Money Magic

courtesy of tumblr

I enjoy games of chance. I’m particularly fond of casino scenes in movies—tuxedos for men, slinky dresses for women, slow-burning cigarettes, and dry martinis all-around. In real life, casinos are about as alluring as a mud bath. In Europe, for example, you’ll find a casino in every sleepy spa town—massages and “water cures” are meant to give a virtuous sheen to otherwise seedy places. Not a Daniel Craig—or even a  David Niven in sight.

The luck factor is probably one of the reasons I’m interested in stock markets too. There are many other things I’d rather do than actually work for money.  Just pick a winner and off to the races we go! (Of course, it never quite works out that way—darn gravity.)

Sleight-of-hand is not only found in Monte Carlo casinos though. It’s alive and well in many corporations. This past week, quarterly results have started to trickle in. You can get an eyeful of some pretty nifty accounting in their filing reports.

I’ll admit that I’ve tortured myself in many ways: self-doubt, bikini waxes, watching two episodes of Vinyl…but I have yet to savor what is sure to be the retina-frying experience of exhuming a financial statement. When the quarterlies arrive at the door, I immediately deposit them straight into the recycling bin. Warren Buffett may have the patience to pick through financial statements with his mental tweezers; I would rather watch Casino Royale, or paint dry.

Here are a few common sleights-of-hand:

Share buybacks. When corporations buy their own shares it reduces the number of shares outstanding and it makes metrics such as cash-flow-per-share and earnings-per-share look much better than they otherwise would.

Extraordinary items. The “footnotes” section of the annual report is a dumping ground for all kinds of juicy expenses, some of which may be on-going. Items such as restructuring, acquisition, severance, write-downs of impaired assets, and data breaches all have an impact on profitability but are often shooed-away, (“don’t worry your pretty head about these darling”), as non-material.

Lower tax rates. While this is not accounting trickery, per se, by moving a company’s domicile to a low-tax country, such as Ireland, a corporation pays less overall tax. This gives their earnings a rosy hue. But these better looking numbers may have nothing to do with improved earnings through actual growth.

So, how good are today’s corporate earnings for reals?

Some investment brainiacs say that deflation is not out of the question. So, unless you’re James Bond, here’s a hot tip: don’t throw all your chips in.

Prince

A few months ago, Prince performed for two nights in my home town. It had been decades since I had seen him in concert. My heart did an extra bump. “I should get tickets!”  And then I did nothing about it. “It’s probably already sold out; scalpers tickets would be a fortune; I’ll skip it this time.” He came and went.

Little did I or anyone else know that there would be no more “next times”. Prince had taught me many important lessons. One of them was to “party like it’s 1999”. I had forgotten that one, and many others, as time passed and  I grew more serious.

When his film Purple Rain came out, I went to see it without any big expectations. Two hours later, when I walked out of the theatre, it felt like my DNA had been rearranged. (The other two times this happened was when I first saw Cher on television and when I heard Queen’s album Night at the Opera or Day at the Races, can’t remember which but instantly fell under Freddie Mercury’s spell. That white unitard, c’mon! Yes, I am secretly a gay man.)

Fortunately I look good in purple. Because, after watching Purple Rain and then buying up all Prince’s albums, I wore a lot of it for the next decade. When I wasn’t dancing myself into a sexed-up sweat to his music, I studied his lyrics for wisdom, (“If the de-elevator gets you down, punch a higher floor”). And, yes, I imagined making love to Prince under the barn roof, the horses wondering who we were, thunder drowning out what the lightening sees and feeling like a movie star. (By the way, another one who died too young,  Warren Zevon, did a stellar version of Raspberry Beret.)

Prince came into my life at just the right time. He offered up a heady mix of spirituality and sexuality and a joyful but not too innocent embrace of life. Just what a young, frisky, and a little bit soulful girl wants to hear.

Like any passionate love affair, this one was programmed to burn out. His music still moved me but I no longer sought it out. My purple wardrobe—satin jacket, suede ankle boots, sequin scarf, rabbit hair fedora, and sparkly pantyhose—had long ago been disbursed to vintage shops and charity drives. Whenever I remembered some of my fashion get-ups from that time, I had to shake my head. Did I really walk around all pimped out like that? Prince and I were exactly the same height, (actually I’m half-an-inch taller), but whereas he looked cool with his sleek black pompadour, I probably looked ridiculous with my frizzy red hair and rosacea cheeks.

I’m sorry I didn’t bother to get tickets to see Prince when he was here last. I thought I had all the time in the world. Tomorrow there’s a screening of Purple Rain at my neighborhood rep theatre. More than three decades have passed since I saw it. I’m not that girl anymore. And Prince is gone. I’ll wear a purple flower in my lapel. Thank you Prince. R.I.P.

Ghost Story

The ghosts of Proust are those brittle couture-clad creatures that haunt the salons of fine hotels where they sip ballet pink Champagne. Perpetually enrobed in an air of melancholy, they climb the spiral staircase to the sacred solitude of their tiny perfect rooms. Drawing the papal purple velvet curtains they turn away from the the noise and the ill-mannered hordes and take to their beds. What else is there to do? As their heavy eyelids close on yet another day, the ghost damask wallpaper shimmers like a spectre.

Oh, the horror of imperfection. If only everyone behaved well and all the flowers were arranged just so life would be so much sweeter. Those who expect perfection and cannot tolerate anything less, suffer.

Take French fashion designer Yves Saint-Laurent. As his lover and business partner Pierre Bergé once said, “Yves was born with a nervous breakdown.”  Saint-Laurent would often retreat to their chateau in Normandy to sketch new collections and to recover from the excesses of Parisian night life. One afternoon Saint-Laurent returned to the chateau and noticed that the housekeeper had placed a bouquet of flowers in the dining room. It pained him to see the uninspired arrangement. He took a pair of nail scissors and painstakingly snipped the tops off each stem, a hundred tiny decapitations. Then he took to his room for the rest of the day.

Just as it’s unrealistic to expect perfection from our housekeepers—and even our fashion designers, after all Saint-Laurent was a great designer but not always a good one—it’s equally juvenile to expect that markets will behave the way we wish them to. As the industry mantra goes: past performance does not predict future returns. Yet many investors mentally latch onto past success and expect history to repeat itself.

After the crash in 2008 it took several years for the markets to regain momentum after which they went on a tear. Investors regularly boasted of 15-percent and up returns. DIY investors felt like geniuses and portfolio managers behaved like kings of the universe. But the wheel turns…These days it’s unlikely our quarterly reports show anything like those stellar returns. Where did all those investing geniuses go, I wonder?

According to John Bogle, the famous value investor and founder of Vanguard, we’ll be facing a tough decade ahead. His math is simple but hard to refute.

He divides total return into investment return and speculative return. Investment return is approximately 2-percent. That is the average dividend yield on U.S. equities. Corporate earnings growth adds another 6-percent for an 8-percent return. Pretty good so far.

Speculative return is how the market values a company’s earnings growth (price/earnings). Right now the P/E ratio is 20 but the historical average is 15. A lower P/E means lower stock prices, unless earnings skyrocket. So, based on Bogle’s back-of-the-napkin calculations, that 8-percent investment return plus a negative speculative return of, say, 3-percent, leaves us with an average return of 5-percent before inflation and before portfolio management fees. Throw in a couple of ghosts-in-the-machine like hedge funds, high-frequency traders and massive short-trades and things can get pretty hairy, pretty fast. (Hello Valeant!)

To mix my holiday metaphors, to avoid a fright upon finding a lump of coal in your retirement stocking, consider factoring a lower real return, somewhere between 1-to-4-percent, into your nest-egg calculations. Many companies today are priced for perfection but they could hit a snag.Don’t let your fantasy of perfect get in the way of a perfectly nice arrangement. Save a bit more, (or spend a bit less), as insurance against a decade of fair-to-middling market returns.

But, darlings, whatever you do, never skimp on pink Champagne.

Ringo, Ringo

Chanel Comet Ring

Dear Readers, you may have been wondering where I’ve gotten to. No new posts since the end of August? Come on girl!

Well there’s been this-and-that. Among other busyness, I got my certificate in Advanced Investment Strategies and, yes, it was as thrilling as it sounds.

The other night we saw Ringo Starr and his All-Star Band. Frankly, it could have gone either way but I gotta say, it was a rollicking good time. This man is enjoying himself so much you just have to clap along.

The former Beatle’s life is a good reminder to never underestimate  anyone, including oneself. By any measure his early life was shambolic.  A crummy Dad, poverty, severe ill health, illiteracy,  violence, lousy jobs, and a cold, damp, coal blighted climate with only two seasons: “July and Winter”. And yet, with a little luck and a lot of grit, Ringo crossed the wide chasm from have-not to mega-have.

Given his upbringing it should come as no surprise that Starr has some strong opinions about money and investing. As he told Forbes magazine, “…I always bought the house. I always felt good about that. I mean it took a long time till we made enough  money that I could buy a house. I have a business acquaintance who keeps saying “Cash is king,” and just because of where I come from, I like to have some cash. That’s all. Those are the two sort of rules I have.”

Starr’s a great drummer but what about his investing savvy? Anyone who’s come from a turbulent background will be drawn to the apparent security that owning land provides. As long as you can manage to keep the lights on, there’s no one to toss you and your belongings on the street. And, when all else fails, you can rent or sell it to put a few shillings in your pocket.

Some people consider real estate a kind of bond proxy in that it generates a predictable stream of income in the form of rents paid/saved. And, like a bond, its market value varies depending on interest rates, economic growth, and investor sentiment. But where a bond will mature and pay out its face value, a house never “matures”. You can keep it forever.

There are other differences as well. Like precious metals and other commodities, investing in real estate comes with many additional costs. Gold bars need to be transported, insured and stored, while real estate needs to be maintained and insured. It’s not portable and is heavily influenced by, not only the macro environment but also the micro, in other words, what is going on in the immediate neighborhood. Each gold bar is pretty much like the other, yet each property is unique with its own quirks.

Cash is Starr’s second investment pillar. But cash alone, e.g. stacks of bills hidden under the mattress or in a storage locker à la Walter White in Breaking Bad, is not really a smart move. For one thing, inflation erodes its value. The best way to think about cash is as a market hedge. If the stock market melts, those who have “kept their powder dry” can use it as an opportunity to buy depressed securities. It also provides a cushion during panics; you can live on your cash instead of being forced to sell assets to pay your living expenses. For this reason, in retirement, it’s good to have at least two years’ worth of basic expenses socked away in short-term GICs or actual cash.

Starr doesn’t mention other asset classes like equities, art, hedge funds, private equity etc. Cash and real estate alone are not a well-diversified portfolio for the average person, although if you have enough of each, you’re pretty much bullet proof. With a net worth north of $400 million, Starr’s well able to diversify.

Judging by his recent concert here his biggest assets are not the real estate holdings or the wads of cash—although they help. At 75, Starr is upbeat, funny, whippet-thin, fit, happily in love with his wife, surrounded by great talents and good friends, and is doing exactly what he wants to do whether it’s making music, painting, writing, acting or petting the dog.

Baby, he’s a rich man.

Peace & Love Ringo!

Rich Face Folly

photo courtesy of Getty Images

Who remembers the 1973 film Ash Wednesday starring Elizabeth Taylor as a 50-ish housewife who goes to Switzerland for a face-lift to save her marriage? Taylor, draped in furs and marital sorrows, secretly hoofs it to a ritzy clinic in Gstaad, has the surgery, then eats, drinks, gazes at the mountains, flirts with a fashion photographer, has an affair with a hunky German, stares at reflections of her restored beauty, but, alas, never reconciles with her husband, played by Henry Fonda, who’s still boinking a much younger woman. The film is notable in two ways. First, it stars the incomparable Taylor, who is watchable in any old schlock; and, second, it marks the first time that plastic surgery came out of the closet, complete with stomach-turning scenes of an actual surgery.

The film is terribly quaint by today’s standards when practically everyone is getting shot-up with Botox and hyaluronic fillers, or sandblasted with lasers and chemical peels. The latest trend, “richface“, is especially popular with millennials.  It involves extreme dermatological procedures meant to proclaim affluence, if not common sense. Selfies of swollen lips, a la Daffy Duck, puffy cheeks or pneumatic mammaries are posted quick-as-a-bunny for comment and applause.

Far be it for me to frown on the pursuit of beauty through personal grooming. No one would accuse me of being low-maintenance in that department (or any). But hyper-grooming is a risky business subject to the law of diminishing returns. (Exhibits A: Melanie Griffiths, Joan Rivers (RIP), any TV Real Housewife…)

Insecure millennials and reality-show celebrities are not the only ones who would benefit by leaving well-enough, or mediocre-enough, alone. Investors, too, are a restive lot prone to over-grooming, or in this case, excessive trading. This proves costly, both in the short-term (frictional costs of trading and taxes), as well as in the longer-term through poor market timing and weakened compounding benefits.

In his book The Single Best Investment, Lowell Miller makes the distinction between investors and traders. He states that long-term investing is about character, depth of vision and the cultivation of patience. By contrast most “investors” are whipsawed by the drone of economists, stock-pickers and other pontificators who populate the airwaves and provoke the “Three Sirens”: greed, fear, and conformity.  This compels us to constantly tweak our portfolios, jumping from one investment to another. Market liquidity, especially for mid-and-large cap stocks, and ETFs, makes trading as easy as a few keystrokes. This is a different kind of liquidity trap and one that I’ve fallen into more often than I care to admit. It’s also why I found Miller’s book such a welcome relief. It provides a counterpoint to investment industry hysteria.

As a 6th-degree black belt in Aikido, it should come as no surprise that Miller abides by a Spartan code in investing. Hold your ground. Become neither overly excited when your portfolio is up, nor excessively gloomy when it’s down.

Feel your feelings, but don’t feel you need to act on them!

Miller is a strong proponent of investing in high dividend-paying companies, with good cash flow, and growing dividends. You’re unlikely to make a killing with them but, on the other hand, you’re unlikely to get killed. Over time, as the power of compounding takes effect, these investments show their superiority over fixed-income, such as bonds or T-bills.

Alas, time is the friend of the dividend portfolio but not of the human who owns it. Warren Buffett is fond of saying that his holding period is “forever” but he tweaks like everyone else. What’s the sweet spot? Aim to tweak somewhere between Buffett and any one of the Kardashians.

Luxurious Solitude

Armani and friend

I’m just old enough to remember when Armani was it. The 1980s. A new luxury mall had just opened up in town with boutiques from most of Italy’s heavy-hitters like Versace, Ungaro, and, of course, Armani who was showing women’s shorts that season. All this and an indoor-skating rink too. It was a flop.

Fast forward.

On my way to Milan to interview Armani, of course I packed my one and only Armani item, a black-and-white satin blazer (Black Label, hello), to be worn with black slacks and white shoes. I suppose it was a small mercy that my luggage got lost at the Milan airport otherwise I would have looked like a waiter. The carousel went round-and-round. By the time I slipped into the back seat of the sleek black limo waiting for me and manned by a former Armani model—my personal driver for the week—I was wearing the only clothes I’d have during the whole trip. What’s that saying, ‘hubris, then nemesis’?

Armani was launching a woman’s fragrance, Sensei, with his new business partner, L’Oreal. They pulled out all the stops. Dinner at Nobu, discounted shopping sprees at Armani boutiques, an free night’s stay at the hotel, and a personal driver to get around Milan or anywhere else the mood might strike. (Lake Como, please and thank-you.) The fragrance was a flop.

I was shadowing make-up artist Pat McGrath backstage as she was prepping the models for the fashion show. Armani would appear and disappear, like a cat. Poof! He would bring a model to Pat, request a change here and there, and then, poof, gone.

Ahead of a group interview, his public relations attaché informed us that Armani had a birthday coming up in a few days’ time and he was in an uncharacteristically good mood. He must have been because one of the Italian journalists started her query with, “Mr. Armani, you’ve obviously had plastic surgery…” The PR-woman went limp. “Now, if I had had surgery, would my nose look like this?” Armani said with a smile. Still, it felt like we were on borrowed time and the interview wrapped up soon after.

By now I had been awake for over 48-hours and still in my original duds. After the fashion show, there was a simple buffet luncheon. I thought if I could just eat a few bites I might be able to keep standing for a few more hours. For insurance, I took my plate and leaned against a pillar. I hoped that when I lost consciousness I could simply glide down the pillar like a petal.  My back touched the cool marble. My eyelids closed. The thrum of the room began to fade.

“Bongiorno.” He was standing in front of me. I blinked hard. “Bongiorno,” I replied. Armani immediately switched to French and began to ramble about “Russe” this and “Russe” that. Naturally I assumed he was complimenting me on my red hair. I nodded vigorously and threw in some “Oui!” After a few long minutes, he shuffled off. Dang, if only I had my Armani jacket, that could have done the talking.

So funny to think that this fashion mogul started out as a window dresser but was fired because  his employer thought he was a daydreamer. Armani is one of the shrewdest businessmen on the planet. He owns the buildings that house his boutiques; he has expanded his brand to home decor, cosmetics, luxury hotels, yachts, chocolate, and now that most of it is manufactured in China, his pockets are even more flush. This is one savvy cat.

Armani never looks more miserable than when he’s hobnobbing at the Met Ball—and never happier than at home with his cats, or on his yacht with his cats, or on his island in Pantelleria—with his cats.

You know you’ve made it when you’ve got luxurious solitude. Hold the cats.

Mazl

Good fortune came my way this morning with The Sunday New York Times feature entitled “Kitty With The Gee”, in which two of my favorite subjects— diamonds and Yiddish—intersected.

The diamond district in New York is located on 47th Street between Fifth and Sixth Avenues. It’s literally chock-a-block with sparklers. The endless rows of expertly-cut carbon make privates’ (retail shoppers) eyes bug out, but for those who ply this trade, it’s business as usual. Like all professions, selling loose diamonds has its own codes, in this case heavily influenced by Jewish culture, and Yiddish and Hindi expressions.

I’ve only once visited the Diamond and Jewelry Way, as it’s called. A former boyfriend had bought me a luxury watch and, much like the relationship, despite my best efforts, it was perpetually out-of-sync. My ex had made a tidy sum on a business deal and decided that my trusty Timex needed an upgrade.

“What about this one?” I said, pointing to a simple gold Blancpain watch with a yellow strap.

“Oh, this is a very special watch,” said the salesman. “It’s made in Switzerland. Everything by hand. Exceptional timepiece.”

“So it must be very accurate, then.”

“Actually, because it’s an artisanal watch, it’s always off by a few seconds.”

In my real life I ran for the bus each morning to get to work. But in my fantasy life—where I spent most of my time—there was no running for the bus, or anxiety about being on time. I figured if one was an aristocrat, the “right time” was when one arrived.

The watch never kept time. At first it was slow by a few minutes, which I could work around. But soon the gap grew to over twenty minutes or more, forcing me to do mental calculations, or to ask strangers to tell me the time even though they could plainly see I was wearing a watch.

After the relationship cratered I had even less patience for the watch. But, like Eliza Doolittle, I was now in limbo. I had crossed over and couldn’t go back to the pedestrian Timex; I had to make the Blancpain work.

“Mazl” means good luck in Yiddish. It may be an acronym for the three elements of luck: makom (place), zman (time), and limmud (learning). The Blancpain gave me no mazl.

I happened to be in New York on business and went to a vintage watch boutique on Madison Avenue. The owner looked at the Blancpain and the papers of certification, noted that the gold was scratched and offered me $750.00. When I balked, he suggested I take the watch to the 47th Street and gave me a name. It didn’t take long to locate my guy. In a matter of seconds he appraised the watch and offered me a slightly higher but still uninspiring amount. Defeated, I brought the watch back home.

One day I was reading a New Yorker article about a woman who loved the look of her grandmother’s diamond Cartier watch. After wearing it for years, it has conked out for good and she didn’t know what to do until someone suggested replacing the entire mechanism.

Eureka! This was mazl in action, where place, time and learning converged.

Right Time: It was time to let go of the parts of my life that were no longer working (the emotional attachment to the relationship; the crappy watch).

Right Action: The article in the New Yorker showed me what was possible.

Right Place: Joe, the watch expert in my home town,  was willing to take the Blancpain parts as payment for putting in the Movado movement.

Moral of the story: Like the Blancpain watch, you can’t rush mazl.

Mazl Un Brokhe (Good luck and a blessing)

A Matter of Luck

Many years ago, on a blustery December morning, I headed downtown to return some rented videos, (I told you it was long, long time ago!), but got waylaid by a shoe sale. I popped in just long enough to have my knapsack stolen.

As I went to find the mall police to report the theft, I made a mental list of what was missing, in order of importance: Chanel lipstick and face powder, wallet, bus fare, apartment keys… videos! I told the policeman how it happened. “What was in your knapsack?” he asked. “Well, my wallet, keys, bus fare, cosmetics…and some videos.”

His ears perked up. “What kind of videos?” he asked. “Beverly Hillbillies Christmas Special and Petticoat Junction Holiday Special,” I replied. At which point you could tell that he wondered, how amazing it was that I had made it even this far in life. I explained that the videos were rentals and that I was on my way to return them. He took my phone number and said he would call if anything turned up.

At the video store I shared my tale of woe. “Which videos were they?” asked the young man. “We don’t get a lot of requests for those. Just let us know if they turn up.” (Guess what, about 2 years later they did turn up, along with my purple knapsack and wallet. By then the video store had gone out of business and was now Lululemon.)

Well, imagine my surprise when, after all these years, Jed Clampett’s name, patriarch of the Beverly Hillbillies clan, turns up.

CEOs are unlikely to admit their successes are due to luck. But that is exactly what Harold G. Hamm, CEO of Continental Resources, has done. He’s using the ‘Jed Clampett’ divorce defense to argue that only 10-percent of his enormous wealth ($18B) is due to his skill and effort.

Hamm and his wife are in the midst of a divorce battle and he hopes to use the Clampett defense to shield his wealth by saying that the majority of it was due to passive appreciation, e.g. high oil prices beyond his control, and should not be part of divisible assets. This, of course, runs contrary to the idea that CEOs deserve the outsize salaries, options, expense accounts, and other sundries they receive in exchange for services rendered.

Like many people, I, too, believed that those with mighty titles were not like the rest of us toiling in the shadows. However, since moving up the corporate ladder myself and having numerous opportunities to watch these folks up-close-and-personal-like, I’ve come to realize that, while some of them are exceptionally talented, most are average of skill, above-average of luck.

Confirmation bias is the trick of mind that leads us astray. We look for information that confirms what we already believe. So, for example, if we believe that a CEO has above-average skills, we look for signs to confirm it. Excessive pay and benefits are one way we confirm this belief.

I worked in a high-tech company during the big software boom. After a hugely successful IPO the founders became instant multi-millionaires. During a general staff meeting I glanced over at one of the co-founders who also happened to be a senior vice-president of something. She sat on the floor with an unfocused gaze absent-mindedly picking at her bare feet. I figured she must be some kind of genius—her eccentric behavior together with her big job title and wealth assured me of it.

Years later, after the mea culpa cheques had been sent off to the SEC, the now-disgraced founders went their separate ways. The smart ones, including the toe-picking VP, realized that luck, in the form of the software boom, had graced them and that it might only strike once— like the oil that gushed out of Jed Clampett’s yard. Instead of attempting another home-run, she moved to Chianti, Italy and parlayed her creativity and effort into baking and cooking and running a highly-praised hotel, an investment that appears to have paid off handsomely.

Water Sign

Courtesy of Habitually Chic

Happy New Year from everyone at Luck& Gravity! We (that’s me) wish you a joyful and prosperous 2015. And what better way to signal a year of plenty than this charming photo of a happy, wealthy couple: Elizabeth Taylor and Mike Todd at La Fiorentina in Saint-Jean-Cap Ferrat.

Some years ago when I was making yet another heartfelt attempt to learn French, I went to a school on the Cote D’Azur. (Bien sûr.) Villefranche-sur-Mer is a low-key little town compared to its flashier neighbors Monaco and Nice. Yet, in its day, it had seen plenty of shambolic goings-on, courtesy of rock stars like Keith Richards, who recorded Exile on Main Street here, as well as from the Euro trash that flock to the Cote D’Azur like crows to leftover canapés.

On week-ends, I took jaunts to nearby towns including the Saint-Jean-Cap Ferrat. Here were palatial villas set behind lush tropical gardens. They could only be glimpsed by pressing oneself against the imposing iron gates—or not at all if the guard dogs were on-patrol. Occupants included newly-minted Russians and, before the great crash of ’08, the lucky Irish. Each week-end I set out for Cap-Ferrat in search of the Queen of the Villas: La Fiorentina.

In 1967 Taylor and Todd rented La Fiorentina for the summer. Every morning Taylor, born under the water sign Pisces, swam lengths in the long pool that overlooked the shimmering Mediterranean. The photo above shows Todd surprising Taylor with a suite of diamond-and-ruby jewelry after one of her swims. I think it was Tuesday. Ain’t love grand?

In astrology, the water sign Pisces is not renowned for financial acumen. (Long story so the short version: Pisces is associated with the 12th house of dissolution and endings, thus is not considered auspicious for wealth accumulation. In Vedic astrology Taylor was an Aquarius, a whole other kettle of fish. But not here.) Yet, there is also wisdom in water as it can be used as a metaphor for navigating through life —and investing.

The following is the New Year’s message from of Ven. Samu Sunim, the founder of the Zen Buddhist Temple. (The italics are mine.)

Water always flows downhill. “Learn humility”.
A common mistake investors make is believing their gains are based more on skill than luck. Learning humility allows us to ask for help when we need it, and be willing to change our habits when they no longer serve us well.

Water always meanders around obstacles. “Learn wisdom.”
Flexibility is necessary to invest well. For example, blindly following a buy-and-hold strategy could cost us greatly if we disregard changes in sector dominance.

Water does not refuse dirty water. “Learn inclusivity.”
Investment wisdom is everywhere—and so is dross, unfortunately. Keep your eyes, ears and mind open to great investing ideas. They can and do come from anywhere.

Water adapts itself to any situation. “Learn adaptability.”
Good times/Bad Times. Always try to keep at least one-and-half years of expense money in a money market fund. This way market gyrations or unexpected setbacks will have less of an effect on your state of mind. If you are retired, this amount should be adjusted upwards to at least 3 years.

Water is patient and endures.”Learn perseverance.”
Once you have made an investment, it rarely pays to get twitchy. Unless there has been a negative material change, you must stick with your plan for several years to benefit. Do not become a victim of volatility. In an accumulating portfolio, use it to your advantage. In a distribution portfolio, see previous note. 

Water is not afraid of throwing itself off a cliff. “Learn grit and courage.”
Investing always involves some risk. If all your money is under the mattress, that is a different kind of risk. What is the optimum level of risk/reward?  When you’re taking risks with your money, ensure that the risk premium is appropriate. In other words, don’t overpay.

Water travels ceaselessly to reach the ocean where it becomes one with the ocean. “Learn the way of the Budhha in ocean Samadhi.”
Money is a manifestation of energy. Like knowledge, it loses its value when hoarded. Use the energy of money wisely to lift yourself and others up. Spend your wealth for good.

P.S. I did eventually find the sign pointing me in the direction of La Fiorentina but the dense foliage around it foiled me from seeing it. (For more photos and a short history of the property, click here.)

Blue Period

Courtesy of Mertim Gokalp

With tax-loss selling behind us, it’s time to contemplate 2015 and what the markets may have in store. Pundits predict a generally robust year, albeit with increased volatility. Despite the blather about the market being rational, it’s as zany and fickle as the people who trade in it. How else to explain seasonal effects like the “Santa Claus Rally”, “January Effect”, and the fact that years ending in a “5” give positive stock markets? (The number 5 was certainly lucky for Coco Chanel who named her first perfume Chanel No. 5. Its financial success has made the brand the juggernaut it is today.)

Despite attempts to explain these effects as expressions of rational behavior, I think it’s best not to overwork the dough, so to speak. Is the January Effect, when stock indices get a bump, the result of investors buying back stocks after December’s tax-loss selling?  I say, when Nature gives you a boon, just say ‘thank you’ and shuffle off before She changes her mind.

Pablo Picasso said, “If I don’t have red, I use blue.” This is great investment advice.

The latter half of the year saw a lot red. When the price of West Texas Intermediate dropped through the floor, the share valuations of many senior, mid-, and junior-oil and gas companies went along for the ride. Of course, some are now in oversold territory and may attract investor interest next year. Others, particularly those with overly-leveraged balance sheets, high production costs, and unhedged contracts, will find the capital markets unobliging, forcing them to slash dividends, put themselves up for sale, or simply close shop. Until sentiment towards this sector changes, best to put down the red brush and pick up the blue.

In 2015, it’ll be blue skies over the country the world loves to hate, America. Lower fuel costs will be a boon for consumers— and Americans do love to spend their way to happiness. Hence small-and mid-cap companies that sell within the domestic economy like Coach, Nordstoms, Home Depot, and TJX Cos., as well as those who typically spend a significant chunk on transportation, like Fed Ex and Amazon, for example, are sure to see fatter margins in 2015 and beyond.

Another ‘blue’ area is luxury products. According to a recent special report in The Economist, shares of public luxury companies have outperformed those of other companies since 2005. Hermes, LVMH, Prada, Burberry, Swatch, Kering, Richemont, and Diageo are doing smashing business. Avid consumers in Asia are more than compensating for lower demand in Europe and North America. But don’t cry for Europe. Its luxury industry sold $726 billion of covetable mercy in 2013 and has 70% of global sales. So, while its citizens have cooled it on luxury spending, the continent is still running the show and reaping the rewards through employment, exports, and increased GDP.

Bernard Arnault, the sharp-eyed LVMH honcho was once asked by the late Steve Jobs for his advice on retailing. “I’m not sure we’re in the same business,” replied Arnault. I don’t know that we will still use Apple products in 25 years, but I am sure we will still be drinking Dom Perígnon.”

So, let’s raise a glass of Dom to next year’s most promising sectors: U.S.consumer goods companies, U.S. financial institutions (the regional ones too), small-and mid-cap U.S. domestic companies, and U.S. pharma and technology companies. Russia is a dud but India is looking interesting, and if monetary policy loosens up in Japan, that region may be worth a gander. Higher interest rates in the U.S. and, by extension, Canada, will put a damper on the allure of high-dividend paying stocks. But don’t be blue because steady growth in the U.S. economy will more than off-set this. And, for those going long, you could do worse than investing in luxury goods. No red ink in sight.

Here’s to good health and good fortune to all in the year that ends in “5”.