AWM Insights Financial and Investment News

To understand investing, you must start with ownership and lending. You can use your money to either buy ownership or lend it to borrowers. Investors are either owners or lenders, anything else is a speculator.   

Ownership

Participation in profits, growth, cash flow. You own the future of the business for good or bad.

A stock, mutual fund, or ETF is your claim to the assets minus liabilities, but most importantly the stream of future profits. 

Lending

Loaning out money in exchange for fixed payments and eventually a return of your initial investment. 

Individual bonds, bond funds, or bond ETFs do not entitle you to the growth of a company. But in exchange, if the company goes out of business, you have a higher claim on the company’s assets than stockholders (ownership).

EPISODE HIGHLIGHTS:

• (1:05) The very first principle of investing. 
• (1:53) Ownership versus lending. 
• (2:25) Ownership is a claim to the company’s profits. And that means risk if the business does poorly.
• (3:30) Your equity in the business is assets minus liabilities and the future profits or cash flows from the business. 
• (4:05) Companies may not be profitable now but have the potential for large future profits which will make the company valuable.
• (4:42) Real estate equity is the same math as equity in a company. 
• (5:55) Rental real estate and the future income it provides is a great example. 
• (6:15) Discounted Cash Flow explained. This is how you value an asset.   
• (7:20) Valuation is the basic principle of financial markets. It’s the same process no matter what asset you choose to value. 
• (8:08) When it comes to being an owner or lender, you can do it in the public market or private market. The biggest differences between the two is efficiency of information and volume of transactions. 
• (9:08) Private markets have illiquidity issues and slower transaction time to complete a purchase or sale. 
• (9:45) If you own the shares in a public company and they release reports about their expected future cash flows increasing. The value of your ownership has gone up.
• (11:49) Lending is called fixed income and/or bonds in the industry. 
• (12:40) You lend your money in exchange for interest and your initial investment is returned at the time period.
• (13:00) Lenders have a higher claim than owners in the event of bankruptcy so it is less risky to be an owner. But you also are not entitled to profits if the company does extremely well. 
• (13:57) Public Debt vs Private Debt 
• (14:30) A good example is mortgage lenders and the specialization of lenders.
• (16:50) A good example of lending is Microsoft selling bonds to investors. Because Microsoft is so large and with a strong balance sheet. They are able to get a very low interest rate which the market sets. 
• (17:30) Tax treatment is a huge area where lending versus ownership is much different. Ordinary income versus capital gains respectively. 
• (18:30) What about gold, art, and crypto?
• (19:11) It’s not an investment if it doesn’t fall into either ownership of a business or lending. It is speculation.
• (19:11) Gold, art, bitcoin are all speculative because there are no future earnings or cash flow to expect. You only hope to sell at a higher price.
• (19:11) Crypto is not ownership nor lending. Your only return will come from selling at higher price (or lower).

Why risk your hard-earned money? What if you don’t invest because you’re too scared to take any risk? 

Every person has different priorities and investing money to meet those priorities is crucial to not just our happiness but the legacy we leave behind. Just making money for the sake of making money won’t lead to a satisfying investment experience. 

Successful investors put themselves in position to weather downturns so they can capture long-term returns. This allows you to be conservative where you need certainty and aggressive where you need growth. You can tilt the odds in your favor to achieve desired long-term results by adjusting your strategy, optimization, and continuous planning.

EPISODE HIGHLIGHTS:

• (0:30) Why even take your hard-earned money and put it at risk by investing?
• (1:25) Investors that don’t understand the why behind their investing strategy will not have a good investing experience.
• (2:30) Invest to maximize the odds of achieving your unique priorities.
• (2:53) The reason you invest is to take the capital you have today, optimize it, and invest with the odds in your favor to meet the priorities most important to you.
• (3:33) No one will ever be laying on their deathbed remembering how they beat the S&P 500 every year. They will remember the impact their money made on the lives of those they care about.
• (4:40) Everyone has priorities and money should be grown to meet those priorities.
• (5:34) We need money to grow. If not, purchasing power is lost every year.
• (6:50) Warren Buffett’s is no doubt a great investor but the key to creating his billions was actually time. 
• (7:39) Chasing past performance or active management with a good story doesn’t end well for investors. It usually means future poor performance.
• (8:30) Short-term sound bites make for great media but are rarely right. These market predictors are almost never held accountable if they’re wrong. 
• (9:50) Psychology of Money by Morgan Housel tells a great story about how being lucky but lacking investment strategy can literally ruin lives.
• (11:28) Headlines make for great entertainment, but shouldn’t drive your strategy. Pushing the odds in your favor for success will keep winning over the long-term.
• (12:00) Be conservative where you need certainty so you can be aggressive where you need growth. This is how you give yourself the greatest chance of success.
• (12:30) No one can predict the future but you can put yourself in position to achieve success over the long term.
• (13:50) Private markets have gained a ton of press but they should always be integrated as just one part of your long term strategy. 
• (14:55) A protective reserve provides the financial security to take compensated risk and target higher expected returns.
• (15:56) Wall Street firms are creating private market products to sell to investors as an asset gathering tool.
• (17:25) Private markets are not a panacea of great returns. There will be good years and bad years, the key is to stay the course for the long term.
• (18:20) Plan for the plan to not go according to the plan. Adjustments are necessary and part of any good process. 
• (18:20) Financial structure, including a protective reserve in place, allows the power of the markets to grow your wealth over the long-term. The power of the markets has been one of the greatest wealth drivers in human history.

Money is such an important part of our lives, impacting mental and physical health. With so much information available immediately and through so many sources, sticking to the data of what works for a good investing experience can be difficult.

Zoom out and look at your big picture first. This will always help focus on what’s actually important and to ignore or block the things that don’t actually matter with a wider perspective.

EPISODE HIGHLIGHTS:

• (1:45) Why is money even important? Why do people jump to invest before looking at the big picture? 
• (3:20) With so much information out there, why is it so hard to filter out the bad?   
• (4:05) The data and evidence for a good investing experience is out there. 
• (5:23) Why do we invest? This is the first step to understand your big picture.
• (5:55) Everyone’s personal experience with money is different and defines how they behave in the future with their investments.
• (7:05) To help our clients, we reframe and guide to the long-term, to multigenerational growth of wealth. 
• (7:45) NFT boom and Opensea. Is this a “sure thing” to invest in? 
• (8:45) Nothing is certain in investing. No one can predict the future. If there is no risk there would be no return for the investor taking that risk.
• (9:30) Theranos and Elizabeth Holmes were seen as a great investment at the time. It ended with investors losing everything and Holmes convicted of fraud.
• (10:30) OpenSea’s valuation is very high. If you were to invest, keeping the allocation small and part of a bigger private investment portfolio is how you would do it. 
• (12:00) Statements like “crypto is going to change the world” should trigger you caution reflex.
• (12:45) Be careful getting caught up in the flashy returns. Return back to what will give you the best chance of achieving long term wealth.
• (13:30) Not investing in private markets isn’t the right answer either. Proper allocation to private markets is where you can seek big returns, when done the right way.
• (14:17) At the end of the day, what are you trying to achieve. Determine your priorities and the investment decisions become simple.
• (15:20) Investing is to make money but many investments will do that. Next week will cover how to do it most effectively.

Financial Structure is a household’s entire net worth, human capital, and tax rate evaluated in a comprehensive and holistic framework.

No matter how many different accounts you have, you only have one effective tax rate. 

A portfolio is only one part of your Net Worth. Other assets should not be ignored.

Human Capital, often the greatest asset on a personal balance sheet, should also be counted.

Priorities are everything you want to achieve in life and the financial structure should be tailored to achieve those outcomes.

EPISODE HIGHLIGHTS:

• (0:40) Markets are struggling and have finished down for three out of the last four weeks. 
• (1:03) The Federal Reserve has pivoted to be more “hawkish” and is speeding up the end of QE and signaling faster interest rate hikes.   
• (2:40) The Omicron variant is having less of an impact on the market as it is proving to be less deadly than previous variants. 
• (3:25) HSBC and Wells Fargo are settling currency trades between each other on the blockchain. A great tangible benefit and use case for the blockchain. 
• (4:05) Reddit has filed for an IPO and will go public early next year.
• (4:15) The Build Back Better bill currently in Congress is not going to pass before the end of the year. Joe Manchin has shut it down and will be pushed to January. 
• (5:20) Fed Chair Jerome Powell has publicly said he can’t predict interest rates. 
• (7:10) Financial Structure is the big picture of one net worth, one effective tax rate, and knowing the value of your human capital.
• (8:25) Planning is an ever present item. Waiting until the last minute means you most likely have already lost out on the opportunities.
• (9:00) Roth Conversions and Backdoor Roth strategies. 
• (9:30) Mutual funds are required to pay out their capital gains in the fund. These distributions can sometimes be massive short term capital gains.
• (10:35) Turnover in funds, meaning they are churning their holdings through frequent buying and selling can mean a huge tax bill.
• (12:15) Because of the reporting, no one really sees the tax drag this causes for investors.
• (13:15) Tax loss harvesting is a strategy to bank losses to offset future gains while staying fully invested.
• (13:50) A dynamic trading system allows the opportunities to be exploited throughout the year and doesn’t wait until an arbitrary date.
• (14:40) Integration with tax planning, investments, financial strategy, insurance, and estate planning keeps.
• (15:40) Many times tax preparers don’t understand tax loss harvesting and many other financial planning strategies.
• (16:15) Donor Advised Funds and giving appreciated assets maximize impact for both you and the cause you care about.
• (17:10) Instead of selling and donating cash, gift the shares directly to the DAF and receive a deduction for the value of the appreciated asset.
• (18:40) A Donor Advised Fund explained.

Fundamentals are the science of investing. The data and evidence prove that long-term investors that stay tax-conscious win over the long term. Smart diversification, managing emotions, avoiding media pumping fear and greed, and letting markets work for you is the proven way to invest for wealth. 

Gambling and speculation will always be more “fun” for the risk-takers. It is also a good way to have poor returns, high taxes, and at worst, destroy your wealth. For every home run to be flaunted in the media there are hundreds of strike-outs. 

Risk and reward are always related. There is no free lunch. There are no shortcuts to build wealth.

EPISODE HIGHLIGHTS:

• (0:28) News: US Inflation at highest level since 1982. Unemployment dropped to lowest level since 1969. 
• (1:56) Starbucks employees at a location in Buffalo voted to unionize.   
• (3:19) SEC Chair, Gary Gensler took aim at SPACs and the risks they pose to investors.
• (4:20) The indexes are near all-time highs which is hiding the carnage of many speculative stocks. Many are down more than 50% from their highs. 
• (5:31) Are you a long-term investor or are you gambling to hit a home run.
• (6:03) There are over 6,000 different cryptocurrencies. Picking the few winners is too risky to bet your financial future on. 
• (7:17) The fundamentals of an investment are the science and logic behind it. This drives a future value that should be your gain.
• (7:55) Crypto makes huge claims that are a stretch to ever be realized.
• (9:15) Crypto is only one use of the blockchain and it's possible to not even be the best use of the technology.
• (10:20) You can apply the same logic picking crypto to stock picking. 
• (11:00) Over Allocating to too few companies or too few cryptos can unnecessarily risk your wealth.
• (12:00) If you have your core priorities taken care of, then you can take speculative risk. You can take chances on low percentage opportunities with massive upsides. Because if you lose it all, your financial security is not in jeopardy.
• (12:47) Markets have been said by some to be overvalued for the last decade. If you had acted on that information waiting your returns would be terrible.
• (13:20) Valuation data doesn’t correlate with forward returns. If they did, it would be easy to outperform the market.
• (14:20) Media never goes back to see if they were right with their predictions from the year before. Keep a look out for all these fortune tellers heading into the New Year.
• (15:30) Market valuations are high but that knowledge doesn’t help you with forward returns.
• (16:38) Speculating is fun when it comes to fantasy football, sports gambling, and casinos. Building generational wealth with science and data removes the uncertainty of hoping to get lucky.
• (17:45) The media loves to rile up investors predicting gloom and doom. They also feed greed. This is their business model. Your advisor should cut through the noise they create and give you the clarity you deserve.

To get the best returns in Private Markets you need to have an advantage. Do you have more information or uncommon expertise about the company? Can you add value to the company to improve their chances of success? Do you have the time and team to evaluate 1000s or deals a year. 

The best firms keep winning for the same reason Alabama dominates College Football. The best talent, coaches & players,  want to go there. This success breeds more success. It is the same in venture capital.

EPISODE HIGHLIGHTS:

• (0:28) News: Omicron and faster Fed tapering is causing volatility in the market. 
• (1:26) Inflation has moved from being transitory to more persistent according to the Federal Reserve. .   
• (2:56) MLB Players have been locked out by MLB Team Owners. Until an agreement is reached, the MLB 2022 season is in jeopardy.. 
• (3:03) Money has been pouring in to Private Investments amid strong performance. 
• (5:31) Private markets, unlike public markets, have information asymmetry which can cost novice investors a lot of money.
• (7:37) To get the best returns in Private Markets you need an advantage. You need to have better information or the ability to add value along with Capital. 
• (9:51) About 60% of venture capital companies go belly up. 
• (11:11) The winners keep winning when it comes to Venture Capital. 
• (11:30) The best venture capital firms are like the elite College Football Teams. The best talent wants to go there and they get the best deals. It’s a self reinforcing cycle. 
• (12:41) The best venture firms are seeing 1,000 pitches a year. They only pick a few. 
• (13:37) Expected returns in the future - resetting your expectations
• (15:29) Private markets are not the most tax efficient asset class
• (17:25) Invest in the best in the private markets or just take your money and go right back to the public 

To be able to invest like a pro for the long-term you must adopt three investment philosophies:

Let Data Drive Investment Decisions 

This means ignoring chasing the hot stock or crypto of the month and following the data that produces the best returns. 

Anyone that has chased COVID stocks this year like Robinhood, Peloton, or Teladoc has lost a ton of money. The same is true for those chasing the recent fund performance of Cathie Wood and ARK ETFs (tickers: ARKK, ARKF, ARKG) which have massively underperformed the market index. 

This same story plays out year after year in the markets and the costs to investors is painful to watch for experienced advisors. A new generation of investors gets sold the same false promise of shortcuts to wealth every market cycle. 

Stay Long-Term Focused

Time is the greatest superpower in investing. Being patient and ignoring the short-term is always easier said than done. It allows an investor to ignore their FOMO in the greed cycle of markets and suppress their panic when the fear cycle follows. 

Planning early and understanding how time can greatly benefit your wealth is not easy to understand for anyone yet it is and will always be the biggest driver to wealth creation. 

Customized Diversification Matters

Excessive concentration creates unnecessary risk for generational wealth. Investing according to priorities reduces uncertainty while creating a tailored and superior investment experience.

Risk tolerance questionnaires or age based investing philosophies completely ignore what’s important to you. This type of investment advice isn’t proper planning and does not set you up to create generational wealth. 
 

EPISODE HIGHLIGHTS:

• (0:47) News: The Omicron variant of COVID has created uncertainty which rocked global stock markets on Friday. This is a big dose of uncertainty and markets react quickly to these type of events.     
• (1:39) IPO stocks so far this year are below their initial listing price. This is to be expected as the data on buying IPOs is not good for investor’s returns.   
• (3:10) Jack Dorsey has stepped down as CEO of Twitter. 
• (3:45) Being data driven is an investing superpower. This is a principle of investing that should be a part of your philosophy. 
• (4:14) Long-term focus is another superpower. It is natural to overly focus on the short-term. Reframing your mindset to care only about the long-term can be learned and will produce better outcomes.    
• (5:06) You can’t solve heart disease with a weight loss pill at age 65. You achieve better results by starting at a younger age with establishing discipline.
• (6:57) Why is it so hard to appreciate the long-term.
• (7:57) A portion of your portfolio should be invested in very risky assets to grow.
• (8:20) Dave Ramsey telling people to invest everything in equities and nothing in bonds without knowing anything about what they want to achieve in life is idiotic. 
• (9:48) Time is the superpower of investing. Years and years of compounding returns creates exceptional results. Determining what “long-term” is for you is the key. 
• (10:25) Don’t wait to plan. Use time to your advantage. 
• (10:54) How time helps with FOMO (Fear of Missing Out).
• (12:51) Taking your entire salary in Bitcoin is dumb. Excessive concentration of your wealth is never smart and will end badly.
• (14:07) Just owning bonds isn’t customized diversification. High quality bonds owned to meet a priority is how a customized portfolio removes uncertainty. 
• (15:58) Anyone that tells you they can pick the next Tesla is full of it. 
• (17:00) Whether luck or skill created massive wealth is irrelevant. The risk to your priorities is too great to stay over-concentrated in 1 or 2 stocks. This applies to anyone including founders, venture capitalists, stock pickers, early crypto adopters.
• (18:45) An investment philosophy built with your priorities as the goalpost and invested according to those priorities removes the worry and a more satisfying investing experience along the way to generational wealth. 

The gifts you buy for other people define a lot about your relationship with money. Are you compensating for an insecurity? Are you showing off?

Success with your money starts with your relationship with your money. What are you trying to achieve with your assets or income? Is your portfolio customized to your specific priorities and vision of success?

Understanding the cash flow game creates the extraordinary opportunity to generate enough passive income to enjoy the lifestyle you desire for life. Understanding your own relationship with money is key to winning this cash flow game.     

EPISODE HIGHLIGHTS:

• (0:57) News: unemployment continues improving, Rivian has now gone public with a market value greater than Ford Motor. Staples Center becomes Crypto.com Arena. The Build Back Better Plan has passed in the house and moves to the Senate.     
• (2:23) This holiday season is predicted to be the highest retail sales on record.   
• (2:55) Relationship with money and the why behind what kind of gifts you give to other people. 
• (3:58) A great book that explores the complex attitudes and emotions that people have with money is The Psychology of Money by Morgan Housel.
• (4:58) Success with money has very little to do with how smart you are. Many intelligent people struggle with money and saving. 
• (5:55) “The gift is for the giver” is an old saying because there is usually an interesting why when it comes to what people give each other. 
• (7:00) Winning the cash flow game is essential to financial success.
• (7:44) Simplifying the ways to generate income: human capital, intellectual capital, social capital. 
• (8:20) After taxes you can spend it, give it or save it. It’s that simple. 
• (8:45) “The cash flow game is making sure you can get enough into the savings and growing category so that the earnings from that, the passive income from that, can pay for the lifestyle you’ve created” -Brandon Averill. 
• (10:10) Winning the planning aspect early sets you up for the future. 
• (11:25) The breakdown we see is a portfolio not invested to achieve the priorities of the client. Each portfolio should be invested according to the priorities and values of the client.
• (14:28) Visit our website to request a free copy of Morgan Housel’s book Psychology of Money. 

Congress is set to pass a large spending bill before the end of the year that will increase the tax bills of many. Tax planning is something every athlete deserves incorporated into their financial advice, yet few are actually getting.  

An advisor that is making recommendations without looking at the tax impact is costing you money every single year. This is unnecessary wasted wealth that you can never get back. Tax planning is easily the most missed opportunity and it’s up to clients to demand it.

Tax loss harvesting, backdoor Roth conversions, avoiding unnecessary capital gains, accelerating, or deferring income, asset location, individual 401ks, and duty days are just some of the menus of options when it comes to managing your tax bill. If you ignore tax planning, you are choosing to pay unnecessary taxes. 

EPISODE HIGHLIGHTS:

• (0:51) News: Rivian went public at a targeted $54 billion valuation but due to strong demand debuted at a $91 billion valuation.
• (1:17) Pfizer has created an antiviral pill that reduces the risk of hospitalization from COVID and is pending FDA approval. 
• (2:00) Economic data for the economy is slowing and Congress is debating Biden’s Build Back Better Plan that will increase taxes and is an increase of around $2 billion in spending.
• (3:55) Backdoor Roth contributions have been talked about being eliminated. This has been a great tax planning strategy over the last decade for those that took advantage.
• (5:17) Tax planning and investments should go hand in hand. Wall Street brokers cannot legally give tax advice. 
• (6:05) Tax loss harvesting and how it benefits the client. 
• (7:30) Systematic planning over the long-term adds up to significant tax savings and large account balances.
• (8:28) Understanding tax planning when gifting can increase the impact for the charity and save taxes for the client.
• (9:00) Goldman Sachs gives zero thought to tax planning. Unnecessarily realizes gains to the detriment of the client. 
• (9:45) Separation of duties doesn’t work in the real world. Your CPA isn’t checking the work of your investment advisor. Find an auditor if you want to catch fraud. 
• (10:54) Chase Carlson and other fraud attorneys evaluate if you are being taken advantage of.
• (11:34) The wealthiest families have a multi-family office that integrates tax strategies and investments. 
• (12:18) Even if you're not ultra-wealthy, an independent RIA that integrates tax planning will be to your benefit. 

Public markets are efficient, meaning they price in all public information almost instantaneously. 

This was proven once again this week when Peloton reported earnings and immediately dropped 25%. Then, Zillow reported they were exiting the house flipping business and promptly dropped 22%. These were unpredictable news events that were immediately incorporated into the stock price. 

Private investments do not have this same efficiency. Those with the right access to the best investments have a huge opportunity to create and sustain generational wealth with such an illiquid asset class.

When it comes to the public markets, success is achieved by investing in a diversified and data driven way across the world, and always staying long-term oriented.   

EPISODE HIGHLIGHTS:

• (0:32) News: Braves win the World Series. Payroll number beats expectations and lifts the market higher. Very good news for the US Economy, which also brought unemployment down to 4.6%. Central banks have begun pulling back some stimulus and normalizing operations.     
• (2:27) Earnings season is underway. Peloton, a COVID winner, dropped on weak forward guidance.   
• (3:45) Zillow is exiting the house flipping business after losing money and is unloading their current inventory of homes.
• (4:55) Efficiency of markets and news is immediately priced into the stock price.
• (6:30) Public markets are efficient whereas private markets are not. 
• (7:30) Company forecasts are often wrong just as the analysts that follow the stocks are often wrong. They both cannot predict the future. 
• (8:15) Zillow, with their large amounts of data, could not predict future home prices enough to make a profit.
• (09:40) Investors with access to asymmetric information, like exists in the private markets, creates an opportunity to earn higher returns. Only inefficient markets can provide that.     
• (10:20) Realtors almost always tell clients their homes will appreciate but they are just guessing.   
• (10:42) Penn National Gaming stock crashed because of one person in the company, Dave Portnoy. 
• (11:00) The lesson at the end of the day is that for long term investors are rewarded as the world economy continues to grow. That is the bet with the highest chance of success.
• (11:33) Invest across the world, in a data driven and thoughtful way. If you can do that, ignoring the short term noise, you will have success.