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2015 January Newsletter

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

Principles + Optimism + Commitment

The young monk carefully pulled each young sprout out of the earth, just a bit, to try to help them grow just a bit faster ... or so the story goes that has been used for years by Buddhist monks to teach their students the importance of patience and having faith in nature.

Of course, the next day the young monk found a field of wilted, browning plants ruined by his impulse to meddle in the natural flow of nature.

In the financial world where my team and I make a living, the lessons of patience and “faith” in the natural ebb and flow of business fundamentals are lessons that I find increasingly valuable. I’m blessed to have cut my teeth in an era when some of history’s greatest long-term investors (my investing monks, so to speak), such as Warren Buffett and Sir John Templeton, turned such lessons into timeless investing principles. I’ve found that over my 30+ years of professional investing, a combination of: 1) consistently applying these investing principles; 2) approaching each day with a general sense of optimism; and 3) remaining committed to investments throughout market cycles has been a simple formula for long-term investment success. 

Timeless Principles

Among the many nuggets of investment wisdom I’ve gleaned from Warren Buffett over the years, perhaps the most important has been the simple concept that “price matters.” This principle, which has long been a core belief at FIM Group, proved especially valuable during the Internet bubble when we refused to speculate in hot Internet companies whose stocks traded at absurd prices relative to their financial fundamentals (many didn’t even have revenues to report!). Like Buffett, our team invests only when the price is right, and we spend significant time analyzing the valuation levels of both existing portfolio positions and new ideas.  

We also monitor a wide array of broader market valuation tools, including one the financial media has dubbed the “Buffet Indicator.” The Buffett Indicator (See top of page 2) simply takes the total market value of a stock market and compares it to a country’s gross domestic product (GDP). In a 2001 Fortune Magazine article, Buffett described this measure as “probably the best single measure of where valuations stand at any given moment.” The higher the ratio, the more expensive stocks are and vice versa.

Below is a chart from dshort.com, which shows the long-term data for the Buffett Indicator against the S&P 500. Today’s levels certainly indicate a level of optimism toward U.S. stocks surpassed only once before during the tech bubble. As you might imagine, indicators like these are consistent with our team’s view that it is presently difficult to find U.S. stocks that meet our quality and valuation criteria.

Sir John Templeton taught us the importance of investing globally. Why would you pay $3 for a unit of earnings in the U.S. when you could pay $1 or $2 in another country? When you look at the great companies in Japan, England, Germany, Singapore, Norway and other developed countries, it is illogical that these should sell for much less or much greater valuations than those in the U.S. GM and Ford need to be compared to Toyota and other global brands, not just their U.S. counterparts. John Templeton said it was “common sense” to be global. He also said, along the same lines of Buffett, that it was common sense to avoid overvalued investments and embrace undervalued investments. He champion-ed the approach that opportunity exists where perception is different than reality, and was successful because he had a long-term view and did not follow the crowd. Templeton also believed that values mattered and embraced an ethical approach to investing.

Optimism

“Human history becomes more and more a race between education and catastrophe ... Yet, clumsily or smoothly, the world, it seems, progresses and will progress.”
– H.G. Wells

Investors today certainly face no shortage of challenges. And only five years removed from a brutal global financial crisis, it is easy to understand why high levels of pessimism continue to persist through financial markets. I’ll be the first to admit that when I hear news of accounting fraud, political shenanigans, environmental abuses, mistreatment of workers and the like, it’s easy to get a bit bummed out. But investing requires that we seize an inner optimism and take a “glass half full” (at least) approach. Otherwise, why would we ever trade our cash for an ownership interest in a company and the expectation of a positive return for our effort some time down the road? 

Fortunately, there are innumerable sources of optimism for those who bother to look. Take the BIG PICTURE trends in human progress GLOBALLY: higher life expectancies, lower infant mortality, higher literacy and education levels, higher incomes per capita, and lower poverty and extreme poverty, just to name a few. Despite centuries of wars, natural disasters, economic depressions and ravaging waves of disease, we’ve continued to find a way to improve our lot. And at the individual company level where we invest our client funds?

We continue to find no shortage of companies around the world with great prospect for increased value whether it be via industry growth (e.g., health and wellness), market share gains (organically or via acquisition) and/or simply better management (e.g., organizational restructurings).  

Commitment

Obviously, timeless investment principles and a healthy dose of optimism only get you so far. Just thinking about investing or all the great places to make money in the world won’t translate to investment returns. We must be able to take portfolio action. Translating investment philosophy and process into executed investment decisions and sticking with your convictions through tricky investment environments is where the rubber hits the road. As Warren Buffett puts it, “Investing is simple, but it is not easy.”

At times, staying committed to an investment idea seems like a walk in the park. Since deciding to invest against the crowd last year in a wide variety of fixed-income closed-end funds, our thesis has worked out almost exactly as planned. Interest rates moved our way (lower), fund discounts normalized (narrowed) and distribution yields came in as expected. The result was double-digit returns for many of our fixed-income positions in a world of historically low rates. If only every investment were so smooth!

We’ve certainly felt a bumpier course this year in deep value equity ideas like our U.K. supermarket and natural resources stock positions. As we’ve discussed in various communications this fall, we bought most of these at prices more than 30% off their highs. We’ve clearly been early and our short-term performance during the last four months of the year has certainly been temporarily impacted by further erosion of investor sentiment toward these stocks. While we’ve made some rotations in these areas and executed some tax loss strategies, we are generally sticking with our conviction that the companies we own, now trading at distressed prices, will ride through this turbulence and deliver solid returns with time. 

Our general objective is to be as committed to long-term investments as we can be (of course, provisioning for client cash needs). This is especially the case today when the return on cash is negative after inflation. We know that sentiment toward companies (especially those trading at distressed prices) can change in a heartbeat. When it does, market valuations can explode to the upside. We also know that trying to time a perfect entry point is a fool’s errand and that we must not fear being early into a position.

Life Expectancy at Both Total World:

World Bank GDP:

The Istory of FIM Group

2015 begins FIM Group’s next 30 years of investment management. I fully suspect that we will continue to deploy a formula of Timeless Principles + Optimism + Commitment to achieve continued investment success. American author
E.L. Doctorow writes that, “History is the present. That is why each generation writes it anew.” I’ll paraphrase and say that history becomes istory, or is-story, as we relate it to our current world and current conditions. The istory of FIM Group is based on a set of principles derived from some of the world’s investment legends like Buffett and Templeton. It is guided by a general optimism in the world we live in. And it is driven by a commitment to invest through all varieties of investment environments and staying true to our convictions. 

John Bresnahan
By: John Bresnahan

Nordic November Narrative

For nearly a decade, I was the analyst/strategist of a top private wealth management team at UBS in Honolulu. Hopefully my background in philosophy and work experience will help me to hone a unique perspective and add value to the clients of FIM Group. 

“Instead of noblemen, let us have noble villages of men. If it is necessary, omit one bridge over the river, go round a little there, and throw one arch at least over the darker gulf of ignorance which surrounds us.”
    – Thoreau

Finland is home to one of the most educated populaces on the planet. A typical Finn’s education spans 19.7 years, first amongst Organisation for Economic Co-operation and Development (OECD) countries. Across reading literacy, math and science, Finland ranks third behind Japan and Korea. Studies have shown that Finnish students are less impacted by their socio-economic background, with far lower than average disparity in relative test results (sixth amongst
OECD nations). 

Keep in mind that modern Finland, as we know it, is rather new. The Finnish people have not even experienced the centennial celebration of their independence (December 6, 1917). Over the last century they have made the leap from an agrarian society, quickly moving into manufacturing and more recently a service economy.

The ultimate stage of an advanced economy, purportedly, is one based on knowledge and wisdom, with wisdom being the practical variant of knowledge. Where better to build such an economy than the home of highly educated, motivated and conservative peoples. 

A seemingly benign topic for many in the West, membership in NATO is the center of heated debate in Finland. Most Finns do not want to be caught between the West and Russia. However, when looking at the ramifications of recent sanctions, it could be argued that the West has set Finland’s near-term fate. Geography is important here, as Finland shares an 800-mile border with Russia. St. Petersburg is a mere three and one-half hours by train from Helsinki (the Finnish capital). Hence, its desire is to remain as neutral as it can, all the while being a good member of the European Union. 

When people talk about economies evolving, in Finland you have a situation where you have no choice … it must innovate, move forward, set its sights on the future, and execute.

The tribulations have not been few, nor have they abated. Nokia’s fall from glory, the forestry industry’s slide and proximity (leverage) to Russia have all exacted a steep toll in recent years. What were once strong tailwinds have become gale force headwinds. 

Finland never came out of the 2008/2009 “Great Recession”; it has muddled through the last six years. That it is able to roughly generate 0.30% of Global GDP with 0.07% of the populace (during these times) speaks to the ingenuity, toughness and flexibility of the Finnish people. 

Not a soul has been spared from the fallout that the economy has seen as a result of tectonic shifts in industry. Additionally, urbanization and the further concentration into major population centers (e.g., Helsinki), a trend since the 19th century, continues to highlight challenges. Smaller municipalities are facing a double threat to revenues, an aging populace (one of the oldest in Europe) and dwindling, working-aged inhabitants. 

The Nordics are well-known for their social welfare systems. Norway has vast energy reserves to lean on, and Sweden has a larger and more robust economy. The people represent Finland’s only innate strength. While reform in the Finnish welfare system is being seen, changes have thus far been minimal; they will need to be more substantial going forward. Thankfully, those managing companies have been made all too aware that complacency can be lethal. Changes have been made/are being implemented at the corporate level as I write this.

In some cases, those with a new perspective (and few attachments) have been brought in. Any sense of pride has been shelved, and there is a tangible notion that whatever must be done for the nation as a whole must/will be done. To bring in outsiders is a significant move for a nation that has seen a historical push-pull between Sweden to the West and Russia to the East.

Corporations have led the charge, and now we await change in/from government. Those currently in power, having been there for the mere sake of power, recently hung on by a thread. Elections in the spring look to be a grand first mover. While Finland will likely see a long, dark and cold winter, there is a strong sense that spring will bring with it more than mere flowers. 

For every challenge there is an opportunity. Understanding their circumstances the Finns are not standing idly by. The government has set up organizations (e.g., Tekes) to fund promising startups. A recent analysis highlighted Finland
as fourth in Europe (behind France, Germany and the U.K.) for startups. This was highlighted at the Slush conference in Helsinki – more than 14,000 people from some 79 countries, representing thousands of companies (e.g., IBM, Samsung, heiaheia.com) were present. 

In the Finnish you have a people who are quite humble; they do not like to waste time with an intellectual joust. Here, you see action. Perhaps these are the fruits of an even-keeled people and a younger economy.

For the entire month of November I made my home Helsinki (some 10,000 miles and a 12-hour time change away). Traveling throughout the Nordic region I met with corporations and individuals, and I sought to learn more about their countries, peoples, economies, histories and cultures. 

How did this come to be? This all began when Paul and Zach identified a few companies whose valuations, and stories, had piqued their interest. Thank you, Russia. After broadening the search to their respective countries and rationalizing a list of ideas against where we are allowed to invest, the focus shifted. For a month I had been researching companies, ultimately looking at every public company in the Nordic region (and many in Eastern Europe). Quickly, I came to realize that a majority of the more compelling entities were located in Finland. 

Once on the ground I was completely immersed in Finnish society. Somehow, eventually, I even managed to blend in. Free Wi-Fi at the local café, sprinkle in ample reading on the day’s companies, and of course sorting out where I was headed … and off I would go. 

Fredrikinkatu? Kirjatyöntekijänkatu? Mannerheimintie? Check. 

Most meetings would start in a similar fashion – they asked me what I would like to discuss. The answer was simple. First, I would ask that they assume that I knew nothing about what it is they do. Second, I asked them to please enlighten me as to what they believe the more salient points are (regardless of what analysts usually harp on). You can learn a lot when you listen and save your questions. After a couple hours, I would go on my way, collecting my thoughts as I searched for empirical evidence that Finland was viable as an investment. For one month I repeated this daily, and in the end it felt more like I was leaving home than returning. 

>span class="s1">For a society that is often characterized as reserved, perhaps introverted, I was amazed at how honest/true and open people were. There are no layers that you need to wade through in order to discern reality. Sure, when you read the paper or inquire, deeply, as to the state of things … yes you will hear negatives. But I don’t know that this is something unique both thinking in time and space. I don’t know that you hear these things for any reason beyond that you are looking for them or that others feel that is what you are looking for! I’ve heard that the Americans are more concerned with the state of affairs in Europe than the Europeans. I would have to agree.

To borrow Zach’s words, I would like you to think of me as “… a new member of the FIM investment team, whose first tire-kicking trip was one where I literally traveled halfway around the world to kick tires.”

Nokian was already an investment, and with my arriving during the first snow, how apropos to be meeting with a winter tire company. Analysts can have their blinders on, ridiculous tunnel vision, not looking out more than a quarter or two. Investors need to look out past the horizon. We want to know where management plans on taking Nokian (not where they have been). 

Of course, present challenges were discussed, but the real focus was on the future … how/would the company grow? Clearly, recent market action shone a value lens on them, but what of time? Would we be looking at a 10-year turnaround story, or are we talking more along the lines of three to five years? Had the company found a base? Would it continue to be viable if its current situation went on longer than even it imagined it might? Would investors be compensated to wait? How would this value be realized for investors?

These are all questions that I hope will be answered for you in our Investment Spotlight. In short, though, the answer is “yes.” Herein lies great opportunity, Nokian and Finland will triumph.

After dozens of meetings I am confident that a portfolio entirely of Finnish companies would be viable, at least, in a simpler world. Over the coming months I look forward to elucidating processes, strategies and opportunities for you.

Alice McDermott, CFP®
By: Alice McDermott, CFP®

Focus, Practice, Implement 2015

As I begin my journey into a new year, I feel obligated to reflect on years past and be mindful of areas I might change or improve. I’m not talking short-term mentality, but rather a longer-term change in behavior. Sure, everyone has their own “New Year’s resolutions” – lose weight, become more active, treat others with more compassion and kindness, give up an unhealthy vice. Kudos to those who succeed, but unfortunately most fall back to their unwanted habits and give up saying, “I’ll try harder next year.” My personal goals entail becoming a better cook (Hey, my husband’s a great cook!) and incorporating yoga into my too-crazy-at-times schedule. More important, rather than doing these things on a “when-I-have-time” basis, my goal is to “practice” a change of behavior and mindset, because as our teachers and mentors have always preached, “practice makes perfect!”

It’s tough to change! In my case, for example, I have a bad practice of staying up late, which leads to waking up with just enough time to get to work, which leads to a long work day, which leads to no time to cook a healthy meal and, in many cases, exercise. I think this behavior started back in college … pulling those “all-nighters” to get a project completed on time. In other words, this is a behavior I have had for a very long time! As we all have learned at one time or another, “change” does not happen overnight – change is behavioral and a mindset. The only way to get better at something is to practice the desired behavior. We’re not going to be perfect the first, second, or even third or fourth times … we must remain vigilant, give ourselves a break and continue striving for improvement. Overall, I believe I’ve improved over the years, but I want to do better!

Other areas of change may have nothing to do with exercise, eating well or changing a behavior. Rather, they may have to do with complacency. As a financial planner, I see all too often individuals and couples without their financial house in order. They may be extremely successful in other areas of their lives, but rather than getting a will or trust, purchasing life insurance to protect their family or saving more for retirement, they put it off saying they’ll get to it “eventually,” or when they “have more time.” Due to this complacent behavior, the focus shifts to the short-term, because what’s in front of you always takes priority over what lies ahead. And because of this lack of planning and focus on the long-term, one may go off-course, become misdirected, perhaps over volatility in their portfolio, what’s going on in the “market” or what’s going on around the world. I do my best to encourage clients to turn off the “noise,” live their lives, try not to put too much emphasis on areas they have little control, and put that energy into the areas they can … whether it’s a healthier lifestyle, building a business, following a passion or getting their financial house in order. 

At FIM Group, we believe cleaning one’s “financial house” includes asking yourself the following:

  1. Have I reviewed my life, house, car, umbrella and business insurance policies lately?
  2. Has there been a major change (marriage, death, divorce) that might require meeting with an estate planning attorney or changing beneficiaries?
  3. In the event I am disabled or die, will my family be okay financially?
  4. Am I putting as much as I can into retirement and savings?
  5. Is my investment strategy still appropriate given my timeframe to retirement? 
  6. If retired, are my investments earning a good income relative to other investment options?
  7. Have I met with my Certified Financial Planner lately? (We recommend annual reviews)
  8. Am I reading the monthly newsletters and signing up for webinars to educate myself?

Like New Year’s resolutions and behavioral changes, implementing an annual check-up is a good habit, one that may require “practice.” Given recent volatility in certain asset classes, those with a messy financial house typically revert to a short-term focus and become nervous and reluctant to stay the course. At times they ask themselves if they (or FIM Group) are doing the right thing. FIM Group has been managing clients’ wealth for 30 years with a great track record – over the long-term. If you’re one to focus on the short-term (daily, weekly, monthly, even annually) you will feel disappointed at times. Markets are cyclical and returns are compressed (positive or negative), so when uncertainty sets in, we must ask ourselves, “Is my financial house in the best shape possible, and what can I do to change my focus from a short-term mindset to a long-term one, so I don’t cause harm to my financial future?” Styles of investing go in and out of favor and, in many cases, are based on greed and fear. But depending on the conviction and philosophy of the manager, the “out-of-favor” periods can lead to fantastic buy opportunities which, over the long-term, can produce very favorable results. 

My goal for 2015 will be to “practice” good behavior (a better sleep schedule, yoga, healthier eating), with the end result being a lifestyle that comes naturally ... easy ... and not one I must consciously work on. Looking to the future, the reward will be feeling rested, less stressed, and a healthier and happy wife, mother, daughter, sister and, yes, co-worker!

What behaviors or changes will you practice and implement this year? 

Hau’oli Makahiki Hou!
(Happy New Year!)

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