Tuesday, September 22, 2015

5 Things Bill Gates and other mega entrepreneurs have in common

Bill Gates' net worth is around $80 billion. He owns the $12.6 billion ownership of Microsoft. He also owns a $4.5 billion ownership in Canadian National Railroads, a $3 billion ownership in Republic Services, and a $2.8 billion ownership in in Ecolab. His diversified investments, through Cascade Investments, amount to $37.6 billion. 

As such, Microsoft, the company he started and associated with the most, stands for only 16% of his family wealth. 

Bill Gates is a mega entrepreneur. 

What sets very successful entrepreneurs, like Bill Bill Gates, apart from the rest? What turns them into mega entrepreneurs running a myriad of companies, overseeing immense and complex web of capital, and forging multigenerational wealth and legacy?

Here are some interesting statistics on mega entrepreneurs:
  • One third of FORTUNE 500 companies are owned or controlled by mega entrepreneurs or their families
  • 67% of NYSE companies are owned or controlled by mega entrepreneurs or their families
On the other hand:
  • About 30% of entrepreneur started and led business survive to the second generation
  • Only 12% make it to the third generation
  • Only 3% make it to the fourth generation
Many wonder what has become of the Rockefellers' ownership and clout over Exxon, Mobil, Chevron, Amoco, Standard Oil of Ohio, Atlantic Richfield, etc. We wonder as well, but its not there...anymore.

All entrepreneurs face the same challenges as they grow their start-ups in to successful companies:
  1. Raising capital without losing control 
  2. Recruiting and retaining top talent 
  3. Business continuation and succession 
  4. Converting profits and value to wealth
How mega entrepreneurs deal and keep dealing with the above challenges makes the difference. 

So, what sets mega entrepreneurs, apart from the rest? 

  1. Mega entrepreneurs have the "big-picture focus".
  2. They take risk and leverage financial and human capital to grow their enterprise.
  3. They rely on their entrepreneur's offices to manage finances, support M&A deals, raise or repay personal capital, execute financial reorganizations or restructure debt. Employees of their core companies are not involved in these processes. 
  4. Liquidity and cash management is given a high priority, managing cash efficiently and having it ready for difficult times and when great opportunities arise.
  5. Risk management is paramount.
Below are some examples of mega entrepreneurs and their strategies. 

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Susanne Klatten: Dynasty Company as the Backbone of Dynasty Fortune. Wealth created though growth of a single company, BMW. Company is still a key asset of the family and its business identity. Other key assets are acquired and sold in line with “Dynasty Company” strategy

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Leonardo Del Vecchio: Multi-Generational Family Company Leading to a Dynasty Fortune. Wealth creation through growth of a single company, Luxottica. Company is the identity of business family. Strategically and selectively diversifying dynasty fortune.

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Bill Gates: Company Value Leading to a Multi-Company Family Fortune. Wealth creation though a growth of a single company, Microsoft. Diversification of holdings and assets. Establishment of strategic wealth thought.

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Wang Jianlin: Diversified Entrepreneurships Leading to Family Fortune. Wealth creation through network of holdings growth. Increased concentration of holdings in key companies and assets. Strategic diversification across asset classes and geographies.

“The difference between a business family and a business dynasty is the strategy. Everything must be in line with strategy. Selling assets, exiting ventures… followed by reinvestment of capital – in everything strategy sets the rules.” - Baron Albert Frère, Founder and Chairman of Groupe Bruxelles Lambert, one of the largest family enterprises.

Statistics & Graphics: Courtesy of Financial Strategist Board.

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Friday, September 18, 2015

Redmount’s brief opinion on the Federal Reserve’s (Fed) decision to not move on rates

We think it probably won’t do anything good for markets
  • Attention will now simply shift to “will they/won’t they” for their October meeting.
  • There had been expectations for a “one and done” increase of 0.25%, but that became more and more unlikely given the market tabulations.
  • That said, an increase to the fed funds rate of 0.25% would be a rational response to the probably very slow profile of rate rises over the next 12 to 18 months.
  • Initial rate rises have typically been followed by continued equity market performance on average while the final ones usually brought economic contraction and earnings recessions resulting in stock market losses.
  • And that’s what we’re concerned about, earnings trends. As history suggests, “don’t be afraid of the first interest rate rise, be afraid of the last one
  •  In general, we remain concerned with market volatilities.

Wednesday, September 9, 2015

4 Investment Risks Warren Buffett Says You Should Not Take

What does risk mean to you...and Warren Buffett? 

If you ask the average person, they’re likely to say the probability of losing money. If you ask most financial professionals, they’ll probably equate risk with volatility of returns. (While these may sound similar, they’re not exactly the same thing.) For example.

Let’s say investment A loses 3% one year and gains 2% the next and investment B gains 5% one year and 20% the next. Most people would call investment A riskier since it lost money while financial professionals would say investment B is riskier because the returns were more variable.) But if you ask Warren Buffett, the second richest American and widely considered the greatest investor alive today, he would say they're both wrong.

In his 2014 annual letter to shareholders, Buffett wrote:
“Volatility is far from synonymous with risk… If the investor…fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things.”
Instead of volatility, Buffett measures risk as the loss of purchasing power or basically how much you can actually buy with that money, which is the whole point of actually having it.

What is your risk tolerance?
How much risk is there in your portfolio? 
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So what are those “very risky” things investors may do by focusing on volatility? Here are 4 that Buffett mentions and what you should do instead:

1) Keeping long term money in cash.

Many people keep most or even all of the long term money in cash because they're afraid of market volatility. Buffett admits that “owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents,” but he argues that over the long term, “a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.” That’s because in the long run, the erosion of the value of your money due to inflation is much more devastating that the short term fluctuations in the stock market.

Average money-market rates are less than a tenth of a percentage point while the average inflation rate last year was 1.6%. That means, the real value of your cash is decreasing by about 1.5% a year. In the short run, that’s a lot less than what you could lose in stocks but in 10 years, your money will have lost almost a quarter of its purchasing power. Compare that to the S&P 500, a selection of 500 of the largest companies in the US, which more than doubled with dividends reinvested over the last 10 years despite the financial crisis in 2008,

Bottom Line: Match your investments to your time frame.

2) Not being adequately diversified.

Another mistake is people having too much in one stock. Often its their employer's stock or the stock received in exchange of a sold company. Sometimes it’s a majority or even all of their money in one stock. There are lots of different reasons. They may know and trust their employer and don’t understand or trust their other options. This stock may have been performing particularly well. The employer stock may be one option out of several in their retirement plan and by spreading their money around, they may inadvertently put too much in their employer stock. They may have acquired the stock as a gift or inheritance or from options, grants, or an employee stock purchase plan and they don’t know what to do with it.

Regardless of the reason, any individual stock (no matter how good the company) is inherently very risky. Unlike what Buffett calls a “diversified equity portfolio” an individual stock can go to zero and never come back. That’s not volatility. That’s a permanent loss of purchasing power.

Bottom Line: Make sure you own a larger number of individual stocks in a a variety of industries or stick to broad-based mutual funds or ETFs that diversify the money for you.

3) Attempting to “time” the market.

Although not thought often as such, this is one of the most common investor mistakes. How many times have you heard people say that they know the market will decline and are waiting until then to jump in. Yes, it’s true that the market will decline at some point. The problem is that no one knows when. 

As Buffett puts it,
“Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.”
Bottom Line: Instead of trying to time the market (which even Warren Buffett doesn't try to do), make sure you have adequate time IN the market, as that is what matters most. 

4) Active trading.

Instead of trying to time the market, others try to beat it by trading stocks they believe will outperform the market as a whole. This belief can be strengthened if an investor has one or more lucky trades. In many of these situations, the investor mistakes a rising market for his or her investing prowess.

However, many economists believe that the stock market is essentially efficient, which means that it’s extremely difficult if not virtually impossible to beat over the long run. Even if you don’t subscribe to this theory, it’s noteworthy that the vast majority of professional mutual fund managers consistently under-perform the market. Even the few that do outperform over a given time period are actually less likely than average to do so over the next same time period. In other words, any out-performance may be due to luck, exactly what the economists would have predicted.

So if not higher performance, what does all this trading produce? One study found that all this trading costs the average mutual fund about 1.44% per year. That loss comes out of your pocket but is not included in any of the fees reported by mutual funds.

Bottom Line: If professional investment managers, many from top business schools, with access to cutting-edge research and teams of research analysts working for them are unable to consistently beat the market, what makes you think you can? Instead of actively trying to beat the market, limit your trading to making sure your portfolio matches your time frame and risk tolerance, harvest tax losses to offset taxable gains, or switch from higher cost funds to lower cost funds.

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Tuesday, September 1, 2015

Bond portfolio risk and reward equilibrium

Most bond investors want income to be high and stable. We think a bond portfolio can be built to strike a balance between both—provided investors are willing to take some risk to do it.

Risk, of course, is the price everyone must pay to achieve returns. But one of the more surprising findings in a study, which surveyed more than 2,000 investors and advisors around the world, was the number of people who seemed to be looking for the investment holy grail: high returns and growth with little or no risk.

When one asks investors about their income expectations, one is told investors want to earn at least 6% per year. But when asked about their priorities, three-quarters of investors surveyed put “growth opportunities” and “principal protection” at the top of their lists. “Amount of income,” cited by 71% of investors as a high priority, was a close third.

There’s nothing remarkable about people wanting the highest possible returns from their portfolios—especially when low interest rates have left investors around the world starved for income. We also understand why those who survived recent crises and gut-wrenching market swings want to minimize risk and preserve the wealth they already have.

But it’s hard to achieve both of these objectives consistently. That’s especially true in the current low-interest-rate environment. Allocations to low-risk assets, such as government bonds and cash, aren’t likely to deliver the level of income investors told us they expect from their portfolios. To generate a sizable income distribution from their portfolios, investors have to take risk.

Diversify with a Multi-Sector Approach

Of course, that doesn’t mean investors should blindly reach for the highest-yielding bonds available. In recent years, we’ve seen investors charge into high-yield securities where the compensation wasn’t always commensurate with the risk—think some CCC-rated junk bonds and parts of the leveraged-loan market.

What’s more, following the crowd into the same credit sectors is dangerous. As we’ve seen, yield-hungry investors have been crowding into—and out of—certain sectors with alarming frequency.

A better approach, in our view, is to embrace a multi-sector strategy that diversifies across sectors, geographies and credit quality. Investors who avoid concentrating their allocations in single-sector funds—high-yield, emerging markets, and so on—can instead allocate to high-income asset classes based on where they or their managers see specific opportunities. This makes it possible to capitalize on undervalued bonds no matter what sector they’re in—and it keeps investors from getting trampled by the crowds when they decide to sell.

Broadening the opportunity set in this way can reduce overall risk and potentially increase risk-adjusted returns. Of course, even a highly-diversified strategy won’t erase risk altogether. The reality is that in today’s low-rate environment, investors must take some calculated risks to earn income from their portfolios that’s as high and stable as possible.

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.