Bonds, unfortunately, are nowhere near as exciting as the actual 007. Or at least, they’re not supposed to be. Maybe a Roger Moore 007 though, those were all pretty boring. A bond is an IOU - a promise to give your money back in the future with periodic fixed interest payments in the meantime. They used to be issued as actual certificates, with little coupons that you would clip off every six months and turn in to receive your interest payment, but alas, those days are gone.
So, if you get your money back (let’s call that amount “100”) at some point in the future and in the meantime are collecting interest payments, how much is that bond worth? 100? 102? 96?
Last month we started big - economic theory big. Now we’re going to look at stocks and bonds. More specifically, what are they and how do you know what they’re worth?
As beach season gets into full swing, we’ll try and keep your brains from going all washed-up-jellyfish. And we’re starting big - economic theory big.
Have you heard of Modern Monetary Theory (MMT)? It’s all the rage right now and is completely absurd. Why, you may ask? Good question! Let’s take a whirlwind tour through the history of economic theory to find out.
Welcome to 2019! The depths of winter have arrived, and with them temperatures in the US that are literally colder than Antarctica. But fear not dear readers! We have prepared this January newsletter with you in mind, and hope you will find the content stimulating enough to keep you warm.*
Have you heard of Modern Monetary Theory? If not, you just did. And you’ll probably hear more of it soon, because it’s like an Acme Portable Hole for the government’s Wile E. Coyote. It just can’t help itself.
The World Cup this summer threw off our newsletter scheduling a bit, as school is now well in session and we have yet to do a “What is…?” newsletter. But fear not! This one has been a long time coming - we tried looking back to see which previous newsletter promised this current one, but stopped when we looked back through four to no avail. But better late than never, as they say, so without further ado: what exactly is inflation?
There was an article in the June Tybee Island Beachcomber that mentioned in passing the use of cats as currency on Tybee, and how it made everyone wealthy until inflation came along. This may or may not have actually happened here, but something similar definitely did happen with pepper in China, and tulips in what was then the Dutch Republic, and paper money in Weimar Germany, Zimbabwe, present-day Venezuela and others. So let’s let the proverbial (or possibly literal?) inflationary cat out of the bag and take a look at it.
We have carved out some time in between World Cup group stage matches this month to bring you part two in our Price is Right series - how to value stocks. Those of you wanting a refresher on the time value of money and bond valuation before we move on can find yourselves suitably refreshed here.
Facetiously, stocks are worth what someone is willing to pay for them. Unlike bonds, there is no intrinsic starting point for valuing stocks. With bonds, you get your money back at maturity (hopefully), so it’s fairly straightforward to use that as an anchoring point and work backwards to a reasonable valuation. Stocks, on the other hand, have neither a maturity date nor an expected future price, which makes them more or less impossible to actually value. Not really kidding about that. There are textbooks upon textbooks upon college courses upon certifications all trying to impart some standardization to stock valuations. If you want to make the big bucks on Wall Street, you go work for an investment bank and spend all your time trying to figure out how much companies are worth.
But saying “whatever, it’s all made up anyway” two paragraphs into a note isn’t particularly satisfying. So let’s take a look at common methods of valuation, and then we’ll see if we can learn anything about what those methods have to say about current stock market valuations.
Ever look at that dollar in your pocket and wonder, “What’s so special about this piece of paper?” Remember when that bill used to say “Silver Certificate” across the top instead of “Federal Reserve Note”? What about “Gold Certificate”? If you answered “yes” to that last one, a very happy 90th birthday to you, since those stopped being printed in 1933.
Well that’s the question for today: what’s the difference between sand dollars and dollar dollars, and why is one investable and not the other? The short answer is there aren’t enough sand dollars. The longer answer is...
If you’ve never spent a Sunday watching Antiques Roadshow on PBS, your life is missing something. Especially the British version of Antiques Roadshow. The gist of the show is that a bunch of appraisers travel around and set up shop in various small towns here and there, and then people bring all of the stuff that has been lying around their attic for the last 25 years to see if it’s worth anything.
It has even spawned its own hilarious meme. At its core, Antiques Roadshow works for two reasons: one, it’s a big play-along treasure hunt so that everybody can be a couch Ray Dalio (fun fact: not only does Ray Dalio run the world's largest hedge fund, his submarine just found a $17B shipwreck treasure); two, it answers the age-old question of “that’s worth how much?” that has also fueled such long-running classics as The Price is Right and House Hunters.
In this month’s note, we are going to try and answer the question of “that’s worth how much?” with regard to stocks and bonds, a long running soap opera that’s on from 9:30am to 4pm daily (weekdays, anyway. That aren’t federal holidays.)
For those of you who perhaps missed it, ATI Wealth Partners is being featured in a series on young investors in USA Today. The first two articles came out earlier this month, you can check them out here and here.
What now? Is it time to sit back and rest on our laurels? No! It is time to forge an empire. And by “forge an empire” we mean “bring back the summer educational series!” Those of you who were with us this time last year hopefully remember the What is…? articles on cash and stocks that we wrote last summer. If not, feel free to click the links and refresh your memory, we'll wait.
(starts mental countdown.....3.....2.....1....) Ready? Good.
This month we’ll be looking at options - if you’ve talked investing with us at all you’ve probably heard us mention options at some point. We think they are a valuable tool for both conserving and building wealth (especially given the current market environment), and are something we regularly use in our clients’ portfolios. Hope those pencils are sharpened. This is summer school 201 now, it’s time to kick it up a notch.
Knowing these terms will help an investor navigate the bond universe. By Jeff Brown Contributor
Welcome back to the second installment of our “What is…?” series. Last month we took a look at cash, and the role we believe it should play in your investments. Yes, it is now September, yes summer is almost over, no we don’t blame you if you’ve forgotten last month’s note. Feel free to read over it again and refresh your memory.
This month we are going to look at “securities” - specifically stocks and bonds. Now, the term securities is fairly broad and encompasses basically anything you can or could buy and sell in a financial market. Mortgage-backed securities (MBS) were all the rage a decade ago. As were other acronymed things like CDS and CDO. We considered giving in-depth explanations on these, but feel that by and large Margot Robbie has it covered, so suffice it to say that securities can be almost anything.
The two most common types of securities, and what most people are usually referring to when they talk about investing (us included), are stocks and bonds. So let’s start with what exactly these things are that you may be buying, and how they end up in your portfolio they way they do.
Have your red pill ready? Good. Let’s go.
As the calendar turns over to August and kids and parents alike start gearing up for “back to school” mode, we thought we’d join in the fun and present a two-part “What is…?” series. This week we’re going to look at cash money, next month will be securities (stocks and bonds). What exactly are these things? Why do you want them, and what does it mean to invest in them?
We decided to start with cash because, believe it or not, it is the most controversial of the three. It’s fairly unanimous that one should hold stocks and bonds in a diversified portfolio, with some semantic arguments over the specific percentage allocated to each. But what about cash?
Most advisors you ask will probably say that no, cash is not an asset class. They’ll talk about “cash drag” on a portfolio (the idea that money not invested is missing out on returns, so the overall portfolio underperforms the market), the inability to keep up with inflation (the concept of inflation and how it is measured deserves its own newsletter someday, but broadly speaking the idea that your $100 will buy you less in the future than it will today), and the fact that cash doesn’t yield anything (no dividends, statistically zero interest in the current low rate environment). They’ll talk about better options to protect your portfolio if you’re afraid of it losing value - long/short strategies, absolute return funds, managed volatility, options strategies, non-correlated diversification blah blah blah. (As an aside, there’s possibly also a self-serving aspect to it that usually won’t get mentioned - how do you justify charging management fees on cash? Why wouldn’t a client just keep it in the bank or under the mattress for that matter? It’s basically the same thing. In fact, some firms don’t let their advisors charge a management fee on cash. So...incentive much to keep your money invested?)
We like cash as its own asset class within portfolios. Sometimes a little bit. Sometimes a lot bit. But before we get into that, take the red pill for a second and follow us down the rabbit hole of...What is money?
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