From Leonard's Desk
Abby with the Torah

Abby with the Torah

Our family celebrated a wonderful and extraordinary event at homemade soaps the end of March, Abby’s Bat Mitzvah, the lovely Jewish rite of passage for a young lady as she passes from childhood and begins the process of becoming a mature and independent woman. She worked very hard to learn Hebrew and how to read from the Torah, she presented a couple of speeches, and sold her homemade soaps (photo at right) to raise $3000 for WildAid, a non-profit working to reduce poaching of endangered animals. We are very proud of her, and took some family photos at our ranch in honor of the occasion. The entire event cost quite a bit (Hannah actually tells me that our planner thinks we were “very economical and efficient”), but it was also a reminder that the most important things in life are worth paying for.

I believe that an innovative independent financial advisor is also one of those things, especially in the current period that is testing advisor mettle. We are always working to prove ourselves up to this task, and I would like to describe this work.

  1. Data monitoring – Each week we meet to examine the data metrics of major markets, currencies, interest rates, and much more, and highlight interesting items and changes for us to discuss. For example, we may take a look at the difference between the yields on high yield bonds and Treasury bonds: what are they telling us? Are they indicating a nervous or confident market? Or the change in the shape of the yield curve: what is it telling us? Is it possible there is a recession ahead or is there no sign of one? Rarely if ever do any of these metrics act as a “magic bullet” where the future can be told, but taken together they help us form investment decisions to benefit clients. Over the past months the tenor of our transactions has been to reduce overweight positions to US equities, and increase fixed income and international holdings. Time will tell, but our model portfolio performance against their benchmarks has been meaningfully positive year to date.

  2. Professional views – New Capital is called on by a remarkable array of companies and market professionals who wish to visit with us to present their investment products and theses. While we are a relatively small firm with about $250 million under management, we are called on by the likes of Pimco, Vanguard, DFA, Blackrock, Fidelity, Templeton, and many more. You might think we give Fidelity preference because they are our custodian. We don’t. Fidelity’s custodian division and its mutual fund division are separate, and just because client assets are in custody at Fidelity doesn’t mean that we are going to automatically buy Fidelity mutual funds – their mutual funds must stand on their own against their competition. Moreover, when these fund companies visit us, they bring with them briefing books, economic perspectives and slides, data handouts, fund sheets – valuable information developed by some of their most important internal thinkers: economists, portfolio managers, executives, and so forth. We are therefore able to assemble a general view of how the largest and best positioned asset managers in the world see things, and then assimilate and factor those viewpoints into our own. We believe this makes it less likely, though not impossible, that we would be “blindsided” by large fund capital flows.

  3. Historical research – We study general, economic, political and market history and try to use that in our views. For example, the current tariff conflict differs from the catastrophic Smoot-Hawley tariff law that contributed to the Great Depression in important ways: back then Congress was in charge of tariff policies, now the President is. Back then, individual Congressmen “vote traded”: I’ll give you your tariff if you give me mine, and the U.S. therefore wound up with an indiscriminate “shotgun” approach to tariffs. The current actions are more “rifle shot” by the President and Chinese premier, targeting specific industries in bi-lateral trade. That doesn’t make them any less concerning, but they are different, and that has permitted us to not call you and frantically say “There’s a trade war on just like in the 1920’s, you have to sell everything now!” At the same time, we are carefully watching for downstream effects and retaliatory measures, the two main negative effects from tariff wars. History may rhyme rather than repeat, and an advisor needs to be able to distinguish between the two.

  4. Technology – The financial advisory industry is in a “golden age” for technology innovation, just as most industries are. Every day we are marketed new products that could prove useful to us and to you, companies marketing new financial planning systems, data aggregation systems, and reporting systems. For example, we are currently conducting a paid trial of a system called Hidden Levers that tests and models portfolios under different conditions. For example, we could ask the system to tell us: “what would likely happen to the portfolio if inflation increases by 3%, and what might an appropriate defensive response be?” We like the software, believe it is well designed and useful, and think it might be helpful to us as we help you. Even though this system costs money, it may be worth it, just like a Bat Mitzvah.

  5. Risk testing – We continue to invest time, energy and effort in exploring and practicing evolving ways to test your personal risk measures: your risk capacity (your financial ability to take risk); your risk tolerance (your natural psychological attraction or aversion to risk); and your risk composure (your ability to retain your composure in the face of market drawdowns). We are using tools available to advisors, as well as creating our own where we cannot find anything that meets our needs. We believe that portfolio management begins with you and your feelings about risk.

  6. Perspective – In this time of intense political drama and conflict, it is vital that your advisor be able to separate political events from economic realities, and to maintain the perspective that we are investing in business ownership through stock ownership and loans through bond ownership. Calvin Coolidge, a Republican President from the Roaring ‘20’s (and who also coincidentally attended the same small college I did), famously said that “the business of America is business”, and that is how I see it too during this period. The business mentality of America will continue long after this chaotic and extraordinary Presidency ends, and as an advisor I must keep my eye on the long term.

  7. Mindfulness – A couple of years ago I was contacted by Jason Voss of CFA Institute (of which I am a member) seeking to introduce meditation to its membership as a way of enhancing its performance and ability to deal with the stress of financial markets. They asked me to assist with offering feedback on the interactive tool they were developing and I was happy to do so. I felt Jason’s team’s eventual results were impressive, and were a clear signal that mindfulness is fast becoming an important and recognized part of an advisor’s toolbox. At New Capital, I practice with that tool each day, for my own benefit, for yours, and for your finances.

  8. You – New Capital will always retain its substantial focus on you and your goals. I attended a conference this week at the St. Regis Hotel sponsored by Barron’s for the top advisors in Houston. On one panel, one of a larger practice’s principals discussed their work with ultra high net worth “masters of the universe.” He described how one client felt poor with his $100 million, another with $50 million, and I went up and asked this advisor after the session what they were doing to help these clients transform their poverty mentalities into gratitude mentalities. He, unfortunately, could not give me a satisfactory answer. At New Capital, I am interested in helping you with all manner of financial matters, including those that exist in your imagination, because that is the very heart of financial advisory.

New Capital is a truly independent financial advisory, that not only talks about diversification, but practices it in all areas of our business. We are diversified in our technology, business partners, and clientele. All of this, by design, is to provide you with the stability and trusted partnership that you, and I believe every investor, deserve. Abby’s Bat Mitzvah was her own rite of passage. Part of its beauty was that it inspired me to think of my own, and New Capital’s. The past year has been a time of transformation, and I am excited about the road ahead. We will be there with you, helping you focus on what's important and helping you tune out the noise.

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