With one daughter off at college, studying illustration the next three years in England, and another daughter who began her graduate studies in public health, in Paris, my son remains at home, on the cusp of finishing high school….

My dependents have become less dependent.  In contrast to my kids, the investment markets’ price levels are generally the highest in history and cry out for continued support from the U.S. Federal Reserve and the world’s other central banks.  Government spending, tax cuts, wealth are all dependent upon the central bank’s support.

The Fed is buying U.S. government debt at a rate of $120 billion in bonds per month, which depresses interest rates, stimulates credit and supports prices in asset markets.  So many young people can’t afford the high price of a new home even though mortgage rates are low.

The Fed’s economic modeling anticipates inflation running above 3% through the end of 2024.  In financial history, after the Fed’s creation, rising inflation and reversals of easy, excessive credit have preceded stock market declines.

Since 2008, each time the Federal Reserve has reduced its bond purchases, markets have stumbled.  Will inflation, global economic imbalances and supply bottlenecks trip up this market?  Wealth has certainly inflated.

What about those left behind?  Read Fiona Hill’s recently released memoir There Is Nothing For You Here for thoughts about that issue.

These days the Fed’s Chairman Jerome Powell hints at gradual action, hesitantly calming investors’ worries about whether the Fed might reduce its bond purchases, too much, too early -- those kids have too much anxiety to move out.

Arif Naqvi liked to say, “Today’s peacock is tomorrow’s feather duster”, an apt phrase for a man who was once an impact investing celebrity, targeting social equity and economic growth in emerging markets.  He was charming, generous, attractive, but also bullying and narcissistic.

Naqvi’s hedge funds, foreign entities run out of Dubai, became the Middle East’s largest.

Investors included the Gates Foundation and World Bank.  If Bill Gates is investing, others thought, they should, too.

The funds had been audited and favorable opinions issued.  Despite this, as private funds, and this is a very important point to be aware of, the funds’ fraudulent financial practices were hidden from investors for years.  Private funds lack the heightened oversight and financial controls of publicly regulated entities.

Naqvi, with his connections to the rich and politically powerful, his 154 foot super-yacht and along with his fellow fund managers pocketed the funds’ cash in secret bank accounts.  Turns out, investors eventually noticed they had been duped.  The Gates Foundation raised questions.  Wall Street Journal journalists Simon Clark and Will Louch dug in.  Whistleblowers came forward.

Give me your money to invest, Naqvi said, and we’ll reduce poverty and improve public health.  Instead, he has been charged with stealing $780 million.

The takeaway here is that, even when a fund’s purpose is noble, be diligent and trust, but verify.

Italian artist Salvatore Garau last month sold an invisible sculpture in the form of a stamped certificate of ownership for $18,000.  Too bad, if the sale had granted ownership via digital non-fungible token (NFT), I’d speculate it’d have fetched at least $180,000.  One can only imagine….

What’s the investment most opposite from an invisible sculpture and can be purchased at an incredible bargain today?  US Series I savings bonds, among the safest of investments, currently yielding 3.6% annually (cannot be redeemed in the first year, a three-month penalty applies within five years of purchase).

I-bonds’ interest rate varies.  It is a fixed rate, 0% for newly issued bonds, plus inflation, which is currently 1.8%.  Get this...an I-bond will earn you 3.6% annualized until October 31, a rate that will change with inflation semi-annually.  Compare that with other interest rates: short-term Treasury bills, 0.1 to 0.5%; high-yield savings accounts, 0.6%; and CDs, 0.2 to 1.0%.

I-bonds’ interest is also state and local income tax-free.  If redeemed to pay for college expenses of immediate family members, I-bonds’ interest could be federally tax-free depending on income level, $97k for a single, $123k for a joint tax return.

You can buy or receive up to $15,000 in I-bonds per year via the US Treasury Direct web site or with your federal tax refund.  If you buy as a gift for others, with the intention to pay for college, be sure to buy in the parent’s name, due to financial aid eligibility and the above tax advantages.
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Right now, I-bonds are the superior low-risk investment … or, you can always buy yourself an invisible sculpture?!?

There’s more money circulating than ever, expanding at an all-time record.

Remember baseball cards on paper?  There’s a new digital spin on them.  It’s called NFTs, non-fungible tokens, aka digital rights.

I could take a photo of this page and, if recent transactions are any guide, receive thousands of dollars from someone who bought the right to enjoy the view.

After selling this page as an NFT, I could send you this letter, you could still read it and then you could do whatever you wish, dropping it into the trash or your filing cabinet.  The whole time, our letter’s NFT owner could be enjoying it all.

As they say, the kids just love it.  The National Basketball Association (NBA) has offered digital trading cards  through their partner Dapper Labs.  They’re booming, issued as limited quantities in potentially limitless editions.  Turns out, the fine print states buyers own nothing but a moment they view on the issuers’ digital platform, the app experience.  It’s the right to enjoy the view, for hundreds or even thousands of dollars apiece.

More money boosts speculative demand, driving up prices.  Spend wisely, or not.  When will it end?

Surely, you’ve heard of the video game retailer GameStop stock’s climb in price recently as a result of an online mob’s chitchat to buy.

If you haven’t heard about it, god bless you.  It’s an endless dog chasing its own tail, a rabbit hole on a blank page upon which any story could be told.

One bunch of speculators sought to manipulate another even as they themselves were unknowingly manipulated.

Does it make sense to you?  It doesn’t to me.

I’ll tell you my version of the story.  It’s a scam, one that combined the lure of striking it rich with a desire to punish greedy hedge funds.  It all works, until it doesn’t.
  
Speculators urged others to buy in order to achieve higher prices.  It’s anti-social behavior at its darkest, to entice naive buyers.

Ignore poverty, an economy transforming in favor of the wealthy, climate change or an ailing healthcare system, nothing to see over there.  For the past two weeks, the financial news focused on small-time speculators as they battled big, nasty hedge funds which had bet on a decline in the stock price.  GameStop stock soared +2,300% in one week.

In my old days at the U.S. SEC, we’d have investigated this as a scheme to defraud, a messy case to be sure.

Over its second week, GameSpot stock fell -87% amidst public discussion over how much money was made and lost.  Should have sold out when you had the chance.

We define who we aren’t as we unite over who we are.  Or do they get what they deserve?  It’s a little of both.
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When values fade, empathy darkens.  And GameStop is not the world that I love.

​Covid, economic conditions and the election have made analyzing investment prospects as challenging as ever.  Because the Federal Reserve proclaimed near-zero short-term interest rates until 2023, injecting trillions of financing into the investment markets, to keep them buoyant, the stock market went up.

Over the long term, returns on stocks over the past century annualize to around +7% per year.  However, there have been 10-year periods when overall real returns have been negative for stocks, and 20-year periods when returns were nearly zero.  Is the market nearer its +7% long-term average with regard to its future returns or will it test its -2% annual return boundary over the upcoming decade?  At current benchmark prices, the market appears expensive.  Given all that could happen, i.e. tax increases, economic recession and numerous possibilities we cannot yet imagine, low stock market returns ahead seem quite possible.

In many ways, our portfolios don’t look like the overall stock market as reflected by its broadest benchmarks.  Within the sub-benchmarks, large stocks have out-performed small stocks by 21% on the year.  Expensive growth stocks have out-performed cheaper value stocks by 32%.  These two characteristics have factored into our portfolio performance, for better or worse.

As Ray Dalio, the legendary investment manager behind Bridgewater Associates, says about both investing and for living a good life: 1) determine what it is you want, 2) determine what is true, and 3) focus your energy on making #1 happen in light of #2.

What we’ve been living within is an Age of Illusion.  It won’t last. 

Bob Dylan, eleven years ago this month, in the rain, was picked up by police while wandering around Long Branch, NJ.  He was wearing a hooded raincoat, black sweatpants and rain boots. The officer, she didn't believe he was Bob Dylan.

He didn't carry ID.  He had stepped into the front yard of a house with a "For Sale" sign. The homeowners had called police, reported an "eccentric-looking old man" and followed him down the street.

Dylan explained to police he had been looking at the house for sale. Was he also looking for a nearby house where Bruce Springsteen lived in 1974-75? He did have a history of visiting the former homes of Neil Young and John Lennon.

After driving him to his tour buses parked at a nearby oceanfront resort, police verified Dylan's identity.

This story, black and white.  Dylan got a ride in the back of a police car.

Earlier this year, Ahmaud Arbery, also looking at a house, one under construction, was shot dead while the sun was shining, ambushed by three white men, one a former police officer.  Both Dylan and Arbery were in the wrong place at the wrong time, one subject of a quirky story; the other a tragedy.

Bob Dylan, poetically raw, real and beguiling, in his song “My Back Pages” sung about how hatred in the heart is not a pathway to love.  Though we might feel strife, though we might become angry, hate need not drive the behavior of our souls.
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I’ll stop there.  It’s raining.

Today is a day that is filled with surprises,
Nobody knows what's gonna happen.
Anyone can be a fool and do things which are wrong
But fools find out, when it's too late, that they don't live so long
Oh, I'm no fool, no siree
I want to live to be 93
I play safe for you and me
'Cause I'm no fool

— songs written by Jimmie Dodd and sung by the Mouseketeers and Jiminy Cricket

The song “Anything Can Happen Day” conveys a feeling of the times, if you can forgive its perky joyousness.  Lest you think I’ve gone a bit loopy, my other favorite these days is the classic Disney song “I’m No Fool”.  Within these songs’ advisory warnings is contained my investment strategy’s intent: anything can happen, but I’m no fool.

Rates paid by U.S. government bonds are low, low, low, between 0 and 1%.  Stocks of healthcare, grocery staples and stay-at-home technology companies are high, high, high.

This is uncharted territory, a global health crisis, the economy plunging to depths similar to the Great Depression, at the speed of the 1987 stock market crash, from high prices rivalling the 2000 and 2007 bubbles.

We move across a spectrum of feelings that range from our worst nightmares to our happiest of dreams.  It’s bad and we know it, but the same could also be said of the good.

Collectively, we feel denial, shock and anger.  We have little common agreement, high uncertainty and stark group affiliation.

In a few words, it has been and will be chaos around what is out of our control.

Humanity’s best answers will be discovered, built up or gifted to us over time.
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While we grieve, we also find time to be kind, grateful and compassionate.  Love and connectedness are not contained byviral outbreaks, economic transactions or political disputes.

We will move through this and, one day soon hopefully, out of it.
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I plan on being steady, humble, careful and prudent.  Ourselves we can control.

Stocks are by definition riskier than bonds and, at current prices especially, shouldn’t be substituted for bonds without recognizing the risks.

Hold on, some say, risk lessens for long-term investors, since any negative event in stock prices becomes distant memory when investing over a long duration.

Let’s me argue against that point.  First, stocks are by definition simply a share of ownership in an enterprise.  Unlike with bonds, equities are not a promise to pay or receive anything.  Over time, you might receive nothing for your stock, unless the company declares dividends or you decide to sell your stock to another investor.

Risk doesn’t necessarily average lower over time, just as the risk of crossing a busy divided highway by foot doesn’t lessen the more times you do it.  I’ve bicycled on short stretches of interstate, which is perfectly legal out west, and it’s not fun to travel in the same direction as such fast, heavy traffic, let alone cross in a perpendicular direction to it.
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This winter, I’m cautious amidst the market traffic of gravity-defying prices in stocks.  Be balanced, now is not the time to take chances.

Small is beautiful.  This quarter, we highlight small companies we invest in.

When you buy small, you get focus and, as the owner, it’s important to know what you own.   I dare any Wall Street analyst to tell me exactly what a large multinational conglomerate does.  It’s vast.

A company is more than a balance sheet and profitability measures.  It’s important to understand both the bigger picture and the detailed implications.  With a smaller company, I can talk or meet with management.  While not every investment opportunity is a small one, smaller ones can be among our most rewarding.