2022 Benchmark Returns: 9/30/2022
MSCI All Country World Index: -25.63%
S&P 500 Index: -23.87%
Morningstar Moderate Target Risk Index: -20.91%
US Aggregate Bond Index: -14.61%
By Kristin Grant, Financial Advisor Associate & Director of Financial Education
As a California resident, this year I’ve witnessed gas prices rise as high as $7.00/gallon, along with staggering increases in rent and groceries. Believe me when I say shrinkflation is a real concept. Some essentials are scarce or not even on the shelves. As an investor, this year has been incredibly volatile, with some of my favorite stocks taking a tough beating. Inflation has certainly done a number on us. The Federal Reserve’s attempt to stimulate the economy after the global pandemic certainly has its effects.
Inflation can occur when there is a rise in consumer demand but a shortage of supply. During the pandemic, trillions of dollars were pumped into the economy which provided additional purchasing power for consumers. This sudden influx of money consequently drove consumer prices up. In turn, the US and international supply chains were strained, just as consumer demand rose. The Russian invasion of Ukraine also caused a disruption in oil prices, manufacturing, and shipping. These factors gave rise to the inflation we are experiencing today. Some corporations and landlords see inflation in the headlines and have sought opportunities to not only keep up with it but also try to profit from it.
The U.S. Federal Reserve Bank’s (aka the Fed) primary goal is to uphold the dual mandate of keeping inflation in check and unemployment low. But inflation rates and employment rates tend to have an inverse relationship. When the unemployment rate is low, the economy is stimulated as consumers have more money to purchase goods which causes prices to rise. It is a difficult balancing act. The Fed’s monetary policy can either be described as “hawkish” or “dovish”. The Fed is “dovish” when striving to sustain employ ment and “hawkish” when striving to manage inflation. With the inflation rate at a 40-year high, the Federal Reserve has imple mented the most aggressive hawkish measures we have witnessed in decades. This year, the Federal Reserve has raised the federal funds rate six times. In just six short months, the rate jumped from 0% in March to 3.75-4%. The staggering four consecutive hikes of 75 basis points, have many consumers on the edge of their seats and bracing themselves for the long-awaited recession.
Some critics tend to perceive hawkish measures of the Fed as neg ative or even malicious. But it helps to think about what a hawk
symbolizes – strength, determination, and most importantly, pro tection. The Fed is the hawk attempting to slow down inflation be cause high inflation is a greater threat right now than slightly high er unemployment. The Fed is focused on avoiding hyperinflation, even if it means raising rates too fast in the meantime. Hyperinflation could cause even more detrimental effects and trigger a depres sion which would take longer to recover from than a mild recession.
The well-known investing mantra, “Don’t Fight the Fed”, is a phrase that was coined by Martin Zweig in his book, Winning on Wall Street. He explains how the stock market reacts to the Fed eral Reserve’s monetary policy decisions and suggests that you align your investment decisions with those of the Federal Reserve. The advisory team at Regatta surely agrees with his mantra and works tirelessly to find solutions that are in alignment with the Fed’s decisions. Zweig pointed out the risk of making investment decisions contrary to the Fed. Going against the Fed raising rates today would look like a risk-averse short-term investor choosing to invest heavily in tech equities, which we all know are not doing so great right now, rather than assets that preserve cap ital. Another example of fighting the Fed would be if a financial advisor told my grandmother in the last few years, “the rule of thumb is to own high-qual ity long-term bonds in the percent age that equals your age”. The Fed lowered bond rates to such low rates during the pandemic that these traditionally “safe” assets rep resented a lot of risks. If my grandmother followed this advice, her long-term government bonds would be down 20% this year.
The Federal Reserve will likely raise rates again in their final meet ing of the year in December by at least 50 basis points and once more in January 2023. While borrowing costs may be high, there is an even stronger incentive to save. The advantage of a “hawk ish” Fed for investors is you can find more attractive money mar ket rates and bond rates. The money market rates are competitive with returns at 3.25%, but ultra-short corporate bonds and lon ger-term municipal bonds look even better for longer-term savers. So, don’t fight the fed. If there was any time to have a trusted Financial Advisor, now is that time!
We are three quarters through 2022 and the household name growth stocks have taken a beating: Meta -61%, Netflix -52%, Tesla -39%, Alphabet -30%, and Amazon -28% [as of Sep tember 30th].
This is the bad part about growth stocks. They feel so wonderful when they are going up and then one day they face the reality of being valued relative to other assets. Even before their earnings decline, the stocks hit an air pocket called “multiple compression” and come crashing down.
We anticipated this bleak season for growth stocks (albeit, the speed and magnitude has surprised us), and we reduced our hold ings significantly over the past few years, but it never seems like enough. During growth stock bull markets these companies be come more difficult to avoid as they crowd out the value and core stocks in market cap-weighted indices.
Investing strategies or styles run in cycles. Growth stocks do well for several years and then value stocks do well for a new peri od. Growth stocks dominated this last economic expansion from 2010 to 2020, followed by a bonus round of dominance during the 2020-2021 pandemic boom. This chart shows how growth stocks pulled away from core and value stocks beginning in 2015.
the case that luck is not the source of the market beating per formance of a small group of investment managers that all trace their roots back to the teachings of Benjamin Graham & David Dodd. The common intellectual theme of the investors from Gra ham-and-Doddsville is this: they search for discrepancies be tween the value of a business and the price of small pieces of the business in the market.
Buffett enumerates his evidence in great detail and concludes that there are “much inefficiencies in the market” and “market prices are frequently nonsensical”. And he notes that the secret has been out for 50 years (as of the time of the article in 1984) and yet he was not worried about the method ceasing to work. He attributes this to a perverse human characteristic: we humans likes to make things difficult.This isn’t to say that value investing is easy. One of the most difficult things to do is resist FOMO and the thought that “times have changed, so should I.” And growth stock investing feels so good - who wouldn’t want to own the stocks that everyone is talking about?
Now, this also isn’t to say that we should throw the baby out with the bath water. There is a permanent place for growth stocks in a portfolio – even Buffett has come around to the idea that some of the best companies to own rarely become cheap enough to be called a value. But the way to build a portfolio is to take a step back and recognize that these long cycles do exist and the day of reckoning always comes, and the exact time of its arrival is never very clear. So, we diversify and tilt; we want to lean into growth after value has led for a while (2010-2022) and then lean into value when growth has been the leader (2022 - ?).
Now is the time for us to return to Graham-and-Doddsville.This chart shows the lost decade in the US stock market when the S&P 500 lost money on a cumulative basis from 2000 - 2010. Value stocks were positive during this time and handily beat growth stocks. The popularity of investing styles can run in long cycles.
Stocks entered a bear market in 2022 as the Fed began raising interest rates to cool inflation and stock investors lost their appe tite for highly priced stocks, especially growth stocks. As this bear market runs its course, it looks like a good time to reacquaint you with a place called “Graham and Doddsville”. This is a mythical place described in a 1984 speech by Warren Buffett.Every serious investor should read this speech and I will include a link at the bottom of this article. It came to mind a few weeks ago as I was reviewing the horrid growth stock returns and compared them to the best value managers we own and follow. I found myself saying, if people were just more patient and willing to lag the hot stocks, they wouldn’t be subjected to the way growth stocks can come crashing down.
In a 1984 speech at Columbia Business School, Buffett made
Here is a link to the article that was very closely based on Buffett’s 1984 speech: www8.gsb.columbia.edu/sites/valueinvesting/files/
To invest better than most other people, we need to have an edge. There are three types of edges for investors:
1. Informational Edge: This comes from having better quality or quantity of information about companies, the economy, etc. At Regatta, we have great tools that put high-quality in formation at our fingertips, but most information is widely dis tributed in this digital age, so we need another edge.
2. Analytical Edge: This is the ability to better synthesize the mountains of information and distill it down to a credible in vestment viewpoint. Thanks to our MBAs, CFAs, CAIAs, and our decades of experience as professional investors, this is a strong edge for us.
3. Behavioral Edge: Even when armed with high-quality in formation and sound analysis, humans have been proven to make poor decisions due to well-researched psychological biases. At Regatta, we strive to counteract these biases by recognizing them in ourselves, each other, and our clients by constantly reviewing them.
Let’s review some of the most critical behavioral biases from the growing study of behavioral finance.
• Anchoring Bias: If we see a shirt for sale for $500, then we see another shirt priced at $100, it will strike us as rath er cheap. But if we only saw the $100 shirt, we might not consider it to be cheap. People are wired to evaluate infor mation based on recently observed information. This same bias also means that people are slow to make large chang es to their predictions about the future, even in the face of dramatically different information.
• Herding Mentality: The herd mentality has helped humans survive this long by helping us cooperate and mimic one another’s behavior to avoid threats and find resources. However, this mentality works against us as investors. The herd mentality leads certain investments to become very popular which drives them to become overpriced. Over priced investments always fall back to earth without warn ing at some point, devastating the lemming investors.
• Recency Bias: We are naturally programmed to make pre dictions about the future that looks an awful lot like the recent past. When markets have been rising, our brains tell us that this is a good time to invest, and when they have been falling, we think that the markets will keep going low er. To help counteract this, we study the long-term history of economies and investments, looking at centuries instead of just the last few years.
• Overconfidence Bias: The survival of our species has re quired that people wake up every morning feeling that they can take on life’s challenges. People are therefore pre programmed to have an irrationally high dose of self-con fidence. This is all fine and good…if we are not making in vestment decisions. Imagine asking 100 people a random quantitative question (like how many miles is Shanghai away from Anchorage) and telling them to answer with a range (high and low) such that the correct answer is 50% likely to be inside that range. If people were purely rational, about 50 out of the 100 people would answer with a range that contains the correct answer. Only 10-15 people actually will do so! We all need to be aware that our predictions and projections are far worse than we naturally think. That’s why we diversify!
• Confirmation Bias: In this age of social media and web search algorithms, an understanding of confirmation bias is more important than ever. Confirmation bias is our tenden cy to seek out information that agrees with our hypothe sis, rather than information that disproves it. This tendency leads us to deepen our conviction in our original thought, even though there may be an ocean of disproving evidence out there that we simply have not looked for. One trick I use is to intentionally focus on reading research and articles that appear to conflict with my worldview.
By studying our biases and taking specific steps to mitigate them, we can make much better financial planning decisions and achieve better investment outcomes.
Regatta Capital Group has recently opened a new office located in the Jewel of the Valley! If you are ever in Studio City, we welcome you to stop by! 12317 Ventura Blvd Studio City, CA 91604
At its basic level, cryptocurrency is a purely digital currency that uses blockchain technology to create a public, decentralized, immutable ledger. Trans ferring cryptocurrency occurs when the transferor enters the recipient’s public address where the cryptocurrency is to be sent, the transfer amount, and, op tionally, a note describing the transfer. The transferor presses send, and a de centralized network of independent com puters validates and executes the trans action and lists it on the public ledger.
The IRS’s current position is to treat cryp tocurrency as property, not currency, for tax purposes. As a result, when creating an estate plan, it is crucial to view cryp tocurrency through this lens. This means, for example, that such property could re sult in reportable financial gains or loss es, just like real estate (sale price – cost basis = reportable income or losses). Therefore, holders may want to consider making gifts of cryptocurrency to reduce income taxes accruing on their holdings.
The most fundamental risk of this digital currency can be summarized by the ad
age: “Not my key, not my coin.” When you first buy cryptocurrency, you are is sued two keys: a public key, which works like an email address (meaning you can safely share it with others, allowing you to send or receive funds), and a private key, which is typically a string of let ters and numbers, like: JYXsLxHETxL GAghRQdixF4DGzV5ktopu4wjsuVmjC MZ58Yk24r, which is not to be shared with anyone. Without the latter, you cannot make cryptocurrency transactions and prove ownership of your holdings; your digital currency may be forever lost in the ether. Hence, “not my key, not my coin.” Just Google “James Howells” to read about a man who, in 2013, while cleaning out his office, mistakenly threw out a computer hard drive containing the
private keys to what is now worth more than $180 million in cryptocurrency. Like Mr. Howells, who is still scouring the local dumps of Wales for his loot, not setting up a succession plan for your cryptocur rency holdings could mean surrendering significant financial holdings.
When planning an estate, be sure to dis cuss any cryptocurrency holdings you may have or intend to acquire with your advisors. This information will allow your attorneys and advisors to properly draft estate planning documents to permit your fiduciaries to access your digital assets, such as laptops and cell phones, holding the private keys to your digital currency. Furthermore, even if you would provide your fiduciaries with the ability to access your cryptocurrency upon your incapacity or death, failing to document this permission in your estate planning documents could cause your fiduciaries to violate state and federal laws.
Cryptocurrency is here to stay, and Re gatta Trusts and Estates is here to help you create a succession plan for this rela tively new asset class.
Source: wsj.com/market-data/bonds
Already arguably the most environmentally sustain able company on the planet, Patagonia just went all-in. Faced with the choice of sell ing Patagonia or going public, founder Yvonne Chouinard and his family decided to do neither. Instead, they gave the company away.Yes, you read that right.
A long-time environmental advocate, Chouinard is an un likely businessman. While liv ing in his car eating damaged cans of cat food he bought for five cents apiece, Choui nard started making climbing equipment for friends in the early 70s before moving into apparel. He abhors his bil lionaire status electing to live modestly between Ventura, CA, and Jackson, Wyoming. He drives a beat-up Subaru and doesn’t own a comput er or a cell phone. He’s long championed practices that most other CEOs would scoff at – a commitment to unparal leled customer service, a life time warranty on Patagonia products, and donating 1% of corporate revenues each year to sustainable causes. Patago nia was a leader in shifting its supply chain to organic cotton and implementing employ ee benefits such as on-site childcare long before such practices were in vogue. At one point, Patagonia famous ly ran a Black Friday ad on in the New York Times that read “Don’t Buy This Jacket.” They still discourage customers from buying a new jacket and would rather you send your old jacket back to be repaired or recycled through their
Worn Wear program. Patago nia is a Certified B Corp and in 2018 officially changed its corporate mission statement to “We’re in business to save our home planet.”
That’s why Chouinard’s most recent decision to give the company away was both si multaneously shocking and incredibly predictable. In looking to create a viable succession plan, Chouinard vetted several different paths. His children weren’t interest ed in running it so he consid ered everything from turning Patagonia into a co-op where the employees would be come the owners, becoming a non-profit, to even selling the company to a SPAC. Going public was a likely disaster as Patagonia would then be sub ject to maximizing profits to make good on their fiduciary responsibility to shareholders. Selling the company to a third
party left no guarantees that Patagonia’s mission to save the planet would remain at the forefront of its corporate cul ture. Instead, Chouinard, his wife, and his adult children all unanimously decided that the only path forward was to give the company to two separate irrevocable trusts – the Pata gonia Purpose Trust and the Holdfast Collective. Through this arrangement, Patagonia can continue forward as a pri vate company with 100% of its profits going toward fight ing climate change. While the Chouinard family will continue to oversee the management of the trusts, they will reap no financial benefit. And because the Holdfast Collective is al lowed to make political con tributions, they will receive no tax benefit for their gift.
Patagonia has already donat ed $50 million to the Hold fast Collective and expects to
contribute another $100 mil lion this year. Mr. Chouinard has said much of the focus of the Holdfast Collective will be on nature-based climate solutions such as preserving wild lands, funding grassroots activists, and supporting po litical campaigns. In his own words, Chouinard says that instead of “going public” Pa tagonia is “going purpose.” Instead of extracting value from nature and transforming it into wealth for investors, Pa tagonia is electing to use the wealth it creates to protect the source of ALL wealth.
While unorthodox, Mr. Chou inard’s decision to essentially give Patagonia back to the planet is the perfect conclu sion to his remarkable career.
And he still doesn’t want you to buy the jacket.
As an advisor who manages more than 40 company retirement plans, I have received every question imaginable. Here are some less Frequently Asked Questions that may be equally beneficial to you:
What does “money source” mean and why should I care? A money source is the coding for each dollar inside of your 401k/retirement plan. It describes how your dollars will be treated if you 1. Leave the company or 2. Take a distribution.
1. If you leave your company, you will want to know which dollars you can take with you. Employee contributions (your contributions) are always yours to take. Employer contributions depend on a vesting schedule. Vesting (in the 401k world) asks the question: how long must you be employed for all/ some of your employer contributions to be yours when you terminate your employment? This vesting schedule can be different for your company’s match or your company’s profit share. It may take up to 6 years for all their contributions to fully vest.
2. When taking a distribution, you will want to know if the dollars are pre-tax or after-tax. Pre-tax dollars are all tax able at the time of distribution at what ever your income tax rate is in that year. These include your pre-tax 401k con tributions and your company’s match/ profit-sharing contributions. Your own Roth contributions will never be taxed (so long as your distributions are after 59.5 years old) since they were taxed at the time of contribution. After-tax con tributions are divided into two buckets: your contributions and the investment gains. Your contributions will not be taxed but the investment gains will be taxed at your income tax rate. Helpful tip: you may convert your con tributions to Roth dollars so the invest ment gains begin to grow tax-free.
The time value of money suggests
I should contribute the maximum amount to my 401k as early as possible in the calendar year. Is that always a good idea? The short answer is no. Many plans (but not all) calculate their match on a per-payroll basis. That means if you max out your 401k early in the year, you will be forgoing your company’s contribu
tion to your account.
Example: In 2022, you contributed all $20,500 of your employee contributions to your 401k by June 30th. If you earn $200,000 in 2022 and your company matches 4% on a per-payroll basis, you would have missed out on $4,000 of the total $8,000 available to you. In this case, the best strategy is to spread the max imum amount across all your paychecks for the year.
I plan on working into my retirement. Can I avoid taking RMD from my 401k? Yes! As you all know, you will be required to start taking distributions from your pre-tax retirement savings at 72 years old. However, if you don’t own more than 5% of the business, you can forever de fer your RMDs if you are still employed. This strategy allows you to have signifi cantly more flexibility with how much tax es you are forced to pay.
Creative examples: Can you sell your business but stay on as an employee to keep deferring your 401k taxes? Can you work part-time to have a 401k available to you? Financial planning and foresight may do a lot to help.
SERIES I BONDS Series I bonds are a type of savings bond issued by the US treasury that is used to protect the value of your cash from inflation. The interest rate is based on two different rates. There is a fixed rate that remains the same for the life of the bond and the earnings rate which is adjusted by the inflation rate every six months. Series I Bonds have a full 30year maturity date with a 20-year original maturity period that is followed by a 10-year extended maturity period. You have to wait at least one year to be able to cash-out of a Series I Bond. If a bond is cashed-out within the first 5 years, interest from the prior three months is forfeited. One great thing about Series I Bonds is they are exempt from state and local income taxes. Due to the high inflation rate, Series I savings bonds have become very popular with risk-averse investors.
Main Branch Office
Spencer Kelly, Nick Ozer, Britt Joyce, Lee Clay, Ben Satterfield & Russell Mohberg
880 Apollo Street Suite 129 El Segundo, CA 90245
Office: (310) 725-9102
Westchester Branch Office
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7135 W. Manchester Avenue Suite 2 Westchester, CA 90045 Office: (424) 255-1045
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Office: (310) 471-6461
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Studio City, CA 91604 Office: (310) 220-2226
If you have comments or questions, please do not hesitate to reach out to us at info@regattainvest.com
Volume 15, Number 3
Editor: Kristin Grant
Contributing Editors: Spencer Kelly, CFP®
Russell Mohberg, CFP®
Contributors:
Venessa Robinson
Grace Yu, CFA, FRM
Britt Joyce, CFA, CFP®
Lisa Margulies
Erika Jenkins, CPA
Ellen Himmel, JD
Nick Ozer, CFP®
Lee Clay, CSRICTM
Marc Joyce, Esq.
Benjamin Kingston, Esq. Brian Mollo
Grant Nabell
Chloe Barnett, CFP®
Benchmark Data Source: Tamarac, Inc
Your personal performance report has been posted to: https://regatta.portal.tamaracinc.com
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ABOUT US
We are unabashed in our commit ment to scouring the investment universe to find the best possible solutions for our clients and their money. We know there’s an easier way to manage money, but we choose to take the road less traveled. For example, we invested in Facebook preIPO, own clean energy facilities and have directly invested in over 50 private, multi-family apartment building LLCs.
Capital Group provides investment management and financial planning advice to individuals, families, business owners and endowments. The firm manages more than $900 million for clients in Los Angeles, 35 states and 4 countries.
Learn more at www.regattainvest.com
©2022 Regatta Capital Group, LLC. All rights reserved. Reproduction by any means is prohibited. While data contained in this report are gathered from reliable sources, accuracy and completeness cannot be guaranteed. All data, information and
opinions are subject to change without notice. Investments referenced are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Past performance does not predict future results.