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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Are We Headed for a Passive Index Meltdown?
September 19, 2018

Without Googling, try to guess who said the following quote: “If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.”

Give up?

The speaker, believe it or not, is John Bogle, founder of Vanguard, which has been at the forefront of indexing. Bogle made the comment last year at the Berkshire Hathaway shareholder meeting, basically admitting that there’s a limit to the amount of passive investing the market can handle and still function efficiently.

The thing is, we’re testing that limit more and more every day as passive mutual funds and ETFs—those that seek not to “beat the market” but track an index—take up a larger slice of the pie. The share has increased dramatically in the past 10 years, rising from only 15 percent in 2007 to as much as 35 percent by the end of 2017.

Index funds have grown as a share of the fund market
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As for when passive investments will overtake the active market, Moody’s Investors Service estimates we’ll see this happen sometime between 2021 and 2024. Markets simply wouldn’t be able to function without active managers calling the shots—rewarding good corporate governance and punishing the bad—so Bogle’s what-if scenario of 100 percent indexing is, for now, purely hypothetical.

Nevertheless, the seismic shift into indexing has come with some unexpected consequences, including price distortion. New research, which I’ll get into below, shows that it has inflated share prices for a number of popular stocks. A lot of trading now is based not on fundamentals but on low fees. These ramifications have only intensified as active managers have increasingly been pushed to the side.

Watch Out for Rebalance Risk

This could end very badly for some investors, as I told CNBC Asia last week. It’s possible we could see a correction when it comes time for a number of multibillion-dollar funds to rebalance at year’s end. The same thing happened to the tech bubble in 2000, when everyone rebalanced after a phenomenal run-up in tech stocks.

And remember what happened to small-cap gold stocks last year when the massive VanEck Vectors Junior Gold Miners ETF (GDXJ) was forced to restructure its portfolio? They were knocked down despite having incredible fundamentals.

Take a look at the following chart. Internet commerce stocks—Apple, Amazon and the like—are up nearly eight times since May 2010.

Ecommerce is the second largest bubble of the last four decades
click to enlarge

This isn’t just the second largest bubble of the past four decades. E-commerce is also vastly overrepresented in equity indices, meaning extraordinary amounts of money are flowing into a very small number of stocks relative to the broader market. Apple alone is featured in almost 210 indices, according to Vincent Deluard, macro strategist at INTL FCStone.

If there’s a rush to the exit, in other words, the selloff would cut through a significant swath of index investors unawares. And just as Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”

A Huge Opportunity in Under-Indexed Stocks

Deluard’s research also suggests that passive index investors could be missing the hidden gems. After analyzing returns in the Russell 3000 Index, he found that stocks that are overrepresented in indices—again, think Apple—have been underperforming those in fewer indices. Despite lagging for the past five years, stocks that were in 75 indices or fewer returned more than 60 percent for the 12-month period, while the performance of stocks featured in 200 indices or more was around half that. Over-indexed stocks were also 2.5 times more expensive, Deluard found.

Stocks that are included in fewer indexes have outperformed over the last 12 months
click to enlarge

Whether we’re dealing with causation or correlation is probably too complex for me to get into here. The implication, as I see it, is that there’s huge potential for gains in stocks that are least loved by index providers. Talented active managers who are able to uncover these hidden gems and make the appropriate allocations are worth every cent investors pay them in fees.

In the Race to the Bottom, Everyone Ends Up Last

As I said earlier, a lot of trading now is based not on fundamentals but expense ratios. There’s been a race to the bottom to see who can provide the lowest fees. Fidelity appears to be first to introduce a no-fee fund—the catch being the investor must use Fidelity’s brokerage firm. Some industry experts now believe it’s only a matter of time before we see an index fund with negative fees.

You get what you pay for, as the saying goes, and buying cheap often comes with a high price in the long run. A tummy tuck in Tijuana costs a whole lot less than one in L.A., but you might end up having to pay far more in medical expenses should a mishap occur.

The same thinking applies with certain passive mutual funds and ETFs.

Recently Ray Dalio, billionaire founder of Bridgewater Associates, told CNBC that we’re in the “seventh inning” right now, and as such, investors should probably get “more defensive.” In addition, the Goldman Bull/Bear Indicator just hit its highest level since 1969.

Investors who feel this bull run might be getting long in the tooth would be prudent to make sure they have their recommended 10 percent weighting in gold and gold stocks, as well as a position in short-term, tax-free municipal bonds. Both assets have long been sought as safe havens in times of economic uncertainty and have performed well even when markets are down.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Russell 3000 Index is a market-capitalization-weighted equity index maintained by the FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks which represent about 98% of all U.S incorporated equity securities. The Nikkei 225 Stock Average is Japan's premiere stock index. It includes the top 225 blue-chip companies listed on the Tokyo Stock Exchange. The SET Index is a Thai composite stock market index which is calculated from the prices of all common stocks (including unit trusts of property funds) on the main board of the Stock Exchange of Thailand (SET), except for stocks that have been suspended for more than one year. The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. The S&P Homebuilders Select Industry Index represents the homebuilding sub-industry portion of the S&P Total Markets Index. The SSE Composite, which is short for the Shanghai Stock Exchange Composite Index, is a market composite made up of all the A-shares and B-shares that trade on the Shanghai Stock Exchange. The NASDAQ Biotechnology Index is a stock market index made up of securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as either Biotechnology or Pharmaceuticals. The Dow Jones Internet Commerce Index is designed to measure the 15 largest and most actively traded internet commerce stocks. The Goldman Sachs bull/bear indicator takes into account five factors: growth momentum (measured by the average percentile for U.S. ISM indexes), the slop of the yield curve, core inflation, unemployment and stock valuations as measured by the Shiller price-earnings multiple.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 6/30/2018.

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Minute with the Trader: Meet Michael Matousek
September 11, 2018

Meet Mike Matousek—head trader at U.S. Global Investors. With over 20 years’ worth of industry experience, Mr. Matousek is responsible for managing the trading desk and conducting rebalances for our ETFs and growth and large-cap mutual funds. In addition to advising the investment team about market behavior, he spends much of his day executing trades based on technical and quantitative metrics.

Mike joined U.S. Global Investors in January 2008 and was promoted to head trader not long after. Before joining our team, he was a proprietary trader and then director of institutional sales and trading for a broker-dealer, advising the firm’s hedge fund clients on technical trading strategy and implementation.

In this brief Q&A, Mike recounts how he found his way to U.S. Global Investors and shares his take on what it means to be a trader.

Tell us about your journey to become a trader. What drew you to the investment business?

When I was younger, I remember seeing news of the 1987 crash. Later, in my sophomore economics class, we studied the junk bond fiasco in the early ‘80s. I believe those events, along with the excitement of building wealth for clients and myself  in the capital markets, drove my interest early on in stocks and trading. As I gained experience, I started to learn I really enjoyed trading—specifically proprietary trading, or the art of pulling money out of the capital markets.

I traded for myself and started teaching others some of my strategies before becoming a full-time proprietary trader. My trading style in those days could be described as scalping, or trading for “quarters” on an intraday basis.

Then in 2001, when U.S exchanges started quoting the bid/ask prices in decimals, my trading profitability started to decline. I figured I needed to reinvent my trading style, so I enrolled in the Chartered Market Technician (CMT) program to learn more about technical and quantitative trading.  This was a real eye-opener. It showed me you always have to be seeking new and different ways to pull money out of the markets.

Once I passed the CMT program, I was one of only 500 CMTs in the world. Now I think there are about 3,000.

Eventually, I thought I was getting “burned out,” so I stepped away from trading and became a consultant for a sell side broker-dealer. I focused on trading strategy development and implementation for their hedge fund clients. It was a really fun position. I had the chance to meet with multibillion-dollar investment advisors and talk markets and trading strategies.

But eventually I began to miss trading, so when the company was purchased by another entity, it seemed like the right time to exit this part of my career path.

I started trading for myself again and was living in San Antonio when I came across the opportunity at U.S. Global Investors. They were looking for a derivatives/ETF trader for their hedge funds and mutual funds. Because San Antonio doesn’t have a huge financial district, and given my trading experience, I was a top candidate. I remember the director of human resources telling me it was hard to find someone with my experiences in “sleepy San Antonio.” Initially, I wasn’t sure if I was going to accept the offer, but one of my friends said, “You’ve got a chance to work with Frank Holmes! You’ve got to do that!” I figured it was a great opportunity, so I accepted.

ETFs have become increasingly popular in the last few years. What is your take on the shift from mutual funds to ETFs?

It’s funny—I was a proponent of ETFs even before I joined U.S. Global Investors. In fact, I started trading them back in 1998 and would write about them in a newsletter I was publishing as a hobby. I remember when I first started at U.S. Global, we were a “mutual fund shop.” At the time, there was a huge rivalry between mutual fund firms and ETF providers, with both sides claiming they had the superior product. Today, I manage our lineup of ETFs.

What should traders keep in mind for the remainder of 2018?

Everyone has a different view of what a trader is. My opinion is that traders are more short-term in nature. We generally don’t buy and hold something for a long period of time. But the trade can become “longer term” if the position continues to turn a profit. Admittedly, my background in proprietary trading and day-trading might skew my thoughts about this a bit.

Knowing that, I don’t believe in predictions. I don’t want to have an opinion, but I also want to follow the market direction with the least amount of resistance. 

So I believe for the remainder of 2018, traders need to trust the trend when it is heading in a particular direction. Stay invested, but always manage the risk. Risk is the only thing we can fully control.

There’s a saying in the industry: “Do you want to be right in your opinion—or make money?” Unfortunately, when people have opinions, pride steps in and bad decisions are sometimes made. I would rather make our investors’ money.

Want to stay on top of market trends? Subscribe to the award-winning Investor Alert newsletter for a weekly recap of the biggest market-moving events.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

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Early-Stage Investing with Adam Sharp (EXCLUSIVE INTERVIEW)
August 30, 2018

For years, Adam Sharp has helped accredited and retail investors get in on the ground floor of some of the most promising early stage investment opportunities. These include not just venture capital but also equity crowdfunding and cryptocurrencies, which he added last year to his two research offerings, First Stage Investor and Crypto Asset Strategies.

I recently had the pleasure to speak one-on-one with Adam, whose deep knowledge of the rewards and challenges of early stage investing is bar none. Read on to get his unique insights into the future of bitcoin trading, the promise of cannabis stocks and what he looks for in a startup. 

When did you first get involved with bitcoin?

I got into the financial newsletter industry in about 2008, doing marketing and search engine optimization (SEO), and I started reading people who come from the libertarian, Austrian school of economics—Bill Bonner, Porter Stansberry and some others. It was on one of these online message boards in 2011 that I first heard about bitcoin. It might have been trading for less than a dollar. I watched it for a while, and in 2013 I finally decided to pull the trigger because there was a reputable exchange at this point. I got in at $84 a coin, and I’ve held onto them ever since.

It’s been a wild ride, and the volatility we’re seeing right now is admittedly hard. It’s difficult to maintain a positive community during a correction like this, but I think the alt-coins that are able to survive the downturn are going to come out even stronger and be in a really good place in a couple of years.

Early on, did you experience any pushback from friends and colleagues?

I might have convinced a few people successfully to buy bitcoin, but not many. It wasn’t easy, trying to describe this new alternate financial system that had maybe 100,000 participants around the world. I think part of it is that, at the time, I didn’t fully know what was going to happen. Maybe it would be worth a lot of money some day?

Turkish lira down more than 45% for the year
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Now that I’ve been through a couple of cycles, I can see how the growth works, and I believe it’s sustainable over long periods. Bitcoin and cryptocurrencies in general have built up big enough communities and momentum that I think they can become a major monetary force in the world. What’s really going to drive this forward are currency crises around the world, not to mention growing distrust in banks and governments. It’s a slow process, and it won’t happen overnight.

So where are the institutional investors?

The institutional crypto boom we’ve been anticipating is real. The infrastructure is in place now to support big investors. Contrarians will likely lead the way. It might be as much as a year out, but eventually you’ll have a couple of guys move heavily into cryptocurrencies and start posting some attractive returns. And then I think you’re going to see many numbers of followers jump in.

Speaking of that, you wrote recently about Intercontinental Exchange (ICE), owner and operator of the New York Stock Exchange (NYSE), launching Bakkt. Many people are calling this project a game changer. Explain what Bakkt means for cryptocurrency trading.

Bakkt is definitely the biggest news of the year. It’s exactly the type of qualified, regulated custody solution big financial firms need to be comfortable enough to get started in crypto—and it launches in November. It has the backing of ICE, the NYSE, Microsoft, Starbucks and others. It’s going to be a huge step in the right direction in terms of getting big firms on board, and I think it should help pave the way for a bitcoin ETF as well. The market’s reaction so far has been nothing short of ecstatic.

designed to solve the need for trusted price formation in cryptocurrencies. what bakkt will provide

Perception is definitely an important factor when writing about not just cryptocurrencies but also cannabis, an industry you also follow. What do you think will be the biggest challenges in changing people’s minds about these asset classes?

I think we’ve already hit the tipping point with cannabis. It’s just a matter of how long the Feds can last under the pressure. Right now in every state, there are kids with epilepsy and other disorders, and their parents are desperate for new treatment options. This is what’s driving the entire thing. Kids and adults both need access to cannabidiol (CBD) oil—which isn’t the psychoactive part of marijuana, by the way—and it’s getting tougher for government officials to deny them this.

What’s convinced a lot of skeptics is that, not only can you treat epileptic children with CBD oil, you can also get them off Xanax and other incredibly addictive sedatives. The medical potential is limitless, touching on pain relief, insomnia, anti-inflammation, appetite and many other applications. The pharmaceutical companies are probably terrified, and they should be.

And yet we still know so little about it.

We’ve discovered as many as 113 different cannabinoids, but so far very little research has been done. Most of it isn’t happening here in the U.S., either, and I’m afraid we could fall behind the rest of the world. In recent months, for example, some very promising studies in Israel have shown that autism can be treated with CBD and tetrahydrocannabinol (THC). We’re just beginning to scratch the surface.

the pharmaceutical companies are probably terrified, and they should be.

Let’s move on to private equity and venture capital. Global private equity firms raised a record $453 billion in 2017. Why do you think this space is booming right now? What are the contributing factors?

A lot of it has to do with the Enron scandal in 2001 and the Sarbanes-Oxley Act (SOX) that was enacted afterward, which made it many times more expensive to be a publicly traded company. To be clear, I think public markets are a very good thing overall for companies. They enforce discipline, and they make things transparent. But more and more, people want the privacy of being a private corporation. Combined with SOX, this is what’s leading the boom in private equity. This huge venture ecosystem has sprouted up to meet demand, and companies now have access to the best deals, the best networks and the most capital. If you’re a company like Uber, you really don’t need to go public anymore.

global private equity raised a record amount in 2017
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One thing we’re constantly trying to find for our members is different ways to invest in private companies. There are a few good publicly traded stocks through which you can access private equity. With equity crowdfunding, you can also invest in individual startups that are raising money online. It’s really a fascinating industry, and it’s a lot of fun because you get to work with young entrepreneurs. I believe it’s the future of capital formation.

I should also add that the whole initial coin offering (ICO) phenomenon was partly a reaction to the lack of opportunities in public markets.

What do you look for in a startup?

My favorite startups are those that haven’t raised much, if any, funding, but they’ve built the business with sweat equity and elbow grease. If they’ve invested their own money, that’s great, but if they’ve boot-strapped their way to a couple million dollars in revenue, that’s the ideal situation for me. It doesn’t really matter what industry it’s in, as long as the company’s growing at a fast and sustainable rate.

Other than that, I look for startups headed by people who are experts in their field, with a deep background and understanding. Ideally the founder or chief executive has a magnetic personality and can attract capital, talent and press. You want somebody that can tell their story well, and that people want to work for and write articles about. I’d like to think that when I talk to a founder I can tell how much magnetism they have, but you do get false positives from time to time.

You co-founded and write for a number of subscription research services. Tell us about some of these projects, what they focus on and how our readers can sign up for them.

We believe early stage investing and cryptocurrencies are the two leading alternative investments that are available to everyday investors, so that’s what we try to focus on. 

Our first service, First Stage Investor, covers startup investments. Basically, we look at all of the equity crowdfunding deals that are on the market at any given time and we try to find the best ones for our members to invest in. We have a cryptocurrency portfolio in First Stage Investors that we started last summer, so you get a mix.

Our other service is called Crypto Asset Strategies, which, as the name implies, is crypto-only, with the exception of a couple of publicly traded stocks. We look for the most promising bitcoin and Ethereum competitors—coins that are 1/100th or 1/500th the size of bitcoin or Ethereum. And then we do the research. We talk to the founders when possible, and we recommend what we feel are the best ones to our members.  

Curious to learn more about the blockchain and cryptocurrency market? Stay up to date by subscribing to the FREE, award-winning Investor Alert!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 6/30/2018.

 

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The 5 Dimensions of a Rich Life
August 27, 2018

5 dimensions of a rich life

Studies show that mindfulness and having an attitude for gratitude is important in all aspects of life. One way to increase gratitude is to regularly take stock of not only your finances, but the other dimensions of your life as well. This includes relationships with family and friends, personal and professional achievements, and ways in which you give back.

During my recent trip to the Oxford Club’s Private Wealth Seminar in Whistler, I was reminded of this very topic. I had the privilege of hearing from numerous inspiring and intelligent investment professionals during the event, including my good friends and chief strategists at the Oxford Club, Alex Green and Marc Lichtenfeld.

One of the presentations, however, really stood out to me. The topic included the five dimensions to living a rich and fulfilling life, a theme also covered in Alex Green’s book Beyond Wealth.

The key? Being “rich” isn’t all about money.

1. Monetary Gain and Financial Freedom

When you think of richness, you likely go straight to monetary wealth. Granted, this dimension of life is incredibly important, but what’s more important are the steps taken to achieve a sense of financial stability. Having the knowledge and skills to responsibly build wealth can bring a sense of strength, comfort and safety that is unmatched.

This is particularly true for those approaching retirement age, a time when families don’t want to rely on the government for assistance, but instead want a nest egg, and then some.

As demonstrated in one of my favorite books, The Millionaire Next Door, the average millionaire doesn’t make ostentatious displays of wealth, rather they under consume and live in average-to-middle class neighborhoods and focus on investing. Simple strategies like these can make a world of difference.

2. Extraordinary Experiences

GPD and PMI car anologAre you challenging yourself to stray from your everyday activities? Extraordinary experiences, such as traveling the world, bring a new perspective to life. Pushing yourself out of your comfort zone is the key to growth.

I often write about the importance of explicit and tacit knowledge, with tacit knowledge referring to real world experiences, or boots-on-the-ground research. I have always believed this type of knowledge is just as important as textbook knowledge. Having your driver’s license, for example, is simply a piece of paper. It means nothing until you put it to use, get out on the open road and explore.

I travel often for both business and leisure and it’s true that you have to see the sights, taste the food, meet the people and hear the music to experience the limitless delights that the world has to offer.

3. Personal Achievement

Everyone has different goals they set out to accomplish in their lifetime. Taking time to list out all of your personal achievements thus far, as well as the goals you’re still working toward, is one way to truly put things in perspective.

Continuing the pursuit of personal achievement keeps you active physically and mentally, and encourages you to keep learning. One personal achievement I am very proud of is my completion of numerous marathons all over the world. Running these races was challenging no doubt, but equally as rewarding.

4. Ways of Giving Back

One of the many rewarding aspects of life is having the ability to make a lasting impact on your community and those around you. Giving back typically comes in the form of volunteering, whether it’s with your time or money, to help support causes close to your heart. At U.S. Global Investors we make it a point to support our local community and I’ve always encouraged employees to volunteer for and share causes important to them.

5. Strong Relationships– Intellectual and Emotional

Love and friendship are easily two of the most meaningful components of a rich and fulfilling life, and both are achieved through strong relationships. Whether at home or at the office, surrounding yourself with like-minded, passionate, successful and caring individuals can truly be the driving force behind how you choose to live your life.

Social wealth and a sense of connection are just as powerful as financial wealth. Self-confidence and self-worth are important feelings, and often times, high self-worth is correlated with high net worth. To me, relationships are one of the most rewarding aspects of life and in this video I discuss the crucial role that mentors played in mine. The wisdom and experience of someone who has walked a different path than you, or who is further down the road than you are, can help steer you away from setbacks or roadblocks to maintain a balanced life.

Maintaining a Well-Balanced Portfolio

GPD and PMI car anolog
click to enlarge

Interpersonal relationships aren’t the only thing that a fulfilled person should balance. It’s never too late to start learning the basics of a well-managed portfolio.

One rule of thumb is to have an ever-shifting balance between equities and bonds, with some exposure to gold for diversification. Traditionally, equities are more growth-oriented than bonds, but also hold greater risk. As you age, your portfolio should evolve to contain a higher allocation to bonds, which favor safety and liquidity over growth.

I believe it’s prudent that your allocation to bonds be equal to your age, as seen in this chart. Follow the 10% Golden Rule, and put the remainder of your portfolio in equities.

GPD and PMI car anologAs a refresher, here’s what I mean by the “10% Golden Rule”. The rule suggests a 10 percent portfolio allocation to gold, with 5 percent in bullion or gold jewelry and 5 percent in well-managed gold mutual funds or ETFs.

Remember to rebalance annually, adjusting allocations and weightings as investment goals change.

While we have an eye for gold at U.S. Global, we also provide investors with a wide array of opportunities to invest with us, ranging from emerging markets and natural resources to infrastructure and domestic funds. 

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Diversification does not protect an investor from market risks and does not assure a profit.

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Investing for the Long Term: A Conversation with Marc Lichtenfeld
August 20, 2018

the oxford club's marc lichtenfeld One of Marc Lichtenfeld’s proudest moments was getting to ring announce a world title boxing fight promoted by Mr. “Only in America” himself, Don King.

“He was one of my main clients for many years,” Marc tells me, adding that the boxing impresario “is always the smartest guy in the room. He’s three steps ahead of everyone else.”

You could say the same thing about Marc. As the Oxford Club’s chief income strategist—his day job when he’s not announcing boxing matches—Marc has spent much of his career educating investors on how best to stay “three steps ahead” of the market.

That means, among other things, taking a long-term investment approach and focusing on what he calls “Perpetual Dividend Raisers”—high-quality companies that consistently raise their payouts, preferably by a significant amount.

“The longer you can stay invested the better, as your dividends will grow and so should your capital,” he writes in his most recent book, You Don’t Have to Drive an Uber in Retirement.

Staying disciplined and sticking to this strategy go a long way in helping investors roll with whatever punches the market might throw.

Read on for more highlights from my recent conversation with Marc Lichtenfeld.

What inspired you to get into the financial world?

When I was in college, I had no interest in the stock market or finance. I wanted to be a sportscaster. It wasn’t until after I graduated that I started to invest for myself, and I became kind of obsessed with it. This was before the internet, so I would spend Saturday afternoons in the library researching companies and learning everything I could.

I eventually decided to make my hobby my profession, but nobody was interested in hiring a 20-something kid with no relevant experience.

I decided to visit a trading firm right down the street from my house that I knew was looking for a trading assistant. When I walked in and handed them my resume, I got the impression that I wouldn’t be getting a call back. I could see, though, that they desperately needed help entering orders and balancing their books, so I made the guy an offer he couldn’t refuse. I told him I’d work for free for a week, and if he wasn’t happy with what he saw, he could tell me no thanks. But by the end of the week, he told me to come back on Monday and that he’d start paying me.

That was my entry into the world of finance. From there, I had a couple of other positions, including as a sell-side analyst at Avalon Research Group, and then in 2007 I joined the Oxford Club, where I’ve been ever since.

Tell us about your start with Oxford Club and how the group has contributed to your professional development.

One of the things I admire most about the Oxford Club is its emphasis on individual investors. It really tries to teach investors how to grow their wealth the right way by managing risk and investing in quality companies.

get rich with dividends. how to build a portfolio with double digit returns I began there by writing about biotech, which even now I believe is an industry of the future. A few years later, I spoke with Julia Guth, our CEO and publisher, about taking over the dividend newsletter, and in 2013 I launched my own dividend newsletter, the Oxford Income Letter.

My main focus since then has been on dividend growth companies. Around the same time that we launched the Oxford Income Letter, I wrote a book called Get Rich with Dividends. The strategy I describe is one that’s worked for many years. When you invest in companies that are raising their dividends 5 percent, 8 percent, 10 percent a year, you vastly improve your odds of generating some impressive returns and beating the market year after year. If you’re still in the wealth-building phase, it’s also important to reinvest the dividends because then the compounding machine just goes into overdrive.

This can really make a significant difference in the size of your portfolio and change your life down the road. It’s one of the many reasons why I started my kids investing in dividend growth companies. If they started as children, they could be in a very good position 30 years from now when they’re looking to buy a house or send their own kids to college.

Sticking with that strategy sometimes requires a lot of discipline.

I was actually having a conversation with my brother recently because he’s looking to put some money to work and wanted to get my thoughts. He’s a bit of a worrier, though, so I reminded him that if he’s going to invest, he really needs to be disciplined and not freak out if the market takes a downturn in, say, three years. What’s far more important is where the market will be 10 years from now. Historically, the market is up 10 years down the road—it’s very rare that it’s not—but you need to have the discipline to stay with it.

The important takeaway here is to know your tolerance for risk and adjust your investments accordingly. My brother’s very cautious, so he probably shouldn’t put every dollar in the market if he’s going to lose sleep over a correction and sell at the wrong time.

It’s easier for those who’ve seen the data and know that the market has historically been up in 10 years, even if we’re at the top of the business cycle. In Get Rich with Dividends, I talk about the only times when markets have been down over a 10-year period, and those are in the middle of the Great Depression and in 2008-2009 during the Great Recession. You would literally need to cash out in the middle of a historic downturn not to make money over 10 years, and that’s if you sold right at the bottom. If you had waited another year or two, you might have come out at least breaking even, if not better.

Who were your mentors early on?

My biggest mentor was David Hines. David was my research director at Avalon, which had the reputation of being the most contrarian research firm on Wall Street. We initiated ratings on stocks only if that rating was going to be contrarian. If we were bullish on energy and so was the rest of the Street, there was no reason for us to publish our research. Why would anyone listen to us versus Goldman Sachs or Morgan Stanley?

In any case, I thought I was contrarian—until I met David. Any time I came to him with my research, he would just poke so many holes in it. It made me double and triple-check that all my i’s were dotted and t’s were crossed before presenting an argument to him.

What book do you think every investor should read?

I would say The Richest Man in Babylon, by George Clason. It’s 70 or 80 pages, so you could read it in an afternoon. The book, which is about 100 years old now, is filled with great life lessons on money management and saving and investing. I would recommend it especially to someone who has a teenager or young adult in their life, and they want to impart some important lessons.

On the more technical side, I would recommend David Dreman’s Contrarian Investment Strategies. He’s considered to be the father of contrarian investing. The book is pretty data-rich, but if you like that kind of thing, it really makes a strong argument for contrarian investing.

In one of your recent presentations, which I attended, you explained that cash flow is more important than earnings. Can you elaborate on that?

There’s no doubt earnings are important. Stock prices tend to follow earnings over the longer term, but they can easily be doctored and manipulated. Let’s say a company records a sale of $1 million on December 30. Even if it hasn’t been paid yet, it can still include that sale as part of its revenue for the  fiscal year, depending on the industry. The $1 million means nothing, then, in terms of its ability to pay bills and dividends and meet payroll.

Cash flow can tell a truer story because it excludes all the non-cash items and adjusts for accounts receivable. It represents only the cash that has come into a business during the year, and it gives you a better idea of a company’s ability to pay the bills. In the above example, cash flow would show you that the $1 million hasn’t come in yet. Also, if there’s fraud going on, oftentimes cash flow is where you’ll be able to detect it. If earnings are constantly going straight up and cash flow is not following it, this might raise some red flags.

Now, I want to caution, this doesn’t always mean fraud is taking place if earnings rise for a year or two and cash flow doesn’t follow. But if you see a trend of rising earnings but deteriorating cash flow, then you might want to start asking some questions.  

So what’s your outlook for the rest of 2018?

We don’t try to time the market at the Oxford Club. Rather, we focus on trying to find great opportunities—stocks that are undervalued or that we expect to go up because of momentum or fundamentals—and manage risk.

Having said that, I don’t see any reason to expect a market correction at this point. The market has so far shrugged everything off—trade wars, outrageous presidential tweets, higher interest rates and more. It seems the market wants to keep going higher, so we’re going to continue to try to ride it higher, too.

 

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There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

Cash flow is the total amount of money being transferred into an out of a business, especially as affecting liquidity.

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