalization (the value of all stocks added together) to GDP. Logic dictates that a good ratio would be below 100%, because a stock cannot be worth much more than the GDP of the country that supports it.

Another, more indirect, way to look at it, Bill said, is to compare U.S. household net worth(which includes real estate, bonds, and stocks) to national output.

And yet another calculation looks at the number of hours the typical person would have to work to buy the S&P 500 Index.

What are all these measurements telling us about the U.S. stock market today?

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