As investors, we watch, measure and weigh. Some of us already know what we’re going to do. After measuring our needs for cash over the next 28 to 24 months, we will attempt to secure the benefits of investment value compounding at an equity-like rate of return in the US stock market, even with an increased risk of more regulatory oversight and inflation. Watching the financial markets, we see the likelihood of increased oversight by federal and state regulators, the chance of rising inflation which would damage the value of most financial investments (we look to invest in those with the best likelihood of recovering their former value in a reasonable amount of time), and, always, some ways to refine our philosophy of investing. Measuring the effects of increased oversight and regulation brings us to the fiduciary rule: always putting the client’s interest ahead of our own. Since this is part of the Investment Company Act of 1940, we at Woodstock have been complying with this rule for all of our registered investment company life. We plan to follow it in the future.
The current regulatory push is to attempt to describe the fiduciary rule in a way that can include broker-dealers whose commission-based financial model, on its face, violates the fiduciary rule. We rely on broker-dealers to do our job. We understand they are not fiduciaries. Caveat emptor is fine with us. But our regulators don’t like “relying on educated consumers” or “useful differences.” Now layer in the fact that approximately 70% of the financial services industry, as measured by assets under management, is currently dual-registered as both an investment advisor under the fiduciary rule and as a broker-dealer. “Dual registration exposes fiduciary clients to unique conflicts” notes Financial Planning.[1] If “unique” means “unsolvable,” we agree. This regulatory effort may cause short-term difficulties for firms, even ours, but seems unlikely to change human nature. It is aimed at the wrong target.
Inflation and Monetary Policy
Sizing up the risk of inflation falls on another large federal bureaucracy, the Federal Reserve. Through the various monetary tools at its disposal, the Fed is increasing the money supply to stimulate the economy toward full employment. A stable monetary environment used to be its principal mandate (i.e., controlling inflation to preserve the purchasing power of the dollar), but in modern times it seems the emphasis is more on full employment. The path to full employment through monetary policy is complicated, however. The Fed provides an increased money supply, which commercial banks loan to entrepreneurs to grow businesses and hire more people. Commercial banks have to trust that businesspeople will pay them back and businesspeople have to trust that inflation won’t make their loans too expensive, or that politicians won’t arbitrarily shut down the economy, or that federal, state and local governments won’t take their profits by raising taxes.
The Federal Reserve’s efforts to boost inflation towards its target with increased money supply have animated asset prices and probably have contributed to the economic recovery. Historically, a combination of monetary policy from the Federal Reserve and fiscal policy from the executive and legislative branches (i.e., cutting taxes) have worked best. The fiscal move creates business confidence. The Federal Reserve looks like it’s aiming monetary policy at a difficult target, unless supported elsewhere.
Our philosophy of investing is described in this issue and past issues of our QMP. As we’ve noted, we know approximately what we will do from an investment perspective, even in extraordinary times. We believe we’ve received some confirmations from disparate sources. A current entrepreneur and former US Olympic gymnast was quoted as saying, “when you go past the edge of balancing everything in your life properly (health, happiness), you’re working against yourself”.[2] We’re watching others obsess and aim at the wrong or difficult targets. Also, goals-based financial planning tends to miss its goals because in trying to plan for 10, 20 or 30 years out “most people don’t even know what’s possible in the first place.”[3] No one tells them that Woodstock is where they want to be. How to tell them? We’re obviously not the best salespeople. We are trying very hard to “know who to approach, what to say and how to educate and motivate prospects to become clients.”[4]
We know that you are the most valuable business development tool that we have. Your referral of a friend, colleague or family member to us is the most important way that we grow.
We thank you for your support and want you to know that we are dedicated to serving your best interest.
William H. Darling, Chairman & CEO
Adrian G. Davies, President