In Case You Haven’t Heard…

Our population is getting older and doing so at a quicker pace than was projected in the past. For the first time in U.S. history there are more people over the age of 65 than under the age of 5.

Here in Vermont this has led to a recent downgrade in our sterling AAA bond rating by Fitch to AA+, which pulls Vermont in line with the rest of the New England cohort. Fitch reasons that Vermont now has the third oldest population in the country leading to slower projected economic growth with more social programs and less tax dollars available for funding. Vermont is an old state and very well may be the canary in the coal mine for the rest of the globe.

The historical pattern for fertility has typically followed a roughly 100 year trajectory whereby newer countries peak at around six children per family and level out at the naturally sustainable fertility rate of around two children. This fertility evolution stretched about 88 years in the United States. But the pattern unfolded at a much quicker pace in places like China and South Korea, where moving from six to two happened in only 22 years (See illustration.) In fact, in South Korea things have now dropped below the 2.1 naturally sustainable population level, leading experts to predict total population in that country to be 30 million by the year 2100. That’s a whopping 40% decrease from current population of 51 million.

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But there are areas of the world population that still are growing quickly, mainly in Africa. Small farmers make up 70% of the Sub-Saharan African population and extra hands to help out are in high demand. One sure way to increase a workforce on these farms is through childbirth. As the saying goes, “children have two hands but only one mouth.” But even in these pockets of the world the downward trend in fertility is moving more quickly than was originally anticipated.

As countries mature opportunities for education and career alternatives lead to lower fertility and focus on less tangible things, like spending quality time with children. Raising a child is expensive which in turn drives fertility rates down. This is a First World problem.

We are also thinking differently as we move from generation to generation. 2019 will mark the first time that Millennials will outnumber Baby Boomers. Generally speaking Millennials are more socially liberal. Same sex marriage, interracial marriage and legalization of marijuana are all things Millennials see as the norm. They are also less focused on raising a large family and more interested in their careers, which at the moment are dominated by the tech industry.

So what does this all mean? The positive is hopefully these population changes will be good for the environment. But it also means we may need to start to think of things a bit differently. There are two main drivers to economic growth; population growth and productivity. If we aren’t having enough babies then the only other way to grow population and in turn the labor force is through immigration. Immigration broadens the talent pool for future innovations leading to greater productivity, propelling our economy forward.

So perhaps the investment opportunity lies in companies that focus on improving productivity and less on those companies producing products and services in the discretionary consumer sector, which relies more heavily on ever increasing populations. These products geared towards improving productivity include automation, robotics and technology.

The patterns clearly show a slowing in worldwide population growth and as previous generations have always shown economic adjustments will be made to account for the new reality. Who knows, we may be closer to the first robotic President than we think.

Best to Sit for This Ovation...

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The Chicago Symphony Orchestra recently concluded the longest labor strike in its prestigious 128 year history. The issue at the heart of the dispute was the future of the pension plan offered to musicians. While pensions have become quite scarce in the private sector, they remain a cornerstone among the nation’s leading orchestras. Earlier this month, behind closed doors of the Mayor’s office, a deal eliminated the pension plan for the orchestra.

This is not surprising. Only about 15% of Fortune 500 companies offer pensions today, down from nearly 60% of companies just 20 years ago! This enormous shift in retirement saving responsibility has people changing the way they approach their retirement.

The solution to accumulating enough money is an easy equation; save more money and do so over a long period of time. But once you have all this money, how do you go about spending it during retirement? The longstanding adage calls for retirees to pull no more than 4% of investment account values during retirement each year. For example, a $400,000 IRA should produce $16,000 of annual income come retirement. Investing in a balanced portfolio of stocks and bonds should help keep pace with your withdrawal and even help offset the pace of inflation.

The 4% Rule makes good sense, but assumes that retirement spending is a steady game. Thirty years of Bureau of Labor Statistics data show a pattern of retirement spending declining persistently over a retiree’s life. Another study by Morningstar shows that spending declines 1%/year for the first decade of retirement, 2%/year for second decade and about 1%/year thereafter. JP Morgan used proprietary data from actual bank accounts and credit cards to track spending habits for retirees and found the same: more spending early on with a consistent decrease over time (see graph below).

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We are living longer, thank goodness, but this means retirement can last upwards of three decades, if not longer. With such an extended time in retirement, it makes sense that spending will vary over time. These periods of retirement can be broken into three distinct phases; the “Go-Go” early years of retirement, the “Slow-Go” years and eventually, the “No-Go” years.

During the early “Go-Go” years spending will be higher on getting out and enjoying retirement. This phase is the most expensive of the three as travel, home improvements and eating out are more prevalent. But studies show that each year into retirement brings a slightly reduced level of this spending. As health and energy start to slow, less is spent on discretionary items. The “No-Go” phase sees discretionary spending replaced with higher health care expenses.

But life isn’t a reflection of a bunch of data points. Planning for reduced spending in nice tidy 10-year bands is a good exercise and planning technique, but spending changes often will be an unavoidable event, most likely triggered by a health-related experience.

This realization that spending during retirement is not a straight upward sloping line, but rather a series of decreasing spending years means many may be able to enjoy the early years of retirement more than was originally thought. But the responsibility is on the individual and not the employer to make the math work. This most certainly means saving more of each paycheck and/or preparing to retire later in life.

A long retirement is a wonderful thing that can be wildly rewarding albeit, for many, laced with financial challenges.  However, much like the Chicago Symphony Orchestra, the pensions are gone but the show must go on!

The Times They Are A Changin’...

This past summer, Vermont became the ninth state to legalize marijuana and the first to do so via state legislature. Once a taboo topic, cannabis is going mainstream. A 2018 Pew Research Poll found that 62% of Americans believe that cannabis should be legalized; this is the highest number in the last 50 years.

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There is big money on the horizon here, U.S. legal sales of cannabis reached $13 billion this year and are projected to double within six years. Pile on strong medical growth prospects and you have the budding of a legitimate industry. But how can individual investors cash in on this green wave?

Access to capital is a serious issue for new companies, especially in the U.S. As long as the drug remains outlawed at the federal level, you won’t see U.S. businesses with cannabis operations listed on U.S. stock exchanges. Investors interested in these U.S. businesses must seek alternative investment structures to gain exposure. This leaves investors open to illiquid and speculative risk, two investment characteristics we find especially unappealing.

Canada on the other hand has legalized cannabis on a national scale. Companies north of the border are growing at a much faster pace since they are able to list on the Toronto stock exchange as well as U.S. exchanges like NYSE and NASDAQ, opening the floodgates for much needed capital to drive growth.

Here in the U.S., nothing quite helps stoke the flames of change like the opportunity to make some serious money. Medical marijuana sales are projected to grow by 36% per year, making it a potentially $54 billion segment by 2024. CBD, or cannabis oil, a non-psychedelic element found in cannabis, is projected to grow at 700% in the coming years! Eventually the U.S. will need to pass laws to make cannabis legal on a federal level. They will want to do this for two reasons: regulate and make money via tax revenue.

Although the hype is high and well documented, this is still an unestablished industry, so navigating the minefield may be most closely compared to the dot.com environment of the early 2000s. Back then the internet was clearly here to stay, but there were many “internet” companies that proved to be building castles in the sky, resulting in huge losses for investors wanting to get a piece of the action.

Taking up a position in any one company, especially those in new and uncertain ecosystems, is a risky proposition. The current big businesses in Canada are trading at multiples in the 100s. Most are not making money, but rather losing cash as they build up their infrastructure for potential growth ahead. This suggests that the industry is still at the beginning of what could be a hockey stick growth trajectory (see image). The next big event that will propel growth upwards could be federal legalization.

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While we see strong potential for growth here, we do not have confidence in speculative industries selling at such high multiples. The same rings true for past hot ideas like 3D printing and cryptocurrency. In the current cannabis environment it is too difficult to tell which businesses will really thrive from those bound for failure. A more calculated approach may be investing in diversified marijuana ETFs to gain total sector exposure.

The four most dangerous words in the investment world are, “This time it’s different”. Cannabis could very well go mainstream like tobacco and alcohol, but remember that cannabis has NEVER been legal during any of our lifetimes and the ship may take longer to turn around than is thought. Tread carefully here and never invest more than what you are willing to lose, especially in this space.

A Beautiful Mind...

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You’ve all heard of the placebo effect, where a patient is administered a fake medicine without knowing and then shows signs of recovery. That’s interesting on its own, but would you believe that they are now running tests where patients are told that the pill they are taking is fake and the results still show improved health? Think about that for a second; people are being told they are taking sugar pills and their minds still help their bodies heal!

Our minds also play tricks on us when it comes to investing. Biases tend to sit deep within our psyche and may serve us well in certain circumstances. However, in financial matters they may lead us to potentially hurtful outcomes. It should be noted that these biases impact all types of investors, both professional and private.

Overconfidence bias is having an inflated view of one’s own abilities. For instance, when asked to rate your ability as a driver, 70% – 80% will say they are above average drivers, although obviously only 50% of all drivers are above average. We tend to look at the world through a positive lens, which may be good in some situations but often harmful for your investments.

Warren Buffet typically begins his annual letter to shareholders by highlighting the stupid decisions he has made and how he has learned from them. There is a lesson to be learned here since most people will view a negative investment outcome as simply bad luck, but attribute a really successful investment to superior skill and knowledge. We don’t learn from our mistakes and, more importantly, we don’t take ownership of them.

One way to correct for this is to write down your mistakes and dissect them to understand where things went wrong. The goal is to get better with future decisions. We can learn much more from mistakes than from victories - this is true of many things in life.

Another interesting bias is loss aversion. The work suggests that investors weigh losses more than twice as heavily as potential gains. If I flipped a coin and offered to pay you $10 if you were right but you had to pay me $10 if you are wrong, would you take that bet? Studies show that the answer is no; people require $25 if they win versus handing over $10 if they lose. Losing $10 is much more painful and outweighs the euphoria you get from winning $10.

We don’t stay up late at night worrying about the investments that did well; instead we grind our teeth about those that lost. This pain from losing stands in our way of making rational decisions with our long-term investment goals.

Moreover, people do not like being associated with losers, so stocks that have performed poorly will largely be avoided. As the chart below indicates, stocks tend to perform their best when investors are feeling the worst about the future outlook. Much like every other purchase in life, stocks are best to buy when on sale, yet we insist on doing just the opposite when it comes to investing.

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We are interesting creatures indeed and the mind is a powerful thing. The way we handle our investments is especially fascinating. The pitfalls are well documented yet we still find ways to fall into the same traps, time and time again.