Dear Clients and Friends,
Markets were happy in the third quarter of 2024 because they got what they wanted: a 0.50% interest rate cut, continued momentum from the Magnificent 7 tech stocks on the back of unabated AI enthusiasm, and robust numbers for economic growth & employment. All in all, it was good to be an investor of any stripe. Interestingly, the leaderboard looked different this past quarter: bonds slightly outperformed US stocks, international stocks outperformed their US counterparts, and gold trounced all three asset classes. In fact, gold has outperformed the stock market for the last 3 years. I am not sure what it says about our economy or financial markets that the most productive financial asset is one that doesn’t produce anything at all.
Will the good times keep on rolling? Not indefinitely. But the power of compounding is like no other force in financial markets. The longer you can stay invested, the better your results will likely be, even if sometimes you feel like taking a break and swapping the turmoil of being a stockholder for the serenity of being a cash hoarder. But that’s advice for a different day. Today, I am encouraging a healthy dose of fear – if that can even be dosed in healthy quantities – in light of markets with an unhealthy dose of greed.
What would a healthy dose of fear counsel? Stay diversified, don’t chase the market’s winners ever higher, don’t deliberately increase the risk level of your portfolio, nor let it creep up, and have some rainy day assets like cash and gold. That’s what we are doing for our clients and it does not preclude us or them from pursuing attractive investment opportunities from port-a-potties to the chips that power Large Language Models (LLMs), wherever the market offers appealing risk/return trade-offs.
You do You
In my son’s preschool class, each day the teacher draws 2 columns on a dry erase board with 2 distinct labels: a red or a green apple, a firetruck or a police car, etc. The kids then get to add their name to the column that represents their preferred choice. Last week, the choice was between an orange pumpkin or a white pumpkin. They all chose the orange pumpkin, except for my son. I couldn’t help but think: he is going to be a great investor because he avoids running with the herd.
In investing, following your own path is a powerful driver of success. But it’s hard and you risk being inconsistent if you do not articulate what your path (strategy) is in advance. So if there is a secret to investment success it might be that “having a strategy” is more important than what exactly the strategy is. The stronger your adherence to a strategy, the less likely you are to fold when the market deals you a weak hand and you feel left out and unvindicated.
A simple example will illustrate the point. I recently came across the Talmud Portfolio, based on a passage from the Talmud which suggests that one’s wealth be divided into three parts: a third in land, a third in business, and a third in reserve. Loose translation: a portfolio that equally weights real estate, stocks, and bonds. I recreated that portfolio with 3 Exchange Traded Funds (ETFs) representing the US stock market, bond market, and real estate market. The results are eye opening: an investment strategy devised 1,500 years ago beats the market. Yet would you have the conviction to follow this strategy, undeterred, when everyone else is doubling down on AI and whatever else is the future?
To be sure, the Talmud (portfolio) isn’t for everyone, nor does it have to be. Rather, finding a sound strategy that feels right and you think you can stick to, is one of the most impactful actions you can take to set yourself up for investment success.
Staying Ahead of Financial Fraudsters
Necessity is the mother of invention. Sadly, this also applies to malevolent actors that deem it necessary to defraud people of their hard earned money. Cyber security is a $200+ billion industry and for good reason. As an estimated 5 million people around the world go to work each day with the goal to make online systems safer, there is an unknown number of criminals trying to probe these systems to exploit any weaknesses. Recent statistics paint a sobering picture – according to AARP, 42% of American adults had personal experience with fraud. Even more concerning, the FTC reported Americans lost a record $10 billion to fraud in 2023. Not all of that is online, to be sure, but that is an ever bigger slice of the pie.
While scammers target people of all ages, they often focus on individuals who are over the age of 65. Why? It may be as simple an explanation as Bonnie & Clyde would offer: “because that’s where the money is.” Typical scams targeting this demographic are romance, lottery, and investment scams. But younger generations are not immune. Gen Z-ers (18-29) are often targeted through social media with online shopping, job, or crypto scams. Furthermore, a laxer attitude towards privacy among Gen Z members, is a prime opportunity for extortion and impersonation.
Recently, artificial intelligence has made it possible to clone voices with just a few recorded sentences, giving new tools to those perpetrating scams like the “grandparent scam,” where fraudsters impersonate family members in distress – often grandchildren and most commonly targeting older people – hence its name. Other schemes employed by scammers vary from offering unrealistic returns on “safe” investments to building long-term romantic relationships online before requesting money.
In another vein, scammers might pose as tech support reps seeking computer access or impersonating legitimate businesses and government agencies, with the purpose of gaining access to your bank or investment accounts. What makes many of these scams effective is that they often exploit positive human traits – trust, politeness, and willingness to help others. Scammers are skilled at creating urgency and emotional pressure, making it difficult to think clearly in the moment.
Consider this recent case that illustrates how sophisticated these scams have become: A couple married for over 55 years lost their life savings of $690,500 through what started as a simple email about a supposed Amazon purchase. The scammers claimed there was a $1,500 unauthorized charge being shipped to an unknown address and provided a phone number to resolve the issue. What followed demonstrates the scammers’ sophisticated tactics: they gained remote access to the couple’s computer (a practice the victims were familiar with through legitimate technical support), showed them a fake Amazon website, and convinced them they needed to wire money to an ‘Amazon Refund Recovery Center’ to fix the problem. Through persistent daily calls and manipulation, the scammers convinced the husband to make four wire transfers to Hong Kong and China over just eight days.
The best defense against these schemes follows a simple principle: think fast, but act slow. While the digital age brings new risks, it also offers protection – electronic records create audit trails that help track and prevent fraud. As an advisor, we serve as both a gatekeeper and a second set of eyes on our clients’ accounts. This additional layer of security is one reason why professionally managed accounts through established custodians are typically more secure than self-directed brokerage accounts or crypto wallets.
In our firm’s 17 years of operation, we’ve maintained a perfect record against fraud – knock on wood. However, this track record only strengthens our commitment to vigilance. Our firm culture emphasizes constant awareness and careful oversight, supported by our custodians’ multi-layered security systems, strict verification protocols, and ongoing security enhancements. Together with our partners, we continue to adapt and strengthen our protective measures as financial technology and potential threats evolve. But nothing trumps culture. Vigilance has to be in your DNA as a company in 2024 and certainly as a person. In the offline world, the cars and homes that get broken into and the phones and wallets that get lifted, tend to disproportionately be the low hanging fruit. A commitment to not being the low hanging fruit has to be second nature and will pay off immeasurably.
Are Clean Energy Stocks a Fat Pitch?
I have written in past newsletters about the appealing future of clean energy stocks despite their unlovedness in the stock market. Well, they are still mostly unloved, but the present has caught up with the future and some of these companies have current earnings forecasts that are being ignored by the market, as if they won’t come to pass. Moreover, all news has been bad news for clean energy stocks, which does not seem logical and signals market inefficiency. A larger than expected rate cut? Clean energy stocks drop. Rates will stay higher for longer? Clean energy stocks drop. Biden blows up during the debate, making a Trump win and a “Green New Scam” agenda more likely? Clean energy stocks drop. Biden drops out and Harris enters and pulls the race back to 50/50? Clean energy stocks drop.
So is this a buy signal, or yet another false dawn for green stocks? Depending on who wins the election, sentiment will stay morose or improve dramatically. That seems like a good tradeoff. Moreover, much of the clean energy action happens at the state level and the buy-in is broad based; red and blue states alike. Afterall, clean energy growth means jobs growth, which (most) politicians can generally get behind.
A few stocks that exemplify today’s opportunity set are First Solar (FSLR), Enphase (ENPH) – which makes microinverters for solar panels – and Vestas Wind Systems (VWDRY). These companies are expected to grow earnings next year by 59%, 85%, and 192%, respectively. To be sure, earnings projections are not guaranteed, but neither is it a foregone conclusion that these companies will not deliver on their order book. There will likely be a time that these stocks will feel safer to buy, but when that time comes their upside might also be less.
“May you live in interesting times”, a curse disguised as a blessing, misattributed to China, and such an apt descriptor of the world in which we find ourselves. I hope I did not make anyone regret their tattoo choice. Rather, let me sign off by wishing you a little less interesting and a little more familiar and joyful times for you and yours, as the holiday season will soon be upon us.
Kindly,
Jan P. Schalkwijk, CFA
JPS Global Investments