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Finance Shminance: Stadium Naming Rights

In this episode of Finance Shminance, Adam Austin and Nick Rossolillo talk about the research report from Concinnus Financial about stadium naming rights, the companies that purchase them, and lessons for investors.

Finance Shminance: Commodities

Host Adam Austin and portfolio manager Nick Rossolillo talk about and offer their two cents on commodities, but not too seriously!

Finance Shminance August 10, 2016 – Economic Indicators

Host Adam Austin and Concinnus Financial lead portfolio manager Nick Rossolillo discuss economic indicators and there use to individual investors.

The Invention of (and Fallout From) the 30-Year Mortgage

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” – Ogden Nash

The year was 1934. The United States was wallowing through the Great Depression. Unemployment was well into the double digits, nearly one in ten homes were in foreclosure, and the average property had lost about half its value from peaks seen in the 1920’s. That year would see the launch of the Federal Housing Administration, or FHA, one of many measures to help pull the country out of its deep rut.

The economic crisis of the 1930’s would end up being a grand experiment in government intervention, and would give birth to the modern home loan that we are familiar with today. Yet the onset of these financial instruments have had far-reaching consequences, both intended and unintended, and is worth mulling over. What can we learn from history, and how do we put that knowledge to work for our personal financial situations?

The Invention of the 30 Year Mortgage

The FHA was created to help Americans get back into or keep their home, as well as stimulate construction. Many home owners were unable to negotiate terms with lenders during the depression, in part because of widespread unemployment and a lack of liquidity for banks. New standards of lending were needed to get things moving again.

Prior to the onset of the Great Depression in 1929, home mortgages were very different from what they are now. A typical mortgage had an average six-year term, had a variable rate that was typically re-negotiated every year, and the loan was usually limited to a maximum of 50% of the property value. As a result, more than half of Americans rented in the pre-WWII era. Home ownership was the exception, not the rule.

When the FHA program got under way, mortgage terms and conditions were drastically altered. Duration of the loan was extended to the now familiar and commonplace 30-year term, rates were offered at fixed interest rather than variable, and the loan amount was increased to well over 50% of the property value. The government-backed program met with great success, and was expanded post WWII when war veteran’s compensation packages started to include the new home loan terms.

These new long-dated, fixed rate, high loan-to-value mortgages successfully stabilized the housing market and helped many Americans fulfill their dream of home ownership (by the 2000’s, homeownership had grown from less than 40% of households owning their own home prior to the Great Depression to well over 60% of all households owning their own home).

Despite those successes, there have been both financial and psychological repercussions from the loose lending practices launched over 70 years ago. What have those repercussions been?

A History of US Real Estate Since the 1930’s

Let’s take a look at a few charts illustrating how real estate has reacted since the implementation of FHA standards.

Home Prie Index

Home Value to Income

Home Price Inflation Population

Data courtesy of Robert Shiller, Standard and Poor’s, and the US Census Bureau. Charts created by Nicholas Rossolillo.

Let’s start with the first chart, the Case-Shiller home price index. Home values are indexed to 1890 property sales prices, and account for inflation rates (basically meaning that inflation is subtracted out, and we are left with property values in today’s dollar figures). Chart number two illustrates the ratio between home values and total household income. The historical average has been roughly 2.2 (stated another way, a home value is 2.2 times your annual pay), but that ratio starts to rise rapidly starting in the late 1980’s and now hovers around 3.5. Chart three compares the Case-Shiller index from chart one with inflation and population growth (notice the uncorrelated price of real estate compared with steady population growth, but the inverse relationship property has with inflation and interest rates).

What do we learn? You can see in the charts the depressed values of real estate through the 1930’s. As new lending standards got under way in the late 30’s and through World War II, real estate makes a sudden and dramatic jump up. As that period gives way to rising interest rates and eventually high inflation, real estate stagnates for a roughly 30 year period. Inflation and interest rates started a steady downtrend in the 80’s, and combined with another round of slow easing of lending practices, we see property values run up again very quickly through 2006. As seen in chart two, the spike in property value as a ratio to income is also concerning, as that ratio remains well above the historical average even post-2008 financial crisis.

Chart three shows that, despite what many people believe, real estate is uncorrelated with population growth (more people does not always translate into an increase in demand, which in turn does not always lead to an increase in price). Instead, inflation and interest rates paired with current lending practices are a much more useful proxy for home values. It is also concerning that current home values remain at historic highs when factoring in inflation and the average family pay check.

Real Estate and Your Financial Plan

For anyone looking to purchase a home, remaining cautious would be the course of wisdom. Buying a home is big decision. For most Americans, a home purchase likely means a purchase of their largest asset. That asset purchase can have far-reaching and long-lasting consequences. Keep in mind that, despite what many claim, real estate values do not ALWAYS go up. Sometimes the stay flat. Sometime they go down. Sometimes they go down and stay down for a very long time. The above charts demonstrate this fact.

Here are a few tips for home buyers:

  1. Purchasing a home is not an investment, it is the purchase of a commodity (a roof over your head). What is your long-term plan? Is this home an acceptable place to put down roots? What is the plan if you do have to move and you are not able to sell (the assumption that property values will be higher someday is not good enough)?
  2. What are your financial priorities, and what do you prefer to spend money on? Is it your place of residence, your car, travel, shopping, starting a family, etc.? For most of us, money is a limited resource. We cannot have it all, and therefore money should be prioritized and allocated according to what we deem most important in life. Are you spending your money on things that are truly important to you? In other words, do you have a budget?
  3. Beware of taking on too much house. Just because a lender (be it through a government subsidized program or otherwise) may be willing to lend you as much as 40-50% monthly debt payment to your gross monthly income does not mean you should take on that much of a payment. Living well within your means, if possible, is always the best course of action. If you decide to buy, how low can you realistically get your mortgage payment as a percentage of your income? I typically recommend that your mortgage payment for your primary residence be no more than 25% of monthly income.

Mortgage lending has undergone massive change in the US in the last 70 years, and that change has drastically altered the outlook many have on real estate and housing. A little historical and mathematical perspective can go a long way and can help us avoid the irrational decision making when it comes to home ownership that has ruined so many over the last decade.

Five Reasons You Should Ignore Warren Buffett

Besides articles that feature numbered lists, one of the biggest clichés I run across on a weekly basis are articles about business and investing lessons we can learn from Warren Buffett. The internet is full of them. What is he investing in now? What were his comments at Berkshire Hathaway’s last annual shareholder meeting? What is his most recently expressed opinion on the world’s state of affairs? “And what is wrong with that,” you ask?

Don’t get me wrong, I am interested in the Oracle of Omaha, how he operates, and what he is up to. What is not to like about someone who is very good at what they do? Or, in Mr. Buffett’s case, the very best at what he does? And his quippy remarks and anecdotes are certainly entertaining and usually contain some small gem for his listeners to peruse. That being said, how applicable is his advice? Should we, as non-billionaire investors, hang on every word and action?

Therefore, partially in jest and in only mild seriousness, here is my numbered list on why you should not try to imitate Warren Buffett and what he does.

Reason #1: You are not a billionaire.

(If you are a billionaire, I might suggest you move on to other reading material.) When money is a substantially more limited resource to you, it is going to affect your priorities. I’m talking about a budget. Billionaire’s have budgets, but they look different. Instead of listing funds for a next targeted business takeover or activist investment position, you have line items for more basic needs of life. If you truly want to run your life like a wealthy individual, stop pouring over articles speculating and prognosticating on Mr. Buffett’s next move. Start mulling over your budget, cutting costs, and saving money on non-essentials.

Reason #2: You are not the CEO of a multi-national conglomerate.

Much like reason #1, not being at the helm of a multi-national corporation with a multi-billion dollar budget places you in a different boat. Even if you are a business owner, it is unlikely that you have to deal with the some of the same issues like currency exchange rates and navigating the legal and political environments of other countries. What constitutes a good decision for Berkshire Hathaway does not mean you should follow suit. What you can do, though, is utilize good capital budgeting and management techniques. These apply whether you are managing what you have personally accumulated or if you own and manage a business.

Reason #3: Warren Buffett’s buy-and-hold is different from your buy-and-hold.

One of the most annoying and misapplied (in my opinion) pieces of advice from the fabled investor is the “buy-and-hold” strategy. I certainly agree that there is very little added value garnered from hyperactive trading strategies (at least for the average investor). However, do not for a moment believe that Warren Buffett buys a business and then forgets about it. Many businesses end up being wholly owned by Berkshire Hathaway, or at least enough is purchased to have a controlling interest in the business. This gives him the ability to at least have a voice in how the business is run, or in some cases completely overhaul and restructure the business. If you are reading this, you are probably not the same type of “buy-and-hold” investor. Investments should not be purchased and forever forgotten. Do your due diligence, and continue to monitor and review your holdings.

Reason #4: He is not in the business of giving you personal advice.

As touched on before, Warren Buffet’s many quips and anecdotes have little lessons built into them that offer many great insights into the markets. These are not meant to be taken, though, as individually tailored tips and advice to you. What is more, acquisitions and speculative acquisitions by Berkshire Hathaway should not be taken as an investment recommendation to you personally. Which leads to my final reason you should ignore Warren Buffett…

Reason #5: If you want in on a Warren Buffett deal, consider doing the obvious.

If you really are that big of a fan and want in on exactly what he is doing, save yourself some time, stop reading the hundreds of articles out there like this one, and consider buying the stock. Berkshire Hathaway trades under the tickers BRK-A, or for the less fortunate fanfare, BRK-B. See below comments for the necessary regulatory disclosures.*

I hope my numbered list has been helpful, or at least entertaining, and that I have cured any addiction to Warren Buffett advice articles! If not, the main gist I am trying to get across is this: as an investor, saver, business owner, etc., it is important that you develop your own unique strategy, unique to your own particular beliefs and situation, and unique to your own particular needs. Do your due diligence that goes beyond superficial reading, or enlist the help of someone qualified to help you do your own due diligence, develop a strategy, and then execute it with discipline. Happy investing!

 

*The author does not hold positions in either security listed. All investing involves risk, including loss of principal. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Lower Oil and Gas Prices – How to Maximize Your Upside

By Nick Rossolillo, President, Concinnus Financial

March 10, 2015

I want to say one word to you. Just one word. Are you listening? Plastics.

Thus went the recommendation given to Dustin Hoffman’s character Benjamin Braddock in the 1967 movie The Graduate. Sound advice? Perhaps. Actionable advice? Dubious.

In a world where “advice” is easily obtained but rarely personalized, the real trick becomes how to apply it to your own situation. In a previous article you can find here, I outlined some of the reasons oil and gas has come down so dramatically in price in the last nine months or so. However, the actionable advice part of the post was lacking. This is a follow up to that article on how one might specifically put these lower prices to work for their own situation, whether as a business owner, or as an investor and saver.

Current Prices, Tax Deductions, and Discrepancies Between the Two

At the time of this writing, I filled up the gas tank at just over $2 a gallon. Having a 10 gallon tank in my car, that equated to just over $20. You have, no doubt, been experiencing something very similar, depending on your car (or truck) and which part of the country you are filling up in. It’s a pretty good feeling, since that leaves you a few extra bills in your wallet than it did last year (about a 60% savings in my particular case!).

If you use your car for work or you are self-employed, you probably know that the federal mileage deduction rate for 2015 is set at 57.5 cents per mile*. Let’s assume you get an average of 20 miles per gallon, your vehicle has a 10 gallon tank, and you use that entire tank of gas for business related activities. Your deduction would be $115 dollars, more than likely substantially higher than what you actually paid at the gas station. (Perhaps you do not drive for work, or as a business owner you do not take this deduction but instead write off actual costs of your business vehicle or vehicles. Hang with me, this is still applicable for you. We are all currently saving on our gas budget in some form or fashion.)

What are you doing with that savings? Is it being spent elsewhere, eating out, going on vacation, etc.? Or is it being put to work for you, either helping you catch up on bills or padding your savings account? If you answered yes to the former, here is a way for you to perhaps adjust your budget and start accumulating some extra funds. If you answered yes to the latter, congratulations! Let’s take your planning to the next level.

Ideas to Put That Cash to Work

If you believe that inflation is a real thing and that prices will always tend to go higher over the long-term, you are wise to accept current gas prices as a gift and stow away your savings for later. Here are a few ways you can get a little extra out of that savings:

  1. Increase the amount you are contributing to your retirement accounts. If you haven’t fully taken advantage of what your employer matches, increase your deferral to do so. If you already take advantage of your work-sponsored plan, consider starting a Traditional or Roth IRA. ᶱ
  2. Start a savings account earmarked for future gas consumption. As prices rise again in the future and start to cut into other parts of your budget, you have a cushion to fall back on.
  3. Consider a hedging strategy with what you have already saved. You can purchase oil and gas investments in your retirement savings, which you can assume are for future transportation costs when you retire. If you own a business or are self-employed, you can deposit savings into a business investment account, and hedge for a future increase in business expenses. If prices rise, you are growing current savings to hedge against future cost increases. If prices decline, your hedge is a wash as you continue to save money on your driving expenses.ᶲ

Any strategy you may choose to pursue should begin with a look at your budget as a whole (whether it is a business budget, personal budget, or both). Where is your money going? Is a decrease in spending in one category being allocated somewhere else? Is this re-allocation a necessity? How much are you saving overall? If you use one, consult with your financial professional regarding your budget and any tax strategies or investment strategies you employ as part of your business or personal financial planning. Consider consulting an accountant and/or investment advisor if you are unsure of how to structure any of the strategies just discussed for your business.

Final Thoughts

The drop in fuel costs caught many by surprise. Who would have guessed a year ago we’d see gasoline under $2 a gallon again? Or that we would see news headlines now espousing oil oversupply, after a decade of discussion about energy shortage and unsustainability? At the end of the day, though, treat the current circumstances as an opportunity. Don’t let it slip away, only to be a “remember when…” story recounted at summer barbecues and after-hour work parties. Find a way to put the situation to work and benefit from it down the road!

 

Nick Rossolillo is the president and founder of Concinnus Financial, based in Spokane, WA. He works with individuals and small businesses creating personalized investment portfolios and helping with financial planning. To contact Nick, visit www.concinnusfin.com, email him at nick@concinnityfinancial.com, or call (509) 220-1895.

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk and you may lose your principal.

*New Standard Mileage Rates Now Available; Business Rate to Rise in 2015.” IR-2014-114, Dec 10, 2014. www.irs.gov/uac/Newsroom/New-Standard-Mileage-Rates-Now-Available;-Business-Rate-to-Rise-in-2015

ᶱIndividual Retirement Accounts (IRA) offer tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of IRAs. Their tax treatment may change.

ᶲManaged futures are speculative, use significant leverage, may carry substantial charges, and should only be considered suitable for the risk capital portion of an investor’s portfolio.

The “Fiduciary Standard” – What Is It? Why Should We Care?

Nick Rossolillo, President, Concinnus Financial

March 3, 2015

 

On February 23, 2015, President Obama made comments about the “fiduciary standard” while speaking about retirement savings and investments at AARP’s offices in Washington, D.C. The comments were a call on the Department of Labor to draft new laws requiring financial professionals working with retirement assets to put client interests before their own. “Wait,” you may be saying, “How can such a thing be enforced? And how can I tell if my financial professional is working in my best interests?” You are not alone. The debate has been going on for quite some time within the financial industry, and was brought into the public’s awareness especially after the financial crisis.

Why the debate? What is the fiduciary standard? And how can you make informed decisions as an investor and saver?

 

History of the Fiduciary Standard

In the wake of the Great Depression, a slew of new regulations emerged in an attempt to crack down on sales practices in the financial world. Two such acts, which are relevant to our particular discussion, were the Maloney Act of 1938 (an amendment to the Securities Exchange Act of 1934), and the Investment Advisors Act of 1940.

The Maloney Act established the NASD, which has since morphed into what we now call the Financial Industry Regulatory Authority (or FINRA). Among other duties, FINRA regulates broker-dealers, or individuals or companies who charge a commission to clients for selling stocks, bonds, mutual funds, etc.

The Investment Advisors Act of 1940 authorized the Securities and Exchange Commission (or SEC) to regulate investment advisors. An investment advisor charges a fee (either an hourly rate, a flat annual fee, or a percentage fee based on total account value) to clients rather than a commission.

Ok, are you completely bored yet, or are you still with me? What is the debate about exactly?

 

Commissions vs. Fees

In the aftermath of the world’s most recent economic crisis, heated debate has surfaced about the charging of commissions versus the charging of a fee. Many financial professionals who charge a commission (are a broker-dealer and are regulated by FINRA) have to reasonably believe that a recommended investment is “suitable” for the client. In contrast, professionals who charge a fee (are an investment advisor and are regulated by the SEC) are held to the “fiduciary standard.” Basically, the fiduciary standard is this:

  1. Investment advisors must make reasonable investment recommendations independent of outside influences.
  2. They must always place client’s best interests ahead of their own.

This is not to say that professionals who charge a commission do not follow this standard. However, only investment advisors regulated by the SEC are held to this fiduciary standard by law. At this point you are no doubt asking, “How do I know if my advisor is really acting in my best interests? I don’t read minds.”

The most recent proposal, brought up again on the 23rd of February, would enforce a fiduciary standard on all financial professionals handling retirement assets. This would be done by eliminating commissions and only allowing a fee to be charged for the handling of retirement assets. This would, in theory, eliminate conflicts of interest arising from the high commission investment products many financial companies offer.

 

Arguments For and Against Commissions-Based Investing

Those in favor of keeping commission based investments argue a few main points:

  1. Eliminating commissions would reduce the investment options investors have, since some investment types are offered mainly on this basis.
  2. Over the long-term, paying a commission instead of an ongoing fee is cheaper for clients.
  3. Enforcing a fiduciary standard will raise costs for financial firms, which will be passed on to clients in the form of higher fees.

There are a few assumptions this argument is making. First is that some investment vehicles only work if they are high cost on the front end (or that a commission is charged and paid). Second is that once a commission is paid, there are no additional client charges that occur within the investment vehicle. Third, an assumption is made that clients will hold, and be encouraged to hold, investments over the long-term, thus not incurring additional commissions.

 

Arguments For and Against Fee-Based Investing

Those in favor of fee-based standards argue this:

  1. Conflicts of interest arising from investment products being offered with a higher commission are eliminated.
  2. Client and financial professional interests are aligned when the financial professional’s pay is tied to investment performance.
  3. Investment decision making and advice is improved and becomes more objective.

Some of the arguments from the opposite angle arise here as well, specifically the ongoing cost argument. Why would a client interested in buying ‘investment XYZ’ and holding it indefinitely continue paying a fee every year for investment advice they don’t need? Also, a fee-based advisor faces a conflict of interest in that they may not offer other types of products (such as insurance) that is based off of a commission. Obviously, the two sides of the argument are not perfect.

 

What Can You Do?

Until some concrete decisions are made surrounding the debate, you as an investor have some decisions to make. Start by asking yourself a few questions such as this:

‘How knowledgeable and comfortable am I managing my own investments?’

‘What type of investment am I looking to make?’

‘Do I need financial advice outside of the decision making that goes on inside my investment portfolio?’

‘What exactly am I looking for in a financial professional? Is it product driven (i.e. you are investing for a future need, you currently require income, or you need a specific product like insurance) or relationship driven (you need someone who can answer your financial questions and provide education)?’

Also bear in mind that many professionals have a foot on both sides of the line. As an example, they may offer fee-based investment management but also offer insurance products that pay them a commission. When consulting a financial professional, make sure you know exactly what you are getting from them and how they are going to be paid.

Simply put, do your own homework! Make sure you understand costs, the nature of the costs you are being charged, and what you are getting in return.

 

Nick Rossolillo is the president and founder of Concinnus Financial, based in Spokane, WA. He works with individuals and small businesses creating personalized investment portfolios and helping with financial planning. To contact Nick, visit www.concinnusfin.com, email him at nick@concinnityfinancial.com, or call (509) 220-1895.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing in securities is subject to risk and may involve loss of principal.