David Fleer
Bristlecone Value Partners, LLC
12301 Wilshire Blvd., Suite 320
Los Angeles, CA 90025 USA
Work 1-877-806-4141
www.Bristlecone-VP.com


Reiterating Why Diversification Matters

September 24th, 2018

You’ve heard us repeat it regularly: although the keys to reaching your financial goals are very simple, implementation is not necessarily easy. The most important rules are: spend less than you earn, invest your savings regularly, keep your investment expenses low, and diversify your portfolio. Today, we’ll focus on this last rule, and consider the recent outperformance of U.S. stocks versus foreign stocks and bonds.

First, an important concession:  Bill Gates, Jeff Bezos, and other billionaires did not get that rich by diversifying. Rather, their wealth sprang from extremely concentrated exposure to a few incredibly successful investments. Diversification is not a formula for building extreme wealth fast, it is a recipe for achieving financial security and maintaining it. Diversification improves outcomes for most investors. Why is that? Read the rest of this entry »

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The Leap of the Century (On the Nature of Records)

August 24th, 2018

Nearly 50 years ago, nine months before Neal Armstrong’s “giant leap for mankind,” another American made his own giant leap for the record books. The scene was the 1968 summer Olympics in Mexico City. The date was October 18, 1968.

Through the 1960s—almost as though engaged in a remote, long-running battle of the Cold War—American Ralph Boston and Soviet Igor Ter-Ovanesyan had steadily traded world records in the long jump and pushed the record distance out by a full 5 inches. By the time of the 1968 Olympics, those two shared the record: 27 feet, 4.75 inches. Read the rest of this entry »

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Q2 2018 Review: Tax Cuts = Buyback Rocket Fuel

July 25th, 2018

Domestic stocks rebounded in the second quarter–led by small cap, energy, and technology shares—but the broader S&P 500 index still ended the quarter below its January peak (up less than 3% for the year).  Investor sentiment during the first half was mixed. Initially, optimism abounded that the stimulative impact of last December’s tax cuts, combined with the longest monthly job expansion on record, would push stocks higher.  Subsequently, rising geopolitical tensions and escalating trade disputes have clouded the picture, and increased the potential for negative unintended consequences. Read the rest of this entry »

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How Much Can I Safely Spend from My Portfolio?

June 16th, 2018

This is among the most common questions we receive from clients, many of whom are either already retired or nearing retirement. It is an important issue and one that often prompts investors to seek out professional help from an advisor.

But first, let’s lay out some basic terminology:

What is the ‘net spending rate’?

This number is defined in relation to your assets. First, add up all your annual expenses from last year. Make any needed adjustment(s) to get a more realistic amount if you feel that some items were over or understated. If you were still working, adjust for that as well.  Subtract from these expenses any income that you receive from sources other than your portfolio: social security benefits, annuities, pension, rents, alimony, etc. The difference between the two is your net spending, i.e. the amount you’ll need to draw from your portfolio. The net spending rate is simply this number expressed as a percentage of your portfolio’s value. Read the rest of this entry »

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Has the Housing Market Peaked (Again)?

May 21st, 2018

Last week brought news that the average 30-year mortgage rate increased to 4.61%, the highest level since 2011.  This should not be particularly surprising–mortgage rates are highly correlated to the benchmark 10-year U.S. Treasury bond yield, which has more than doubled from its record low nearly two years ago:

Some background: After years of buying up bonds on the open market in order to keep interest rates low by injecting cash in the economy (“Quantitative Easing”), the Federal Reserve began winding down its balance sheet late last year, allowing a managed amount of bonds to mature each month without having their proceeds reinvested in new securities (as had been the prior custom).  This policy shift represents a sizable incremental drop in demand for treasuries and a withdrawal of liquidity.  At the same time, the federal budget deficit is expected to increase to about $800B in fiscal 2018, due to the net impact of tax reform legislation passed in late 2017.  Consequently, the government will have to issue more debt to cover the deficit, increasing the supply of government bonds.

The combination of lower demand for treasuries, and their increasing supply, puts downward pressure on bond prices (and inversely, upward pressure on interest rates).  Meanwhile, economic growth remains robust (aided by the aforementioned fiscal stimulus), unemployment is at multi-year lows, and consumer confidence is high.  These factors increase the likelihood of future inflation, which is the key assumption underlying long term rates.

Nevertheless, housing and related services is an important driver of economic growth, constituting nearly 1/5th of U.S. GDP.  And mortgage rates, of course, are a key driver of housing affordability.  Therefore, news of mortgage rates hitting a 7 year high naturally has pundits casting a wary eye toward the housing market.  For now, home prices continue to appreciate (by a national average of about 6% over the past year), despite higher interest rates.  Explanations abound, including: a strong job market, wage growth, and perhaps most importantly, the low level of available inventory, particularly within the market for “starter” homes.

While annualized new home construction has rebounded quite a bit from the recessionary nadir, it is still below the long-term average of the past several decades:

Particularly in many large coastal cities (i.e. the ones experiencing strong job growth and net migration) the pace of new construction has failed to keep up with population growth.  A recent Politico article highlighted the struggle of even relatively affluent millennials to find affordable housing in Seattle, thanks in large part to restrictive zoning laws.  More than half of the city’s land is explicitly reserved for single-family homes, impeding development of higher-density buildings which could otherwise add much-needed inventory to the market.  Another interesting subtext to this story is the inter-generational conflict between the incumbent homeowners who favor low density (mostly older baby boomers) and the younger cohort of prospective first-time buyers (mostly millennials), who prioritize affordability.

But there are even more subtle ways in which zoning laws and urban planning decisions underpin housing scarcity and bolster home prices.  As this video from Vox points out, the U.S. contains an estimated 8 parking spots per car.  This is due to local zoning laws which commonly mandate a certain allocation of off-street parking spaces per 1,000 square feet of new construction (the ratio varies by the intended use of the building).  This investment in “free” parking makes driving more convenient, but also requires that an inordinate amount of space (an estimated 30% of urban areas) is devoted to vehicles which spend only a fraction of each day performing their intended use.  The true cost of this parking subsidy is measured not only in land use (where it crowds out potential housing stock) but also in the way that it drives up development costs for all new buildings (forcing developers to recoup costs associated with vast underground garages, for example).

The important takeaway here is that while mortgage rates are a key determinant of housing affordability, they are not the only factor impacting housing prices.  In the housing market—as in most markets—myriad factors impacting both supply and demand interact to set prices.

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