Category Archives: Quarterly

First Crack in the Bull Market, but Don’t Get Fooled Again

First Quarter 2019

“Won’t Get Fooled Again”

I’ll tip my hat to the new constitution
Take a bow for the new revolution
And smile and grin at the change all around
Pick up my guitar and play just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again, don’t get fooled again, no no no no
Meet the new boss
Same as the old boss

Songwriters: Pete Townsend
Produced by: The Who

Key Takeaways

Don’t get fooled again by rising interest rates doomsayers.

  • The yield curve just inverted for the first time since 2007—short term rates are now higher than long term rates.
  • There’s typically a 17-month lag between a yield curve inversion and the start of a recession.
  • The curve did not stay inverted very long further confusing outcomes.
  • Markets tend to perform well during the post-inversion lag period–but stocks eventually draw down when the economy contracts.
  • Stick to your plan. Ignore the media. Buy when things are cheap and take lower but acceptable returns.

 The Yield Curve Inverts

In 2007, I was in China and purchased a statue of a bull for my home office. The statue arrived via FedEx with a crack down the middle. Little did I know that crack would be an eerie warning of the 2008-09 financial crisis—the most punishing global recession we had seen since 1929?   I’m not superstitious, but a more traditional recession indicator flashed negative soon after my damaged shipment arrive from the Far East–the yield curve had “inverted.” In other words, rates on long-term (10-year) Treasury bonds were actually paying investors less than short-term (3-month) notes were. As we’ll see in a minute, this phenomenon has happened at least five other times over the past 40 years, and each time a recession has followed.

A similar inversion just occurred at the end of March 2019 while U.S. stock markets had rebounded nearly 20-percent from a recent bottom and the bond markets were on a win streak as well. Does that mean another recession is looming? Quite likely it is, but there are some important caveats to consider in terms of timing, severity and what you should do with your portfolio. The markets like life are never easy.

First, it’s important to remember that not everyone uses the same definition of “inversion.” Like the San Francisco Fed, I consider it to be when the yield on 3-month Treasuries is higher than the yield on 10-year Treasuries. According to the Cleveland Fed, inversions of that 3-month/10-year spread have preceded each of the past seven recessions, including the 2007-2009 contraction. The Cleveland Fed acknowledged there have been two false positives — an inversion in late 1966 and a “very flat” curve in late 1998.

What does the yield curve really mean?

The 10-year rate is set by market supply and demand as investors determine the equilibrium point of where that 10-year rate should be. But, the 3-month rate is set not by market forces, but by policymakers at the Fed. As the old saying goes, when investors are scared, they run to the 10-year and when the Fed is scared it raises short-term interest rates. These two forces collide to invert the curve. As a result, when short-term rates are higher than longer term rates, investors are indicating that they’re cautious about the future of the economy and they don’t want to tie up their money.

Yield Curve is Not a Timing Mechanism

The problem with using the yield curve blindly as a recession indicator is that there is historically a lag of 10 to 24 months between when the yield curve inverts and when the economy limps into a recession (see below). More importantly, you don’t want to head for the hills immediately because markets tend to perform very well during that initial post-inversion lag period to the tune of PLUS 15 percent on average (see subsequent chart).  Here are the start dates for the five previous inverted yield curves along with the beginning of the ensuing recessions:

Source: Ben Carlson, A Wealth of Common Sense

As you can see, there has been a substantial lag from the time of the inversion until the start of the recession in each of these instances. The average number of months was 17, meaning it took about a year and a half for the economic slowdown to hit after the yield curve inverted. Again, history shows that markets tend to perform very well in the initial year or two following an inversion.

Source: Ben Carlson, A Wealth of Common Sense

As mentioned earlier, the average return during these lag periods was a gain of more than 15 percent. There was just one downturn which occurred after the dot-com bust in the early 2000s. Although the stock market doesn’t need to see a recession for a large correction, it’s a safe bet that an economic contraction will lead to a draw-down in stocks.

What does it All Mean?

I know what you’re thinking: “Thanks Matt. You just hit me with a bunch of financial gibberish that I don’t understand and have thrown out some conflicting signals.” I’ll make it easy: It appears we have our first serious recession signal in over a decade, so we should take this indicator seriously. However, the other Fortis recession signals are not yet flashing red:

  1. Wage growth is still below 4 percent.
  2. Inflation is not accelerating.
  3. Initial jobless claims are not rising, and
  4. Inventories are up, but not at recession levels.
  5. Bonus factor- the yield curve only stayed inverted for a couple days.

Our 4th Quarter Letter encouraged investors to be aggressive and take advantage of the near 20 percent correction in the markets. Over that time, as U.S. market valuations pulled back to median levels, we said the probability of a significant rally following a bad quarter would be quite high (see below grid). We followed that Q4 letter with our first webinar for investors that discussed in greater length the opportunity at hand. As most of you know, the first three months of 2019 ended up being the best quarterly return for the Dow and S&P 500 in a decade.

Source: Ben Carlson, A Wealth of Common Sense

Looking Ahead?

While we can’t avoid a recession forever, we’re not likely to endure a downturn as punishing as we had in 2008. Bank balance sheets are in rock solid shape. American citizens have been cutting debt aggressively, resulting in stronger personal balance sheets than we’ve seen in many years. But we have to be disciplined, because the probability of a cyclical recession is rising and there is a strong likelihood of lower portfolio returns after a decade of euphoria.

At this point, employment numbers can’t get much better–we have more jobs available in the U.S. than eligible unemployed citizens. As is usually the case with markets, unemployment numbers are counter-intuitive: The time to invest is when unemployment is high. When unemployment is high, stock valuations are usually low and no one is buying equities. As Warren Buffet always says: “Stocks are the only thing people don’t buy when they are on sale.”

Interest Rates

I am sure you thought this Quarterly Letter’s theme (“Don’t Get Fooled Again,”) would be a warning about the next 2008.  It’s actually about the probability of interest rates going higher. One of the reasons the yield curve inverted is because the Fed was raising short-term rates at a time when the rates on longer term 10-year Treasuries were falling. As I mentioned earlier, short term rates are driven by Fed policymakers, while long-term rate are driven by market forces.

The chart below shows that estimates for rates under “preferred conditions” have dropped from 3.5 percent in 2018 to 2.5 percent in 2019. Further, there is ample speculation about a rate cut in 2019.

Historical S&P Returns when Unemployment Low

Estimate of Fed Policy Going Forward


Think of Fed Fund Futures as a Betting Line

The line has now moved heavy in favor of a rate cut in 2019.

Global Bond Yields Slide to Fresh Lows Following ECB Comments

As the Wall Street Journal recently reported, yields have slipped as central banks have signaled they are willing to hold rates low for significantly longer than expected.

For 25 years, economists have been predicting doom due to rising interest rates. Here we are again with mortgage rates near historical lows. I am already trying to teach my kids that betting on sports is a loser’s game, but an even biggest loser’s game is making bets with your money based on expert predictions about interest rates. “Don’t get fooled again.

Since 1992, Economists Have Predicted Higher Interest Rates.  How did that work out?


Source:  Blackrock

If you do not believe me, here are Warren Buffet’s comments from his latest Berkshire Hathaway shareholder letter???


Equity investors have enjoyed a historic run over the past decade, and now it appears we have our first serious signal of a downturn.  Again, the inverted yield curve is not a timing mechanism, nor is it a 100-percent reliable recession indicator. We also have a de-levered banking system and a de-levered high-net-worth population in the U.S.

America’s wealthiest households are stashing their cash at record levels. The top 1-percent of households now have three times more money in readily available cash than the bottom 50-percent holds! The 1-percenters have about 20-times more in cash today ($304 billion) than they did before the last recession ($15 billion) according to Federal Reserve data released last week.

 We are blessed to live during a dynamic time in U.S. history. Bull markets are getting longer and bear markets are getting shorter. Most of us endured a once-in-a-lifetime recession in 2008, but came out with a record setting bull market run. When the the next recession arrives, it will most likely follow the same path as shown in the chart below.

For investors who are net savers, over the next decade, you should welcome the recession as an opportunity to buy stocks on sale. I am a firm believer in Warren Buffett’s American Tailwind theory: “Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind.  We are lucky-gloriously lucky-to have that force at our back,” quipped Buffet.

History of U.S. Bear & Bull Markets Since 1926

Final thoughts: Prepare for the years ahead

  • Stick to your plan. Investing is a psychology game, not an IQ game. Do not get emotional and have a plan.
  • Prepare for lower but acceptable returns.
  • Mentally prepare for a recession size drawdown in equities 30-40%
  • Get aggressive when stocks are on sale
  • Ignore the headlines and doomsayers.
  • Ignore politics as elections approach.
  • Don’t lever up now. Opportunities will present themselves in the near future to use your debt/margin in a more efficient manner.

As Springsteen Takes Off on Broadway, Investors Got Blinded By the Light

4th Quarter, 2018

 “She Got Down But She Never Got Tight She’s Gonna Make It Through the Night”

 Blinded by the Light

Blinded by the light
Revved up like a deuce
Another runner in the night

She got down but she never got tight
She’s gonna make it through the night


Songwriters: Bruce Springsteen

Blinded by the Light lyrics © Downtown Music Publishing

Springsteen’s off-Broadway

I recently watched Springsteen’s fabulous Broadway performance on Netflix, having seen The Boss over 20 times myself, it still was unreal to hear him tell personal stories around growing up and his career.  As I watched one of the most volatile stock market year ends in history, I couldn’t help but apply investors psyche to a Springsteen song.  Most investors got Blinded by the Light, it was just too easy, buy FANG stocks, buy S&P index, buy anything.  After 2017 being one of the least volatile years in market history including no drawdown of S&P over 3% versus historical annual average drawdown of 14%, the market sent a giant wake-up call that investing is always emotional including an all-time record almost 3% Christmas Eve smack down.  Here’s the good news, it seems she (market) is going to make it through the night as she always does, it’s not 2008 or anything close, we have some wood to chop in the short-term but valuations are reverting to mean.

2018 was a historic year for financial markets in more ways than one-first time in 27 years that stocks and bonds were both negative in the same year, worse stock market December since 1931, over 90% of investable assets were negative in 2018, and no asset class returned over 5% for the first time since 1974.

A Record Share of Asset Classes Posted a Negative Return in 2018

Investors felt pain this year across the board as diversified portfolios were nowhere to hide, in fact some well diversified holdings returned less than the S&P due to exposure to bonds, commodities, international stocks and U.S. small cap stocks.  Three of these groups were down more than the S&P and most bonds were flat to negative.  The tradtional 60/40 model was negative for the year with returns coming in 13% below historic median, if you’re 60/40 was global returns were even lower.  Target Date funds are popular and growing especially in 401k plans, see below as they are posting first negative returns in 10 years.

Diversified Portfolios Big Red Year – Target Dates Down for First Time in Ten Years

In my first quarter 2018 letter I wrote at length about tech facing its Machevellian moment in the next 12 months, mentioning that a small cadre of tech stocks were responsible for most of the markets gains which is unsustainable.   But the bigger problem was the market was due for sector rotation especially since traditional defensive sectors of market hit record low capatalization in the S&P even lower than 1999 or 2008.  This sector rotation back to defensive certainly started in the 4th quarter now the question becomes how long will it last?

Click here for first quarter letter

As popular stocks and sectors started to crumble, retail investors as in the past started to get emotional, including pulling a calendar-month record  $98 billion from U.S. based stock funds in December.  In fact it was almost double the previoius record of $48.8 billion in October of 2008.  As anyone who has read my thoughts in the past knows, investors are terrible market timers.

Investors usually sell in market panic downturns and buy when they are blinded by the light of euporia.  But as you can see from the chart below, selling during bad quarters can cost you, buying during bad quarter has proven profitable on 1yr, 3yr and 5 year periods.

The good news is that markets will most likely, like Springsteen says, “make it thru the night.”  Banks balance sheets are in good shape as are household balance sheets, the debt overhang this time around is corporate debt and private lending, not enough to spark another 2008.  This could leave us looking at a bear market without a recession or a cyclical bear market within a longer-term secular bull.  The good news on these two scenarios is that the pain will be short-lived.  For anyone who is a net saver for the next 5-10 years or more, buying opportunities will present themselves as some are already coming to fruition.

See chart below the length of bull markets versus bear markets, especially some of the shorter corrections or cyclical bears.

History of U.S. Bear and Bull Markets Since 1926

How about returns for the market after bad quarters and months like December?  The market actually has impressive returns on a 1 year, 3 year and 5year basis after a 4th quarter like 2018.  If you strip out the American depression years, last quarter was the top 10 worse quarter in stock market history.  So we should run for the hills right, contrary to the natural emotional response, instead we should channel our inner Warren Buffet and stay to a disciplined system for the long-term.

The good news about market sell off is that valuations naturally come down, as you can see in the following chart, S&P price to earnings ratios have pulled back to the mean.  Even though investors and the media love to talk in terms of the S&P, diversified portfolio holders invest internationally, across market caps in U.S., in commodities and real estate.  The even better news is some of these non-S&P asset classes are trading at 25 year lows.  Value stocks are at record discounts to growth stocks in the U.S., International stocks are trading at half the fundamental valuation measures of U.S. growth stocks and commodities are at a 25 year low valuation to the S&P.  The idea that all asset classes are expensive after this 10 year bull market is fake news.

S&P Valuations Trading Below 25 Year Average P/E

Valuation Grid

Value Stocks and International Stocks Trading at Discount to U.S. Growth Stocks.

Global Valuations as of 12/17/18


Diversified portfolios generally work well over the long-term but they are sometimes painful to hold in the short-run.  The last 10 years have been an S&P dominated investment environment, this has left some asset classes behind resulting in cheap valuations.  Investors that are net savers for the next 10 years now have an opportunity to invest more aggressively at more attractive valuations.  As one of our earlier charts indicated most investors are selling, historically this has been the best time to buy and post bad quarters data also puts probabilities in your favor for a 3-5 year horizon.

Investors should expect more volatility in the first quarter as company earnings hit the tape and the market decides whether this is a correction of something bigger.  Valuations in many asset classes have already priced in something bigger but as the song goes “she will make it through the night.”  As I like to remind readers in most letters, the S&P 500 has experienced twelve 20% corrections in the last 70 years and it’s returned 15,000%.  I believe investing is a psychology game not an IQ game, I suggest you keep your emotions in check and stick to your plan.

3rd Quarter 2018 “Looking for Bubbles in all the Wrong Places”

Looking for Bubbles in all the Wrong Places

Eleanor Rigby – The Beatles

“All the lonely people
Where do they all come from?
All the lonely people
Where do they all belong?
Ah look at all the lonely people
Ah look…”

Liquor, ladies and leverage for the retail investor

Legendary investor Warren Buffet likes to say there are three ways to go broke: Liquor, ladies and leverage. “It is crazy in my view to borrow money on securities,” he told CNBC earlier this year. “It’s insane to risk what you have and need for something you don’t really need.”

After a 10 year bull market in equities, private equity (PE) is now looking for all the “lonely people” who haven’t yet joined the alternative investment party. U.S. equities certainly aren’t cheap today, but there are other areas of the economy and investment world that are closer to bubble territory. In its insatiable hunger for more investors, PE is now pitching average retail investors—The Joe Sixpacks—as aggressively as lending companies served up zero down, no doc mortgages to the masses on the eve of the global financial crisis a decade ago. We all know how that story turned out.

Wall Street wants to help out average investors by offering them access to private investments

In a recent Wall Street Journal interview, Securities and Exchange Commission Chairman Jay Clayton, said the SEC wanted to make it easier for individuals to invest in private companies, including some of the world’s hottest startups. These “opportunities” were once reserved for institutional investors and ultra-high-net-worth individuals.

Wall Street wants to help out Mom and Pop investors by offering access to private investments

Dear Average Investor, Run like hell!

Matt Topley

Needless to say that even if the rules overhaul goes through, Joe Six Pack will not be offered the same type of private equity fund or venture capital fund that the Harvard Endowment is offered. I’ll also go out on a limb here and say these offerings may be a little too complicated for most investors to understand. Trust me. I’ve been working in the investment world for over 20 years and I still struggle to grasp the fees and valuations methods of the private world.

This latest development could well signal the top of the current private investment boom in the U.S. There are now 2,700 private market managers in business today, up from number of 502 less than 20 years ago. (Source: Preqin)This reminds me of the boom in hedge funds in the 1990s which saw the market grow to 12,000 managers from 500 in a short span of time. Not surprisingly, alpha disappeared as too many managers were chasing the same ideas. The same scenario could likely play out in the private world today.

As you can see in the chart below, hedge funds generated a lot of alpha during the 1990s when there were relatively few players in the market. But after 2000, the number of new hedge funds exploded and returns predictably went south.

Is private equity getting too big?

According to Cambridge group, PE returns have lagged the Russell 2000 by 1 percent and the S&P 500 by 1.5 percent for the past five years. In 2015, eight executives at the four publicly traded private equity firms (BX, KKR, CG and APO) made a collective $1.9 billion while shareholders in those same private equity firms lost a collective $13.7 billion.

Institutions are adding $200 billion per year to private investments, thus leaving private equity with $1 trillion in excess cash to spend. At, the end of the day, there are simply not enough deals at reasonable valuations to satisfy demand. It reminds me of 2008-09 when institutions piled into hedge funds just as their alpha generation was disappearing.

But, PE funds are not paid to hold cash. They need to pay high valuations with a big bet on future growth. Another big issue is that PE deals are debt dependent. The average PE deal is 65 percent debt-financed in addition to having an opaque valuation system.

How will a bear market in bonds affect private offerings?

As Daniel Rasmussen explained in American Affairs Magazine, PE firms typically double the debt on their balance sheets from 2.5-times EBITA to 5-times EBITA so they are significantly more levered than a typical public company. Rasmussen said studies from the Canadian Pension Plan Investment Board (CPPIB) and the Abu Dhabi Investment Authority (ADIA) found the average ratio of net debt to enterprise value at inception is around 65 percent. By contrast, the typical Russell 2000 small cap stock is levered at about 16 percent and the typical Russell 2000 large cap stock is levered at about 18 percent.

From where I sit, it seems we may finally be entering a rising rate environment as the 10 year U.S. treasury yield breaks out from a 30 year downtrend. If a bond bear market is underway, highly leveraged companies (particularly small companies with volatile cash flow) will be weighed down by the cost of debt. Also, high investment activity in the private world is driven by easy access to credit—something that may be getting harder for PE managers to get in the future.

On top of that, middle market growth companies, previously the most lucrative segment of the private equity world, are seeing the most competition as big PE firms move downstream in search of returns and as family offices increasingly bypass funds so they can invest directly in companies.

This trend has lowered estimates of future returns with longer holding periods.  Investors with recent vintage years now may be held up longer than the average American marriage lasts. Compare that to small cap value funds that often generate higher returns and can be redeemed within one day while costing only 25 basis points.

Two things may happening if we are truly entering a bear market in bonds:

  1. Investors that previously took on more risk in search of higher returns may now be content to park their money in tax fee municipal bonds paying at 5 percent interest, and
  2. Companies that rely on leverage will see their valuations sink.

The real leverage is private lending. 

 The Rise of Private Assets Is Built on a Mountain of New Debt

Credit businesses have helped drive the private-equity industry’s expansion, but things could get awkward when companies hit trouble. As Paul Davies explained in The Wall Street Journal: “In the world of private deal making, the biggest borrower in town is becoming one of the biggest lenders too. With so much money chasing buyout opportunities, big and risky deals seem the likely outcome.”

Davies also said that in recent years, private-equity firms have increasingly got into lending to buyouts, too—often lending to their own deals. As a result, their credit businesses are “adding to the huge growth in specialist private debt funds and retail money that has taken place in loan markets since the crisis. The flood of money into credit has driven down borrowing costs and cleared out traditional lender protections known as covenants on many loans.”

According to Pensions & Investments (P&I) Magazine, total commitments in 2017 to private lending were 617 percent higher than the $4 billion tracked by P&I in 2010.

Private credit funds now run three times as much money as they did in 2007. Although default rates are low, interest rates have been benign. On top of that, we know that most lenders will keep playing until the music stops. It appears the discipline in lending standards has broken down as “covenant lite” leveraged loans hit another record.



A private equity market, already bloated with record inflows, is now being offered to the general American public at a time when interest rates are moving higher and the investing discipline is breaking down. When you see a 600 percent increase in money flows, loan covenants disappearing and valuations hitting record levels, PE is not what the average retail investor needs in his or her 401(k) plan.

I have nothing against private equity. Many PE many firms have admirable track records and private equity is also an awesome space to drive the economy as capital flows to small business. But, everything runs in cycles. Money tends to flow to where it’s treated best–until the music stops. Now is a great time to be a seller to private equity, but I wouldn’t include PE in your 401(k) plan. 

Instead, wait until the headlines trumpet the death of private equity. As Warren Buffet likes to say: “Buy when there is blood in the streets,” not when it’s raining covenant lite loans and 14x EBITA buyouts. For all the lonely people who feel left out of cool private investments, save yourself a lot of money and stress: Go buy a small cap value fund at 25 basis points. You’ll sleep a lot better and have more in your pocket. 

Eleanor Rigby – The Beatles

“All the lonely people
Where do they all come from?
All the lonely people
Where do they all belong?
Ah look at all the lonely people
Ah look…”

12 Questions That Will Change Your Financial Life

How well do you really know yourself and your relationship with money?

by Matt Topley

Key Takeaways

  • When it comes to your money outlook, you tend to be influenced by the five people you spend the most time with.
  • Commit to being a lifelong learner about personal finance and personal fulfillment. There’s a strong correlation between the two.
  • Don’t let your emotions get in the way of a sound financial plan—or life plan.
  • Be brutally honest with yourself about what’s most important in life. Eliminate distractions that prevent you from putting your energies where they truly belong.

Going through my summer reading pile the other day, I came across a great article by Ryan Holiday, called “12 Questions That Will Change Your Life.” Holiday, author of the best-selling book Ego is the Enemy, wrote 12 Questions for a general audience, but I’ve found they can be applied to investing, wealth accumulation and wealth preservation, too. You don’t have to read these provocative questions in order, but do yourself a favor and give each one some thought:

Q1. Who do you spend your time with? According to motivational speaker and business guru, Jim Rohn, we are the average of the five people we spend the most time with.

It’s been proven time and time again that people are the product of their environment. If you spend your time around people who constantly complain about money, who degrade rich people, who see money as the root of all evil or who will do anything to avoid a conversation about finances, then you’ll have a lower probability of growing your wealth than if you spend your time surrounded by people who have a healthy relationship with money.

That doesn’t mean you have to champion the “Greed is Good” philosophy made famous by Michael Douglas in the 1987 classic “Wall Street.” But, think about your closest friends and colleagues. Do they seem to have a positive relationship with money?  Do they inspire you to grow your net worth and pursue financial freedom by way of example? On the other hand, if your closest friends and colleagues are willing to accept an unhappy financial lifestyle, they will most likely endure an unfulfilling family and work life.

Q2. What does your ideal day look like?  One of the biggest benefits of financial freedom is that you can live your life on your terms—not on someone else’s terms. But if you don’t know what your ideal day looks like (both a workday and a weekend day), then how do you expect to experience it on a regular basis?  It’s important to take inventory of your financial life.  One of the best ways to do that is to spend a few hours a week increasing your financial literacy. It’s not about learning how to be a better stock picker. It’s about learning how to boost your career skills or starting a side business that can substantially boost your income.

Before diving in, it’s important to know how you learn best. Do you learn best by reading, by listening or by watching?  Whichever channels works best for you, spend an hour a day on it building your career skills and financial literacy.  Surely it’s worth devoting 60 minutes a day to something that will lower your stress and increase your pursuit of self-actualization.

READ: Barron’s, Wall Street Journal and Topley’s Top 10 blog.
LISTEN TO: Behind the Markets (Wharton Business Radio) and Barry Ritholtz’s Masters in Business podcast (Bloomberg)

Q3. To Be Or To Do?  Legendary Air Force colonel, John Boyd, used to ask trainees: “To be or to do? Which way will you go?”  Boyd wanted to know if the new recruits would be focused on the pursuit of success or choose to focus on a higher purpose?

The goal of financial freedom is not to acquire big houses, fast cars or expensive bling. It’s about acquiring the freedom of time so you can enjoy life and pursue a higher purpose. Finding a higher purpose takes time and contemplation. If you are just scrambling to pay bills all the time, you are not in a position to be thinking about your higher purpose in life. The stress hormone cortisol is public health enemy No. 1 and research shows that a sizeable percentage of Americans suffer from financial anxiety (see Question 12). Real tangible accomplishments happen only when your thinking is sharp and free of stress and distractions.

Q4. If I Am Not For Me, Who Is?  If I Am Only For Me, Who Am I? The alternative translation of that last part is “If I am only for me, what am I?”  The answer is “the worst.”  It doesn’t make you a bad person to want to be remembered, or climb to the top of your profession, or focus intensely on providing well for yourself and your family.  But, if this is ALL you want from life, then that’s a problem. Many successful people have strong gos and are driven by self-interest, pride, dignity and ambition–but they temper those traits with a sense of humility and selflessness.

Warren Buffett, no stranger to success, said that “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

I love Buffet’s quote and recently wrote a paper based on it (Investing Is a Psychology Game, Not an IQ Game). If you’re not careful, ego can be your greatest enemy in both investing and in life. Temper your investing life with a sense of humility and simplicity. This will give you the time and money for selflessness. Improving your personal financial life give you the time and money to change the world in a way that is most meaningful to you.

Q5. What Am I Missing By Choosing To Worry or Be Afraid? In his book, The Gift of Fear, Gavin de Becker suggests that when you worry, you should ask yourself: “What am I choosing NOT to see right now?”  What important things am I missing because I choose worry over introspection, alertness or wisdom?”

Obstacles in our financial lives make us emotional. The inability to keep our emotions in check is what often destroys net worth and can lead to fractured personal relationships and stunted careers.

Don’t let the stock market’s fickle gyrations fool you into making bad decisions. Don’t let Wall Street pundits and the financial media scare you with attention grabbing headlines.

When it comes to investing, things are never calm for long. Over the past 70 years, the S&P 500 Index has experienced twelve separate corrections of at least 20 percent. That’s an enormous amount of wealth wiped out in a relatively short time. But despite those frightening reversals, the index has gained a stunning 15,000 percent over that seven-decade time frame. Those who stayed invested and who didn’t try to get in and out of the markets have been handsomely rewarded for their discipline.

Meanwhile the average U.S. investor is barely keeping up with inflation (Sources: Richard Bernstein Advisors LLC, Bloomberg, MSCI, etc.). Why is it so hard for individual investors to keep up with inflation, let alone the unmanaged market index? Because many make emotional decisions at the wrong time—again and again!

The Greek word “apatheia” refers to the equanimity one gains when you are free of irrational fear and extreme emotion. Apatheia is one of the keys to successful investing and paves the way to a state of flow in your personal financial life. A fulfilling life revolves around doing meaningful work and having meaningful relationships. A stressful personal financial situation can destroy your ability to enjoy your work and relationships.

Q6. Am I Doing My Job?  The last thing that legendary college basketball coach, John Wooden, said to his players in the locker room before every game was: “Men, I’ve done my job; the rest is up to you.”

You may not be part of an elite basketball program or Fortune 100 company, but ask yourself if you are really doing your job each and every day? Remember, you can be extremely busy—working to the point of exhaustion–and still not be doing your job. You cannot be the best at your job when you are scrambling to pay the bills, fighting with your spouse over money matters, or envying a co-worker you think is more financially successful than you are. To operate at your highest level for career advancement, you must be in a state of mental flow. This flow state can only be reached when distractions are kept at a minimum. A healthy financial plan will limit distractions from many areas of your life—not just the money ones.

Q7. What Is the Most Important Thing? If you don’t know what the most important thing in life to you is, then how do you know if you’re putting it first? If you have personal financial stress, you will never have time or mental energy to focus on what’s most important to you because you will be constantly distracted by the negative weight of your money burdens. However, once you put your financial house in order, you will develop the quiet confidence to succeed in all aspect of your life. Seneca, the ancient Roman philosopher called that quiet confidence “euthymia”– the belief that you’re on the right path and that you won’t be led astray by people who are hopelessly lost.

Q8. Who Is this for? It doesn’t matter if you’re making something, selling something or trying to reach people, you have to know who your audience is. Great speakers, great politicians and highly creative people tend to have a good sense of who their target audience is. So can you.

Creativity is the key to self-improvement and career growth. In order to be creative you need to generate a LOT of ideas. They won’t all be winners, but you need a clear mind and long periods of uninterrupted thinking time to come up with a diversified portfolio of potential ideas so you can consistently develop good ones. Clearing your mind of financial worries and other distractions is the key to getting into your flow state—a mindset in which you do your best thinking and achieve real breakthroughs.

Q9. Does this Actually Matter? Given the shortness of life, does this thing I’m thinking about, worrying about, fighting about, throwing myself into even matter?  Sadly the answer is usually no.

As Coach Wooden always told his players: “Learn as if you were to live forever; live as if you were to die tomorrow.”

If nothing else, don’t get stressed about short-term market volatility and the media hysteria around it. All that matters is your long term financial plan and preserving wealth for yourself, your family, your heirs and the causes you support. As get older, I realize more and more that money is simply a tool for making the most of our brief time on earth. Making money for the sake of making money’s will just keep you on the hamster wheel forever.

“You could leave life right now,” the second century Roman emperor, Marcus Aurelius reminded himself, “Let that determine what you do and say and think.”

Q10. Will This Be “Alive Time” or “Dead Time?” At the end of the day there are only two types of time: Dead Time and Alive Time. Dead Time is when we are just waiting and Alive Time is when we are learning and active.

Resist the temptation to get distracted by Wall Street pundits. Don’t let them sway you into chasing the next hot stock or sector. Don’t let them talk you into getting in (or out of) the markets at EXACTLY the wrong time (see danger of market timing in Question 5).

Case in point
: During a recent eight-day span, research found that the big three cable news networks had over 600 stock market pundits on the air—that’s about 75 different “talking heads” tugging at your ego and emotions every day. Behavioral finance research proves how hard it is to predict markets accurately, but still we are exposed to thousands of gurus a month through conventional and social media. Use your Alive Time to become a smarter investor, to get better at your profession, to become a better parent, to read and to exercise regularly. Don’t allow your Alive Time to become Dead Time by trying to predict the unpredictable (think weather, stock market, natural disasters or traffic accidents, etc.).

Q11. Is this Who I Want To Be? Our minds have a unique ability to make the distinction between what we do and who we are. The problem is you can’t be a good person if your actions are consistently bad. People make bad decisions when they’re under fiscal duress, often falling into what we call “the triangle of corruption:
Need + Justification + Opportunity.

Unfortunately, sociopaths aside, the triangle is where people get themselves into trouble. By keeping your financial house in order, you can prevent the triangle from swallowing you up. You are what you do. Regardless of what you happen to be doing, always ask yourself, “Is this reflective of the person I want to be?”

Q12. Man’s Search for Meaning. Viktor Frankl, a renowned Austrian neurologist and Holocaust survivor, said life demands that we always answer the question, “What Is the Meaning of Life?” He said we answer that existential question with our actions and decisions.

After examining 65 studies on debt and mental health, researchers from the University of South Hampton concluded that people in debt are three times as likely as those who are debt-free to have a mental health problems. Those problems can range from drug and alcohol dependence, to depression, anxiety disorders and psychotic disorders. That’s a scary statistic considering that more than one-third of Americans have delinquent debt according to the Urban Institute.


Surround yourself with people who have a positive outlook on life and a healthy relationship with money. Control what you can control and let everything else go. Finally, if you are to find the meaning of life in your actions and decisions, then debt and financial worries are clearly things to avoid at all costs.

About the author

Matthew Topley is the Chief Investment Officer of Fortis Wealth in Valley Forge, PA and a 2018 winner of the Philadelphia Inquirer “Influencers of Finance” award. He authors the daily blog Topley’s Top 10.


Fortis Advisors is a wholly-owned subsidiary of Fortis Wealth and is a registered investment adviser with the Securities & Exchange Commission.

This presentation outlines research and is not an offer to sell or a solicitation to buy any securities. This is intended for the general information of the clients or potential clients of Fortis Wealth. Any investment information does not consider the objectives, financial situation or needs of individual investors. Before acting on any advice or recommendation in this material, a client must consider its suitability and seek professional advice, if necessary.

The material contained herein is based on information we believe to be reliable, but we do not represent that it is complete or accurate, and it should not be solely relied upon as such. Any opinions or suggestions as of the date written may change without prior notification.

No part of this material may be copied or duplicated in any form by any means and may not be redistributed without the consent of Fortis Wealth.

If you would like to receive a copy of our Form ADV Part 2a or any other information,
please contact Matt Topley at, or call (610) 313-0910.

Additional information about Fortis Advisors is also available on the SEC’s website at

There’s Still Time to Take the Road You’re On, but It’s No Guaranteed Stairway to Heaven

“There’s still time to change the road you’re on”

Led Zeppelin

‘Stairway to Heaven’


Stairway to Heaven

Led Zeppelin

There’s a lady who’s sure
All that glitters is gold
And she’s buying a stairway to heaven
When she gets there she knows
If the stores are all closed
With a word she can get what she came for
Oh oh oh oh and she’s buying a stairway to heaven

Key Takeaways

  • Just four stocks have accounted for 84 percent of the S&P’s upside in 2018.

  • Defensive sectors account for a historically small part of the S&P’s current market cap.

  • The large gap between growth and value stocks is not sustainable long-term.

  • Growth stocks have outperformed value stocks for extended periods six times since 1945….each time, that run was followed by a significant recovery in value stocks.

  • Even if the yield curve inverts, there should be plenty of opportunities for savvy investors.

The first chart to start this quarter’s letter looks more like a stairway to hell. It depicts the composition of traditionally defensive sectors (utilities, telecom, pharma, consumer staples) as a percentage of the S&P 500 index. Representing a record-low 11 percent of the index’s total market cap today, defensive sectors have sunk below levels last seen during the internet bubble era of early 2000.

In my early adulthood, it was a safe bet that you were staying out too late when the rock classic “Stairway to Heaven” came on the bar’s sound system at closing time. But, as an almost-50 year old reading Led Zeppelin’s iconic lyrics today, I can see why “Stairway to Heaven” is a perennial fixture on classic rock Top-10 lists.

As longtime advocates of sector rotation, you could say our firm’s investment philosophy is driven by the Zeppelin refrain: “There’s still time to change the road you’re on.

Throughout my Firm Letters over the past three years, I have defended the bullish case against Trump election doomsayers, mini-bubble procrastinators and comparisons to the 1999 tech crash.  However the conclusion of my Q4 Letter of 2017 (It Ain’t Over, but the Fat Lady is Warming Up) hinted that the bull market was entering its “euphoria stage.” And now in the second half of 2018, it’s clear we are seeing a historically large spread between growth stocks and value stocks.

As tech weightings in indices move higher, defensive sectors are halved

Equity markets: The relative weight of defensive stocks (such as utilities) in the S&P 500 continues to trend lower. As you can see in the chart below, there has been a clear break through the Internet Bubble lows of 2000.

The last time we saw such a giant gap between defensive sectors and the rest of the market, that spread was erased quickly during the unraveling of internet stocks at the beginning of this century. Unlike the dot-com era, we do not have a rampant IPO market of zero-revenue “story stocks” today, but we do have massive gaps such as FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) outperforming traditional value sectors by over 700 percent during the last five years.

As some of you may know, I started my trading life in 1997 at an earnings momentum shop that focused on tech stocks. My introduction to Wall Street was trading tech stocks and other high growth sectors during the internet bubble. As mentioned in my past letters, we are not experiencing anything like the internet bubble today. If anything, that risk is found in the venture capital and private equity world today, not in the hands of public market investors. However, we are experiencing a historically large spread between value stocks and growth stocks that will eventually revert to the mean.

The last giant gap between growth and value stocks

When gaps between growth and value form like they did during the dot-com boom (see chart below), they are reflected in valuation spreads.

Spread between growth and value hitting record highs

 2007-2017 Russell 1000 Growth +182% vs. Russell 1000 +96%

Right now, U.S. growth stocks are trading at a 59-percent higher price-to-book ratio than U.S. value stocks are, and they’re trading at a 67-percent premium to U.S. small cap value names.

The largest spread right now is an almost 80-percent price-to-book premium for U.S. growth stocks over emerging market value stocks. The majority of capital asset pricing models (CAPM), which are strictly math-based, predict that emerging markets will be the highest performing asset class for the next 10 years–if you can stomach the volatility. Emerging market valuations are relatively cheap and middle class growth projections are positive, but debt levels in U.S. dollars are high, hence the recent 20-percent correction around a 7-percent rally in the U.S. dollar relative to other currencies.

Source: Vanguard

During my early trading days in the late 1990s, there was talk about a new world order in which value-oriented Benjamin Graham advocates were no longer relevant. Today there’s talk about a new world order in which technology-driven whiz kids will dominate the markets. Artificial intelligence, robotics, internet of things, intelligent agents and virtual reality are all part of the “fourth industrial revolution” that is changing the world. But, as often happens, there may be far more losers than winners in this race to the top.

As the market continues to narrow and a small number of names drive all the alpha, you start to hear comments like these from new world order investors:  Value investing is a lost cause.  That’s not surprising when just four high-flying tech stocks–AMZN, MSFT, NFLX and AAPL–have been responsible for 84 percent of the S&P’s entire upside for the year-to-date.

But, as Barron’s predicted in March, the big valuation gap between growth and value funds indicates a value comeback.

Growth manager vs. value manager

On the other side of the aisle is mid-cap growth fund manager Michael Lippert, who has a 7 percent weighting in Amazon (AMZN) in his $308 million Baron Opportunity fund (BIOPX). Value investing is a lost cause in today’s high-tech, winner-take-all economy, according to Lippert. “The world we live in today—is haves and have-nots, and there are way more have-nots,” he said. “There are so many industries being disrupted by the digitization of the world; it’s hard to make cyclical bets on have-not value stocks.”

Those conflicting viewpoints have led to a stark contrast between the valuation of Baron Opportunity’s and Heartland Value’s portfolios—and their respective performance. According to Morningstar Direct, Baron Opportunity’s stocks have an average trailing 12-month price/earnings ratio of 42, compared to Heartland Value’s 7. Baron Opportunity’s five-year annualized return of 14.2 percent is double Heartland’s 7.1 percent. Small wonder, as market darlings like Amazon, Alphabet (GOOG), and Tesla (TSLA) dominate Lippert’s portfolio.

Bloomberg ran a story last year about Goldman’s Death of Value Investing report. Just last week, Barron’s ran an article about the demise of value investor David Einhorn: “For ‘King David’ Einhorn, a Steep Fall.”

Headlines like these remind me of late 1999 when Barron’s asked: “What’s Wrong, Warren?” The article suggested that legendary value investor, Warren Buffett, was losing his magic touch. During the 20-month period ending in February of 2000, the Nasdaq was up 145 percent, while Buffet’s Berkshire fund was down 44 percent — a mind-bending 189 percent streak of underperformance for the Oracle of Omaha, at least compared to Nasdaq’s growth-oriented technology stocks.

My good friends at Alpha Architects explained why. Growth stocks have outperformed value stocks for extended periods six times since 1945….and each time, that run was followed by a significant recovery in value stocks. Timing this rotation is impossible, but we are getting close to record spreads in valuations with interest rates rising and unemployment at record lows.

Growth has outperformed value six times since 1945

Many believe that an inverted yield curve, in which short-term interest rates are higher than long-term rates, is a reliable indicator of a forthcoming recession. The difficulty with the inverted yield curve is that stocks tend to do really well when the curve flattens, as is the case today. Stocks also tend to do well shortly after the curve inverts. But, today the defensive sectors that are lagging now have huge outperformance in a down market.

We highlight quickly that none of our 5 recession indicators are flashing yellow or red…Then discuss how momentum is a sector/asset class rotation strategy

Chart shows sector performance when yield curve inverts (Fortis #1 recession signal).  Even in recessions, the sector divergence is striking.  The past 4 defensive periods show healthcare and consumer staples outperforming the S&P 500 Index by 40.5% and 33% respectively.


The difficulty with reversion to the mean is that you can go broke waiting for market to express itself fundamentally back toward value.  Right now, our five recession indicators are all green with none showing signs of an imminent implosion. What’s more, our technical momentum indicators all point to U.S. growth stocks maintaining leadership.

At Fortis we believe in evidence-based academically-backed research. With this philosophy leading our investment thesis, we conquer the challenges discussed in this Letter by combining momentum stocks and value stocks. The reasons behind this strategy require a much longer discussion, but please feel free to contact me any time (610-233-1074) to discuss in more detail.

In the end, there are “two paths you can go by” in market-growth or value. Right now we are experiencing historic spreads between the two. As has happened throughout history, the new pundits arrive singing the death of one path–in this case value–due to the permanent triumph of the other, in this case growth.

Remember back in 1999 when the “talking heads” were predicting the end of Warren Buffet’s value strategy? Remember after the 2008 crash when the S&P hit a generational low 650 and the same talking heads were predicting the end of growth in America?  The Stairway to Heaven for the last decade has been growth stocks, but every elevator has a top floor.

As Warren Buffet likes to say, “Predicting rain doesn’t count, building Arks does.”

If there’s a bustle in your hedgerow
Don’t be alarmed now
It’s just a spring clean for the May queen
Yes, there are two paths you can go by
But in the long run
There’s still time to change the road you’re on
And it makes me wonder

Stairway to Heaven

-Led Zepplin

Fortis Wealth 1st Quarter Letter 2018

Technology Faces Its Machivellian Moment

Tech stocks have been letting the good times roll for five years

Good Times Roll – The Cars

Let the good times roll
Let them knock you around
Let the good times roll
Let them make you a clown
Let them leave you up in the air
Let them brush your rock and roll hair


  • Despite the headlines, technology sector remained the top performing sector in Q1 2018.

  • Is the tech sector expensive, or just FAANG stocks?

  • The volatility we’ve experienced in 2018 is NOT abnormal from a historical perspective.

  • Sector rotation to defensive companies has not yet happened.


Remember Sonny the Boss in the movie “A Bronx Tale”? A big fan of Machiavelli, Sonny asks the ultimate Machiavellian question: “Is it better to be loved or feared?”

Sonny made his choice in the movie, as all of us must, and it depends on your circumstances. To my way of thinking, in Sonny’s line of work (organized crime), it is much more important to be feared. Sometimes you can be both loved AND feared, but only for a short period of time. Eventually the single dominant characteristic (loved or feared) will surface.

The just-completed NCAA Men’s Basketball Tournament was a great example of a team that was loved then feared. Loyola of Chicago, a private Catholic University rarely mentioned among the nation’s elite college basketball teams, knocked off one heavy favorite after another on an unlikely

run to the national semifinals. The Ramblers captured hearts of sports fans everywhere with an undersized roster of humble, selfless players including two lightly recruited guards that have played together since 3rd grade.

Then there was Loyola’s telegenic spiritual advisor, Sister Jean, a 98-year-old wheelchair-bound nun who confounded the basketball experts and lit up the national TV cameras after each game with her smile, moxie and bold predictions. Last weekend, on Easter Eve, the Ramblers had joined big blue chips Michigan, Villanova and Kansas in the national semi-finals, marking the school’s first appearance in the Final Four since 1963.

Ultimately, the Ramblers didn’t win it all, but as but as they busted their way through the brackets, the “Cinderella” team wasn’t just lucky. It used steel tip boots and a killer instinct to sink fear into the hearts of much better known, better funded opponents. In short, the Ramblers were easy to love—unless you had to play them.

The way I see it, in today’s stock market, the technology sector is going through the same tug of war between being feared and being loved. As Sonny’s character says: “It’s nice to be both; but it’s very difficult.”

The technology sector has led this epic nine-year bull market in concert with consumer discretionary stocks. Tech stocks now account for a whopping 25 percent of the S&P index weighting. (source:

More importantly, the five largest technology and internet stocks account for more than 14 percent of the S&P 500 index weighting. Investors are struggling to reconcile their love of tech products (and earnings) with their fear of tech’s lofty valuations. That’s the conundrum. Is the entire tech sector overvalued or just the dominant FAANG stocks (Facebook, Apple, Amazon, Netflix and Google)?


Source : Daily Forex


Source: Semper Augustus Investments Group LLC


The volatility we experienced in the year’s first quarter may have been unsettling, but many investors are out of practice feeling nervous. In my opinion, the volatility was actually quite normal in light of the exceptionally calm year we had in 2017. At the end of the day, market returns come down to earnings. Nearly 90 percent of tech stocks beat their revenue estimates in the 4th quarter of 2017—tops among all sectors. In fact, it was the best quarter for tech stocks in five years and CIO expectations for tech spending were at the highest level in 14 years, according to a Sanford Bernstein survey of chief information officers.

Is it better to be loved or feared?  For technology stocks, 2018 will tell the story.

It appears based on technology stock revenues and earnings, the near term looks positive for the sector. But it seems that the same Wall Street pundits and analysts touting international economic growth are the ones tilting negative on tech valuation. That’s further puzzling since the tech sector gets over 50 percent of its revenues from international markets.


Tech valuations do not appear to be significantly richer than the overall S&P 500 index.


I started my career in 1997 on a trading desk during the height of the Internet bubble. My firm was a small-cap tech-oriented shop, so my introduction to the world of trading was a technology-stock version of baptism by fire. Regular readers of this letter know I don’t like making predictions, but I have to get this one off my chest: If you ask me, today’s market is absolutely nothing like the 1999 bubble!

I remember those exuberant dot-com days like they were yesterday. Once, while waiting for my car to be serviced in 1998, the mechanics kept running off the shop floor to check their diagnostic computers in the main office. At first, I feared my car was in big trouble, but I later learned the mechanics were using the office computers to day-trade stocks.

Back then we heard stories of landscapers routinely leaving their jobs to day-trade at 100-to-1 intraday leverage. And today, we believe these same investing amateurs, having been burned, keep all their money at Vanguard and swear by passive indexing.

Granted, tech sector valuations are not cheap today, but I find it’s tough to support an argument that we’re in bubble territory. The P/E for technology stocks is 19-times next year’s earnings. Compare that to a 17.7x multiple for the S&P 500 index and a 54x multiple for tech stocks during the March 2000 bubble. Even after a torrid start in 2018, tech stocks trade on par with their 20-year price-to-book ratios relative to the S&P 500. And based on price-to-earnings ratios, tech stocks carry a valuation that is 22 percent below their 20-year historical average relative to the S&P 500.


This article in MarketWatch helps put tech valuations into perspective


         PICTURE 1 (1983-2000)                       PICTURE 2 (2000-2017)



The debate over offense vs. defense is not just for basketball in March. The most offense-minded sector (technology) has pulled off one of the biggest blowouts in market history relative to the defensive-minded consumer staples sector. As the chart below shows, over the past half-decade, Tech has outpaced Consumer Staples by a whopping margin of 158 percent to 33 percent—reminds me of a UCLA basketball score from the late 1960s and early 1970s.


The chart below shows the tech sector in red and the consumer staples sector in blue.

See Eddy Elfenbein, Crossing Wall Street for more


See sector leadership history below when the yield curve inverts



When the next bear market hits, it’s likely defensive sectors will take leadership and new sectors will spearhead the next bull market. Markets are an exercise in rotation. The way I see it, there is always a bull market somewhere–timing and emotion is what matters most.  When will value stocks take leadership over growth stocks?  Will international outperform domestic over the next three years?  When is the next sector leadership rotation?  Will techfall from the top sectors?


So, is it better to be loved or to be feared?  The jury’s still out on that question, but as Sonny the Boss would say, “It’s tough to be both.”

Technology stocks may be over-loved at the moment, but paralyzing fear is what prevented most investors from buying them when they were at bargain basement prices a decade ago. Right now, it seems tech valuations are high, and investors are following classic behavioral finance patterns:

They’re “following the herd.” For instance, in the first quarter of 2018, tech had the highest sector inflows since 2000.

We live in a global technology driven world in which many jobs and tasks, not to mention employees, are being replaced by technology. This has led many people to question whether the five dominant FAANG stocks have become modern day monopolies.  The conundrum is that the rest of the tech sector aside from FAANG stocks is expensive–but not in a 1999 Bubble kind of way. How do you rectify this in a world that’s being rapidly divided into learners and non-learners?  Especially when the learners are technology driven.

Is the tech leadership real or an illusion?  We shall see in 2018 if the good times continue to roll.

Good Times Roll – The Cars

If the illusion is real
Let them give you a ride
If they got thunder appeal
Let them be on your side

Let them leave you up in the air
Let them brush your rock and roll hair
Let the good times roll
Won’t you let the good times roll-oll
Let the good times roll

Let the good times roll
Won’t you let the good times roll
Well let the good times roll
Let ’em roll (good times roll)