EP: 152 The Ladders of Wealth Creation (Part 6/7)

Zak and Austyn discuss the fourth ladder on Nathan Barry's Ladders of Wealth Creation (https://nathanbarry.com/wealth-creation/): selling products. This episode explores the various product types and how to incorporate each into your business model.

How NOT to Sell Your Investments

By: Zachary Bouck, CFP®

I could have called this blog "How to Sell Your Investments," but that would be inappropriate considering the year we've had (now only two months in). I've been a professional financial advisor for more than a decade now, helping hundreds of clients through the market's ebbs and flows (see: 2008-2010). An article on how to sell your investments would have been more appropriate for a year like 2020 when the market was up triple digits. In years like 2022, however, investors are naturally reverting to a 'safety' mindset, strongly considering selling their investments out of fear that their account balances may continue to go down. It’s not a foolish thought – losing money is no fun. But when you look at what the average investor has made over the past 20 years, you should realize that the thought processes they use to invest are dangerously flawed.

The average investor loves buying when the market is going up, and inevitably gets worried and sells out when the market starts going down. It’s human nature to handle your investments in such a way – as we all know the pain of losing money is far greater than the joy of making it. I’ll help you understand when and why you should consider selling an individual investment. Whether you decide to sell or not sell, you will continue to face this decision throughout the rest of your life, so working out a clear philosophy is important.

The decision to sell is one that everyone struggles with – and I mean EVERYONE. Warren Buffett talks about unforced errors in selling investments too soon – like Disney in 1960 – a sale that cost him tens of billions of dollars. Hanging on to investments too long can also cost lots – like buying and holding clothing manufacturer, Berkshire Hathaway, as it continued to lose money as domestic manufacturing became less profitable.

As you can see, selling an investment is challenging.

Instead of facing each investment sale as a one-off decision – it is helpful to establish a philosophy of what types of investments you should sell, and what type of investments you should never sell – or at least be less likely to sell.

A framework for what you should be selling

Here is the philosophy that I’ve found is most helpful when describing this framework for clients. Our company, Denver Wealth Management, has over 600 households. And while we manage most of our clients’ investable assets, almost all our clients have one-off assets that they need to consider selling or keeping. Things like watches, crypto, real estate, stocks that appreciated dramatically, company stock – you get the picture.

So, when is it appropriate to take a gain and when is it appropriate to hold on for that glorious long-term compounding that turns ordinary folks into multi-millionaires?

I’ve found that it’s best to organize your investments into two different broad categories.

Category One: Long-term compounders

Category Two: Speculation or rapid appreciation

Long-term compounding investments are investments that you should never sell unless the fundamentals of the underlying investment are deteriorating. These investments are generally purchased with the mindset that the price appreciation and dividends will reward you as a shareholder for a very long time period.

Think of a company like Walmart, whether you bought it in 1980, 1990, 2000, 2010, or 2020 it has generated a long-term positive rate of return. There were a lot of years that it underperformed the broader market, and many years it outperformed the broader market. There were years where investors assigned a high growth multiple and others where that growth multiple was dramatically lowered. But given a long enough time period, Walmart has always generated a positive return for investors.

This is because the underlying business of Walmart has remained strong due to its successfully implemented long-term growth plan. If that growth plan ever ceases to be successfully implemented, or if the CEO begins making shocking errors in judgment, then perhaps selling the investment makes sense.

In our experience, it’s better to be slow to sell – especially with a great company that has a great track record. The same can be said of mutual funds with consistent long-term results. A good management team or philosophy will always have the occasional down year – but if you sell your investment every time it’s down, you will consistently be generating less money than the overall market.

In the end, the decision to sell a long-term compounding investment is always a judgment call. Some great decisions will be made, as well as some errors. But keeping long-term compounding investments through ups and downs has historically benefited long-term investors.

What to do with big gains

Now, what about speculation? Speculation is when you are trying to make a buck. You’re not really concerned with the underlying business or investment – you think the cost of something will go up, so you buy it now, hoping to sell it for more later. You buy crypto for X dollars, not because it’s going to change the world, but because you think you can make some money. Almost everyone I know with an investment account occasionally wants to play around in the speculation game. This is where I see people get burned the most.

If you buy a stock at ten dollars thinking you’ll make a quick buck – then it goes to $20, and all the way up to $80 – it’s easy to think that the stock will continue to grow and that you’ve found a gold mine.

If you buy a stock at $80 and it drops down to ten dollars, it’s easy to think the price will rebound soon, and you’ll sell when it gets back to $20.

Both examples are how speculators hurt themselves. The most consistent process for speculation I have seen is to:

1) Write a hypothesis for the trade, ‘I think stock X will do this; therefore, I will buy it at $Y and sell it at $Z.

2) Set a maximum loss, ‘If stock X goes down Y% I will determine my hypothesis was incorrect and sell it.’

3) Set a maximum gain, ‘If stock X goes up Y% I will consider my trade a success and sell it.’

Then use your newfound riches to buy long-term compounding investments or your next speculation. But don’t let your speculations rise or fall for long time periods – remember they are not long-term plays.

Investors need to identify and differentiate the ideal outcome for their investments. Long-term compounders are to be held through bull market and bear market alike. Speculative investments should be sold after the numeric goal is achieved. 2022 seems to be a good year to hold on to your long-term compounding investments and it may be a good time to say goodbye to many of your speculative investments.

Disclosures

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Denver Wealth Management, Inc., a registered investment advisor. Denver Wealth Management, Inc. is a separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no indication of future results.

Growth investments may be more volatile than other investments because they are more sensitive to investor perceptions of the issuing company's growth of earning potential. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Any individual securities mentioned are for reference only and are not intended as a recommendation to buy or sell. Investing in mutual funds involves risk, including possible loss of principal. Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance.

All information is believed to be from reliable sources; however, Denver Wealth Management, Inc. and LPL Financial make no representation to its completeness or accuracy.

A Practical Guide To Using Email

By: Zachary Bouck, CFP®

Keeping on top of communication and work projects is extremely challenging. Many workers spend much of their day staring at their email inbox instead of doing meaningful proactive work. (I would cite a source, but the real source is me looking over people's shoulders to see what’s on their screen) Here’s how to clean out your inbox, and manage your email inbox from an extreme procrastinator, with a pretty good process for staying on top of communication.

When to email

Let’s start with when we SHOULD be using emails. An email is a middle-of-the-road tool. Email should be a quick communication to:

- Organize a long conversation outside of email (Group Project Work)

- Follow up on the status of a project in one business day (Administrative Work)

- Set up or co-ordinate a meeting (Scheduling)

- Accumulate information for a meaningful project or input (Deep Work)

Long conversations are best left to phone calls, meetings, and in-person conversations. If you have an email that requires a long conversation, respond by asking for a meeting. Then delete the email, and put a note in your CRM to follow up in a certain amount of time. As soon as I find myself spending more than a few minutes on an email – I usually just pick up the phone and call, or simply respond with “Let’s schedule a quick call to discuss on this day – how is 10 am?”

Email is best for short conversations or quick questions that are not time-sensitive. The way I think about it is every email should be responded to within 24 hours, but the flip side of that is that I don’t expect a response before one business day. Immediate responses are for phone calls / instant messages and texts.

- Instant messaging gets a little tricky. Below is a list of my current inboxes

o Work Email

o Work Voicemail

o Personal Email

o Personal Voicemail

o Personal Text Messages

o Zoom Messages

Many people (i.e. me procrastinating at 7 pm at night) simply cycle through their inboxes looking for things to respond to….if you’re in a primarily reactive role (think inbound calls/messages) this setup is what you may be forced to deal with. If you’re in a job that requires proactive and thoughtful work, this is a disaster.

We’ve discussed what emails are for – Organizing a long conversation outside of email, following up on the status of a project, setting up or coordinating a meeting, and accumulating information for a meaningful project. What are emails not good for?

When to not email.

What is email not for? Email is not for quick responses, not for LONG responses, and not a way to spend the majority of your day. Email is a middle-of-the-road tool for conversations and compiling data for future meetings and projects.

When should you check emails?

A lot of guru types tell you to have email blocks over certain times per day. This is really smart, and if you can do it, you should! I am terrible at this. For me as a business owner/father/husband/Financial advisor/CIO my days are varied, so while I could block off 12-1 on my calendar to send emails – the truth is when I’ve tried that I rarely do it.

Here’s how I approach this. I love inbox zero – and that’s how I try and end my day.

After the project work, meeting work, administrative work, and proactive work are done for the day, before I hang up my hat and become husband / parent / chef / movie critic, I get to inbox zero. To do this, I process every email before the day is done.

Be committed to processing EACH email as you open it. If you’re not in a position to take an action on an email immediately, then WHY THE HELL ARE YOU READING EMAILS? I am guilty of perusing emails at stoplights, in elevators, in bed, and on the toilet. What I’m really doing is looking for emergencies that I may need to forward quickly. Guess what? Email is not an EMERGENCY COMMUNICATION TOOL. Have you ever emailed 911? What does the emailer expect of you if you’re in a meeting? On a plane? Emails are sloooooowwww communication. So take the burden off of yourself to think of email as rapid communication and TAKE EMAIL OFF OF YOUR PHONE.

It's a revolutionary idea, and I know a lot of folks (people who travel a lot for work for example) where this strategy would not be ideal. But for those of us who work in an office environment the majority of the time, that time is when you should be processing emails – not while you’re on the go.

Examples of various emails I get and how I respond.

Project Work – I manage investment portfolios and I get a lot of data from various sources. If I get an email with economic information – I don’t read it quickly and delete it. I drag it into a folder labeled

‘March 2022 Investment Research’

Then when I’m ready to do deep thinking on investing I open that folder.

Financial Planning questions – If I get an email from a client that says something like “Zak how much can I contribute to my SEP this year? I respond “Kevin – got your email, we need some information like total income, total deductions, etc, let’s schedule a quick call to go through what we need. How is x time on y date?”

Here’s where a lot of folks are messing it up. DON’T LEAVE THAT EMAIL IN YOUR INBOX!!!! Communication complete, project initiated, go create a to-do in a CRM or keep a list OFF OF YOUR EMAIL to follow up on that project. Don’t clog up your email!!!

What happens if you write a quick email response like… “Sounds good Kevin, we need your income tax deductions, gross income for the year, and your bank account information.” HE responds with ‘do you need all my income or just the income from the associated business?’ CAN OF WORMS OPENED UP!!!! This email spawns 10 more and now you’re bogged down doing things inefficiently.

Don’t open the door to more emails – it is a time and idea inefficient way to communicate.

Internal Communication – Emails like – “Zak do you want to go with your client to the thing?

Response option one – Sure Thursday at 10 works for me.

Response option 2 - Yes! Call me quick to work out the details.

As a reminder, the majority of my emails can be distilled into these 4 categories:

Deep work

Ongoing projects

Meetings

Administrative

Deep work gets compiled, and Ongoing projects get a quick response either with an answer to the question or a verbal conversation. Meetings get set either quickly or via phone. Administrative gets a quick answer that should end the conversation.

This is my email philosophy that I have hammered out over the past 14 years working in an office.

Email-work efficiency is a pet project of mine because; one I’ve had a very steep learning curve, and two, I see SO many people with 7803 unread emails in their inbox surfing their emails like it’s their job. THAT’S NOT YOUR JOB! Clean up the emails, clean up your life, and do the work you’re actually supposed to be doing.

How do deal with managers who LOVE email.

Now here is a potential problem – what if your boss/manager/co-workers use email for emergency communication? That’s a problem. Unless your job is ‘emailer’ your primary role at a company is probably some kind of project work. Ask your boss if he’d rather have you 100% focused on emails all day or doing whatever your job description says that you should be doing. It may be a little passive-aggressive so you may need to phrase it more delicately than I did, but deep work IS NOT POSSIBLE if you’re checking an incoming email every few minutes (or even a few times per hour).

In search of a data point, I created a custom folder on outlook and I get about 500 emails per week. If those are sent between 9 am & 5 pm Monday – Friday, that is one email every 12.5 minutes)

Final thought

My process is flawed and is always being improved….if you see a potential improvement or your industry has some quirk where this doesn’t apply let me know, and we can solve our email problems together!