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The Fallen

Good Morning,

As you may have expected from previous notes about the topic, sentiment continues to falter on every little hiccup in markets.  I know 400-points down sounds like a lot – but from an 18,500 starting point?  Really?  Not.

Indeed, for the mass audience and the media, 400 points down now immediately triggers the 2008-2009 video reel library and Black Swan chatter abounds.

When will it end?  Likely at much higher prices, with far, far less than $9 Trillion sitting in the bank.  It will be when “bond” has become a new 4-letter word marking foolishness and almost no one remembering anything bad about markets or equities.  In other words – a long time from now.

Sentiment Wilts – Again

You did not expect otherwise did you?  The snapshot below is clear:

Required Disclaimers on all videos and content

 Fallen and They Can’t Get Up

Here is what we have for the bulls now for well over a year++:  When the market goes down, bullish sentiment retreats while bearish sentiment spikes – ala this past week.  The kicker is this: when the market does manage to fool the masses – and rise, bullish sentiment barely budges – more or less staying steady.

In the latest week, which obviously includes the ugly couple days starting on Friday, bullish sentiment declined from 29.75% down to 27.94% – or nearing again the levels seen at the bottom of the pit in 2009!  More amazing?

This also sets another record:  the 46th straight week and the 80th time in the last 81 weeks that bullish sentiment has been below 40%.

Said another way – 72% of investors surveyed nationally don’t like the stock market.

At what level do you think they will like it?

Surely not at lower prices.

While bullish data is still a brain-bender, bearish sentiment spiked quickly this week.  As selling cascaded into the market, bearishness went from 28.48% last week to 35.92% this week.  A quick check will show that 7-point increase was the largest since mid-June (yep – Brexit days).

The fact is – fear runs deep.  There is still a constant emotional reaction, widespread among individual investors, to the risk of being left with no chair to sit in “when the music stops.”

Hauntings of 2000-2003 and 2008-2009 remain as fresh as yesterday.  At the first hint of trouble, sentiment shifts rapidly.

Long-term investors need to be very grateful this is still the case.

Technical Review Backdrop

I prepped a short little video review of the SPY charts from a technical perspective.  I figured you may find some time over the weekend to review.  The upshot?

Markets are doing what they normally do – testing breakout regions and building price supports.  This chop is actually health for the long-term structure one wants to see.

You can view the short video here.  It just takes a few minutes.  I hope you find it helpful.

Improvement Anyone?  

While red ink hits the market for a bit, it may be too early to brag about improvements but we must.

Seems the manufacturing data are improving – again.  I suspect this matches up with data in recent weeks from other regions as well – all showing that the pain felt in this sector (driven primarily by huge setbacks in energy-related orders output) is slowly abating.

Required Disclaimers on all videos and content

 I know – red ink makes it tough to look forward – but that’s where the money is made.

The Empire State Manufacturing Survey chart above is a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Yesterday’s release showed a general improvement for both current and future assessments of manufacturing activity, with the current activity index rising to a still contraction level of -1.99, while future activity also increased, rising to a level of 35.43.

By the way – the latter is nearing highs seen in all of 2015 and 2016 – another hint that we are burning off the energy negatives.  Slowly but surely.  This is also part of the reason it has felt like that US economy has been walking through quicksand.

One more note:  while everyone complains about AI – let’s be thankful some robots exist. If they didn’t, who would man the factories which are producing near all-time record output?

Heck, homebuilders are short guys who will build houses – they can’t find enough of them.

Imagine trying to staff a new factory with just people.

Be thankful that robots are coming to the rescue instead of fearing the advances the technology shift provides for the rest of us.  Thank Gen Y for the push.

Results and Bearishness

An interesting piece from Morningstar, the creator of those God-awful “style boxes.”  They out out an item on fund managers results with data up to the end of August and covering the last 5 years.  It’s pretty ugly.  Take a look:

Here is the simplicity of the back-drop to this data which is most often overlooked when reading the bullet points.  Having been one in my career and with some of my very best friends being great fund managers, most do not recognize the culprit lurking in the background of this data.

It’s emotion.  The very knee-jerk reactions that so often quantify terrible judgment in hindsight.  In a nutshell?

The fund manager tends to see significant withdrawals as prices wilt.  This causes two things: a) a demand he / she sell when prices are low to meet redemptions and, b) a lack of capital to buy stocks while they are cheap.

On the flip-side, the fund manager tends to see inflows only after markets have risen. They are then faced with having to buy the very same stocks at higher prices.

Sounds simplistic – but the public tends to see a mirror image of their emotional reaction waves ripple through the “results” published by the fund manager world.

Last on this front – be careful what you wish for:  ETF’s are not what most people understand them to be.  They are becoming one of the primary causes of the chop we see when sell alarms do ring.

Long-term investors cannot possibly believe that the massively increasing wave of double-digit moves in specific stocks, seconds after an earnings note headline is released, is driven by John Doe and his broker, right?

Closing Thoughts

We hope you have a wonderful weekend.  Check the video above.  The fears of yesterday still haunt markets.  That’s good.

I have stated this repeatedly so let’s keep it in mind:  anytime you think people are too bullish – just give me a few days red ink and I will show you a terrified crowd again. This week is no different in the larger view.

Setbacks are your friend if you remain focused on the long-term horizon, and what is shaping up here in the US.  As much as the media coverage only covers the dark views, many parts of our economy have never been better.

Seeing through all the pitches in the dirt is critical – and it is what investors get paid for – taking risk.  Very significant waves of demand are building in our economy.  As is almost always the case, those understandings will not be clear in the mainstream until they are obvious.

And count on this:  when demand is rolling ahead rapidly.  When we start hearing of shortfalls, when Gen Y footprints are everywhere to be seen and months of waiting for some product pipelines becomes clear to all – we can be absolutely certain that terrible news will cloak all of those events as well.

Stay focused, stay patient, stay on your long-term pathway.

The Barbell Economy is unfolding as expected.

The chop in the market is healthy and a benefit for long-term investors.

Until we see you again, may your journey be grand and your legacy significant.

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Jason No Comments

What Does Your Business Value Tell You?

No one wants to spend money on something they don’t need. So why do you need an estimate of your company’s value when you don’t expect to leave for several or many years?

You may not — if you fall into one of two groups:

  • Owners who are sure that their business exits are more than 10 years away.
  • Owners who are certain that the value of their companies is miniscule compared to what they will need upon sale or transfer.

Many owners, however, look to the value of their businesses as the chief source of liquidity for their post-exit lives. We intend to leave as soon as it is feasible rather than when we are completely burned out. Therefore, most of us need to know the value of our companies now so we can be smart about creating greater business value in as short a time as possible.

Knowing the value of your business today is critical whether you plan to leave your business tomorrow, or in five years because:

  1. An estimate of value establishes your starting line and distance to the finish.
    An estimate of value tells you where your unique race to your exit begins. Your job, whether your company is worth $500,000 or $50M, is to fill the gap between today’s value (the starting line) and the value you need when you exit (the finish line). Based on today’s value, your race to the finish may be shorter, longer, or perhaps much longer, than you expect. Once you know how far you and your business need to travel, you can begin to create timelines and implement actions to foster growth in business value.
  2. An estimate of value tests your exit objectives.
    An estimate of value helps you to determine if your exit objectives are achievable. Let’s assume that you decide that your finish line (financial objective) is to receive $7,000,000 (after taxes) from the transfer of your business interest. You also want to complete your race in three years (timing objective). An estimate of value will tell you if the distance between today’s value and the finish line is too great to reach in three years. If a growth rate is unrealistic for your business, you must either extend your time line or lower your financial expectations.
  3. An estimate of value provides important tax information.
    First, an estimate of value gives you a basis for analyzing the tax consequences of Exit Path alternatives. Once you choose your path, the value estimate provides a basis for your tax-minimization efforts. Taxes can take a significant chunk out of a business sale price so the value of your company (what a buyer pays for it) must usually exceed the amount of money you need to fund your post-exit life. The size of that excess depends on how you and your advisors design your exit, and exit design in turn begins with knowing starting value and the distance to your finish line.
  4. An estimate of value gives owners a litmus test.
    When owners know how much value they need to create to meet their objectives, it helps them determine where they need to concentrate their time and effort. Instead of growing value for the heck of it, dedication to a goal may enable owners to exit sooner with the same amount of after-tax cash than owners who do little or no planning. Pursuing exit plan success all begins with a starting value.
  5. An estimate of value provides an objective basis for incentive plans.
    As you design incentive plans for key employees (such as Stock Purchase, Stock Bonus and Non-Qualified Deferred Compensation Plans) to motivate them to increase the value of your company (so you can work towards a successful exit) you must base these plans on an objective estimate of value. You and your employees need a current value (or starting line) that you all can confidently rely on.

This is Not a Full-Blown Valuation!

We know you are thinking, “How much is this going to cost me?” But we’re only suggesting that you need an estimate of value to establish a benchmark, not the opinion of value which may precede your transfer of ownership, years from now.

Estimate of Value

An estimate of value typically:

Costs about half as much as a standard valuation opinion,

Is the basis for the (later and) complete valuation, but

Lacks the supporting information contained in a written opinion of value, and

Is used for planning only. It cannot be relied upon for tax or other purposes.

Failure to Value

On some level, we all recognize that we will leave our businesses someday. While you may not yet have a vision for the second half of your life, you do understand that the exit from your company is likely to be the largest financial transaction of your life. Does it make sense to go into that transaction and into the second part of your life without an objective understanding of your company’s value?

An estimate of value can save precious time as you build value and pursue the exit of your dreams.

If you would like more information about the role of business valuation in Exit Planning, please contact us.


The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Jason No Comments

True Goals in the Game of Life

True Goals in the Game of Life

life concept hand drawing on tablet pcWarren Buffett recently released his annual letter to shareholders and, as usual, it contains snippets of wisdom almost everyone can appreciate. One quote in particular stood out for us: “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”

What’s not to like about this wisdom from the Oracle of Omaha? And yet, how many families will actually apply his advice to their financial playing field instead of fixating on the attention- grabbing scoreboard of near-term market performance?

From what we’ve seen, precious few. Which brings us to the value that a good coach can add to your field of dreams. To form and stick to a personalized plan for your family wealth, it helps to have an advisor who is committed to not just talking the talk, but making sure that, together, you walk the walk toward your financial goals.

What the Scoreboard Won’t Tell You

In the financial industry, the scoreboard, or near-term market returns, is the primary tool used by brokers to sell more “stuff” to investors. There’s little that stokes the imagination and releases rewarding dopamine in the brain like the hopes of buying into the next best thing. Think tech stocks, real estate, and gold, to name a few. Financial intermediaries who earn their keep from trading commissions know that keeping you focused on the score board keeps you on the edge of your seat, forever uncertain about whether you should keep what you have or move on to the next promising stuff, with its new trading commissions.

Of course, returns are important, but as Mr. Buffett also points out in this year’s shareholder letter, “I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so.” If Mr. Buffett cannot win the scoreboard game, why would others think they can?

The Name of the Game: Planning and Discipline

While the scoreboard is about instant gratification, the playing field is about planning to reach your long-term goals while taking on the least risk along the way. Once a family goes through a thoughtful discovery process and understands how much return they need to accomplish their lifestyle, gifting and legacy goals, then their portfolio – their game plan – can be constructed toward achieving those goals with the least amount of risk required.

What does this level of plan-based management look like in action? Vanguard recently published a white paper, “Advisor’s alpha,” identifying a host of techniques that can be expected to meaningfully improve your investment experience … if you stick to the plan:

  •   Suitable asset allocation
  •   Cost-effective implementation (low expense ratios)
  •   Portfolio rebalancing
  •   Behavioral coaching
  •   Asset location (tax management)
  •   Spending strategy (withdrawal sequence)
  •   Total return versus income investingMeasuring Advisor ValueVanguard’s white paper demonstrates investors can achieve approximately 3% additional returns compared to the returns earned by investors who are not utilizing these best practices.

They define this premium as an advisor’s “Alpha,” or value-added beyond what do-it-yourself investors are expected to accomplish on their own.

The term “Alpha” can be a little confusing, because the traditional definition is how much value an advisor adds beyond market returns. We echo Mr. Buffett’s sentiments in calling for a more meaningful measurement. Citing Vanguard’s white paper, we believe an advisor adds the best value “through relationship-oriented services, such as providing cogent wealth management and financial planning strategies, discipline, and guidance, rather than by trying to outperform the market.” We think of that as the true “Alpha” by which a family’s wealth is best served.