Cleaning Up

One thing investors did not do this year was clean up. Ill winds from China, Latin America, and other emerging markets more than offset signs of life from the United States, where a flicker of economic growth, albeit tepid, is afoot. And let’s not even talk about small and micro-cap, energy and commodity-related stocks which have been crushed like concord grapes into a messy pulp.

The end of the year is the perfect time to face the tumbleweeds and dust bunnies lurking in your otherwise reasonable portfolio. Tax advisors and wealth managers call it “tax-loss harvesting”. I call it “dredging the channels.”

“Dredging the channels” sounds like the medical practice of bloodletting where live leeches are applied to a patient’s skin to relieve high blood pressure and other health problems. The process of culling underperforming stocks is bloodless but it’s traumatic nevertheless. After all, it’s final proof that your investment was a bonafide dud.

Dredging the channels is part of TCM (traditional Chinese medicine) and is as pleasant to do as it is necessary. It scrapes stale energy (called qi) out of the body. Turbid energy, like household dust or the gunk that ends up on your eyeglasses, is created every day. It can come from a variety of external and internal sources such as pollution, too much sitting, overthinking, or negative thinking, aggressive people, excess noise, and stress. When it isn’t cleared, it builds up a nice, thick coat. Over time this messes with your mood and energy and before you know it, you ain’t got no more pep. Dredging the channels involves stretching and visualization exercises. It is a form of personal housekeeping much like fluffing the silk cushions on your Louis IX fauteuil.

This month, in addition to my regular physical housekeeping, I’ve added the rather difficult task of dredging the “losers” in my portfolio. Normally I’m a loyal type but when the market gives you lemons, well…. So I’m booking the losses to offset my realized capital gains to lower my overall taxes (lemonade). This strategy only works in non-registered accounts and you must wait 30 days after the trade to re-purchase the same stock, should you wish to do so. If you re-purchase it sooner, you cannot claim the loss.

No one invests to lose money. However, there’s a gift embedded in every loss. This year the market has been generous with lessons. Here’s what the 2015 market gave me along with the lumps of coal:

Don’t buy into the “story”. I put some of my hard-earned money into concept stocks that have potential but no actual earnings and weak cash-flow. When the markets turn, (as they have this year), these types of companies are the first ones to get battered.

Earnings (see above). Yeah, they should have some.

The fine print. There’s no sense partnering with a company—and, as a shareholder you are a business partner—unless you have a good grasp on how the business is doing. So read their financial statements. How many shares are outstanding? Are there special warrants? What kind of burn-rate does the company have? Do insiders own a significant number of shares?

Value traps. In the quest for income, it’s tempting to grab high-dividend-paying stocks. But all is not what it seems. This year, several energy-related companies with healthy dividend payouts, reduced or cut them entirely. High dividends in a troubled sector spell T.R.O.U.B.L.E. Instead, look for dividend growers, those with growing earnings-per-share (EPS) and reasonable valuations.

Ah, valuations (see above). Yes, Dorothy, asset prices are inflated. The more you pay for something, the lower the probability you’ll make a good profit when it comes time to sell. Warren Buffett calls this the margin of safety. Create a wish-list of good companies and pounce when they go on sale.

Easy money. Ain’t no such thing. Newsletter writers, BNN stock pickers, investment gurus etc. Whether you work with an advisor or are a do-it-yourself-type or a combination of both, take the time to write a personal investment statement. This will help you to tune out as much of the noise in the financial media as possible. Sometimes the hardest part of being an investor is to sit on your hands and not trade.

Match Point

It’s an open secret that Lord Grantham married Cora for her money. Those great British houses, Downton Abbey in this case, are big and drafty and burn through cash like nobody’s business. When you’re unskilled, with no job history, and not the sharpest tool in the shed, (Lord Grantham nearly blew the family fortune on a Canadian railway stock), bartering title for cash seems perfectly reasonable.

This month’s Town & Country has a feature story on another love match also involving a vast fortune. J. Seward Johnson Sr., heir to the Johnson & Johnson pharmaceutical dynasty, fell hard for Basia, a Polish art history student-cum-cook-cum-maid-cum-wife. Roundly accused of being a gold-digger—taking in their amorous behavior on a corporate jet, a J&J executive remarked, “The screwing that he’s getting now is nothing compared to the screwing he’s gonna get”—it was a love match that lasted 12 happy years until Seward succumbed to prostate cancer.

In 2013 Basia herself passed leaving a fortune estimated at $3.6 billion. Equally as incompetent with money as Lord Grantham, Basia had the misfortune of lacking the good counsel of friends and family to help her keep the ship on course. She spent money on one folly after another, starting and never finishing most projects and acquiring enmities along the way. There was never any shortage of individuals—from dubious art dealers to minor royals like Prince Albert of Monaco—to relieve her of her funds.

Disillusioned by America and European high-society, toward the end of her life Basia returned to Poland. She was reported to be seen pacing her garden with her small dog and muttering, “What was all this for?”

Indeed, what is it all for?

On the recommendation of Bob Odenkirk, soon to be seen in the spin-off to Breaking Bad, Better Call Saul, (you’re welcome Bob), I’m really digging that hippie classic Das Energi by Paul Williams. The premise being the entire universe, including us, is just a mass of energy. Or something like that.

There are many philosophical systems that work with energy but the one I’m familiar with is medical qi gong. For optimum health one needs to create a balance between purging stale energy and acquiring healthy energy and then circulating it inside and outside the body.

It’s not a big leap to think of money management in similar terms.

In qi gong, one must be grounded before doing anything else. Basia had a a tremendous amount of energy, (her inherited fortune), but she was ungrounded. Lacking perception, she was vulnerable to her own idiosyncrasies, as well as to the unscrupulous individuals drawn to her. She made poor investments and dissipated the money. Would practicing qi gong regularly have helped her? We’ll never know.

But to help answer Basia’s question, “What’s it all for?”, maybe it’s not about some magic number and, instead, it’s about evolving our understanding of energy and then using it, sometimes in the form of money, in meaningful and productive ways? Just an idea.