Category Archives: Investments

The HFH Way and two newspaper articles

There were two articles in the papers this past weekend (Jan 18) that have a lot, in my opinion, in common. They also address the investment philosophy of HFH Planning Inc.

Jason Zweig starts his article with “Nowhere to run, nowhere to hide – – and no one to get unbiased advice from.”

One was Zweig’s column talking with a man, Dean LeBaron, who made millions founding Batterymarch Financial, an investment firm, before selling it to Legg Mason in 1995 for over $90 million in today’s value. First he suggests that one must look to those areas that did not ride the tide that raised all stock areas in 2013 and second to invest for safety. The “invest for safety” is a favorite of people who have been in the markets and have enough money that even a very small income from those investments is enough to live a life style they choose. Ross Perot was a famous advocate of investing only in Treasury Bills. But the other he mentions is developing markets plus China, Gold, Real Estate and Inflation Protected Bonds (TIPs). We don’t like the Chinese market because of government control of the companies and the lack of transparency. We are not investing in TIPs because inflation adjustment only adds to the principal after six months and the interest is very low

The second article, in the New York Times by Nobel winner in economics, Robert J. Schiller, talks about how he believes that investing is controlled by the irrational behavior of human beings and that the markets cannot be predicted. That view is in opposition to a fellow Nobel winner, Eugene F. Fama, who believes that research is the answer.

At HFH Planning, we walk a line between these different views. First, we believe that asset allocation designed for the individual takes into account the amount of risk to which that individual should be exposed. The more time to retirement the more risk one may take.

Next we choose mutual fund managers who have, over an extended period of time, shown the ability to choose investments that do well.

Third we analyze returns on a quarterly time frame to examine the results of the allocation we’ve chosen and do an asset rebalancing. That rebalancing adds money to areas that have underperformed by taking money from the areas that performed extremely well. The procedure means we miss out on some of the upside. We are willing to accept that loss of potential in order to protect the gains from the exuberant “bubble” and the damaging fall that follows. Safety first.

How To Evaluate Your Financial Adviser. How To Compare Reults

The wealth Management Section of The Wall Street Journal had an article by Charles Passy. In it the people he interviewed suggest all kinds of ways of finding indexes to match the portfolio. What no one suggests and what we at HFH Planning think is the only way to examine a portfolio is to compare each holding against the appropriate benchmark. Yes it’s not easy. Yes, it takes time an effort, but how can an investor know how the portfolio performed. The article talks about bonds (the media term for fixed income) and doesn’t differentiate between long, intermediate and short term investments. They are very different in the risk and therefor very different in their returns.

In the equity area, not differentiating between “Growth” funds and “Value” funds and using “Blend” index which suggests a combination of the other two.

We at HFH Planning Inc. use Morningstar’s categories returns as the benchmarks. In doing so each holding is compared with the return that is comparable so we (and you) know that the 8% return is good, bad, or mediocre.

Take a look at our website,, to see a quarterly report.

Putting Emergency Funds Aside

On Thursday, 12/5/13, Andrew Blackman, writing in the Wall Street Journal, took on the conventional wisdom of having an emergency fund equal to 6 months of expenses and that those funds be in a bank account. He suggested as possible alternatives: a 5 year CD (with a low withdrawal penalty) and a diversified equity portfolio. While the first one would be fine, the latter just puts more money into the broker’s pockets in place of it going into banker’s pockets.

Why not start at the root?

The six month figure sounds fine, but as a starting point not an ending.

Why should we not go back to the source to find the funds needed?

True, if you are an “At Will” employee and the employer may come to you at any time and say that you are not needed you need six months of reserves. However, what if you know you will receive at least some number of weeks or months in the form of a severance package? How about unemployment insurance? Shouldn’t those sums be subtracted from the six months figure to reduce the need for the six months cash reserve and let people feel better about investing in alternative ways.

Technical Ananlysis – Gold and Commodities

I WAS NOT ABLE TO POST THE CHARTS> Contact me directly for me to send them to you.



There are many traders who follow the movements of an investment by using trend lines and other “technical” tools.

I recently received a report from a company that using these tools.

The company is suggesting that commodities are set for a fall and that gold will plunge.

I don’t ascribe to the theory. I do think that, since it is not an absurd way of looking at the prices of stocks that it should be presented.

Let’s start with a chart of the Power Shares Deutsche Bank Commodity Index Tracking Fund(NYSE:DBC), one of the more popular and liquid ETFs on the market, and, for our purposes, a reliable gauge of movements in the broad commodity sector.



We start by noting that all the stock’s moving averages are unfurled and trending lower – a bad sign.

Also a head and shoulders top (in blue) with the neckline broken three weeks ago occurred at the same time that a longer term trend line (in red) was also broken.

Strike two.

Third, and perhaps most damning, support was undercut just two weeks ago when the stock hit a new 52 week low at $25,

At that point we were all but assured lower prices from the commodities and understood that any bounce higher in the interim would be of a temporary nature only.

And yet…

If there’s a ray of hope for those still bullish on commodities, it resides in the currentRSI reading (black square, at bottom). Whereas both RSI and MACD indicators have been on-and-off underwater for two and a half months now, RSI just peeked its head above the surface in the last two trading sessions.  And this comes at a time when price action has also risen to the junction of the head and shoulders neckline and the short term moving average (red circle, at right).

If there’s to be any hope for commodities over the mid- to long-term, DBC will have to rise above this level and stay there.

And the chances of that happening are very slim.

We look for an almost immediate breakdown in DBC to occur that should bring the stock some twelve to eighteen percent lower in the next three to six months and believe the lion’s share of that drop will occur very quickly once the existing lows at $25 are taken out.


We also believe there’s money to be made playing the broad commodity slide.  But we’re not going to do it using an index tracker like DBC.

Very simply, there will be segments that crash, others that hold up and a few others that even climb, given the manifold forces at work in the commodities pits at any given hour on any given day.  So we’re going to focus once again on the sub-sector that we believe stands to take the harshest beating.

It’s without any pleasure that we return to what’s now become our three year old whipping boy, gold.

Please take a look at the daily chart for gold proxy, the SPDR Gold Trust (NYSE:GLD), for the last six months –

 The picture here is fairly simple.

1)     We have a head and shoulders top that’s just millimetres from a breakdown (in blue).

2)      We have old lows sitting just a hairsbreadth below that level – a 4% decline away(in black) – a target which, if reached, would set off a manic bout of selling in the gold pits.

3)      We have RSI and MACD (red squares) trending below their respective waterlines, a bearish indicator that doesn’t look like it’s about to change direction.

4)      And we don’t see any solid support emerging until GLD $110, a stopover that we now expect to reach sometime around New Year’s – if not before.


Look also at the longer term, weekly chart –


Here, there are also some ominous signs, foremost among them 1) two declining moving averages, including the all-important 137 week MA, 2) both RSI and MACD indicators sub-waterline, and 3) no sign whatsoever of panic in the volume figures.

That last bit is crucial.  Until we see a massive turnover of shares, we can’t consider a full-on long position in GLD or any other precious metal stock.  It makes no sense to do so.  A short term decline of a week or a month, or even four or five months might be reversed without a massive capitulatory event.  But after close to three years of declines, forget it.  You will not see higher gold prices until daily average volumes at least double from today’s levels.  Period.  And as we see no sign of that in the charts today, we don’t expect it to occur for at least another eight to ten weeks.

Science??? When is it Science and when Not?

An article in the Wall Street Journal the other day about mistakes doctors make reminded me that I was supposed to write this blog about what is science.

My definition of science is that it is a discipline that always produces the same results when carried out in the same way.

Two hydrogen atoms and one oxygen atom always equals water. If you substitute nitrogen for hydrogen you always get “laughing gas.”

Drop a weighted object from the roof and it will hit the ground in exactly the same amount of time each and every time.

Take a number of jelly beans and add a like number and you always have twice as many jelly beans.

Medicine isn’t that way. We are all slightly different and what works to stop the coughing in one person may not stop it in another. Yes, there are areas of medicine that are replicable, surgery for example, but, on the whole that’s not true.

Economy is not a science. If it were, three different economists with conflicting theories would not have all received Noble prizes for their work.

Which takes us to the investing area. There are those who, to convince clients that the plan they have devised for the client is going to work 95% of the time use some formula or other – very often the “Monte Carlo Simulation.” The problem is that the input is based on extrapolated historical results. Now, since we have no crystal ball to look ahead it behooves us to study historical information to give us information to use in moving forward. We do that when we drive somewhere. Route one has taken us 30 minutes, route two 35 and route three 50 minutes. So we take route one. Sometimes an accident creates a situation where route one takes an hour. That’s life. Well, in investing the same is true. We use historical data and recognize it will work sometimes. However, we don’t want to gamble on that information as if it were a holy grail. We want to use historical input and do not want to drive “looking through the rear view mirror”.

As advisors we want to do the best for you and we also want to make you feel comfortable. Just don’t get too comfortable.

With Regard to Investments, What does HFH Planning do?

We, as almost everyone alive, attempt to view the future.
When I say everyone, don’t we expect the place where we get our breakfast to be there when we get up in the morning? We expect the travel time to the office to be almost the same, etc.
We look at what has worked in the past and, although we know we cannot drive looking through the rear view mirror, we use history to predict or forecast.

Prediction: to calculate (some future event or condition) usually as a result of study and analysis of available pertinent data; especially: to predict (weather conditions) on the basis of correlated meteorological observations

Forecast: to declare or indicate in advance; especially: foretell on the basis of observation, experience, or scientific reason

We use only “value” oriented funds because, over an extended period of time, they return the same as “growth” funds with less volatility.

We use mutual funds. Not index funds. The ETF industry has made a big deal about using index funds because the cost is lower than managed funds and indexes beat 85% of managed funds. So it gives us a job for two reasons.
1. Index funds always underperform their index (there are fees and expenses).
2. We need to find the funds that are part of the 15%.
We use Morningstar as the search vehicle and then cross check our selection by using Standard & Poor’s ratings and the Lipper rankings.
We monitor the funds on a quarterly basis and analyze the fund’s returns compared to their peers. We compare not only apples to apples, but Granny Smith to Golden Delicious.

We use managers who stay consistent. Large Cap managers who don’t stray into the Small Cap field, etcetera.

That is the services we bring to the investment area of our practice.
It is part of what we do to help clients to navigate the “financial jungle.”

From Warren Buffet via AAII

Please note the bold italic portion toward the bottom.  It is so important to not fall into that mindset.

Charlie [Warren Buffett’s partner] Sand I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated. 

We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course, infractions—even serious ones—are innocent; many CEOs never stop believing their stock is cheap. In other instances, a less benign conclusion seems warranted. It doesn’t suffice to say that repurchases are being made to offset the dilution from stock issuances or simply because a company has excess cash. Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation—whether the money is slated for acquisitions or share repurchases—is that what is smart at one price is dumb at another. (One CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at J.P. Morgan (JPM); I recommend that you read his annual letter.) 

Regarding price performance, Buffett argued that investors are better served if a stock price doesn’t move higher when buybacks are made. Rather, he said that long-term shareholders are better served if the stock price languishes for a period of time. Using IBM (IBM), a stock that Berkshire-Hathaway owns, as an example, Buffet explained his rationale:

If IBM’s stock price averages, say, $200 during the [next five years], the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the disappointing scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1-1/2 billion more than if the high-price repurchase scenario had taken place. 

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. 

Buffett acknowledged that his line of thinking won’t win many investors over. Behavioral scientists are documenting how hard it is for humans to pass on a certain, but smaller, reward now for a potentially bigger, but uncertain reward in the future. Yet, the math shows that the potential is there for Buffett’s approach to work.

Even if you don’t agree with Buffett’s logic, cast a critical eye toward announcements of stock repurchase programs. Question whether they are the best use of the company’s cash. Ask whether the company is trading at a discount to its intrinsic value. Ask why insiders aren’t also buying the stock. Finally, consider that there may be better uses of the corporation’s cash, including instituting or boosting the dividend payment.

What/Whom to Listen to for Financial Advice

The November 19/20 weekend had three articles. Peggy Noonan quoting Steve Jobs on why decline in companies happens, Jason Zweig re 401k investments, and The New York Times opinion by Edward Glaeser about the dentist who is not able to retire because of her investment program may not seem to be connected, but I think they are—all three illustrate the pitfalls of making financial decisions based on gut feelings.

Trusting your gut may be appropriate when selecting a mate, but choosing how to invest your money requires a detached analysis of information about investment opportunities, something which historical fact tells us most individuals are not willing to do. It is, therefore, necessary to choose a financial advisor.

While a good financial advisor can’t help you choose a mate, he or she can give sound advice on investing money to accomplish your goals. Choosing a financial advisor is also a decision that requires information and analysis and should not be left to your gut.

First, and probably most important, the individual should be a fiduciary. That means that the decisions that he or she makes put your interest first. A way to insure that is to make sure your advisor is a Certified Financial Planner™.

Next, you should choose a financial planner who works on an hourly basis, one who does not charge fees as a percentage of assets under management. Make sure the advisor will recommend both the asset allocation and the investment. For example, your advisor should be able recommend the extent to which your long-term needs require rapid growth and the amount of risk your financial situation can tolerate. Your advisor should also be able to recommend individual funds to satisfy the allocation. Finally, you should choose an advisor who will monitor your account at least quarterly.

As you have select an advisor, discuss the allocation the advisor recommends. Ask the reasons for the advisor’s recommendations and what the alternatives are. A good advisor will answer your questions and will not leave you feeling “talked into” his or her recommendations. When you agree to the allocation, your advisor should explain why it is in your financial interest to remain committed to that allocation unless you have a life change–for example, a new child, a divorce, a change in employment, or a major illness.

You should also discuss the funds the advisor recommends. Ask the advisor to explain how the performance of individual funds may be affected by market forces and may in turn affect the balance of the asset allocation. The advisor should also explain that changes in investments may be necessary to correct any imbalances and get back to the original allocation. How often reallocations are necessary will depend on the market forces and the size of your portfolio.

Your advisor should assist you in understanding the statements you will receive. When you receive them it is your responsibility to examine them to make sure there are no unauthorized transactions or other inaccuracies.

Finally, if your advisor performs these tasks, you should be confident that he or she is pro-actively looking out for your financial interests throughout the inevitable fluctuations in the economy and the “market”. You will not need to turn to television, computer, or newspapers for news about investments. In fact, to do so is counterproductive—it will only tempt you to buy or sell investments based on your gut. This,in spite of the fact that such reactive moves are financially unwise. One should always be pro-active, not reactive. Your financial advisor, and not your gut, has the proven ability to provide the best long-term protection of your financial assets in a way that will make your goals attainable.

Fallacy in Generic Thinking

There’s an adage that says you can never be too rich or too skinny. The fact is that it depends on how you try to get there. We’re pretty much all in agreement that bulimia and anorexia (an eating disorder characterized by refusal to maintain a healthy body weight and an obsessive fear of gaining weight) are notable exceptions to the latter.
Those in the Hedge fund business, on the other hand work hard at making themselves more wealthy. These people use their expertise to bring in returns that are in excess of what the general individual can find. I’m not about to suggest that being bad. Of course, even they have losses. But not losses that forces the individual into bankruptcy.
However, along comes the story of the professional football player who chooses to use his wealth by investing in areas that he knows little or nothing about to create wealth that he REALLY doesn’t need. Maybe like the anorexic. If the quarterback had invested in a diversified portfolio, similar to what we encourage people to do, he would be able to live out his entire life ( to whatever age that turns out to be) spending at the same level he did during his career, without concern about running out of funds and be able to leave money to heirs.
So where was the financial advisor? Thinking about assets under management or getting great commissions?