Top

2013 June Newsletter

Paul Sutherland, CFP®
By: Paul Sutherland, CFP®

The Love Trade

Family, friends, fame and fortune are all “zeros” according to a Chinese saying. They have no “value” unless there is a #1 in front of them, which represents health. If this ancient quote were to be updated with the latest science, it would incorporate the latest studies on happiness and longevity, concluding that “strong social relationships” (i.e., love) not only increases happiness, but increases longevity by 50%.

I have not gone off my “rocker” – the love trade exists. It is not only recession proof, it actually benefits from inflation. The love trade has consistent demand, barriers to entry and a moat around it. What is the love trade? It is a trade that benefits from the expressions of romance and actions that nurture relationships. While the best thing we can give to those we love is our time, receiving gifts of gold, silver, platinum, diamonds (pink or regular) flowers and jewelry are always appreciated. As most readers know, we are large shareholders of FTD Flowers through our holdings in United Online, which also helps us “find our friends” through classmates.com.

In this article, I want to discuss the symbols of love that are enduring, traditional and constant – namely, precious metals and diamonds. This is a timely subject as prices of commodities like gold and silver have been extremely volatile of late. Recently, gold prices crashed from a high of $1,790 per ounce reached last October, to a low of less than $1,350 earlier this year. Silver went from $35 last October to a low of $20 a month ago.

Mining companies have not been immune to these price fluctuations either. Rio Tinto, a mining conglomerate that owns, among other assets, the mines that produce rare pink diamonds has seen its per-share price drop over the last five years from $118 to around $45 today. The price drop is startling when you consider its current earnings will most likely match its earnings of five years ago. Dominion Diamond company of Canada, which is known for its “fair trade” brand of diamonds that are mined sensitively in Canada, has seen it per-share price drop from more than $45 in 2007 to around $15 today. Most gold and silver mining stocks are off nearly half since last year’s high. Based on the past six months or so, prices have not look very “lovely” for the love trade investor. But if the love trade investor makes just a few assumptions, I think he or she would be a calm, wise buyer or precious assets instead of a panicky, sweaty-palmed seller of the inputs to the products that produce the gifts that express enduring love.

 

An Enduring Opportunity

Here is why FIM Group views the recent drop in prices of gold, diamonds and mining shares as an opportunity and not a reason
to panic:

The diamond industry, from exploration to mining, processing and retail, employs around 10 million people, and jewelry sales, up threefold in past 25 years, are around $72 billion annually. Strongest new demand for diamonds is coming from newly industrializing countries like China and India. It is estimated that up to one-half of gem-quality diamonds are for wedding rings.

Diamond demand and supply are at near equilibrium, and if demand increases as Asia’s billions get married – that should carry prices up. In FIM Group portfolios we own Rio Tinto and Anglo American, both of which are off dramatically from their all-time highs, but are well-managed, diversified companies that have significant revenues from diamonds. Both pay cash dividends in excess of 4% and both are committed to responsibility, ethical business practices, transparency and care for all of their stakeholders – from their employees to the environment.

Companies in the mining industry are at bargain prices. All three FIM Group portfolio companies that produce diamonds are on average down by around two-thirds of their highs from four or five years ago. However, just because a price is down does not mean it is a bargain. With our love trade investments we believe that the current share prices of these profitable companies are not properly reflecting the value of their assets, cash flows and earnings. With Rio and Anglo we are paid a nice 4% dividend yield while we wait for the market to realize the true intrinsic value of these companies.

Gold is more than a financial asset. Gold demand increased worldwide when prices crashed through the floor. Consumers from Nebraska to Hong Kong bought physical gold in the form of jewelry, coins and bullion as precious metal prices collapsed. In April, the U.S. Mint ran out of its smallest gold pieces. Shops in India and China were out of inventory. Ultimately, supply/demand drives prices – when prices decrease, demand usually picks up, prices rise and a new cycle begins. Every cycle has around 2,300 counter-cycles.

Gold prices decrease, consumers buy more, mines quit mining in their marginal or high-cost mines, investors hold/buy and don’t sell, and prices drift up once again.

Long term we see currencies down, paper assets growing less popular and the onset of inflation. Worldwide, central banks have been lowering interest rates and printing money in an attempt to revive their economies. Ultimately this leads to destabilization of the countries’ currency. When currencies are weak, the assets that tend to flourish and hold value are great companies and investments like gold, silver, diamonds, energy and currencies of more stable countries like Switzerland. For example, the Japanese Yen which Zach Liggett discussed in last month’s newsletter, is down more than 20% against the U.S. dollar since last October. While gold since last May is down around 11% in U.S. dollar terms, it is up more than 15% in Japanese Yen. In Japan, those who held gold as their country destabilized their currency were winners – those investors who held CDs and yen fixed-income assets were big losers as their currency lost purchasing power.

We like businesses with sustainable characteristics and solid fundamentals bought at great prices. Famous investor Warren Buffett often discusses buying businesses with a moat around them – gold, silver, diamonds and such can’t be “printed.” And I am sure that few men would have romantic success with this line: “I bought this fake diamond and had it mounted on a gold-plated engagement ring just for you. Want to marry me?”

 

The Numbers

Based on earnings and cash flow to price ratios, precious metal mining stocks are trading at prices near those of the global financial crisis of 2008. Since then, gold companies have been and are still making money and paying cash dividends. According to investment manager and newsletter writer Frank Holmes at U.S. Global Investors, for more than the past 15 years, the world’s top 20 gold companies have increased their dividends by a compound annual rate of 16%. Solid gold companies that are low-cost producers, make less money when gold prices are at $1,400 per ounce, but they still have cash flow, income and sales.

At FIM Group we try to stress test the companies we invest in to see how they would do as a business if prices were to, for example, go to $1,000 per ounce. Most investors worry about the price of the investment instead of the value of their investment, and that creates opportunities. John Templeton said, “Opportunity exists where perception is different than reality.” We believe the reality is that demand for metals will remain consistent, that countries will print money and that the stocks in these companies are true bargains. We think the investors are focusing on “paper” gold in ETFs, futures and such and missing the reality of this market. Commodities like gold, diamonds and energy are not paper. While these hard assets will fluctuate in value like crazy due to perception and the emotions of the fickle, short-term investor, that volatility just gives us the opportunity to buy great assets at great prices.

If you are interested in learning more about the effects of love on health and longevity, read this article from Psychology Today: http://www.psychologytoday.com/blog/feeling-it/201304/the-best-kept-secr...

Paul Sutherland will be conducting a webinar
on Thursday, June 27th at 4:00pm EST

“Currencies, Inflation, Politics and Prosperity.”

Investing is not a zero sum game – wealth is both created and transferred from the silly, trend-following investor to the savvy, thoughtful, realistic investor. The webinar will focus on understanding how the forces that tend to destroy wealth such as inflation, currency devaluations and such can also increase it. 

Space is limited. Reserve your Webinar seat now at:
https://www1.gotomeeting.com/register/918244833

Renée Egelski, CFP®
By: Renée Egelski, CFP®

Discovering the Value of Money

While on a recent trip, I tuned in the “’90s on 9” channel on satellite radio. With each new song that played, I chuckled at the memory the particular song evoked. As if I had never left the ’90s, I sang along effortlessly, not missing a word. You’ll likely recall the one-hit wonder from the group Calloway called “I Wanna Be Rich.” As I listened to the chorus – “I want money, lots and lots of money. I want the pie in the sky. I wanna be rich!” – it struck a chord with me, and I pondered how this song and many others like it had influenced my view of money.

The desire to have a lot of money was instilled in me at a very young age. Reasons for acquiring more were inherent in the abundant media surrounding me each day, and still are today. Effective marketing makes sure we are not lacking ideas to add to our never-ending shopping lists, not to mention the presence of planned obsolescence. Growing up, I understood that money was what was going to get me what I wanted, and therefore as long as I had money, I’d be able to do and get whatever I wanted. As I matured from a naïve elementary student to a working teenager, I soon realized that my wants had to come after my needs, and that more often than not, the money I earned only covered my needs, and left nothing to fulfill my want list. So, therefore, I needed to earn more money, and there began the vicious circle: the more I earned the more my needs and wants grew, and the more money I needed.

I don’t think it was any coincidence that I happened upon a career in financial planning. I have always been passionate about making the right decisions with my money, to a fault actually, as the goal of maximum utility has always made decision-making a very difficult process for me. In addition, the dichotomous relationship between living simply and the desire for more faces me every day. They say that money can’t buy happiness, but as much as I want to agree with that, I cannot fully succumb to that idea. I would argue that material possessions may not buy happiness, but financial freedom does. Money can serve us, or we can be a servant to money. Understanding our life goals and how money can assist in fulfilling these life goals can help us separate our true needs and desires from what we think we need or want for the mere sake of wanting “lots and lots of money” just to acquire more.

Keeping the realities of life and the understanding of social pressures at the forefront of the financial planning process helps us avoid the consumption trap, and allows us to focus on what money really means to us. To rephrase one of my many favorite quotes that hangs on a plaque on my wall at home, “Life is not about the number of breaths we take, but the number of moments that take our breath away.” Life is not about the possessions we acquire, but how we use those possessions to fulfill our life’s meaning. We can define and reach our financial goals with a monetary number, but what’s a number without a purpose for having reached it and a plan for how to spend it? If we’re not careful to recognize when a desire is frivolous, we can easily lose sight of our deepest aspirations.

Getting to know our clients and helping them find the deeper meanings of their monetary goals is the aspect of financial planning that I enjoy most. For me, it’s not just about the monetary values of getting from point A to point B, but the meaning for the path, and the experience along the way. Here at FIM Group, the financial planning process is not merely about the numbers, it is a values-driven process. We care about what’s important to our clients. As Paul said in last month’s newsletter about ethics being an integral part of our investment process, we take a holistic approach to financial planning because “It’s the right thing to do.”

Financial Planning Corner: Health Savings Accounts

A hot topic in the financial planning world these days is the expected astronomical cost of health care in retirement. A recent study from Fidelity Investments showed that the cost of health care for a 65-year-old couple retiring this year will be nearly $250,000 over their lifetime. Clearly, planning to accumulate enough money to pay these costs should be an integral part of any financial plan. One of the most taxefficient tools to save for future health care expenses is an Health Savings Account (HSA).

An HSA is a trust established for the purpose of paying qualified medical expenses to the account beneficiary. HSAs are typically established through an employer’s benefit package.

To be eligible to establish an HSA, you:

  • Must be covered by a high-deductible health plan. The minimum annual deductible for individual coverage is $1,250 ($2,500 for family) to be considered high deductible.
  • Must not be covered by any other plan that is not a high-deductible health plan.
  • Must not be enrolled in Medicare.
  • Cannot be claimed as a dependent on another person’s tax return.

The aspects of establishing and funding an HSA account can be quite complicated, so understanding the various characteristics of an HSA is important. Important HSA issues include the timing of contributions, the amount of contributions and the documentation of expenses.

Here is a quick primer on the characteristics of an HSA:

  • Determine whether you are eligible (refer to the 4 points above).
  • You must be eligible on the first day of the last month of a tax year to make the maximum annual contribution to the HSA.
  • Maximum contributions for 2013 are: Individual coverage – $3,250; family coverage – $6,450. The maximum contribution includes employer contributions, if any.
  • Individuals who reach age 55 by the end of the tax year can contribute an additional $1,000.
  • Contributions are pre-tax (adjustment to income) and need to reported on annual income tax returns.
  • Contributions to the HSA can be made up to the income tax filing date for the reporting tax year. This is typically April 15 of the year following the reportable year. If you make an HSA contribution for the previous year, make sure you identify the contribution with the HSA custodian as a prior year contribution.
  • Qualified medical expenses for the account beneficiary, dependents or spouse paid with HSA funds are not taxed.
  • Qualified medical expenses are generally the same medical expenses that qualify for the medical expense itemized deduction and include premiums for long-term care and medical premiums during periods of unemployment, including COBRA.
  • Most banks and credit unions have accounts specifically for HSAs.
  • Some brokerage and mutual fund firms also have “variable” HSA accounts for those who don’t expect to need the HSA for several years. •    HSA contributions are not incometested.

The favorable income tax characteristics make the HSA an ideal tool for saving for the rising costs of medical expenses. Like the 401(k), HSA contributions should be annually maximized, whenever possible, to effectively build a fund for future medical expenses.

(Source: U.S. Master Tax Guide Wolters Kluwer 2197b Health Savings Accounts)

For additional information on Health Savings Accounts or any other financial planning questions, please contact your FIM Group advisor.

Hawaii

444 Hana Hwy,
Suite D
Kahului, HI 96732
p: 808.871.1006
f: 808.871.1433

Michigan

111 Cass Street
Traverse City, MI 49684
p: 231.929.4500
f: 231.995.7999

Wisconsin

1837 E. Main Street
Onalaska, WI 54650
p: 608.779.0300
f: 608.779.0304

Request Info