Special Note – Because of the events late last week, I issued this commentary one week earlier than originally planned.
“Don’t waste your time with explanations: people only hear what they want to hear.” Paul Coelho
I spoke at major conferences on six continents (and I suspect a few people would have liked to have sent me on a one-way trip to Antarctica) and especially throughout North America to the point where Canada became my home away from home. Through all of those speaking engagements, there was one common theme and that was the clear fact that most in the audience did not come to learn nearly as much as they wanted; they just wanted confirmation of what they already believed.
Knowing how the majority of the public thinks right now, I don’t anticipate too many folks appreciating what I have to say here. But even before some would get a chance to prove me right, I will discharge several of them by first stating the cornerstone of what is the foundation to my thought process (I suspect many won’t get past the first few points):
- It’s a fallacy to believe anyone can predict the future and to regularly prognosticate was/is an insult to the Creator of all that is good in the Universe. It’s why I no longer wish to be called a Wall Street “Whiz Kid” (besides, at age 60 now, kid is only a faint memory). It is a charade to build your financial well-being on the basis of someone supposedly being able to make moves in anticipation of what the future will bring (If you ever watched financial programs from 5, 10 or 20 years ago, not only would you see how most forecasters ended up not profitable to follow, but are not around anymore. Such will be the case with most who you watch now).
- While investing in equities can be part of one’s overall plan, it by no means should be the “end all” to reaching ones financial goals. Nobel Laureates have demonstrated that for the vast majority of equity and bond investors, active money management falls well short of placing capital in a well-diversified, passive index fund. 80% of equity fund managers and 85% bond fund managers have failed to match index fund performance. And, for the small percentage who outperform in one year, almost none do so again the following year. Like it or not (some won’t and definitely many financial advisers will want to shove this thought down my throat), for most people low-cost, diversified index funds are the way to handle equity exposure.
- There is an exception to what I just spoke of regarding equity investing: if you have many millions, you can gain access to people/groups who seem to gain worthy “info” before most others and be placed in equity-related vehicles that get well down the road before the public is able to gain access to that highway. By the time they do, heavy traffic appears and most go nowhere fast (but those “lucky” few who were in early are long gone).
- In 30+ years in and around the financial arena, I have met numerous people who have created serious wealth. Most of them did so by:
- Investing in small to mid-size private businesses
- Buying and selling commercial real estate
- Receiving stock options as management at publicly-held companies
- Selling financial products
It just may be me, but in 32 years I have yet to meet anyone who said, “I put a few thousand into the stock market each year and came away with millions,” (but sadly met some who did the opposite).
- In a society where political correctness has gone wild and where secularism is spreading rapidly, I will make this the last sentence read by some by “boldly” declaring that I believe in a Creator. In the past I may have turned the Ten Commandments into the ten suggestions, but no more. I depend on no financial book (including my own) except one where the topic of money and wealth is the second most talked-about topic, and that book has managed to stay around for about 2,000 years! (Yes, the Holy Bible.)
So to those who still remain, I now provide you my most candid observations. I do so knowing full well that in the end, many will find what the guy/gal down the block has to say far more palatable than what you shall read now, even if he/she practices what just about all financial advisors do: “don’t worry, be happy and buy” strategies.
“No one loves the messenger who brings bad news.”
I began the New Year with a belief that 2016 would go down as the year America (and much of the western world) enters its worst social, political and economic period ever. With half the year now behind us, I don’t think the political environment has ever been more of a mess while the social environment isn’t much better. The last to go is the economic part. The FED has forestalled the inevitable by creating trillions in new debt, but has appeared to have run out of silver bullets no matter how much the “Don’t Worry, Be Happy” crowd (that makes up the lion’s share of the financial service industry and much of the financial media that makes a living off them) does its best to portray otherwise.
If I sold guns, ammo, dry food, survival kits, bomb shelters or even gold, you could say I could benefit from such a negative outlook. Trust me, what I do would be so much easier and far more financially rewarding if I could just grab some of those Wall Street pom-poms and act like the nut job who rings bells and screams boo-yah (but whose financial performance is far worse than his shtick).
Now in my fourth decade in and around Wall Street, I concluded some time ago there are only two types in this business:
- Those who say what they think (even if its unpopular and not revenue producing);
- Those who say what they think you want to hear…because it sells.
God help me if I ever become a #2! It’s bad enough that they surround me in business.
Still with me?
If I had only one sentence to explain why I feel this upheaval is underway, it would be as follows:
America has been robbing Peter to pay Paul, but Peter is tapped out!
I could literally write hundreds of pages alone on the various debt crises America faces, but no one would take the time to take in so much text. But some will take a peek at some videos so I’ve chosen a few that can at least paint a broad stroke of the dilemma we face. Sadly, the problems have only grown worse since these videos were originally created:
The “Third Rail in Politics” is the mother of all economic, social and political problems all rolled into one – Entitlements. The fact that no one really discusses it to any degree has given most Americans a false sense of “security”. Here too, a couple of videos can replace numerous pages of text:
The social and political parts definitely have two sides to the story, but the economic crisis is simple hard facts and figures that no amount of massaging or kicking the ever-heavier can down the road can change. By itself it shall be detrimental, even if the social and political makeup changed dramatically for the better overnight (something that will likely only grow worse).
The social and political parts of my very negative outlook intertwine a lot, but for now, I will just touch on a few main points. Rest assured some of those still reading this communication shall not like parts or all of what I have to say.
Who wouldn’t want to make America great again? One would think everyone would want that. But to many who preach that theme, the great difficulty (if not impossible task) is the simple fact that the vast majority of people who made up America in the supposed better times no longer are the vast majority now. Without a doubt, the Judeo-Christian fabric that founded this country and pretty much held it together for the first 200 or so years has been broken down by a social-secularism that already has swept through much of Europe and the results seen there for a while now, are starting to show up here.
Here, too, I could write endless text describing all the social and political ills we face, but instead I chose a few videos that go a long way in describing my analogies:
Despite all the “Don’t Worry, Be Happy” propaganda, most Americans remain up ____ creek without a paddle when it comes to retirement. If you can believe it (I do because it’s fact), the typical American couple has only $5,000 saved for retirement. And who do you think they’re going to turn to for help when their canoe is about to go over the falls? By the way, Wall Street is partly at fault for continuing to practice methods to their clientele that enrich their own personal retirements at the expense of much of their clientele (Traditional financial planning may now have lots of bells and whistles in this technology age, but it’s still a badly flawed process that I will not associate myself with no matter how few people appreciated my stance).
Back in 2009, while still publishing “The Grandich Letter”, I penned this commentary on Muslims and Islam (The link I shared is a follow-up I wrote in 2010). What I spoke about was not the topic it has become, but never-the-less did generate some “hate” mail, accusing me (Like Trump I guess) of being a bigot/racist. I believe back then, as I do now, that my commentary was a reality pill that many more now in the western world have decided they don’t wish to swallow (It may be too late but just last week in the UK, we saw this play a significant role – like it or not!).
Staying on topic (and likely to generate some more “criticism”), I believe these articles discuss important factors to this topic that has now move front and center compared to when I first wrote my piece back in 2009:
While the good news is that much of America on both sides of the aisle has discovered the political system is broken; the bad news, IMHO, is that the two main candidates have such a high degree of dislike and distrust from the opposition, that their Presidency can very well do more harm than good in the eyes of many here and abroad.
If this makes you wonder who the heck I will vote for, let me answer by saying the candidate who convinces me they fully align themselves with what this former President believed gets my vote (Good luck with that).
I’ve been asked what can one do in the face of all this?
My response has been:
- Start today by believing and living under the guidance that less is more. For me, Public Storage is the poster-child for parts of what’s wrong with America. It’s not their fault, but when we’re closing public storage facilities versus opening more and more, we shall be all but likely heading in a better direction (George Carlin was so right about too much stuff).
- Whether you’re religious or not, thousands of books have been written about money and matters related to it, but only one book has managed to stay around for a couple thousand years: the Bible. Money and matters related to it are the second-most-talked-about topic in it. So forget all these so-called financial experts and their books (including my own book) and discover what the number one book of all time says about how we should deal with matters of finance. (Here’s my Biblical Perspective on Matters of Finance and my Seven Deadly Sins of Finance to give you a head start.).
- Time magazine wrote a wonderful article recently how Wall Street is strangling the economy. If I could “hammer” one chapter of my book into your head right now, it would be Chapter 16. I’m going to reprint it here in its entirely in the hopes it gets at least one reader to truly grasp the significance of it:
Sorry to Say, Still Making it the “Old-Fashioned” Way
“In the movie ‘Wall Street’ I play Gordon Gekko,
a greedy corporate executive who cheated to profit
while innocent investors lost their savings.
The movie was fiction, but the problem is real.”
– Michael Douglas
By now, you’ve learned I was no perfect angel during my several decades of working in and around Wall Street. I remind myself and people I meet that were it not for the grace of God, I would still be turning the Ten Commandments into the Ten Suggestions. Unfortunately, the street where I first began my profession has gone from bad to worse.
Just before the great bull market began in the early 80s, a well-known brokerage firm employed legendary actor John Houseman as their pitch man, and he ended their commercials with the same line every time, “They make money the old-fashioned way… they eaaaaaarn it.” We used to joke back in my stock brokerage days that they should change the last part to “…they churn it.” (Churning, for those who may not know, is a term used on Wall Street that describes how brokers create transactions simply to create commissions.) Unfortunately for the general public, not only does this reckless, tasteless, insiders’ “joke” remain unknown to everyday hardworking lay people, but far too many on Wall Street continue to make money as they have done for decades – illicitly. What doesn’t help is our modern technology, which allows them to do so without breaking any current laws, a feat that would surely impress some of the best crooks who ever applied their trade through Wall and Broad.
Here’s an example of how technology helps what I have to call “legal theft.” Just last year, we learned that several financial groups spent hundreds of millions of dollars laying fiber optic cables so they could “legally” get in front of stock orders, buying what those orders were about to buy, and then re-selling the securities to those same buyers just a millisecond later at a penny or two per share profit. I think society’s ignorance of these deals (or quite frankly, the assumption that beating others on Wall Street is no crime) is why there was no uprising to demand a change to this method. So, let me put this in layman’s terms and tell me if you still think this practice is ok. What these folks did and continue to do is the same as if they knew you were going shopping, saw your shopping list, bought up everything on your list, and then restocked the shelves with your items at a penny or two higher than what they bought the items for…knowing you were walking in the store, pushing your cart and the carefully-prepared items were guaranteed to be bought.
Another example of the financial industry making money the old-fashioned way was the sub-prime mortgage fiasco which took place less than a decade ago. It was, in my opinion, the greatest financial crisis in our country’s history and a major cause of the recession of 2007-09. Hundreds of billions of dollars, if not a trillion or more, were lost because financial institutions around the world (led by U.S. firms) sold mortgage-related products that they knew would fail. Furthermore, the financial institutions actually took the other side of the sale.
I truly believe the general public’s lack of understanding of these transactions (or should say, transgressions) is the reason that not one high-ranking official of any financial institution was found guilty of these criminal acts. What occurred in the sub-prime mortgage crisis would be like if GM, Ford and Chrysler had sold cars that they knew would crash and then bought life insurance on the new owners so when they crashed and died, the car companies could profit twice. Trust me, if this was on the news tonight, the public would be up in arms and the car company executives would be going to jail. Yet, that is what happened, and almost none of the financial execs involved are being held legally accountable.
What would you think of a game where the rules were vague, changed every day without your knowledge, and there was no way to discern how to win? How would it make you feel to find out that not only do most other players have hidden agendas and allegiances, but they also have secret sources of information and much faster playing pieces than you? Given these circumstances, most people would choose not to play. It’s too bad, then, that most are already playing this stacked deck one way or another with their finances.
I tell people that when I first became a stockbroker in 1984, the playing board was already tilted against the general public. Now it’s even worse. I believe 99 percent of the public has a better chance of hitting the lottery than beating the market trading stocks on their own. Trust me, no matter what some crazy guy with a questionable past (who makes all sorts of noises on his daily TV show and yells “BOO-YAH!”) likes to tell you, the game is rigged and only one in 100 people might make a buck. The rest usually lose, and some lose bigger than others.
Talking like this about the financial services industry has not exactly won me Mr. Congeniality. It’s put an end to the Christmas party invitations from financial firms, brought me ridicule from many so-called “financial advisers,” and my honest revelation is often far too “honest” a viewpoint for the general public to accept. Despite this, I continue to point out that:
- Traditional financial planning is doomed to fail;
- The vast majority of money managers fall short in performance;
- “Market timing” is nothing more than a cuckoo clock;
- Most in wealth management end up moving your wealth one way and theirs another;
- Cash flow—not net worth—is king.
If you were in need of surgery to save your life, would you allow a doctor to operate on you who failed 80 percent of the time compared to his or her peers? If you found yourself in legal trouble, would you want an attorney who failed to achieve what 80 percent of other attorneys managed to obtain for their clients? If you said yes, stop reading now. If you said no, I’ll share another tidbit: 80 percent of professional money managers failed to match the performance of simply putting money in a basic, low cost index fund. Odds are good that your investment funds are being managed by the 80 percent—not the 20 percent. Before you run to find one of the 20-percenters, know that in all likelihood their “winning streak” will soon end like mine did, and they will join the 80-percenters going forward.
Dislike me yet?
Do you know how people of wealth obtained it? Most got it one of these three ways:
- Business ownership, or
- Buying and selling commercial real estate.
Despite the stock market being the investment of choice for the majority of people, I have discovered that its role in creating wealth tends to be limited to:
- Investors who get to be insiders at the earliest part of the food chain;
- Members of senior management who are granted stock options at much lower prices than you can purchase shares for;
- Financial sales people who sell financial products.
Still with me? If I haven’t lost you yet, this next part could do the trick.
Wall Street has spent tens of billions of dollars creating an image of success when in fact, the vast majority of investors fall way short of their hopes and dreams. As I detailed in Chapter 12, traditional financial planning—a practice that today may come with lots of computer-generated graphics, statistics and bells and whistles—is destined to fail or fall far short of the intended goals. It’s not because of dishonesty or a lack of skills; I’m certain that the vast majority of financial advisors in the U.S. get up each morning and hope to do an honest day’s worth of work. Unfortunately, the very disclaimers given to their clients have the candid answers to their possibilities, albeit in legal mumbo jumbo that most don’t comprehend or choose to ignore. It’s the part that includes the phrase “past performance is no assurance of future results…” What it amounts to is something it took me 30 years to conclude: no one among us knows the future and almost all will not reach the theoretical returns built into the plan.
The straws that break the camel’s back as to why so many investors don’t come close to achieving their financial goals are these three commonalities found within the financial services industry:
- The bulk of a financial advisor’s education is geared toward getting his or her license. After that, much of the time is spent on product and sales training;
- Hubris and arrogance of the client and/or the advisor (I’m guilty!) lead to decisions based on emotions versus academics and/or a proven process;
- People buy because of greed and sell due to fear.
Show me an investor who has not obtained the financial success that he or she thought was once likely and I’ll show you that he or she:
- Was way too dependent on just equities to increase wealth;
- Had a financial plan that depended on factors no one can consistently and correctly forecast over time;
- Had an advisor who was far better trained in sales than how money really works.
Over the bulk of my career, I travelled around the world speaking at investment conferences. It didn’t take long before I concluded one critical factor about the lion’s share of all the attendees: most came not to learn something new or different, but rather just to get confirmation of what they already believed. This phenomenon plays right into the hands of many who work in the financial world because when it comes to advisors, there are only two types:
- Those who say what they think, and
- Those who say what they think you want to hear… and it sells.
I’m here to say what I think. In an industry where you’re truly only as good as your last call, falling on my face the last few times was truly sobering. With ego and pocketbook deflated, I finally practice what my financial mentor has preached to me for nearly 15 years. If you come away with just one realization after reading this book, I hope it is this: Cash flow is for YOU; net worth is what you leave for SOMEONE ELSE.
Got that? Cash flow (as described in chapter 12) is what you use now and will continue to use in retirement to pay your bills, go out to dinner, pay for health care and generally support your lifestyle. Cash flow is your paycheck. Net worth, on the other hand, is a number that reflects your overall wealth. Add up the value of all your investments and all your stuff, and that number equals your net worth. But the holdings that make up that number are often tied up in assets or investments such as stocks, bonds, real estate, or gold, and they are not liquid. You can’t use shares of stocks to pay the mortgage. First, you have to liquidate those shares at which time your financial services professional gets a fee, then you pay a hefty tax on the capital gain between what the share is worth now and what it was worth when you first acquired it, and finally you can use the proceeds of that transaction to pay your bills. So, after your advisor and Uncle Sam get their cut, you can create a lifestyle with the rest…assuming that it’s worth more today than when you bought it, and events of the past have proven that increase is certainly not anything that can be guaranteed.
Show me a business that failed and I’ll almost certainly show you a business that lacked proper cash flow. That is not dissimilar to you running the business of your life in retirement—poor cash flow will make your retirement plan a failure. Yet, the financial world has brain-washed investors into thinking net worth is the key to financial success. How many times have you seen that commercial of a person carrying their “retirement number”? You know…that mythical net-worth figure that’s supposed to assure a comfortable post-career lifestyle? It’s not the failure to reach the number that often causes the plan to flop as much as it is a misguided obsession with net worth as the scorecard of wealth.
Though net worth may be a valuable yardstick for some things, in retirement what really matters are cash flow and after-tax income. Yet, almost all typical financial plans use reverse engineering that is only intended to preserve principal net worth while living off of interest. The reverse engineering begins with how much income a person thinks he or she will need, and then backs out “the number.” If a person wants to retire on $125,000 a year (which is a total guess, by the way), this approach assumes one needs a net worth of roughly $2.5 million to avoid dipping into principal. That’s based on the formula adopted industry-wide which assumes a retirement portfolio will yield about four to five percent per year in income without diminishing principal.
Think about that for a moment. They’re counting on four to five percent gain year after year after year. Raise your hand if, like me, you’ve taken such heavy losses some years that you’d be happy that some of your investments were worth only five percent less than when you bought them? Letting your lifestyle in retirement rest on the assumption that your portfolio will yield four or five percent per year is foolhardy, in my opinion.
The investment industry promotes this magic number notion because it’s in the business of accumulating assets to manage. Financial institutions are merely intermediaries; they just connect people and businesses with money and get paid very well as middlemen. The more they connect investors with investments, the more money they make. There is a disincentive to showing clients how they may be able to spend some of their principal and still achieve their goals.
They use the fear of outliving one’s assets to continue this pattern that benefits them over their clients. In addition to using fear as a motivation, the financial services industry counts on the fact that the average investor is a creature of habit. Despite the likelihood that you may now conclude the financial services industry isn’t all it’s cracked up to be, their constant barrage of marketing combined with your human nature to default to what makes you comfortable (along with a dose of procrastination), are strong forces that many can’t overcome. Like any other bad habit, many people just do what they’ve always done.
Instead of staying on that hamster wheel, I suggest focusing on a process to build and protect wealth with efficiency at the core, which can lead to a better quality of life. Use an academic approach to asset management and protection, not an emotional one based upon what some product may or may not have done in the past.
It may have taken three decades but with the help of my financial mentor, Frank Congilose, I finally came to the realization that any good financial advisor must demonstrate to his or her clients how critical their lives require financial balance to achieve personal fulfillment. True wealth management demands improving a client’s quality of life, and cash flow will determine that quality—not net worth. Many people boast substantial net worth but have poor cash flow and thus feel poor. What is the benefit of having $2.5 million worth of anything if you still can’t pay your bills?
Since the industry and much of its sales force focus mainly on the sale of products, this kind of education fails miserably in teaching its clientele how to reduce and eliminate many of the wealth-eroding factors faced in today’s world. If financial advisors focused on a process that demonstrates efficiency, cost recovery, asset protection, asset utilization and then wealth building, the advisors and their clients would be much better off. I believe that real wealth is not achieved by exotic financial products or complicated strategies, but instead it is derived from making the most of the opportunities that are often overlooked and underutilized.
If you made it this far, let me congratulate you. I suspect only a small minority of people who began reading this book have read through up until now. That’s okay. I’ve come to accept the fact that only a few will really appreciate hearing the brutal truth, while the rest will still be prime targets of an industry that has spent tens of billions of dollars marketing an ungodly and unethical belief of the lie that more money equals more happiness.
Yes sir, it’s still the old-fashioned way.
Bottomline – Like in investing, the ultimate crime is not being wrong, but staying wrong. The “I shoulda, coulda” line is the biggest line in the universe. Self-pity partiers make up a large portion of those on that line. Make today the first day of the rest of your life and walk your own line with the goal being the understanding that it’s not how we came into this world that matters but how we go out.
Peter the chicken in his foxhole
Remembering I’m out of the “prediction” racket, the following are mere “guesses” and are definitely not investment advice.
U.S. Economy – Wall Street (and much of the financial media that follows them) will wave their pom-poms with Obama, hoping America keeps buying into the “economic expansion” is just around the corner (trillions of new debt and we can’t even put a few quarters of reasonable grown together). Most eyes can’t (or refuse to) see it but the economy is imploding. I do suspect the powers-at-be shall do their best to get at least a nice bounce from last week, but if you can look past the next few days or weeks, and think pass your financial advisers next paycheck, there’s still room in the foxhole with me.
U.S. Stock Market – I began 2016 thinking we would see a flat to down year. No reason to change that opinion (and even more fundamental and technical factors to support that stance).
I fully expect the “happy” people that makes up the lion’s share of those who work in the financial services industry, to do their best to spin last weeks event into a positive (one already being peddled is with Europe in turmoil, money is going to roll into U.S. equities).
Remember, you can toss the vast majority of so-called financial advisers off the top of the Empire State Building, and all the way down they all shall say the same thing – “so far so good!”
U.S. Bond Market – Began the year believing Treasuries and most Muni’s were clearly the far lesser of two evils over equities. See no reason to think otherwise for the balance of 2016.
Gold – A new bull market was indeed born in the early days of 2016. While we can see some consolidation after the huge pop last week, my belief $1,400 could be seen in 2016 is still a reasonable “hunch”.
U.S. Dollar – With the Euro’s demise a question of when, not if, hard to see the U.S. dollar losing much overall ground for the balance of 2016. It could even work higher. Ironically, it won’t likely negatively impact gold as those currencies being hit shall likely see their citizens buying gold more than they have been (I’m not a goldbug- just a realist).
Oil – Perhaps one of my all-time best calls both on its top and near exact bottom and what do you know, I’m out of the soothsayer racket. Go figure. I don’t see how it can rally much past $60 as economies worldwide should get weaker into years-end. Toss a coin for the next $10 move in it.
Finally – Old habits die hard. I’m down to just owning personally two stocks. One is a complete speculation (remember, speculation and gambling are the same thing, only Wall Street doesn’t like to use the word gambling).
With bias and conflict of interest noted, if one had a few dollars they could speculate with (and be fully prepared to lose part or all of their capital and suffer the financial and mental anguish that surely shall bring), the other company I own is also the company I help finance at its beginning over 20 years ago, Nevsun Resources (NSU $2.80 yield 5.71%), appears worthy of a flyer. The dividend may be cut in order to help fund a new development in a company they just acquired so don’t buy for yield. But I think NSU themselves could be acquired long before they make the first pour at their new project.
I/family own around 500,000 shares.
While my overall sentiment is that it’s better to be a live chicken versus a dead duck when it comes to financial markets, I pray that whatever time is left for me, I remember the rope and the utter un-importance of the red part.
Company Note – Please remember Peter Grandich & Company is for individuals and small to mid-size business owners. Trinity Financial, Sports & Entertainment Management Company services professional athletes and entertainers.
Client or interested party – we’re here for you!
Peter Grandich & Company
219 Morris Avenue
PO Box 763
Spring Lake, New Jersey 07762