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HOlmes Osborne

    Longest Bull Market EVer

  We are ten years into the longest bull market ever. A bull market means the market is going up which is better than a bear market. When will this market run come to an end? Who knows?

Be like a farmer and have a strategy. Farmers farm when commodity prices are high and farm when commodity prices are low. Smart farmers don’t waste their time guessing where the prices are going. However, even farmers shouldn’t expand operations when prices are at all-time highs. Hint, hint.

Our strategy is that most of our clients have some percentage of their money in bonds. Bonds are safer yet have much lower rates of return. We aren’t aiming for the moon when the market is at an all-time high.

If you are willing to make 20% when the markets are strong then you must be prepared to lose 40% when the market has a bad year.

We remember what happened in 2008/2009 and 2001. Of course the markets quickly rebounded. It will be interesting to see what the average investor will do when markets don’t rebound for a decade or two.
    
   Self-Directed IRAs

The word never seems to get out that you can invest your retirement account into real estate and other private businesses. You must find the proper custodian. From there, the custodian will send your cash so as you can make your investment. If it’s real estate, subsequent income will go back to the IRA. The title of the investment will be something like: Custodian Trust Company care of Mrs. Investors’s IRA. There are rules to follow set about by ERISA laws and other government agencies.
    
 Congress Attempts to Fix Retirement Planning


There is talk in Washington to “fix” our county’s retirement plans. They are basically tax gimmicks to encourage people to save. As you can probably guess from our use of the word “gimmicks”, we don’t have much faith in these ideas.

The tools are already in place. When you contribute to a retirement plan, you receive a tax deduction. Yet most people do not have the income or discipline to save. To help you save, money can be deducted from your paycheck or bank account and fund a retirement plan, college savings account, or other types of accounts.

The only thing that really works is forced retirement savings. Teachers, government employees, and union members are forced to save for retirement. In some states, between what teachers save and the school district put in, total contributions are close to 30%! Now that’s saving.

That’s why teachers can retire after working 30 years. Many retire in their 50s. The same holds true with union members.

Imagine if a teacher walked into human resources and said that they didn’t want to contribute to retirement? They’d get a funny look and be told “that’s not how we do things around here”.

Investments are diversified in most retirement plans so great losses due to poor investments probably will not happen. Occasionally, you will read of a big loss in a pension, but it’s rare. Pension plans hold stocks, bonds, real estate, and private businesses.

What is unfortunate is when a pension is underfunded. Retirees in the Teamsters Central States Pension witnessed their paychecks getting cut in half. Very sad.

Nowadays, most people own their own business or work for a company. They have the latitude to fund their plan in some cases up to 20% of earnings yet most people pass. Can you believe that people forgo matching contributions from their employers? An employer may match up to 5% but the employee puts in nothing and forgoes the free money. We already have the tools for retirement planning but no one (that we know of) uses them.

What would work is for an automatic 15% be deducted from an employees’ paycheck whether they wanted the deduction or not. In addition, the employer would contribute too. Ideally the employer would contribute at least 5% (if the company is profitable). If you can save 20% of your paycheck, you’re going to make your retirement goals. Another thing to make retirement saving more successful would be to make it very difficult for the employee to cash in their retirement plan.

The old rule of thumb is that you can draw about 3% off your investments if you retire in your mid-sixties. That is, if you want your investments to last for the rest of your life.

So for every $30,000 in annual income you want, you need to have saved $1 million. There aren’t a lot of people running around with $1 million in their IRAs. Yet, there are millions of Americans who draw $30,000 or more from their pensions. The drawback to pensions is that if the employee and their spouse die before drawing benefits, heirs receive nothing, unlike 401Ks and IRAs.

It all comes down to funding. How much are you saving for retirement?


 Second Quarter Activity

The first company that we purchased in the second quarter is Newell Brands. Newell owns many popular household names such as: Elmer’s Glue, Rubbermaid, Graco baby products, Paper Mate, Sharpie, and Bicycle playing cards.

Newell was formed through the merger of Newell and Jarden. Newell has concerned investors because of its high amount of debt. Management has been implementing a plan to pay down debt and has been showing results. Rawlings baseball equipment and another division were both recently sold off for $2.5 billion after-tax. We like what management is doing and think that the stock is way undervalued.

By 2020, management wants to have a company that produces $9 billion in revenues. If this is the case, the stock only traded at 1.37 times revenues when we bought it—cheap for a consumer products company.

The next company that we purchased is B&G Foods. B&G is the maker of well known food brands including: Green Giant, Cream of Wheat, Pirate’s Booty Popcorn, Mrs. Dash, SnackWells, Baker’s Joy, and many other names. B&G and Newell have a lot in common—both have acquired a lot of debt through mergers and acquisitions.

When we purchased B&G, the stock’s dividend yield was 6.8%. That’s incredible. We believe the dividend will remain stable as the board of directors voted to increase it a few months ago.

B&G and Newell have many things in common. Both are easy to understand—food and plastic products. Both industries normally have high profit margins. Both stocks trade relatively cheap to industry peers. As an investors, you can relate to these companies as their products are easy to find and use.

We sold our position in Harmony Gold. Last year, we bought and sold it twice for a nice little profit last year.

This time, we held Harmony for about a year and lost 19% after the dividend. The gold miner had experienced some problems and issued new shares. In a new share issuance, existing shareholders are diluted and see their ownership percentage drop. This can happen especially when buying higher risk investments like miners.

We’ve reached a double in our Danish brewer Royal Unibrew. We found the company last year while perusing a well-known mutual fund’s holdings. Royal Unibrew has a portfolio of brands known in Denmark and Scandinavia. It also is the Pepsi distributor for Denmark. We also own the Pepsi distributor for the U.K., Britvic, and Norway, Orkla.

It’s interesting how Coca-Cola will own shares in its international bottlers but not completely control them. Pepsi, on the other hand, does not own shares in its international bottlers but instead licenses them to do business for specific countries.



 

holmesosborne@holmesosborne.com


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