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January 29, 2015

Einstein developed a simple formula that provided an explanation to the cosmos, energy and matter.  Well, with determined focus I just developed my own formula E=fs4Uh for the solution to client financial success.  Ed = financial security for you at a higher level.

I attended a presentation by Jonah Berger, author of Contagious: why things catch on and something he said became a Shazam! moment for me – it focused the energy of all my experiences advising clients into a simple formula.  It hit me like a lightning bolt.  This is what I do – I help clients be and feel more secure.  And I do it very well, based on my success with clients and their success with my guidance as their primary trusted advisor.

I now have a USP [Unique Selling Proposition] for what I do.  I provide financial security and comfort solutions.  And, if you think about it, that is what accountants and great financial advisors do.  That is our raison d’ètre.  So, the next time you have an interaction with your financial advisor, look at it in terms of how much more secure you are financially because of the collaboration.

As for my clients: E=fs4Uh

What Succession Planning is Not

January 27, 2015

I’ve gotten calls that indicate that there is some confusion about the succession planning process.  Succession planning is usually a transfer to someone that has worked in the business for a long time who can and wants to take over.  Here are some explanations of what succession planning is not:

  • Succession planning is not transition or retirement planning where someone is brought in to eventually take over with plans for the owner to gradually ease out of and leave the business.
  • Succession planning is not where plans are made to position the business for a sale where the owner has a blunt ending to their involvement in the business except for a short phase in period assisting the new owners.  The efforts to stage the business for a sale can take a few years and needs special care and work.  Also, the owner would receive the right price for the business in cash or some solidly backed notes from which a core of their retirement cash flow would be generated.
  • Succession planning is not slowing down, although that is what happens when owners do not face reality of their getting older and refuse to consider any of the viable alternatives to slowing down.  There is nothing that can be done for these people.  They work until they drop and the value greatly diminishes.  However, they probably will still earn a reasonable income which usually would be more than the income from the sales proceeds had they sold. The offset here is that they like what they do, identify with the business, do not see themselves being independent from the business, don’t mind continuing to spend substantial time working, and are probably happy with the ongoing situation.  Retiring and the lack of realizing the full value for the business is not a strong concern.
  • Succession planning is not pulling the trigger.  You can’t wake up one day and decide to sell to the successor unless there was pre-planning to make sure the successor is trained, capable, empowered, and who customers, employees and suppliers are familiar with and will recognize as an effective replacement.  Also the financing arrangements need to have been organized for this eventuality.

Succession planning is an important process for some, but not everyone.  Each owner needs to consider what they want for themselves, how to get it and the alternatives.  Blogs such as these are intended to convey information and provide food for thought.  I hope this helps.  Good luck!

Organization Charts

January 22, 2015

An effective way to review key staff is to have them separately draw up two organization charts to see how they view their role.

The first chart is what they think their role is showing who they report to, who reports to them, lateral associates and support personnel.  The second chart is what they would like it to be.  Rarely, would the two be the same.

The purpose of the charts is to begin discussions about the effectiveness of each person’s positioning and how they think they could be more effective, their jobs better and the organization enhanced.  The discussions should be held individually and should provide insights of how the organization functions, each person’s role in the big picture and indicated ways for improvement.

After the individual meetings, two more charts would be prepared for a group meeting with all participating.  One chart would show the probable reality of the overall present situation and the second would have a suggested plan to move the participants and organization forward.

This tool, if used properly, can provide great benefits and insights.

Benjamin Franklin’s Self-Help Program

January 20, 2015

January 17th marked the 309th anniversary of Benjamin Franklin’s birth.  This is a good time to recall one of the techniques he followed to make himself a better person – his 13 point self-help program.  This has been excerpted from his autobiography.

“It was about this time I conceived the bold and arduous project of arriving at moral perfection.  I wished to live without committing any fault at any time; I would conquer all that either natural inclination, custom, or company might lead me into.  As I knew, or thought I knew, what was right and wrong, I did not see why I might not always do the one and avoid the other.  But I soon found I had undertaken a task of more difficulty than I had imagined.  While my care was employed in guarding against one fault, I was often surprised by another; habit took the advantage of inattention; inclination was sometimes too strong for reason.  I concluded, at length, that the mere speculative conviction that it was our interest to be completely virtuous was not sufficient to prevent our slipping; and that the contrary habits must be broken, and good ones acquired and established, before we can have any dependence on a steady, uniform rectitude of conduct.  For this purpose I therefore contrived the following method.

In the various enumerations of the moral virtues I had met with in my reading I found the catalogue more or less numerous, as different writers included more or fewer ideas under the same name. Temperance, for example, was by some confined to eating and drinking, while by others it was extended to mean the moderating every other pleasure, appetite, inclination, or passion, bodily or mental, even to our avarice and ambition.  I proposed to myself for the sake of clearness to use rather more names with fewer ideas annexed to each than a few names with more ideas; and I included under thirteen names of virtues all that at that time occurred to me as necessary or desirable and annexed to each a short precept which fully expressed the extent I gave to its meaning.

These names of the virtues with their precepts were:

Temperance: Eat not to dullness; drink not to elevation.

Silence:  Speak not but what may benefit others or yourself; avoid trifling conversation.

Order:  Let all your things have their places; let each part of your business have its time.

Resolution:    Resolve to perform what you ought; perform without fail what you resolve.

Frugality:  Make no expense but to do good to others or yourself; i.e., waste nothing.

Industry:  Lose no time; be always employed in something useful; cut off all unnecessary actions.

Sincerity:  Use no hurtful deceit; think innocently and justly, and, if you speak, speak accordingly.

Justice:  Wrong none by doing injuries or omitting the benefits that are your duty.

Moderation:  Avoid extremes; forbear resenting injuries so much as you think they deserve.

Cleanliness:  Tolerate no uncleanliness in body, clothes, or habitation.

Tranquility:  Be not disturbed at trifles, or at accidents common or unavoidable.

Chastity:  Rarely use venery but for health or offspring, never to dullness, weakness, or the injury of your own or another’s peace or reputation.

Humility:  Imitate Jesus and Socrates.

My intention being to acquire the habitude of all these virtues, I judged it would be well not to distract my attention by attempting the whole at once, but to fix it on one of them at a time; and, when I should be master of that, then to proceed to another, and so on, till I should have gone through the thirteen; and, as the previous acquisition of some might facilitate the acquisition of certain others, I arranged them with that view, as they stand above.

Temperance first, as it tends to procure that coolness and clearness of head which is so necessary where constant vigilance was to be kept up and guard maintained against the unremitting attraction of ancient habits, and the force of perpetual temptations.  This being acquired and established, Silence would be more easy; and my desire being to gain knowledge at the same time that I improved in virtue, and considering that in conversation it was obtained rather by the use of the ears than of the tongue and therefore wishing to break a habit I was getting into of prattling, punning, and joking, which only made me acceptable to trifling company, I gave Silence the second place.  This and the next, Order, I expected would allow me more time for attending to my project and my studies. Resolution, once become habitual, would keep me firm in my endeavors to obtain all the subsequent virtues; Frugality and Industry freeing me from my remaining debt, and producing affluence and independence, would make more easy the practice of Sincerity and Justice, etc., etc.”

There is more in his autobiography – still relevant today.

What is Something’s Value?

January 15, 2015

Reading the front page of yesterday’s Wall Street Journal got me thinking about how value is created or perceived and the trigger for this was a bull that just died. 

During its lifetime, 500,000 offspring resulted from this bull’s semen resulting in tens of millions of dollars revenue for its owners.  The breeder sold the bull who just died 23 years ago for $4000.  However, he said he has no regrets since the notoriety resulted in substantial revenue from his other bulls and fame for his dairy.

Another article was about the new found value in the “Made in the USA” label.  Those that stuck to manufacturing in America have added value not only from latent patriotism, but from a more competitive landscape here even with the strengthening dollar.  Wages and benefits are stable while low wage countries are seeing unpredictable increases and political interference, low cost domestic energy, availability and use of state of the art technology, lower shipping costs, a reemerging supply chain and infrastructure and more reliable quality control.

Hillary Clinton knows the value and perception of adding John Podesta to her “exploratory” staff.  This raises her ability to get contributions and creates a barrier for whomever her competition might be.

Tuesday’s stock market roller coaster was pictured on page one showing a 424 point DJIA price swing.  Seems like there were more sellers than buyers pushing the index and stock values lower.

Leaving the front page and looking at the back page of the New York edition told how Nets owner Mikhail Prokhorov might be interested in unloading the 80% interest he acquired for $220 million plus coming up with his share of last season’s $144 million loss.  Steve Ballmer’s recent purchase of the Clippers for $2 billion changed the methodology for valuing a professional basketball team and Mikhail might just reap unanticipated profits if he sells.

The point to all this is that values constantly change.  Valuing a business or undertaking takes more than a sharp pencil and a neat spreadsheet.  It takes awareness, imagination and a visualization of cash flow creation and perception of possibilities emanating from the ownership.  At the end of the day, sellers need buyers who think what they are buying is undervalued.  And that is what determines something’s value.  And, that’s no bull!

What the Charts Tell Us

January 13, 2015

The previous blog showed 10-year market performance and benchmark charts and graphs; but what are they really telling us?

The purpose of posting them is to indicate market trends over a reasonable period – such as ten years.  From a birds-eye view, they show some macro trends.  The markets, as defined by the four indexes illustrated, are trending upward, although it hasn’t been a smooth ride.  There have been some huge dips and spikes.  It also shows that the movement of these four indexes all follow the same direction, albeit with different amounts.  Possibly, what this indicates is that to share in the growth of the market, it almost doesn’t matter what you invest in as long as you are in the market with diversified across-the-board stocks.  The indexes I chose are the four most-quoted and largest indexes for their groups.  If you want to invest in these, you can with exchange traded funds or index funds.  This type of investing is considered “passive” because the goal is to duplicate the market returns as reflected in the changes in the index and not beat the market as “actively” traded funds try to do.  Passive refers to being willing to accept the market return. Over time, most of the actively managed mutual funds do not perform better than the index for that type of fund. In some years they might do much better, but over a long period, such as ten years they do not.  Also there are some funds that consistently do well, but they are in the minority.

What is also not shown are the highs and lows within each year.  The charts show the year-end amounts.  For the purposes of indicating trends, this might be sufficient, but can also be misleading.  For instance, the DJIA low point was around 6500 on March 9, 2009, yet this amount is not reflected at all in the charts since 2008 ended at 8776 and 2009 ended at 10428. However, this doesn’t change the long term trend.

Another thing the charts do not indicate are changes in the dollar amounts of dividends.  The yields are provided.  The year end 2008 DJIA yield was 3.58% and 2009 was 2.64%. This is a function of the dollar amount of dividends for that year divided by the market value of the index as of the end of the year.  When the market tanked at Dec 31, 2008, the yield went up and when the market recovered, the yield dropped.  Yet, while the dollar amount of the 2009 dividends dropped it wasn’t that great.  The 2008 dividends were $316.40 and the 2009 dividends were $277.38 which is a drop of about 12.3%.  We live off of, spend or reinvest dollars, not the yield percent and to a great extent do not really do anything with the changing prices of stocks.  This relatively small drop in dividends in view of everything else that occurred doesn’t appear to be so devastating.

The Price/Earnings (P/E) trends are clear with some major blips.  Very high P/Es for the DJIA at 2007 and S&P500 at 2009 would need some examination and explanation of the aberrant activity in certain component members.  However, the consistent P/Es before and after indicate stable earnings in relation to stock prices.  In general, the market does not like surprises and erratic profits create instability.  While employment dropped considerably in 2008/2009, corporate profits did not (possibly because of layoffs) and as profits increased stock prices rose.  Also, there appears to be a trend now toward higher dividends even among the so called growth companies causing some stock prices to rise.

Similarly, not evident is each person’s starting point.  If you started at the exact beginning of the period then the results are accurate for you.  However, no one actually starts at the dates indicated, so results vary for each of us.  Further adding or withdrawing funds during periods further skew results as do portfolio management and trading costs and taxes and the effects of having cash sit idle until invested.

There is more, but I think I made the point.  The charts and indexes provide indications of trends and should be used as a guide along with all the other available data before you make a long term investing decision.

2014 Financial Benchmark Charts and Graphs

January 8, 2015

To be used for illustrative and educational purposes.

No recommendations are made or should be inferred from the information presented.

Past results are no indicator of future performance.

These charts continue an annual tradition I started ages ago to use when I do financial planning with clients.  The charts show the 10-year annual and cumulative percentage gains or losses of the major stock market indexes, interest rates, currencies and gold. Also shown is a comparison of an investment 10 years ago in the Dow Jones Industrial Average (DJIA) compared to an investment in a 5-year Bank CD that was rolled over when it came due into another 5-year CD.

10 year financial benchmark performance of

major stock indexes, interest rates, currencies and gold

ed1 ed2 ed3


Ten year comparison between the DJIA and Bank 5-year CDs

This graph compares the 10 year DJIA performance and two 5-year CDs with one purchased at beginning of 10-year period and the other rolled over for another 5-year period when the first CD came due.  The CD rate was 4.5% at the beginning of the period and 3% on Jan 1, 2010. Note that the strategy which seemed good previously might not have to be relooked at considering the low rate environment.  However, this strategy has consistently held up for those seeking complete safety from default.  Further, to find the 2.25% 2014 year end CD requires some thorough searching.  Note also that except for the initial run up in the DJIA it took nine years for the DJIA to surpass the cumulative return on the CD.  If the CD strategy was laddered with a new 5-year CD purchased each year the results would be different.



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