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Thursday, March 5, 2015

What Icarus Can Teach You About “Return-Free Risk”


Brad Christensen
Yellowstone Partners Wealth Management

Most of us know the story of Icarus, the Greek mythological figure who flew too close to the Sun. But do you know the whole story?

Together with his father, Daedalus, Icarus was imprisoned in the labyrinth by King Minos of Crete. Unwilling to submit to captivity, Daedalus gathered feathers and wax and made wings for himself and for his son.

As they prepared to escape, he offered Icarus two points of advice. His first caution was the one we all know, “Do not fly too high, for the heat of the sun will melt the wax and leave you wingless.” But the second, which time seems to have forgotten, was this: “Do not fly too low, for the waves of the ocean will overtake you.”

Icarus soared too high and felt the heat of the sun remove his wings before plunging to his death. If he had flown too low, perhaps we’d more easily recall the second warning, but that’s not how it happened.

In conversations with clients almost every day, I often discuss the balance between risk and reward – between flying too high and flying too low. Every investor wrestles with risk and return. It’s immensely frustrating that return only comes to those who expose themselves to risk, and it doesn’t seem greedy to desire a solid return on investment without the potential to lose, but in today’s low interest-rate environment this is reality.

With yields on CDs, money-market funds, and bonds near historic lows, we’ve entered into a time when cash-equivalent assets suffer from the same type of danger Icarus would have been exposed to had he flown too low. Warren Buffett, one of the world’s great investors, has dubbed it “return-free risk.”

In a February 2012 article for Fortune magazine, Buffett detailed his investment philosophy, specifically, why he prefers stocks over gold and bonds for the long-term. In it, he divides the universe of investment opportunities into three separate classes.

1. Currency-denominated assets (bonds, CDs, money market funds). These are common investment instruments and are commonly denoted as “secure.” Some subsets of this class have historically been described as offering “risk-free return.”

2. Non-productive assets (oil, precious metals). Investors generally accumulate these assets on the premise that they are undervalued relative to an unknown future value. The principal problem with this class is that there is no mechanism for these investments to procreate.  Derivation of gain will come only from supply/demand re-pricing.

3. Productive assets (farms, businesses, real estate). Whether owned in the public market or in private, productive assets are generally capable of yielding annual return which may be reinvested or returned to owners.

Even from their definitions the productive asset category has a clear advantage over the others in the sense those assets are procreative. Consider the farm example, which may be capable of producing a variety of crops each year while still maintaining an intrinsic value of the land, which may fluctuate based on supply and demand.

Buffett is high on productive assets for good reason, as is demonstrated by the graphic below, an asset category historical return “quilt” that plots return statistics for each category over the past 20 years.  Even from a glance at the averages, it’s clear to see that the return profile favors the third class.

The four boxes mopping up the bottom of the list hail from the currency-denominated and non-productive categories. While these investments have their place in short-term investing, when it comes to an extended time-frame, this is precisely when the notion of “risk-free return” flips to the more accurate depiction of “return-free risk.”

When it comes to selecting an overall investment allocation, emotional schools of thought vary, from purchasing the previous year’s top loser (in hopes of a drastic recovery) to purchasing the previous year’s top performer (in hopes of a repeat performance).

Yet, a more rational approach is to build a diversified portfolio – consisting of productive assets such as small/mid/large cap stocks and real estate investment trusts (REITs), which will ultimately provide strong performance balanced with some of the other categories to reduce exposure to the extremes and safely navigate a solid return.

Precisely what Daedalus advised his son.
Click on the chart for a more detailed look at it and click here for even more information.

Wednesday, March 4, 2015

Tobin Cleaning & Restoration plans March 11 grand opening

Tobin Cleaning and Restoration has scheduled a March 11 grand opening of its new new location at 3466 E. 20th North, one block north of the intersection of Ammon and Lincoln roads.

The Greater Idaho Falls Chamber of Commerce will be hosting a ribbon cutting at 11:30 a.m. A free lunch will follow, and there will be a superhero photo booth, spin-to-win games and a chance to meet the staff.

The company is also unveiling the new Esporta is4000, a machine designed to clean almost any soft
item, even the ones your dry cleaner won’t touch.

“Our new location will allow Tobin Cleaning & Restoration to provide expanded services
to our customers. We are fortunate to serve extraordinary families and businesses who have made this new building possible,” said Rhett Judy, Tobin’s owner.

In business since 1972, Tobin Cleaning and Restoration provides service to homes and businesses affected by fire and water damage or mold, also those in need of specialized restoration services. The new location features a flooring showroom, courtesy of Stapleton Flooring, which allows customers an opportunity to conveniently choose their new flooring and arrange flooring restoration services.

For more information, visit www.tobinrestoration.com.

D.L. Evans schedules March 18 grand opening for Ammon branch

D.L. Evans Bank has scheduled March 18 as the date for the grand opening of its Ammon branch,  2634 East Sunnyside Road, in the Sandcreek Commons Center. The event begins at 4 p.m.

The branch is a full-service location offering a full range of banking products and services, President and CEO John V. Evans said in a news release.

The bank was founded in Albion in 1904 with $25,000. Today, D.L. Evans Bank has total assets of more than $1.2 billion, with 26 branches in Idaho.

The Ammon branch was designed under sustainable guidelines by Erstad Architects and built by Construction Solutions Co., a local general contractor in Idaho Falls. Byron Wiscombe will serve as vice president branch manager, the release said.

Lientz appointed to head new INL directorate

Amy Lientz
Amy Lientz of the Idaho National Laboratory has been appointed to head a newly formed directorate: Partnerships, Engagement and Technology Deployment.

In this position, she will be in charge of the lab’s communications and governmental affairs, technology deployment, and university programs and educational outreach.

Lientz has more than 20 years of experience in program management for the energy and environmental industries. Before she became the INL’s director of governmental affairs and communications she was a vice president of CH2MHill.  She is a graduate of Boise State University in environmental science and holds a master’s degree from the College of Engineering at the University of Idaho.

Tuesday, March 3, 2015

Are low gas prices here to stay a while?


I’ve been writing gasoline price stories for decades, and one thing I know is that no matter how much your sources say the numbers at the pump are related to supply and demand, most Americans think something shady is going on.

A year ago, who would have dared to think regular unleaded would be selling for less than $3 a gallon. Yet as I’m looking right now at the GasBuddy app on my phone, I see local prices are generally in the range of $1.90, with $2.15 reported at the Chevron on Grandview. Last week I gassed up my Subaru for $1.64. Horror! I expect very soon to see Facebook friends posting, “The fix is in!”

Is our era of good feeling coming to an end? This is a time of year when we see gas prices start to rise, typically peaking around Memorial Day. Conventional wisdom and past experience suggest our respite is likely to be short-lived, but Bradley Olson at Bloomberg Business dares to suggest that low oil prices could be here for a while and perhaps quite a while.

A growing consensus is emerging from the likes of BP Plc, the International Energy Agency, shale wildcatters and even the Saudis that a near-term recovery to $100-a-barrel crude isn’t in the cards. Instead, expect a range of $50 to $60 for at least the next few years.

When oil prices plunged sharply in 2008, they rebounded almost as quickly. Several months ago, industry and government touted the same U or V-shaped recovery this time out. On closer examination, a new factor in the marketplace — shale oil — has changed their minds.

“This is the new normal,” Dennis Cassidy, co-leader of the oil and natural gas practice for consulting company AlixPartners, said in an interview. His group sees an L-shaped chart that could extend for three to five years.

Unlike other petroleum formations, the nature of shale — with multiple inexpensive, short-lived wells — means producers can stop and start drilling on a dime. On the one hand, this allows them to quickly cut costs in a downturn; on the other, every time prices tick up, so will their output — renewing downward pressure on prices.

To read the full story, follow this link: L-shaped Oil Recovery Flattens V-shaped Market Optimists. And, as they used to say at the ESSO station, "Happy motoring!"