December 2022 Newsletter

“If I live X number of years, I’ll go through X number of recessions. But if I spent all my time guessing cycles, Berkshire Hathaway would be $15/share. You can’t dance in and out of businesses based on forecasts.” – Warren Buffett (1988!)

As we’ve always said, Wall Street wants us to panic about something. That way we transact more, buy more “guaranteed” products (chock full of commissions!) and take high-priced stakes in hedge funds or other private investments! Today’s panic of the moment is the widely predicted oncoming recession. Of course, most of these predictions for a recession were made for 2022. But as these turned out to be premature, calls now are for 2023. And if that doesn’t work out, there’s always 2024. Make no mistake: yes, a recession will ultimately come. But it is equally true that when that time comes, nobody is going to ring a bell and say “ok get out of the market now” and then ring it again signaling to get back in when the market is at the bottom.

Unquestionably, inflation remains the linchpin of the economic debate. And nearly every piece of reported economic data related to inflation results in a “binary” outcome for the market. Negative or weak economic data signal that the Fed can possibly slow interest rate increases, thus encouraging the market to move higher; positive economic data, on the other hand, interpreted as adding to inflationary pressures, may force the Fed to raise rates further—causing the market to sell off. Bad news is good news for the stock market; in essence, we are rooting for companies to lay people off to cool wage inflation. Go figure….

And with the Fed raising rates faster than they have in many decades, the full effects of these hikes have yet to be felt. However, it is also true that employment numbers and growth numbers—at least for now—continue to be solid. Things could certainly change over time, but for now, economic strength remains stable.

Overall, financial markets have been somewhat resilient. Yes, the tech-heavy and growth-oriented S&P 500 and Nasdaq indexes have been mostly in bear market territory all year, but there are other places to invest in the stock markets! If someone had told us that the Federal Reserve would be on pace to raise rates nearly 5 percentage points (from zero!) and that we would have almost double-digit percent inflation rates, we would have guessed the markets would be down even more than they are.

As a side note, the market has also had to wrestle with the collapse of Sam Bankman-Fried’s firm, FTX. This fiasco was yet another example of irresponsible behavior that was allowed to fester when rates were low, money was “free” and speculation rampant. But as always, as the cycle “tightened” and valuations have gone through a correction, the disproportionate and ill-advised risk taking at FTX was brought to light. What ultimately comes of the founder and others who may be caught up in the bankruptcy will be determined over time. However, we can be sure they will not be the last bad actors to take advantage of the public during periods of market excesses.

Lastly, we continue to see the overvalued glamour stocks suffer and money moving into more rationally priced parts of the market. And it should be noted, that in many of these more reasonable-priced sectors, many of these companies are reporting strong cashflows and STILL raising their dividends despite this very uncertain economic environment. All music to our ears….

And just a quick update on our last “boring” stock vs. “exciting” stock comparison in our last letter….Campbell Soup has now outperformed Amazon over the last 4 years! Again, this is NOT a recommendation to buy Campbell Soup over Amazon. But it is important to point out that a great company is not always a great stock; you must, must, must factor in the starting valuations for any investment!

The Risks of “Private” Investments

We’ve always cautioned investors to be very careful when investing in “unconventional “assets. In our opinion, there are a lot of underappreciated risks in these investments, and just recently a few have reared their heads.

FTX is one example. FTX was a cryptocurrency exchange valued at $32 billion just a few months ago; today, FTX is in bankruptcy. Total collapse. Of course, there were plenty of ordinary investors who lost out here, but there were also many “sophisticated” firms who invested in FTX and lost a lot of money; in fact, dozens of these “smart,” accredited investors are regarded as the world’s leading investment firms. From what we know now, FTX sure appears to have the makings of a Ponzi scheme or just an outright fraud. However, the question is how in the world did these sophisticated investors not see these risks? The great Jason Zweig wrote about this in his WSJ column titled, “Why the Investing Pros were such suckers for FTX.”

Zweig’s position (with which we agree) is that these firms simply turned a blind eye to these risks. These firms employ very smart people, but the PRESSURE in the investment world changes behavior. And these firms have so much pressure to produce results in the short term that they risk losing clients if they are NOT participating in a (seemingly) successful investment where their competitors ARE profiting. Greed, “group think”, FOMO (Fear of Missing Out), following the herd. These firms were all probably guilty of at least a few of these. Zweig’s column is a great read for any investor pondering any type of private investment.

More recently, we now are seeing a few private real estate funds (i.e., REITs) restricting customer withdrawals. Basically, this means that if you want to cash in your investment…..you really can’t. Of course, in fairness to the funds who are restricting these withdrawals, this caveat should have been very clear to any investor from the start of the investment relationship and most likely was well disclosed. In fact, many private REIT’s have this as a standing policy, and it really isn’t a terribly unfair policy as we know Real Estate to be a rather ILLIQUID asset; funds do not want to be forced sellers in down markets.

However, the problem here lies more in the process of how these funds actually calculate their returns. These firms earn very high fees on the values that they report, yet only THEY, themselves, determine what that value is. It is conceivable that this creates a conflict of interest. To be sure, the returns these firms quote are very good. However, we don’t know if investors would actually realize those returns; because even If you wanted to sell out from your investment, you (in some cases) can’t!

In summary, just within the last few months, we are seeing the cracks in the wall of private investing. Very high fees for the promise of higher-than-average returns along with a lot of RISK…Risks that are not easy to see upfront and may not be fully considered by all investors.

From our perspective, we prefer public markets where prices are fully disclosed every day, every hour; where we can easily buy and sell for our clients, where the fees are significantly lower, and where the risks are much more easily understood. Further, why would we want incredibly complicated investments when we know we can guide our clients to financial independence using the tools we have within public markets? In short, we’d be very wary of any investment that locks you in for an extended period, effectively “gating” your money. The same can be said about annuities; generally speaking, great investments do NOT lock investors in for 7 years….

There are hundreds of low cost and transparent ETF’s for investors to choose from that can do the job they need to do for most investors. Everyone is entitled to their own opinion of course, but we have a hard time seeing how these incredibly complicated and risky investments that lock up client capital are good for anyone other than those who offer them.

Retirement Account Distributions – Making Sense of Confusion from the SECURE Act

With the end of 2022 right around the corner, it is a perfect time to review the important topic of Required Minimum Distributions (RMDs), especially as the SECURE (Setting Every Community up for Retirement Enhancement) Act of 2019 created some debate regarding the required distributions from retirement plans and IRA accounts. Below we will outline some of the key points which were addressed in the SECURE Act.

SECURE Act 2019 – Key Points

The SECURE Act increased the Required Beginning Date (RBD) for RMDs to start from 70½ to 72 years of age.
An IRA account owner can now continue making contributions after the RBD if the owner has earned income including salary, wages, tips and other taxable employee compensation. Earned income does not include income from dividends, capital gains or interest earned on investment assets.
When an IRA or retirement account owner passes away, the required distributions (as per the SECURE Act) depend on a few important factors:
1. The relationship of the beneficiary to the account owner – to be discussed more below
2. Whether the account owner died after 2019 when the SECURE Act made changes to the RMD rules for beneficiaries
3. Whether the account owner died before or after their RBD
Below we summarize the RMD options available based on when the original account owner passed away:
1. Account holder passed away BEFORE 2020
  1. Spousal beneficiary options – if account holder passed away BEFORE their RBD:
    1. Rollover the account into their own IRA
    2. Keep as an Inherited IRA – take distributions based on surviving spouse’s life expectancy OR follow the “5-year rule”
      - The 5-year rule requires the beneficiary to empty the account by the 5th year after the death of the account owner. 2020 does not count when determining the 5 years and withdrawals are NOT required before the end of the 5th year.
    3. NOTE – if account holder passed AFTER their RBD, then the spouse can only take distributions based on their own life expectancy – the 5-year rule would not be available
  2. Non-spouse beneficiary options – if account holder passed away BEFORE their RBD:
    1. Take distributions based on their own life expectancy with the first distribution beginning by the end of the year following the year the account holder passed away
    2. Follow the 5-year rule outlined above
    3. NOTE - if the account holder passed AFTER their RBD, then distributions are based on the LONGER life expectancy of either the beneficiary or deceased account holder.
2. Account holder passed away in 2020 or LATER
  1. Spousal beneficiary options – if account holder passed away BEFORE their RBD:
    1. Rollover the account into their own IRA
    2. Keep as an Inherited IRA and choose between the following distribution options:
      - Delay distributions until the deceased spouse would have turned 72
      - Take distributions based on their own life expectancy
      - Follow the 10-year rule (The 10-year rule requires the beneficiary to empty the entire account by the end of the 10th year following the account owner’s death & annual distributions are required!)
      - NOTE – if account holder passed AFTER their RBD, then the spouse can rollover the account into their own IRA or keep as an Inherited IRA and take distributions based on their own life expectancy.
  2. Non-spouse beneficiary options – distributions for this type of beneficiary depend on whether they are an “eligible designated beneficiary” as defined in the SECURE Act including a spouse or minor child of the deceased account owner, disabled or chronically ill individual or an individual who is not more than 10 years younger than the deceased account owner.
    1. An eligible designated beneficiary has the following distribution options:
      - Take distributions over the LONGER of either their own life expectancy OR the deceased account owners remaining life expectancy
      - Follow the 10-year rule (addressed above) – IF account owner died BEFORE their RBD
    2. A designated beneficiary who doesn’t qualify as an “eligible designated beneficiary” must follow the 10-year rule
    3. A beneficiary that is NOT an individual should follow the rules as if the deceased account owner died before 2020

We certainly understand that these rules and scenarios can leave your mind spinning, so please feel free to call us if you should have any specific questions about this or any other financial planning item as we are happy to help!

In closing, we wish you and your families a wonderful holiday season and all the best in 2023!

With warm regards,

NCM Capital Management

DISCLOSURE: This newsletter contains general information that may not apply to everyone. The information above should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security. Past performance is no guarantee for future results. There is no guarantee that the opinions expressed in this newsletter will occur.

Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services to any residents of any state other than the State of New Jersey, the State of New York, the State of Texas, or where otherwise legally permitted. For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV.