• the biggest influences on my career,
• why Tony and I launched an investment firm 10 years ago,
• how our firm picks stocks,
• some of our recent trades (find out why we sold Home Depot and bought Lowes),
• a stock picking blunder we made in 2009 and the lesson learned, and
• some investment themes we like for the future.

Read the full Q&A with Covestor here.

DISCLOSURE: Long LOW

So, other fear is acquired, mainly by our brains projecting a possible outcome that may or may not happen.  As our brains mature, we humans have the ability to project future outcomes that range from legitimate, to downright silly.  Case in point, I’m deathly afraid of spiders.  Big ones, small ones, they all freak me out.  I hate them and anyone who has a pet spider needs to have special counseling.  So my brain projects that this tiny little thing can do some sort of egregious harm to me that more than likely will never happen.

So it goes in modern day markets.  Fear and greed push markets up and down and our beloved financial media will always pound the side of fear.  Striking fear in the minds of listeners drives viewership and hence, advertising dollars.  So what are the current fears that are out there; up, down, sideways…it’s all bad all the time.  Here’s a few points from Brian Wesbury of First Trust Portfolios that I attempt to summarize below:

Oil – Between September 2011 and March 2012, oil prices rose about 20%.  This generated fear that consumers will now have less to spend.  But recently, as oil prices headed down through May and June, did the fear go away?  Nope.  Media touted that falling oil is a bad sign, signaling weak global demand.  Be afraid…be very afraid.

Interest Rates – The 10 year Treasury yield has hovered around 1.5% and many now argue that the low rates signal economic problems and the US is the new Japan.  Then there are those who freak out about rising rates as they will hurt consumers, lead to less refinancing, and less business borrowing.  No matter how you look at it, its bad.

Consumer Debt – It is currently trending up.  This is bad because we Americans are on the verge of creating another panic of 2008.  But if it was trending down, we’d hear all about how Americans are tightening their pocketbooks and spending less.

Consumer Savings – It is currently trending down.  This is bad because we’re not saving enough for retirement and we’re all going to be screwed.  But if it were trending up, well that’d be bad too because it takes money out of the economy.  All bad, be afraid…do you sense a pattern here?

Foreclosures – Trending down.  This is bad because now first time home-buyers can’t find any bargains.  Unreal!  But if it was trending up we’d never hear the end of it!

All bad, all the time.  Be afraid, the sky is falling, be worried about everything.  In the meantime, since the lows of March 2009, the market is up over 115%.  Hence the reason why we are adamant about avoiding the noise, make carefully researched and educated decisions, and continue to consistently protect and increase our clients’ wealth.  But are there legitimate fears out there that need to paid attention to?  You bet.  But there are also many compelling investment opportunities that being a perpetual pessimist will blind you to.

Apple’s iPhone business alone is now bigger than Microsoft.  Not Windows.  Not Office.  Microsoft.  Think about that.  The iPhone did not exist five years ago.  And now it’s bigger than a company that, 15 years ago, was dragged into court and threatened with forcible break-up because it had amassed an unassailable and unthinkably profitable monopoly…  In the December quarter, Apple’s iPhone business generated $24.4 billion of revenue.  Microsoft’s whole company, meanwhile, from Windows to Office to servers to XBox, generated $20.9 billion.

A quick look at a 5 year chart comparing the stock price of Apple (AAPL) vs. Microsoft (MSFT) reveals the tale of two techs.  One going nowhere, the other shooting to the moon.

Now, some decry the fact that AAPL share price has been taking a beating lately, but it isn’t hard to discern that overall, the company has a solid brand, solid financial position, and a bright future ahead.

FULL DISCLOSURE:  We are long AAPL at the time of this writing.

FULL PERSONAL DISCLOSURE:  I recently purchased an iPad 3rd generation and am undergoing positive life-change as a result.

Many investors will try to time the market and get in when things are heading up, and getting out when they’re going down.  The problem with that idea is that trying to time the market will rarely work in your favor.  The stock market is a compounding machine.  Over the long-term, companies produce products which you buy and they derive a profit from so-doing.  These profits are called “earnings” and are either passed to the stock-holder via dividends or they are reinvested into the business for it to decide to produce cooler and better products which you buy…and the process is repeated.  Over time, stock prices rise, dividends compound, earnings accelerate, and your wealth increases.

A few years back, I went to a Due Diligence Conference hosted by Davis Advisors where they showed the following chart (updated through 2011).

As you can see, trying to time the market can be quite dangerous.  If an investor, let’s call him Bud, would have stayed the course from 1992-2011, he would have experienced an 7.8% annualized gain.  However, if he would have decided to try to time the market, and ended up missing the 10 best days during that timeframe, his return would have only been 4.1%.  If Bud would have been even more scared (probably listening to too much CNBC I would imagine), withdrew all his money from the market, and missed the 90 best days in that 20 year span, he would have ended up with a -9.7% annualized loss.

Bottom line, stay the course.  Every day has potential.

In today’s culture, it’s always about the next best thing, rising to the top, being the best.  These are not bad items in and of themselves, they are what drive us forward, they’re what make businesses profit, they’re what excite us.  However, if we strive so hard for the ‘arrival point’ that we miss the tremendous blessing of the journey to get there, we rob ourselves of the joy of life today, the joy of our business today, the joy of our children today…

Bottom line, don’t get caught with Destination Disease.  Rather, step back and find the Joy of the Journey.  For me, as a Partner of an Investment Management firm, it is easy to get caught up in the volitility of the markets and future goals for growth of our firm.  But today, right now, I’m reminded of the joy it is to serve a loyal group of clients as we navigate the markets and journey together toward successfully managing their investments.

Josh spent the first decade of his career as a stockbroker on Wall Street. During the financial crisis of 2008, Josh began to question the brokerage model and eventually broke away and converted to an entirely fee-based practice. Today, he is a New York City-based Investment Adviser Representative for Fusion Analytics Investment Partners, a boutique wealth management firm. Josh recently joined the advisory board of Brightscope, where he hopes to help usher in a new era of transparency for the financial advisory industry.

Josh is the author of a new book, Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments. I recently had the opportunity to ask Josh a few questions about his career, his new book, and what he’s learned about investing.

What’s your story? I understand you spent about a decade as a stockbroker, but you are now a fee-based money manager for a Registered Investment Advisor, Fusion Analytics. Please share a little bit about your career as a stockbroker and why you decided to make this transition to work as a fee-based financial advisor.

I kind of backed my way in to a career in the markets – originally I was more interested in stocks and trading and investing. I kind of got taken under the wing of the wrong people (retail brokers) and then got way too good at selling – it was like a ten year layover in a really horrible airport. But then I caught a plane out of there, dropped my Series 7 and converted my best clients to fee-based – which is a great deal for them obviously, compared to paying 2.5% on every buy and sell.

What’s the book about?

The book is the parallel stories of my journey and the history of Main Street – Wall Street relations, I tell the true story of how it came to be that everyone is “in the market” to some extent. I hold nothing back about the marketing and sales process going on behind the scenes.

Who should read the book?

I think Wall Street pros, kids in school looking to work on The Street and investors at every level. They’re going to love it.

Why should they read it?

This is a book that could never have been written and so never has been – until I came along. No one is revealing this stuff, most people have too much of a vested interest in the mirage. I come out and rip that curtain away. Plus, I’ll make you laugh while you shake your head.

Investors looking for a financial advisor or someone to help them manage their investments have many choices today. How can readers find a good financial advisor that they can trust?

Easier said than done I suppose.

You are now 35. You’ve been in the investment industry for 12 years. What’s the most important thing you have learned about investing?

The truth is that markets typically go up. Three out of four years are up years, and 20-50% drops should almost always be bought. But you can’t buy them if you’re fully invested, so investors need to learn to modulate their exposure up and down, not get in or out of the market completely.

Any other tips for becoming a better investor?

Read the blogs, skip the circus performers who pick hundreds of stocks a week.

What advice do you have for someone in college who aspires to be a financial adviser?

Pedigree is more important than almost anything else – get into a big firm, eat their cooking and raise big money. The easy way. Then, when you can’t take the place any longer, go out on your own.

Thank you for your time, Josh.

You can find Joshua Brown’s new book, Backstage Wall Street on Amazon.

Photo by: John Frattasi

Three years ago today also marks the beginning of the current bull market. The current bull market now ranks as the ninth longest bull market ever. It is also the only bull market in history that lasted three or more years and was up 100% or more during the first three years. [Source: Bespoke]

By the way, Josh reminds us that all the main US stock indices have done better than Gold since the crisis ended in 2009.

So, Happy Birthday Bull Market! You are welcome to stick around for awhile:)

Buffett On Bonds:

Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”

Buffett on Gold:

Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Buffett on Stocks:

Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety — but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.

Our View

Our firm is aligned with Warren Buffett. We also view bonds as being priced to deliver return-free risk. Why? Because yields today are less than the expected rate of inflation.

We too view Gold as unproductive and hold only a small amount for some clients as a hedge. Read Tony’s blog post for more thoughts on Gold.

Finally, if you are a regular reader of my emails then you already know how we feel about stocks today. There are many great businesses trading at prices that we believe to be compelling. The market as a whole is trading well below its historical valuation measures. It’s a good time to be buying stocks if you are a long term investor. Don’t let fear and uncertainty get in the way of making some smart stock purchases. Focus on high quality businesses with a competitive advantage, strong balance sheets, and growing profits.

Photo by: Fortune Live Media

Gold seems to be a hedge against general macro uncertainty, fear, and financial instability.  However, gold prices are highly volatile and shouldn’t be expected to always go up even in the face of an economic crisis.  For instance, in 2008, GLD (a gold ETF) fell roughly 25% while equities and other asset classes were getting clobbered.  GLD fell roughly 20% last fall.

While we say that we can’t determine an intrinsic value of gold, it only has value because over the centuries people have believed it has value.  (The same thing can be said of fiat currencies such as the dollar, euro or yen.)  (Note: A ‘fiat currency’ are currencies that governments have declared to be legal tender, despite not being linked to physical reserves).  So it comes down to a question of belief, not fair value.  Can an asset that has appreciated for 11 straight calendar years continue its streak?  If one cannot ascertain whether gold is over- or undervalued, you must simply trust your gut.

As a firm, we own a very small amount of gold in our client portfolios through a couple of different mutual funds.  We’re unwilling to bet large amounts of client’s capital on the belief that gold will go higher.  We’ll stick with what we know…valuations.  Stocks look undervalued, bonds look overvalued, cash is trash.  To the gold pundits, you’ve been right for quite a while, I’d be wary going forward.  Beliefs may change more rapidly than fundamentals.

• be more organized and therefore efficient
• clarify your investment thesis
• maintain a virtual notebook of research notes that are accessible anywhere on your computer, iPad, or smartphone
• quickly retrieve statements and tax records related to your accounts.

I have been using Evernote for over a year now. What I really like about it is that I can access my notes and access them anywhere with my iPhone or an iPad. It is also nice to have less paper by storing as much information as I can digitally. If you are new to Evernote I suggest reading Michael Hyatt’s blog posts about Evernote. You will want to start with How to Organize Evernote for Maximum Efficiency. I struggled for awhile trying to figure out the best way to organize my notebooks. After reading this post I decided to follow Michael’s basic structure. Once I got things organized as he recommended I found myself using Evernote daily.

I recently decided to use Evernote to track my investing research and activities. Here’s how to set up Evernote to make you a more productive as an investor:

First, create a new stack called “Investments“. A stack is simply a collection of notebooks. It is a nice way to separate your investing notebooks so they are all in one place.

Next, within your “Investments” stack create the following notebooks:

• Account Info – In this notebook you can create notes for each account you have. I like to include things like the institution, account type, account number, account type, and contact information.

• Checklists – This notebook will be used to organize your investing checklists. Every investor should have a checklist of items to review anytime they buy a new stock, mutual fund, etc. You should also have a another checklist of items to go through as you review your investments on an ongoing basis. Your checklist will help you determine when to sell a particular investment. It’s often more difficult to make a decision to sell than it is to buy. A checklist will help you make smart decisions.

• Inspiration – I use this notebook to store quotes from Warren Buffett and other successful investors. I also use it to clip blog posts that inspire me to be a better investor.

• Reference – This is the notebook where you will store all of your reference notes and material related to investing. This is a great place to keep book notes, or your “Net Out“, from investing books that you read. I have also created a note with a list of my investing rules and criteria. Basically, you will just want to use this notebook to store any notes you keep on investing that you may want to access later.

• Research Notes – This notebook is where I accumulate notes on specific investments that I have researched. You should have a note on every stock, mutual fund, or other investment you own. I like to title my notes as follows: “$TICKER – Investment Name – Research Notes”. This allows me to search by ticker or the name of the stock or mutual fund.

• Statements – Another great thing about Evernote is that you can store your documents right in your notebooks. If you are a premium user, then any scanned document you upload will be fully searchable. The statements notebook is a great place to store electronic statements that you download from your financial institution. It is nice to have a current statement available for quick access anytime you are working on your portfolio. It is also helpful to have your statements handy when meeting with your financial advisor, accountant, or attorney.

• Tax Records – In this notebook you will store your 1099s. You will also want to store other tax related information you might need later. For example, if you inherited some stock you will need to track the cost basis of that stock in case you ever sell it.

Finally, don’t forget security. If you use Evernote to help manage your investment information it will be critical that you keep your account secure. Use a unique password that is a mix of letters, numbers, and symbols. The longer your password, the harder it is to guess. The basic version of Evernote is free. However, if you upgrade to the premium version ($45/year) you can add a PIN lock to your iOS or Android app for extra security.

Well, this should be enough to start keeping track of your investment activity in Evernote. With these seven notebooks you will find that Evernote can make you a much more productive, and ultimately better, investor. The possibilities are endless. I would love to hear your ideas. How else could investors use Evernote to increase their productivity and ultimately their results?