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Old Friends Seldom Change but Can Provide Valuable Information

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“A fool and his money are soon parted.” – Thomas Tusser


News spread at the end of 2017 within my old high school circle that a very close friend had passed away of a drug overdose. He was an addict and had been living on the streets for a number of years. All his old friends lost touch with him as time passed - likely by design - as he did not want to “drag down” those he cared for along the way. He was one of my best friends growing up - loyal, caring, outgoing and talented. He will be missed more than he could have ever known. I think about him regularly.


In honor of our late, great friend a group from our high school circle arranged to meet-up just after the new year at a favorite bar we frequented back in the mid 90s. We thought it would be an appropriate place to memorialize his life and also reconnect with those who in some cases had lost touch since high school. It didn’t take long for everyone to loosen up.


One old friend was convinced I had pursued a career as a stock broker. I tried to explain I spent 16 years as a government bond and interest rate derivatives trader in New York and Asia, but more recently decided to hang up my shingle to manage money for individuals and families – he scoffed and said “yeah, right whatever... as I said, stock broker.”


Later on, the same friend asked for my opinion of the crypto currency market. I kept it brief as I did not have anything good to say. It didn’t matter. He wasn’t interested in my response anyway given his enthusiasm for investing in the sector. Looking back on that evening, crypto currencies have declined by at least 60% and in some cases by as much as 90%.


Back in the late 90s, I returned to San Francisco for a short vacation. One night, I arranged to meet-up with a group of old friends at a popular bar that also happened to be owned by the father of my late friend mentioned above. The talk of the evening was technology stocks – dot.com this and dot.com that. Most people recognized valuations were high, but were unconcerned, as the majority believed we were in a new era with new rules. One friend, who previously worked as a night club bouncer and had always been the “muscle” in this group was now employed with a technology company, receiving stock options, and additionally investing in array of dot.com names on the side. He was getting rich! I left that evening feeling uneasy. Something was very wrong with this picture. We all know how that story ended.


The middle 2000s were mostly about residential real estate investing. I returned back to San Francisco on vacation during this period and heard of friends and acquaintances getting rich flipping houses with zero or minimal money down. Others were capitalizing on the frenzy working as real estate brokers. Around the same time and on the other side of the country, my cousins were boasting at a family reunion in Florida of the leveraged real estate winnings they were collecting. It seemed too easy and yet none of them had much experience in real estate or as investors. Again, this made little sense to me, and unsurprisingly it was just a matter of time until things came crumbling down.


Today, it is Cannabis. I have a number of friends who are investing in this space and although they are bright, I do not believe they understand what they are getting themselves into. Cannabis investing is new and seemingly has lots of promise. I will not deny that. However, the supply of investable companies is limited, and this is causing a bit of a frenzy with some stock valuations rocketing beyond notable household blue chip names. When the dust settles there are bound to be winners, but I do not have any insight into who that will be, and I think most investors haven’t a clue as well. In the meantime, I expect the sector to remain highly volatile, which can be great for traders with an advantage but could also shake out most “long-term investors” from staying the course. Time will tell.


The Fear of Missing Out, aka FOMO can be a powerful motivator. But there is a downside to this emotional state, in which succumbing to temptation can also prove to be a trap. The late Nobel laureate economist Paul Samuelson once said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” I concur. In a competitive marketplace there are no short cuts.


The take away from all this. Stay in touch with old friends. Not only can they be a pleasure to be around, but often times they are a source of valuable information.

***** On markets, I am not pessimistic... That’s saying something given the recent corrections we’ve seen in both stock and bond markets. Ordinarily I’d be advising clients to tighten up on risk, but I have already expressed my concern throughout 2017 and much of 2018. Risk is very personal. Two separate investors can have the same financial ability to take risk but differ psychologically on their willingness. I view this correction as mostly liquidity driven on the back of recent Fed tightening and higher long-term rates. Going forward, I believe the dynamic between long term interest rates and equity prices will be self-correcting. Meaning bond yields can only go up so much before stock markets take it in on the chin. As a result, I am expecting to see long end yields come down from here, which will likely be supportive of equities going forward. Just don’t expect blockbuster returns. Additionally, I’ve included a chart below highlighted by Barry Ritholtz of Bloomberg View on historical S&P 500 returns one year after midterm elections. The wind is still mostly at our backs.



Sincerely,

Justin Kobe, CFA Founder & Portfolio Manager

Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated.Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond marketis subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.


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