Investment Philosophy

Our Investment Recommendation to You and Your Family

After you have established appropriate cash reserves, invested in money market funds or municipal bonds, we will recommend that you pay down, or better yet, eliminate personal debt.

We will recommend that you invest long-term assets in shares of large, profit-motivated, rationally run, multi-national companies.  Although the future is unknowable, and certainly unpredictable, the investment return to you, from ownership in these companies, should be greater than return from other savings programs.  We expect, but do not know, that the fluctuation in value of your investments in these companies will be significant.  We also expect the fluctuation to be temporary.  A significant part of Our Service to you, and your family, is to encourage you to invest as large a portion of your assets in these companies as you can tolerate.  Then, Our Service to you, and your family, is to encourage you to maintain your investments in the shares of these Great Companies during market downturns.

Only by maintaining your investment during market downturns can you realize the long-term rewards as an owner of the great companies of America and the World.  Read our General Investment Disclaimer.

The following are recent articles that expand on our Investment Philosophy. Please use the search function on your right for older articles.

The Family Vacation House

01/23/2019

Summer is here and the family is going down to the Family Vacation House.  This is a great time to get out in the sunshine, see your family members, and have a great time on the beach, in the ocean, at the lake, or wherever it is that you may go.  But it can also be a time when the closeness of family also leads to other problems, scheduling conflicts, who pays for the house, who fixes the leaky faucets and other repairs, varying definitions of important concepts like “cleanliness”, “friends”, “sharing”.

Our experience, and that of our clients, has been that the summer home can be the source of great family unity.  As a resident of a North Jersey suburb, I have found that the suburban home is not the one that attracts the family; it is the Summer Home.

As you may know, my clients are the source for many of my best ideas.  I want to know what your Family did correctly or incorrectly in regard to your Summer Home.  All comments are welcome!

What can the family do to make the Summer Home an enjoyable experience for all?  …And a positive force for family unity and prosperity?

The following are some of the successes, maybe we will even call them “Best Practices”, that families have done to make the Summer Home an enjoyable experience.  We will also have some of the pitfalls, we will call them “Worst Practices”, to avoid.  We are aware that a “Best Practice” for one Family may be a “Worst Practice” for another!

Many families have had the family matriarch and patriarch buy the house, pay for it, and that continues and works out just fine, especially for the second generation!  The second generation starts to have their own children and the house fills up.  This  creates the problem of scheduling.  Who is going to go to the house at different times, how many family members can they bring, can the grandchildren bring friends?  Suddenly, the house can start to get to be too small.  If the house is large enough to contain all who come, that is a blessing, but it is not usual.  If the matriarch and patriarch can pay for the house throughout this entire process, that works best.  But at some point the house must be maintained and the duties for the maintenance will pass to the next generation…Now we have two potential areas for conflict – scheduling and finances.

When the parents die, there can be significant conflict among the next generation regarding finances and scheduling.  In the Best Practices category, family members who want to be bought out of the house, typically because they’re not using it, or cannot afford it, should be allowed to sell their share to the other family members.  Of course, the selling Family member wants full price while creating new financial burdens on the buying Family member.  Potential conflict there!

We have seen with various families, it is very difficult to maintain the Family Home when the parents die. From a practical point of view, we don’t live with our brothers and sisters and their families year-round. Why should we expect to go on vacation with them for any extended period of time?

Several client families have had great success discussing how to handle the Family Vacation Home in advance.  They may have concluded that when the parents die, the default position is going to be to put the Summer House on the market for sale.  Certainly, the strategy is to allow conflict-free exit from the Family House. A “Best Practice” might turn out to be that if a family member cannot be bought out, because the other family members don’t have the finances, then that is a signal that it is time to buy out all and sell the house.  All family members might agree in advance.  Since most vacation homes are in towns or areas where there are other homes for purchase, the proceeds from the buyout of the main Family Home can be used to subsidize, or even purchase, a few homes in the area.

If the money to support the house is the issue, then an alternative family strategy could be to endow the house, the family vacation location, with separate funding to support the house.  To expand this idea further, the separate funding could be used to maintain the home, and might even be used to pay for family meetings and transportation to and from the family vacation location.  The separate funding could even be a bank of sorts to allow for transactions between family members.

Have you had some strategy work (or not work) with your Family’s Vacation Home?  Please let me know.  You may forward this email to any of your Family Members or Friends who are involved with a Family Vacation Home.  We would like to be a resource to keep a Family Vacation Program going – Your Grandchildren are counting on us!

Regards,
Jim Vaughan

Tariffs and Trade 2019

Please open your economic textbooks to page forty-seven, class, because it’s time to talk about something you probably haven’t thought of since college: tariffs.

On Thursday, March 1, President Trump announced a new plan to institute a 25% tariff on steel imports and a 10% tariff on aluminum.1 Like so many things these days, the response was radically different depending on who you talk to.  More on that in a moment.

Traditionally, tariffs are something most of us don’t have to think about, especially as tariff levels in the United States have been low for decades.  But for investors, President Trump’s announcement has the potential to be very significant.  Why?  Because of the possibility that it could spark a trade war.

Should a trade war actually happen, it could have a major impact on investors.  To understand why, let’s have a short Q&A session.

What are tariffs and why do they matter?

Since it’s probably been a while since your Economics 101 class, let’s quickly cover a few basics.

To put it simply, a tariff is essentially a tax on imported goods and services.  Tariffs can be levied on almost anything: metals, foodstuffs, products, etc.  Historically, tariffs are most commonly used when a country wants to protect certain industries within its own borders.  For example, the Tariff Act of 1930 was designed to protect farmers by increasing the cost of importing agricultural products.  By making it more expensive to import crops from other countries, people would be forced to buy mainly from American farmers.  This is known as protectionism.

Once upon a time, tariffs in the United States were both high and common.  But after World War II, average tariff rates dropped significantly, and have stayed low ever since.  In fact, since the 1970s, the average tariff rate on imports has been well under 10%.2

So are tariffs good or bad?

Remember how I said the response to President Trump’s announcement was radically different depending on who you talk to?  That’s because a tariff’s effects can vary wildly, too.

Tariffs can bring two major benefits:

  • Because tariffs are a kind of tax, they can bring more revenue to the government.
  • Tariffs, and protectionism in general, can be a major boon to certain industries – including the workers within those industries.  In this case, the U.S. steel industry would benefit from a 20% tariff on steel, because it means more people are buying from them instead of their competitors overseas.

You can see why the idea of tariffs can be attractive for many people.

Unfortunately, tariffs can also cause some very negative side effects.  Specifically:

  • Tariffs can make life more difficult for consumers, whether they be individuals, families, or businesses.  That’s because higher tariffs often lead to higher prices, which in turn lead to higher expenses.  For example, if companies must pay more for the steel they need, that could significantly eat into their own profits.
  • Higher tariffs can lead to trade wars.

Okay, so what is a trade war, anyway?

We live in a global, interconnected world.  Toss a stone into the water off one shore and the ripples can be seen near another.  In this case, higher tariffs can cause some very large ripples.

When one country raises tariffs on a certain kind of product, other countries that depend on exporting that product won’t take to it kindly.  As a result, those countries might retaliate by increasing tariffs on their imports, thereby harming the first country.  Before you know it, tariffs become weaponized and a trade war breaks out.

Trade wars are risky things, because they can quickly jump from industry to industry.  Let’s take the current situation as an example.

After President Trump announced his plan to raise tariffs on steel and aluminum, the European Union threatened to do the same to U.S. imports – everything from motorcycles to bourbon to bluejeans.3  Other countries like Japan and Canada, which are both major steel producers and important trading partners, have threatened similar measures.  Should all this happen, the currents of international trade will quickly become choked.  That would lead to higher prices on many goods and services, which in turn would lead to lower profits, higher costs of living, and even – potentially – higher unemployment.

Should all those things happen, the markets will surely suffer.  As an investor, you don’t need me to tell you what that means.

So why did President Trump decide to raise tariffs?

For decades, the United States has seen a worsening trade deficit with many countries.  In other words, we pay more for importing their goods than they do for ours.  According to the Wall Street Journal, the U.S. “ran a global goods deficit of $810 billion” in 2017.4  One of the president’s most long-standing campaign promises was to address that deficit.  It appears that tariffs, along with renegotiating certain trade agreements, like NAFTA, are his tool of choice.

Geopolitical economics is a loaded topic, and there’s a lot of disagreement out there about causes and effects.  Again, tariffs can unquestionably bring lots of advantages, and there’s no question the United States is on the lower end of a trade imbalance with many countries.

At the same time, there’s also no question that Trump’s announcement has spooked both the markets and the global economy.  The Dow fell more than 400 points on the day of the announcement, and continued to fall the next day.5  Many world leaders have already warned about a trade war being a very real possibility.  Even many Congressmen in President Trump’s own party have spoken out against the prospect of higher tariffs.  This isn’t surprising, because the Republican party – or at least a large percentage of it – has traditionally been very much in favor of free trade.

As I’m not an economist, it’s not really my place to decide whether protectionism is good or bad.  It’s worth noting, however, that a trade war did break out the last time the U.S. raised tariff rates this high.

The Tariff Act of 1930, or Smoot-Hawley Tariff Act, raised tariff rates to their second highest level in U.S. history.  These days, economists generally agree that the resulting trade war worsened the Great Depression.  (What no one seems to agree on, though, is by how much.)  On the other hand, the United States is in a very different position in 2018 than it was in 1930.  Back then, the Great Depression had long-since started.  These days, our economy is much stronger.  That makes it hard to predict how hard a trade war will hit.

What happens now?

There are still so many things we don’t know.  For instance, we don’t know if President Trump will actually go through with his plan.  If he does, we don’t know if the tariffs will apply across the board, or if they’ll only be levied against certain countries.  (This is something many of his advisers are recommending.  If our closest allies are exempted, then the effects of a trade war would likely be minimized.)  And we don’t know what other nations will do in response.

What we do know is that the possibility of a trade war can have a substantial impact on the economy and the markets.

At the moment, I don’t believe we need to take any action. Back in February, the markets took a hit due to the threat of inflation and rising interest rates – and then recovered.  While the markets dipped slightly in response to President Trump’s announcement, it’s far too early to make any changes to your portfolio.

However, this is why my team and I keep such a close eye on what’s going on in the world.  Part of my job is to keep you informed of any ripples in the water so that you always stay afloat.  It’s impossible for me to say what’s going to happen next, but I’ll tell you this: We’ll always be here keeping our hands on the tiller.

In the meantime, please contact me if you have questions, or if there’s anything I can do for you!

Sources
1 “Trump to Impose Steep Aluminum and Steel Tariffs,” The Wall Street Journal, March 1, 2018.  https://www.wsj.com/articles/trump-wont-quickly-announce-new-tariffs-on-aluminum-steel-1519921704
2 “Average U.S. tariff rates, 1821-2016,” U.S. International Trade Commission, https://www.usitc.gov/documents/dataweb/ave_table_1891_2016.pdf
3 “U.S. allies around the world steel for Trump tariff tussle,” The Wall Street Journal, March 2, 2018.  https://www.wsj.com/articles/asian-allies-steel-for-trump-tariff-tussle-1519977304
4 “Trade Wars Are Good, Trump Tweets,” The Wall Street Journal, March 2, 2018.  https://www.wsj.com/articles/trade-wars-are-good-trump-tweets-1519996161
5 “U.S. Stocks Tumble After Trump Announces New Import Tariffs,” The Wall Street Journal, March 1, 2018.  https://www.wsj.com/articles/global-stocks-struggle-after-bad-month-1519868670?tesla=y